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2023 Report50 51 Statements of Profit and Loss Balance Sheets Consolidated Statements of Changes in Shareholders’ Equity Statements of Cash Flows Notes to and forming part of the Accounts 52 53 54 Summary of Significant Accounting Policies 54 62 Operating Profit Average Balance Sheet and Related Interest 64 68 Abnormal Items 68 Income Tax Expense 70 Dividends, Provided For, Reserved or Paid 70 Earnings Per Share Cash and Liquid Assets 71 Receivables from Other Financial Institutions 71 71 Trading Securities 72 Investment Securities 75 Loans, Advances and Other Receivables 76 Provisions for Impairment 78 Credit Risk Concentrations 83 Asset Quality 88 Deposits with Regulatory Authorities 88 Shares in and Loans to Controlled Entities 88 Property, Plant and Equipment 88 Goodwill 89 Other Assets 89 Deposits and Other Public Borrowings 89 Payables to Other Financial Institutions 90 Income Tax Liability 90 Other Provisions 90 Debt Issues 92 Bills Payable and Other Liabilities 93 Loan Capital 94 Share Capital 96 Outside Equity Interests Capital Adequacy 96 Maturity Analysis of Monetary Assets and Liabilities Financial Reporting by Segments Remuneration of Auditors Commitments for Capital Expenditure Not Provided for in the Accounts Lease Commitments - Property, Plant and Equipment Contingent Liabilities Market Risk Superannuation Commitments Controlled Entities Investments in Associated Entities Standby Arrangements and Unused Credit Facilities Related Party Disclosures Remuneration of Directors Remuneration of Executives Statements of Cash Flow Disclosures about Fair Value of Financial Instruments Differences between Australian and United States Accounting Principles 101 102 104 117 118 120 120 121 123 124 127 98 100 101 129 101 Financial Statements 1998 This Annual Report is made up of two sections: 1. The “Report to Shareholders” comprising the first 48 pages (ie all pages prior to this page). 2. The full and detailed financial statements and related notes for the financial year ended 30 June 1998 (i.e. all pages following this page). The “Report to Shareholders” is a concise version of this full Annual Report document and is available as a separate booklet for those shareholders who do not want the detailed information contained on the following pages. The Commonwealth Bank intends to send the concise version of the Annual Report (ie the Report to Shareholders) to all shareholders next year unless they request otherwise. For those shareholders who have not specifically requested to receive the full Annual Report, we have included a reply form in this information pack for you to complete advising us of your preference for future Annual Reports. Both versions of the Annual Report are available on the Shareholder Information page of the Bank’s Internet site at www.commbank.com.au/today Directors’ Statement Independent Audit Report 131 142 143 49 Statements of Profit and Loss for the year ended 30 June 1998 Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y C H I E F E N T I T Y Note 1998 $M Interest income Interest expense Net interest income Other operating income Total operating income Charge for bad and doubtful debts Total operating income after charge for bad and doubtful debts Total operating expenses Operating profit before goodwill amortisation, abnormal items and income tax Goodwill amortisation Operating profit before abnormal items and income tax Abnormal expense Operating profit before income tax Income tax expense (credit) Operating profit Abnormal items Income tax expense Operating profit after income tax Outside equity interests in operating profit after income tax Operating profit after income tax attributable to members of the chief entity Retained profits at the beginning of the financial year Adjustment on adoption of ISC Life Insurance Rules Buy back Transfers from reserves Total available for appropriation Transfers to reserves Dividends (fully franked) Transfer to dividend reinvestment plan reserve Provided for payment in cash or paid Dividends provided for, reserved or paid Retained profits at the end of the financial year Earnings per share based on operating profit after income tax attributable to members of the chief entity: Dividends provided for, reserved or paid per share attributable to members of the chief entity: 2 2 2 2 2 2,13 2 2 2 4 5 4 5 39 1(oo) 6 7 6 1997 $M 7,989 4,597 3,392 1,524 4,916 98 4,818 2,959 1,859 43 1,816 200 1,616 588 (72) 516 1,100 22 1,078 794 (11) - 74 1,935 86 419 522 941 908 1996 $M 1998 $M 7,716 4,319 3,397 1,382 4,779 113 4,666 2,849 1,817 41 1,776 - 1,776 635 - 635 1,141 22 1,119 535 - - 27 1,681 55 328 504 832 794 6,012 3,227 2,785 1,691 4,476 224 4,252 2,663 1,589 39 1,550 570 980 506 (409) 97 883 - 883 472 - (384) 200 1,171 - 403 552 955 216 1997 $M 6,561 3,733 2,828 1,390 4,218 85 4,133 2,546 1,587 40 1,547 200 1,347 471 (72) 399 948 - 948 465 - - - 1,413 - 419 522 941 472 7,605 4,208 3,397 1,885 5,282 233 5,049 3,091 1,958 46 1,912 570 1,342 641 (409) 232 1,110 20 1,090 908 - (384) 170 1,784 74 403 552 955 755 Cents per share 117.2 117.5 115.5 104 102 90 The Notes to and forming part of the accounts are an integral part of these accounts. 50 Balance Sheets as at 30 June 1998 Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Shares in and loans to controlled entities Property, plant and equipment Investment in associates Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Due to controlled entities Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Net Assets Shareholders’ Equity Share Capital Reserves Retained profits Shareholders’ equity attributable to members of the chief entity Outside equity interests in controlled entities Total Shareholders’ Equity E C O N O M I C E N T I T Y C H I E F E N T I T Y Note 1998 $M 1997 $M 1998 $M 1997 $M 8 9 10 11 12 16 17 18 40 19 20 21 22 6 23 24 25 26 27 28 29 1,526 3,448 4,009 6,858 89,816 9,727 832 - 1,662 276 531 11,859 130,544 83,886 3,397 9,727 - 321 1,099 875 10,608 10,746 120,659 2,996 123,655 2,007 4,839 2,635 9,233 81,632 8,874 797 - 2,010 - 574 7,502 120,103 77,880 3,621 8,874 - 291 925 835 10,154 7,698 110,278 2,801 113,079 1,393 3,205 2,698 5,949 72,949 9,737 828 5,583 1,438 278 490 11,402 115,950 72,944 3,008 9,737 359 321 642 830 9,239 10,234 107,314 2,996 110,310 1,930 4,627 2,673 7,406 65,731 8,881 786 5,140 1,750 - 529 7,141 106,594 67,836 3,240 8,881 152 291 554 797 8,755 7,369 97,875 2,801 100,676 6,889 7,024 5,640 5,918 1,845 4,112 755 6,712 177 6,889 1,860 4,078 908 6,846 178 7,024 1,845 3,579 216 5,640 - 5,640 1,860 3,586 472 5,918 - 5,918 The liabilities of the Commonwealth Bank of Australia (the Chief Entity) and its controlled entity, Commonwealth Development Bank of Australia, as at 30 June 1996 were guaranteed by the Commonwealth of Australia under a statute of the Australian Parliament. This guarantee is being progressively phased out following the Government sell down of its shareholding on 19 July 1996. (Refer to Note 25.) The Notes to and forming part of the accounts are an integral part of these accounts. 51 Consolidated Statements of Changes in Shareholders’ Equity as at 30 June 1998 Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y C H I E F E N T I T Y Note 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 1(oo) 28 Issued and paid up capital Opening balance (ordinary shares of A$2.00 each) Buy back Dividend reinvestment plan Employee share ownership schemes Closing balance Retained profits Opening balance Adjustments to opening balance Buy back Transfers from reserves Operating profit attributable to members of chief entity Total available for appropriation Transfers to reserves Interim dividend - cash component only Interim dividend - appropriated to dividend reinvestment plan reserve Provision for final dividend - cash component only Final dividend - appropriated to dividend reinvestment plan reserve Closing balance Reserves General Reserve Opening balance Discounts on acquisition and other adjustments Appropriation from profits Transfer to retained profits Closing balance Capital Reserve Opening balance Transfers Closing balance Asset Revaluation Reserve Share Premium Reserve Opening balance Buy back Premium from share issues Employee share acquisition plan issue Buy back costs and other adjustments Transfer to capital reserve Closing balance Dividend Reinvestment Plan Reserve Opening balance Conversion to share capital Appropriation from profits Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments Transfer to retained profits Closing balance 1,860 (76) 57 4 1,845 908 - (384) 170 1,090 1,784 74 231 189 321 214 755 2,195 - 74 (200) 2,069 288 1 289 - 1,300 (191) 396 (3) (2) (1) 1,499 239 (428) 403 214 56 (45) 30 41 1,981 (200) 74 5 1,860 794 (11) - 74 1,078 1,935 86 231 180 291 239 908 2,182 - 86 (73) 2,195 289 (1) 288 - 1,754 (801) 357 (5) (5) - 1,300 162 (342) 419 239 28 28 - 56 1,898 - 83 - 1,981 535 - - 27 1,119 1,681 55 203 166 301 162 794 2,155 (1) 55 (27) 2,182 289 - 289 - 1,432 - 326 - (4) - 1,754 197 (363) 328 162 62 (34) - 28 1,860 (76) 57 4 1,845 472 - (384) 200 883 1,171 - 231 189 321 214 216 1,772 - - (200) 1,572 277 - 277 - 1,298 (191) 396 (3) - (1) 1,499 239 (428) 403 214 - 17 - 17 1,981 (200) 74 5 1,860 465 - - - 948 1,413 - 231 180 291 239 472 1,772 - - - 1,772 277 - 277 - 1,752 (801) 357 (5) (5) - 1,298 162 (342) 419 239 (4) 4 - - Total Reserves Shareholders’ equity attributable to members of the chief entity 4,112 6,712 4,078 6,846 4,415 7,190 3,579 5,640 3,586 5,918 The Notes to and forming part of the accounts are an integral part of these accounts. 52 Statements of Cash Flows for the year ended 30 June 1998 Cash Flows From Operating Activities Interest received Dividends received Interest paid Other operating income received Staff expenses paid Occupancy and equipment expenses paid Information technology services expenses paid Other expenses paid Income taxes paid Tax losses purchased from controlled entities Net decrease (increase) in trading securities Net Cash provided by Operating Activities Cash Flows from Investing Activities Payments for acquisition of entities Net movement in investment securities: Purchases Proceeds from sale Proceeds at or close to maturity Lodgement of deposits with regulatory authorities Net increase in loans, advances and other receivables Net amounts paid to controlled entities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Net decrease (increase) in receivables due from other financial institutions not at call Net decrease (increase) in securities purchased under agreements to resell Net decrease (increase) in other assets Net Cash used in Investing Activities Cash Flows from Financing Activities Buy back of shares Proceeds from issue of shares Net increase in deposits and other borrowings Proceeds from long term debt issues Repayment of long term debt issues Net increase (decrease) in short term debt issues Dividends paid Payments from provisions Net increase (decrease) in payables due to other financial institutions not at call Net increase (decrease) in securities sold under agreements to repurchase Proceeds from (repayment of) loan capital Other Net Cash provided by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at beginning of year Cash and Cash Equivalents at end of year E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 7,557 18 (4,065) 1,204 (1,705) (289) (503) (468) (216) - (646) 887 8,054 18 (4,342) 1,308 (1,614) (310) (251) (399) (629) - 556 2,391 7,939 8 (4,323) 1,426 (1,544) (257) (251) (312) (449) - 2,374 4,611 6,084 106 (3,187) 821 (1,467) (246) (476) (365) (134) (28) (591) 517 6,604 200 (3,482) 1,019 (1,396) (271) (224) (320) (507) (38) 487 2,072 - (66) - - (66) (8,505) 1,787 8,681 (35) (9,882) - 196 (78) (8,887) 1,172 7,013 (86) (11,353) - 307 (180) (9,576) 729 7,956 (52) (8,488) - 194 (313) (7,981) 1,666 8,364 (42) (8,190) (184) 167 (51) (7,517) 1,172 6,291 (90) (8,414) (1,123) 281 (134) 809 750 1,750 809 750 347 1,175 (5,505) (651) 5 6,683 1,355 (1,230) (970) (502) (10) 641 (432) (11,121) (658) (117) (8,575) (1,001) 12 6,892 1,414 (299) 1,905 (452) (59) - 94 6,070 1,620 (143) 370 (451) (79) 347 1,118 (3,977) (651) 3 5,177 1,290 (1,175) (1,005) (502) (11) 641 (427) (8,636) (1,001) 3 5,793 1,024 (299) 1,351 (448) (54) (869) 325 (559) (869) 325 (52) - (496) 3,263 (1,355) 3,318 1,963 (783) - (207) 7,747 (983) 4,301 3,318 (1,994) 1,290 424 6,642 2,678 1,623 4,301 (52) - (185) 2,020 (1,440) 3,415 1,975 (783) - (208) 5,703 (861) 4,276 3,415 Details of Reconciliation of Cash and Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities are provided in Note 45. The Notes to and forming part of the accounts are an integral part of these accounts. 53 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 1 Summary of Significant Accounting Policies Bases of accounting (a) In these financial statements Commonwealth Bank of Australia is referred to as the ‘Chief Entity’, or the ‘Bank’, and the ‘Economic Entity’ consists of the Chief Entity and those controlled entities listed in Note 39. The financial statements are a general purpose financial report which comply with the requirements of the Banking Act, Corporations Law, applicable Accounting Standards and other mandatory reporting requirements so far as the requirements are considered appropriate to a banking corporation. The accounting policies applied are consistent with those of the previous year except for the adoption of equity accounting, refer (d) Investments in associated companies below. Further, in accordance with revised International Accounting Standard IAS1, Presentation of Financial Statements, certain income and expense items have been presented on a net basis. The principal items involved are the netting of rental income against operating lease rentals and general insurance claims paid shown as a deduction from general insurance premium income. Refer Note 2. There is no effect on profit and loss. The financial statements also include disclosures required by the United States Securities and Exchange Commission (SEC) in respect of foreign registrants. The Statements of Cash Flows has been prepared in accordance with the International Accounting Standard IAS7, Cash Flow Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates although it is not anticipated that such differences would be material. Unless otherwise indicated, all amounts are shown in $ million and are expressed in Australian currency. Historical cost (b) The financial statements of the Commonwealth Bank of Australia and the consolidated financial statements have been prepared in accordance with the historical cost convention and, except where indicated, do not reflect current valuations of non monetary assets. Domestic bills discounted which are included in loans, advances and other receivables and held by the Chief Entity and securities and derivatives held for trading purposes have been marked to market. The carrying amounts of all non current assets are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying amount of a non current asset exceeds the recoverable amount, the asset is written down to the lower amount. In assessing recoverable amounts for particular classes of assets the relevant cash flows have not been discounted to their present value unless otherwise stated. Consolidation (c) The consolidated financial statements include the financial statements of the Chief Entity and all entities where there is a determined capacity to control as defined in AASB 1024: Consolidated Accounts. All balances and transactions between Group entities have been eliminated on consolidation. Investments in associated companies (d) Associated companies are defined as those entities over which the Economic Entity has significant influence but there is no capacity to control. Details of material associated companies are shown in Note 40. The Economic Entity has elected to adopt equity accounting in terms of AASB 1016: Accounting for Investments in Associates for the year ended 30 June 1998. Investments in associates are carried at cost plus the Economic Entity’s share of post-acquisition profit or loss. The Economic Entity’s share of profit or loss of associates is included in the Profit and Loss Statement. ASC Class Order No. 97/798 dated 5 June 1997 permits the adoption of equity accounting. As a result of the change in accounting policy, the effect on profit after tax for the year ended 30 June 1998 is $2 million net loss. The carrying value of investments in associates included in the balance sheet is $276 million. There was no transitional adjustment to retained profits as the amount was not material. As from 30 June 1998 PT Bank BII Commonwealth was determined to be no longer a self-sustaining foreign operation and the related Foreign Currency Translation Reserve balance was transferred to Retained Profits. Foreign currency translations (e) All foreign currency monetary assets and liabilities are revalued at rates of exchange prevailing at balance date. Foreign currency forward, futures, swaps and option positions are valued at the appropriate market rates applying at balance date. Unrealised gains and losses arising from these revaluations and gains and losses arising from foreign exchange dealings are included in profit and loss. The foreign currency assets and liabilities of overseas branches and overseas controlled entities are converted to Australian currency at 30 June 1998 in accordance with the current rate method. Profit and loss items for overseas branches and overseas controlled entities are converted to Australian dollars progressively throughout the year at the exchange rate current at the last calendar day of each month. 54 NOTE 1 Summary of Significant Accounting Policies continued Foreign currency translations continued (e) Translation differences arising from conversion of opening balances of shareholders’ funds of overseas controlled entities at year end exchange rates are excluded from profit and loss and reflected in a Foreign Currency Translation Reserve. The Bank maintains a substantially matched position in assets and liabilities in foreign currencies and the level of net foreign currency exposure does not have a material effect on its financial condition. Roundings (f) The Chief Entity is an entity of the kind referred to in Corporations Regulation 3.6.05(6) and, in accordance with Australian Securities Commission (ASC) Class Order No. 97/1005 dated 9 July 1997, amounts in these financial statements have been rounded to the nearest million dollars unless otherwise stated. Financial instruments (g) The Economic Entity is a full service financial institution which offers an extensive range of on balance sheet and off balance sheet financial instruments. For each class of financial instrument listed below, except for restructured facilities referred to in Note 1(m), financial instruments are transacted on a commercial basis to derive an interest yield/cost with terms and conditions having due regard to the nature of the transaction and the risks involved. Cash and liquid assets (h) Cash and liquid assets includes cash at branches, cash at bankers and money at short call. They are brought to account at the face value or the gross value of the outstanding balance where appropriate. Interest is taken to profit and loss when earned. Receivables due from other financial institutions (i) Receivables from other financial institutions includes loans, nostro balances and settlement account balances due from other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit and loss when earned. Trading securities (j) Trading securities are short and long term public, bank, other debt securities and equities which are acquired and held for trading purposes. They are brought to account at net fair value based on quoted market prices, broker or dealer price quotations. Realised gains and losses on disposal and unrealised fair value adjustments are reflected in ‘Other Income’ within profit and loss. Interest on trading securities is reported in net interest earnings. Trading securities are recorded on a trade date basis. Investment securities (k) Investment securities are securities purchased with the intent of being held to maturity. Investment securities are short and long term public, bank and other securities and include bonds, bills of exchange, commercial paper, certificates of deposit and equities. These securities are recorded at cost or amortised cost. Premiums and discounts are amortised through profit and loss each year from the date of purchase so that securities attain their redemption values by maturity date. Interest is reflected in profit and loss when earned. Dividends on equities are brought to account in profit and loss on declaration date. Any profits or losses arising from disposal prior to maturity are taken to profit and loss in the period in which they are realised. The cost of securities sold is calculated on a specific identification basis. Unrealised losses related to permanent diminution in the value of investment securities are recognised in profit and loss and the recorded values of those securities adjusted accordingly. Investment securities are recorded on a trade date basis. The relationship between book and net fair values of investment securities is shown in Note 11. Repurchase agreements (l) Securities sold under agreements to repurchase are retained within the investment or trading portfolios and accounted for accordingly. Liability accounts are used to record the obligation to repurchase and are disclosed as deposits and other public borrowings. Securities held under reverse repurchase agreements are recorded as liquid assets. In the average balance sheet and profit and loss, repurchase agreements and their related interest expense were previously netted against investment and trading securities. Repurchase agreements and related interest expense have been reclassified within other demand deposits. Comparative figures have been adjusted. Loans, advances and other receivables (m) Loans, advances and other receivables include overdrafts, home, credit card and other personal lending, term loans, leasing, bill financing, redeemable preference shares and leverage leases. They are carried at the recoverable amount represented by the gross value of the outstanding balance adjusted for provisions for bad and doubtful debts, interest reserved and unearned tax remissions on leverage leases. Interest and yield related fees are reflected in profit and loss when earned. Yield related fees received in advance are deferred, included as part of the carrying value of the loan and amortised to profit and loss as ‘Interest Income’ over the term of the loan. Note 1(n) provides additional information with respect to leasing and leveraged leasing. 55 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 1 Summary of Significant Accounting Policies continued (m) Loans, advances and other receivables continued Non Accrual Facilities Non accrual facilities (primarily loans) are placed on a cash basis for recognition of income immediately default occurs. Upon classification as non accrual, all interest charged in the current financial period is reversed from profit and loss and reserved if it has not been received in cash. If necessary, a specific provision for impairment is recognised so that the carrying amount of the facility does not exceed the expected future cash flows. In subsequent periods, interest in arrears/due on non accrual facilities is taken to profit and loss when a cash payment is received/realised and the amount is not designated as a principal payment. Non accrual facilities are restored to an accrual basis when all principal and interest payments are current and full collection is probable. Restructured Facilities When facilities (primarily loans) have the original contractual terms modified, the accounts become classified as restructured. Such accounts will have interest accrued to profit as long as the facility is performing on the modified basis in accordance with the restructured terms. If performance is not maintained, or collection of interest and/or principal is no longer probable, the account will be returned to the non accrual classification. Facilities are generally kept as non accrual until they are returned to performing basis. Assets Acquired through Securities Enforcement (AATSE) Assets acquired in satisfaction of facilities in default (primarily loans) are recorded at net market value at the date of acquisition. Any difference between the carrying amount of the facility and the net market value of the assets acquired is represented as a specific provision for diminution of value or written off. AATSE are further classified as Other Real Estate Owned (OREO) or Other Assets Acquired through Security Enforcement (OAATSE). Such assets are classified in the appropriate asset classifications in the balance sheet. Bad Debts Bad debts are written off in the period in which they are recognised. Bad debts previously specifically provided for are written off against the related specific provisions, while bad debts not provided for are written off through the general provision. Any subsequent cash recovery is credited to the general provision. Leasing and leveraged leasing (n) Finance leases are accounted for using the finance method and are included in loans, advances and other receivables. Income, determined on an actuarial basis, is taken to account over the term of the lease in relation to the outstanding investment balance. The finance method also applies to leveraged leases but with income being brought to account at the rate which yields a constant rate of return on the outstanding investment balance over the life of the transaction so as to reflect the underlying assets, liabilities, revenue and expenses that flow from the arrangements. Where a change occurs in the estimated lease cash flows or available tax benefits at any stage during the term of the lease, the total lease profit is recalculated for the entire lease term and apportioned over the remaining lease term. Leveraged lease receivables are recorded under loans, advances and other receivables at amounts which reflect the equity participation in the lease. The debt provider in the transaction has no recourse other than to the unremitted lease rentals and the equipment under lease. Operating lease rental revenue and expense is recognised in the profit and loss in equal periodic amounts over the effective lease term. Provisions for impairment (o) Provisions for credit losses are maintained at an amount adequate to cover anticipated credit related losses. Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, financial instruments and investments and assets acquired through security enforcement. Specific provisions are established where full recovery of principal is considered doubtful. Specific provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. A specific provision is also established against each statistically managed portfolio in the statistically managed segment to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated managed segment for exposures aggregating to less than $250,000 and 90 days past due or more, and against emerging credit risks identified in specific segments in the credit risk rated managed portfolio. These provisions are funded primarily by reference to historical ratios of write-offs to balances in default. General provisions for bad and doubtful debts are maintained to cover non identified possible losses and latent risks inherent in the overall portfolio of advances and other credit transactions. The provisions are determined having regard to the general risk profile of the credit portfolio, historical loss experience, economic conditions and a range of other criteria. The amounts required to bring the provisions for impairment to their assessed levels are taken to profit and loss. The balance of provisions for impairment and movements therein are set out in Note 13. 56 NOTE 1 Summary of Significant Accounting Policies continued (o) Provisions for impairment continued All facilities subject to a specific provision are classified as non accrual and interest is only taken to profit when received in cash. Abnormal Item – General Provision Charge for Bad and Doubtful Debts With effect from 1 January 1998 the Economic Entity has refined the methodology used to estimate the provisions for impairment by adopting a statistically based technique referred to as Dynamic Provisioning. This takes into account historical loss experience and current economic factors to assess the provisioning requirement over the term to maturity of the existing credit portfolios. Initial adoption of this technique resulted in an abnormal expense for bad and doubtful debts of $370 million in respect of the general provision which has been charged to profit and loss in the year ended 30 June 1998. Subsequent requirements for specific provisions will be funded via the general provision. Accordingly, it is appropriate to tax effect the general provisioning refer Note 1(y). Refer also Notes 4 and 13. Bank acceptances of customers (p) The exposure arising from the acceptance of bills of exchange that are sold into the market is brought to account as a liability. An asset of equal value is raised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate fee income which is taken to profit and loss when earned. Deposits with regulatory authorities (q) In several countries in which the Economic Entity operates, the law requires that the Economic Entity lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The amount of the deposit and the interest rate receivable are calculated in accordance with the requirements of the local central bank. Interest is taken to profit and loss when earned. Shares in and loans to controlled entities (r) These investments are recorded at the lower of cost or recoverable amount. Property, plant and equipment (s) At year end, independent market valuations, reflecting current use, were obtained for all individual property holdings (other than leasehold improvements). Directors have adopted a valuation at or below the independent valuation. Adjustments arising from revaluation are reflected in Asset Revaluation Reserve, except to the extent the adjustment reverses a revaluation previously recognised in profit and loss. For the current year the revaluation had no effect on the level of the reserve. Depreciation on owned buildings is based on the assessed useful life of each building. The book value of buildings demolished as part of the redevelopment of a site is written off in the financial year in which the buildings are demolished. Leasehold improvements are capitalised and depreciated over the unexpired term of the current lease. Equipment is shown at cost less depreciation calculated principally on a category basis at rates applicable to each category’s useful life. Depreciation is calculated using the straight line method. It is treated as an operating expense and charged to profit and loss. The amounts charged for the year are shown in Note 2. Profit or loss on sale of property is treated as operating income or expense. Realised amounts in Asset Revaluation Reserve are transferred to Capital Reserve. The useful lives of major depreciable assets are as follows: Buildings Shell - Integral plant and equipment - - - carpets all other (air-conditioning, lifts) - Non integral plant and equipment - fixtures and fittings Maximum 30 years 10 years 20 years 10 years Leasehold improvements Lesser of unexpired lease term or lives as above Security surveillance systems Furniture Equipment - - - Office machinery EFTPOS machines - 10 years 8 years 5 years 3 years The Bank does not own any material amounts of computer or communications equipment. 57 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 1 Summary of Significant Accounting Policies continued (s) Property, plant and equipment continued Abnormal Item - Information Technology Equipment Values (1997) In anticipation of a restructuring of the Bank’s information technology processing, including investment in an information technology business, the carrying value of the Bank’s computer and communications equipment as at 30 June 1997 was reduced. This reduction was undertaken having regard to the sale of equipment to a global technology company. As a result, an abnormal expense of $200 million ($128 million after tax) was charged to profit and loss in the year ended 30 June 1997. Also refer Notes 4 and 18. Goodwill (t) Goodwill, representing the excess of purchase consideration plus incidental expenses over the fair value of the identifiable net assets at the time of acquisition of an entity, is capitalised and brought to account in the balance sheet. The goodwill so determined is amortised on a straight line basis over the period of expected benefit but not exceeding 20 years. Purchased goodwill arising from the merger with the State Bank of Victoria in 1991 is being amortised over 20 years, and goodwill on acquisition of Commonwealth Funds Management in December 1996, Micropay in 1995 and Leaseway in April 1997 is being amortised over 10, 7 and 5 years respectively. The periods of goodwill amortisation are subject to review annually by the Directors. Other assets (u) Other assets includes all other financial assets and includes interest, fees, market revaluation of trading derivatives and other unrealised income receivable and securities sold not delivered. These assets are recorded at the cash value to be realised when settled. Deposits and other public borrowings (v) Deposits and other public borrowings includes certificates of deposits, term deposits, savings deposits, cheque and other demand deposits, debentures and other funds raised publicly by borrowing corporations. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit and loss when incurred. Payables due to other financial institutions (w) Payables due to other financial institutions includes deposits, vostro balances and settlement account balances due to other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit and loss when incurred. Provision for dividend (x) The provision for dividend represents the maximum expected cash component of the declared final dividend. The remaining portion of the dividend is appropriated to the Dividend Reinvestment Plan Reserve. Income taxes (y) The Economic Entity has adopted the liability method of tax effect accounting. The tax effect of timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit or a provision for deferred income tax. Amounts are offset where the tax payable and realisable benefit are expected to occur in the same financial period. The future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised. (Note 20). Abnormal Credit – Tax Effecting General Provision for Bad and Doubtful Debts The general provision for bad and doubtful debts has been tax effected as at 1 January 1998. This reflects the adoption of a balance sheet risk based dynamic provisioning methodology which satisfies the recognition requirement that utilisation of the provision be assured beyond reasonable doubt. An abnormal credit to tax expense of $337 million has been booked to profit and loss in the year ended 30 June 1998. Refer also Note 4. Provisions for employee entitlements (z) The provision for long service leave is subject to actuarial review and is maintained at a level that accords with actuarial advice. The provision for annual leave represents the outstanding liability as at balance date. Actual payments made during the year are included in Salaries and Wages. The provision for other employee entitlements represents liabilities for staff housing loan benefits and a subsidy to a registered health fund with respect to retired employees and current employees. The level of these provisions has been determined in accordance with the requirements of AASB 1028, Accounting for Employee Entitlements. 58 NOTE 1 Summary of Significant Accounting Policies continued (aa) Provision for restructuring The provision for restructuring covers information technology transition costs to EDS (Australia) and other outsourcing arrangements, further rationalisation of processing and administration functions, implementation of the new organisational structure and reconfiguration of delivery systems. Each of these programmes has associated costs, principally in the areas of redundancy and property. Abnormal Item – Restructuring Costs An abnormal expense for restructuring costs of $200 million ($128 million after tax) has been charged to profit and loss in the year ended 30 June 1998. Refer also Notes 4 and 24. (bb) Provision for self insurance Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice. The provision for self insurance covers certain non lending losses and non transferred insurance risks. (cc) Debt issues Debt issues are short and long term debt issues of the Economic Entity including commercial paper, notes, term loans and medium term notes which are recorded at cost or amortised cost. Premiums, discounts and associated issue expenses are amortised through profit and loss each year from the date of issue so that securities attain their redemption values by maturity date. Interest is reflected in profit and loss as incurred. Any profits or losses arising from redemption prior t o maturity are taken to profit and loss in the period in which they are realised. Further details of the Economic Entity’s debt issues are shown in Note 25. (dd) Bills payable and other liabilities Bills payable and other liabilities includes all other financial liabilities and includes interest, fees, market revaluation of trading derivatives and other unrealised expenses payable and securities purchased not delivered. These liabilities are recorded at the cash value to be realised when settled. (ee) Loan capital Loan capital is debt issued by the Economic Entity with terms and conditions, such as being undated or subordinated, which qualify the debt issue for inclusion as capital under Reserve Bank of Australia (RBA) Capital Adequacy prudential requirements. Loan capital debt issues are recorded at cost or amortised cost. Premiums, discounts and associated issue expenses are amortised through profit and loss each year from the date of issue so that securities attain their redemption values by maturity date. Interest is reflected in profit and loss as incurred. Any profits or losses arising from redemption prior to maturity are taken to profit and loss in the period in which they are realised. Further details of the Economic Entity’s loan capital debt issues are shown in Note 27. Shareholders’ equity (ff) Ordinary share capital is recognised at the par value of the amount paid up. Any excess between the par value and the issue price is recorded in the share premium reserve. General reserve is derived from revenue profits and is available for dividend except for undistributable profits in respect of Commonwealth Life Limited of $219 million (1997: $168 million, 1996: $91 million). Capital reserve is derived from capital profits and is available for dividend. Share premium reserve is derived from the premium over par value received from the issue of shares. It is not available for distribution to shareholders in the form of a cash dividend. The share premium reserve may be used to satisfy the payment of a dividend by an issue of shares to shareholders. The reserve may also be utilised to write off preliminary expenses, share or debenture issue costs, share buy back costs and discount allowed on any issue of shares or debentures. Dividend reinvestment plan reserve is appropriated from revenue profits. The amount of the reserve represents the estimate of the minimum expected amount that will be reinvested in the Bank’s dividend reinvestment plan. The allotment of shares under the plan is subsequently applied against the reserve. This accounting treatment reflects the probability that a fairly stable proportion of the Bank’s final dividend will be reinvested in equity via the dividend reinvestment plan. This internal accounting methodology for the dividend reinvestment plan was introduced with the appropriation of the 1995 profit for the final dividend. Further details of share capital, outside equity interests and reserves are shown in Notes 28, 29 and Statements of Changes in Shareholders’ Equity. (gg) Derivative financial instruments The Economic Entity enters into a significant volume of derivative financial instruments which include foreign exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivative financial instruments are used as part of the Economic Entity’s trading activities and to hedge certain assets and liabilities. 59 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 1 Summary of Significant Accounting Policies continued (gg) Derivative financial instruments continued Derivative financial instruments held or issued for trading purposes Traded derivative financial instruments are recorded at net fair value based on quoted market prices, broker or dealer price quotations. A positive revaluation amount of a contract is reported as an asset and a negative revaluation amount of a contract as a liability. Changes in net fair value are reflected in profit and loss immediately they occur. Derivative financial instruments held or issued for purposes other than trading The principal objective in holding or issuing derivative financial instruments for purposes other than trading is to manage balance sheet interest rate, exchange rate and credit risk associated with certain assets and liabilities such as loans, investment securities, deposits and debt issues. To be effective as hedges, the derivatives are identified and allocated against the underlying hedged item or class of items and generally modify the interest rate, exchange rate or credit characteristics of the hedged asset or liability. Such derivative financial instruments are purchased with the intent of being held to maturity. Derivatives that are designated and effective as hedges are accounted for on the same basis as the instruments they are hedging. Swaps Interest rate swap receipts and payments are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item. Premiums or discounts to market interest rates which are received or made in advance are deferred and amortised to profit and loss over the term for which the swap is effective as a hedge of the underlying hedged item or class of items. Similarly with cross currency swaps, interest rate receipts and payments are brought to account on the same basis outlined in the previous paragraph. In addition, the initial principal flows are reported net and revalued to market at the current market exchange rate. Revaluation gains and losses are taken to profit and loss against revaluation losses and gains of the underlying hedged item or class of items. Credit default swaps are utilised to manage credit risk in the asset portfolio. Premiums are accrued to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Any principal cash flow on default is brought to account on the same basis as the designated item being hedged. Credit default swaps held at balance date are immaterial. Equity swaps are utilised to manage the risk associated with both the capital investment in equities and the related yield. These swaps enable the income stream to be reflected in profit and loss when earned. Any capital gain or loss at maturity of the swap is brought to account on the same basis as the underlying equity being hedged. Forward rate agreements and futures Realised gains and losses on forward rate agreements and futures contracts are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flow is amortised to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Options Where options are utilised in the management of balance sheet risk, premiums on options and any realised gains and losses on exercise are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit and loss as interest of the hedged item or class of items being hedged over the term for which the instrument is effective as a hedge. Early termination Where a derivative instrument hedge is terminated prior to its ‘maturity date’, realised gains and losses are deferred and included as part of the carrying value of the hedged item or class of items being hedged. The cash flows are amortised to profit and loss as interest of the hedged item or class of items being hedged over the period for which the hedge would have been effective. Where the underlying hedged item or class of items being hedged ceases to exist, the derivative instrument hedge is terminated and realised and unamortised gains or losses taken to profit and loss. Further information on derivative financial instruments is shown in Note 37. (hh) Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. They are recorded as contingent liabilities at their face value. Further information is shown in Note 36. (ii) Fee income Lending fees Material non refundable front end loan fees that are yield related and do not represent cost recovery, are taken to profit and loss over the period of the loan. Associated costs incurred in these lending transactions are deferred and 60 NOTE 1 Summary of Significant Accounting Policies continued Fee income continued (ii) netted against yield related loan fees. Where non refundable front end loan fees are received that represent cost recovery or charges for services not directly related to the yield on a loan, they are taken to income in the period in which they are received. Where fees are received on an ongoing basis and represent the recoupment of the costs of maintaining and administering existing loans, these fees are taken to income on an accrual basis. Commission and other fees When commission charges and fees relate to specific transactions or events, they are recognised as income in the period in which they are received. However, when they are charged for services provided over a period, they are taken to income on an accrual basis. (jj) The Economic Entity conducts life insurance business through Commonwealth Life Limited (CLL) which is subject to the provisions of the Life Insurance Act 1995. The shareholders’ interest in CLL, consisting of the shareholders’ fund and the shareholders’ interest in the statutory funds, is included in the financial statements of the Economic Entity and has been subject to the stated principles of consolidation. Life insurance business The shareholders’ interest in the statutory funds is carried at cost. Policyholders’ interest in the statutory funds is not included in the consolidated financial statements as the Economic Entity does not have control of such funds as defined by AASB 1024: Consolidated Accounts. The profits from the statutory funds are brought to account in the profit and loss of the Economic Entity. The profits have been determined according to the ‘Margin on Services’ methodology for valuation of policy liabilities under Actuarial Standard AS 1.01 issued by the Life Insurance Actuarial Standards Board. These profits are then transferred to general reserves as they are not fully available for distribution until all requirements of the Life Insurance Act are met. The value of the net worth and the business in force of CLL (known as the embedded value), to Commonwealth Bank of Australia has been actuarially assessed to be $480 million as at 30 June 1998 (1997: $400 million), $445 million in excess of book value (1997: $365 million) in the Chief Entity. This amount has not been included in the balance sheet. (kk) Fiduciary activities The Bank and designated controlled entities act as Trustee and/or Manager and/or Custodian for a number of Wholesale, Superannuation and Investment Funds, Trusts and Approved Deposit Funds. Further details are shown in Note 36. The assets and liabilities of these Trusts and Funds are not included in the consolidated financial statements as the Bank does not have direct or indirect control of the Trusts and Funds as defined by AASB 1024. Commissions and fees earned in respect of the activities are included in the profit and loss of the Economic Entity and the designated controlled entity. Superannuation plans (ll) The Economic Entity sponsors a range of superannuation plans for its employees. The assets and liabilities of these plans are not included in the consolidated financial statements. The superannuation contributions expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Contributions to all superannuation plans are made in accordance with the rules of the plans. (mm) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements. (nn) Definitions ‘Overseas’ represents amounts booked in branches and controlled entities outside Australia. ‘Borrowing Corporation’ as defined by Section 9 of the Corporations Law is CBFC Limited and controlled entities. ‘Net Fair Value’ represents the fair or market value adjusted for transaction costs. ‘Abnormal items’ are items of revenue or expense included in operating profit after income tax and considered abnormal by reason of size and effect on operating profit after income tax for the financial year. (oo) Adjustments to retained earnings Commonwealth Life Limited adopted the new Insurance and Superannuation Commission Rules for financial reporting for the year ended 30 June 1997. This resulted in an $11 million debit adjustment to retained earnings in accordance with ASC Class Order No. 97/171 dated 17 February 1997. (pp) Events Subsequent to Balance Date In July 1998, the Bank entered into a strategic alliance with Woolworths which will provide customers with increased accessibility and flexibility for their financial services needs. 61 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 2 Operating Profit Operating Revenue Operating profit before income tax has been determined as follows: Interest Income Loans Other financial institutions Cash and liquid assets Trading securities Investment securities Dividends on redeemable preference shares Controlled entities Statutory deposits Other Total Interest Income Interest Expense Deposits Public borrowings by borrowing corporations Other financial institutions Short term debt issues Long term debt issues Controlled entities Loan capital Other Total Interest Expense Net Interest Income Other Operating Income Lending fees Commission and other fees Trading income Foreign exchange earnings Trading securities Other financial instruments (incl derivatives) Dividends - controlled entities - other Net gain (loss) on investment securities Net profit on sale of property, plant and equipment Life insurance and funds management General insurance premium income Less general insurance claims paid Other Total Other Operating Income Total Operating Income Charge for Bad and Doubtful Debts (Note 13) General provisions Specific provisions Total Charge for Bad and Doubtful Debts 62 E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 9,490 9,513 9,098 7,703 7,951 6,588 241 88 213 409 59 - - 7 7,605 3,126 217 218 293 183 - 166 5 4,208 3,397 6,794 286 141 108 591 47 - 11 11 7,989 3,470 190 226 291 234 - 170 16 4,597 3,392 6,485 5,126 226 88 110 344 (34) 150 - 2 7,716 6,012 277 160 202 535 26 - 17 14 177 188 196 174 - 123 2 3,459 2,464 - 192 226 163 11 167 4 4,319 3,227 3,397 2,785 5,403 285 141 118 455 4 142 10 3 6,561 2,891 - 191 243 229 6 170 3 3,733 2,828 488 714 447 568 464 506 454 607 408 498 161 35 47 - 18 101 34 205 79 (46) 49 1,885 70 57 47 - 18 4 44 197 64 (44) 52 1,524 78 41 29 - 8 (10) 21 142 48 (40) 95 147 35 47 156 18 119 31 - - - 77 1,382 1,691 5,282 4,916 4,779 4,476 165 68 233 36 62 98 99 14 113 164 60 224 57 57 47 188 12 4 36 - - - 83 1,390 4,218 48 37 85 NOTE 2 Operating Profit continued Staff Expenses Salaries and wages Superannuation contributions Provision for long service leave Provision for annual leave Provisions for other employee entitlements Payroll tax Fringe benefits tax Other staff expenses Total Staff Expenses Occupancy and Equipment Expenses Operating lease rentals Depreciation - buildings - leasehold improvements - equipment Repairs and maintenance Other Total Occupancy and Equipment Expenses Information Technology Services Projects and development Data processing Desktop Communications Total Information Technology Services Other Expenses Postage Stationery Fees and commissions Non lending losses Other Total Other Expenses Total Operating Expenses Amortisation of Goodwill E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 1,412 1 32 (7) - 83 42 59 1,622 141 62 22 103 69 76 473 199 69 87 121 476 75 53 168 - 224 520 3,091 46 1,386 2 46 11 (3) 86 70 65 1,663 133 61 16 160 104 73 547 ( 152 ( ( 103 255 72 57 127 4 234 494 2,959 43 1,298 1,223 (7) 30 (3) - 76 9 39 15 (9) 83 74 73 39 34 1,582 1,392 103 86 20 146 97 72 524 ( 161 ( ( 89 250 63 57 126 58 20 80 55 61 400 180 69 87 113 449 67 43 108 24 241 493 146 (2) 168 422 2,849 2,663 41 39 1,217 (5) 44 11 (4) 80 65 37 1,445 111 57 15 137 98 63 481 ( 133 ( ( 96 229 65 47 124 4 151 391 2,546 40 Operating Profit before Abnormal Items 1,912 1,816 1,776 1,550 1,547 The Bank outsourced most of its information technology functions to EDS (Australia) in October 1997. This has changed the mix of operating expenses and has required a change in categorisation of expenses to more appropriately reflect expenditure into the future. Line by line comparison with prior periods is less meaningful in some instances. 63 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 3 Average Balance Sheet and Related Interest The table lists the major categories of interest earning assets and interest bearing liabilities of the Economic Entity together with the respective interest earned or paid and the average interest rates for each of 1996, 1997 and 1998. Averages used are predominantly daily averages. The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intergroup borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Non accrual loans are included in Interest Earning Assets under loans, advances and other receivables. 1998 Average Interest Average Rate Balance % $M $M Average Balance $M 1997 Interest Average Average Balance $M Rate % $M 1996 Interest Average Rate % $M Average Assets and Interest Income Interest Earning Assets Receivables due from other financial institutions Australia Overseas Deposits with regulatory authorities Australia Investment/trading and other securities Australia Overseas Loans, advances and other receivables Australia Overseas Other interest earning assets Intragroup loans Australia Average interest earning assets and interest income including intragroup Intragroup eliminations Total average interest earning assets and interest income Non Interest Earning Assets Bank acceptances Australia Overseas Property, plant and equipment Australia Overseas Other assets Australia Overseas Provision for doubtful debts Australia Overseas Total average non interest earning assets Total average assets Percentage of total average assets applicable to overseas operations 64 1,882 1,977 106 135 5.6 6.8 2,361 2,747 135 151 809 - - 756 11 6,225 5,528 352 358 73,797 11,947 - 5,542 1,105 7 5.7 6.5 7.5 9.2 n/a 8,782 4,493 537 303 67,292 9,732 - 5,959 882 11 5.7 5.5 1.5 6.1 6.7 8.9 9.1 n/a 1,621 3,354 94 183 690 17 9,044 3,571 641 256 58,304 8,186 - 5,741 770 14 713 43 6.0 739 46 6.2 1,025 59 102,878 (713) 7,648 (43) 7.4 n/a 96,902 (739) 8,035 (46) 8.3 n/a 85,795 (1,025) 7,775 (59) 102,165 7,605 7.4 96,163 7,989 8.3 84,770 7,716 5.8 5.5 2.5 7.1 7.2 9.8 9.4 n/a 5.8 9.1 n/a 9.1 9,660 34 1,625 209 8,883 2,015 (950) (86) 21,390 123,555 17.5% 9,825 55 2,188 235 5,646 1,267 (938) (83) 18,195 114,358 16.1% 10,692 42 2,422 227 4,730 1,278 (994) (62) 18,335 103,105 16.1% NOTE 3 Average Balance Sheet and Related Interest continued 1998 Average Interest Average Rate Balance % $M $M 1997 Average Interest Average Rate Balance % $M $M 1996 Average Interest Average Rate Balance % $M $M Average Liabilities and Interest Expense Interest Bearing Liabilities and Loan Capital Time Deposits Australia Overseas Savings Deposits Australia Overseas Other demand deposits Australia Overseas Public borrowings by borrowing corporations Australia Payables due to other financial institutions Australia Overseas Short term borrowings Australia Overseas Long term borrowings Australia Overseas Loan capital Australia Other interest bearing liabilities Intragroup borrowings Overseas Average interest bearing liabilities and loan capital and interest expense including intragroup Intragroup eliminations Total average interest bearing liabilities and loan capital and interest expense Non Interest Bearing Liabilities Deposits not bearing interest Australia Overseas Liability on acceptances Australia Overseas Other liabilities Australia Overseas Total average non interest bearing liabilities Total average liabilities and loan capital Shareholders’ equity Total average liabilities, loan capital and shareholders’ equity Percentage of total average liabilities applicable to overseas operations 23,336 8,300 1,263 718 22,970 1,680 15,522 1,375 403 104 614 24 5.4 8.7 1.8 6.2 4.0 1.7 24,341 6,487 1,600 529 21,106 1,696 13,016 1,321 538 103 674 26 6.6 8.2 2.5 6.1 5.2 2.0 21,180 1,509 477 5,939 20,346 1,483 12,301 752 641 95 714 23 7.1 8.0 3.2 6.4 5.8 3.1 3,062 217 7.1 2,587 190 7.3 2,291 177 7.7 481 3,175 3,640 1,656 2,631 874 2,891 57 17 201 220 73 133 50 166 5 713 43 3.5 6.3 6.0 4.4 5.1 5.7 5.7 8.8 6.0 221 3,463 3,445 1,354 2,524 968 2,752 15 739 7 219 215 76 191 43 170 16 46 92,363 (713) 4,251 (43) 4.6 n/a 86,035 (739) 4,643 (46) 91,650 4,208 4.6 85,296 4,597 3.2 6.3 6.2 5.6 7.6 4.4 6.2 n/a 6.2 5.4 n/a 5.4 230 2,904 1,740 1,447 1,531 795 1,894 46 9 179 121 75 145 29 123 2 1,025 59 75,904 4,378 (59) (1,025) 74,879 4,319 3.9 6.2 7.0 5.2 9.5 3.6 6.5 n/a 5.8 5.8 n/a 5.8 3,738 58 9,660 34 9,377 1,990 24,857 116,507 7,048 123,555 16.5% 3,566 53 9,825 55 7,504 1,438 22,441 107,737 6,621 114,358 15.6% 3,604 76 10,692 42 5,726 1,245 21,385 96,264 6,841 103,105 15.3% 65 Notes to and forming part of the accounts continued NOTE 3 Average Balance Sheet and Related Interest continued Commonwealth Bank of Australia and Controlled Entities Changes in Net Interest Income: Volume and Rate Analysis The table allocates changes in net interest income between changes in volume and changes in rate over the previous year. Volume variances have been calculated by multiplying the average of both years’ average interest rates, on average interest earning assets and average interest bearing liabilities, by the movement in average asset and liability balances. Rate variances have been calculated by multiplying the average of the average asset and liability balances by the change in average interest rates. Variances resulting from changes in volume/rate movements have been allocated to each category in the same proportion as the actual ratio of individual volume and rate variances. Year ended 30 June 1998 versus 1997 Rate $M Year ended 30 June 1997 versus 1996 Rate $M Volume $M Volume $M Total $M Total $M Interest Earning Assets Receivables due from other financial institutions Australia Overseas Deposits with regulatory authorities Australia Investment/trading and other securities Australia Overseas Loans, advances and other receivables Australia Overseas Other interest earning assets Intragroup loans Australia Change in interest income including intragroup Intragroup eliminations Change in interest income Interest Bearing Liabilities Time deposits Australia Overseas Savings deposits Australia Overseas Other demand deposits Australia Overseas Public borrowings by borrowing corporations Australia Payables due to other financial institutions Australia Overseas Short term borrowings Australia Overseas Long term borrowings Australia Overseas Loan capital Australia Other interest bearing liabilities Intragroup borrowings Overseas Change in interest expense including intragroup Intragroup eliminations Change in interest expense Change in net interest income (27) (48) 1 (148) 65 544 205 n/a (2) 590 2 592 (64) 155 43 (1) 116 1 34 9 (19) 12 15 8 (4) 8 n/a (2) 311 2 313 279 (2) 32 (12) (37) (10) (961) 18 (4) (1) (977) 1 (976) (273) 34 (178) 2 (176) (3) (7) 1 1 (7) (18) (66) 11 (12) (11) (1) (703) 1 (702) (274) (29) (16) (11) (185) 55 (417) 223 (4) (3) (387) 3 (384) (337) 189 (135) 1 (60) (2) 27 10 (18) 5 (3) (58) 7 (4) (11) (3) (392) 3 (389) 5 42 (33) 2 (18) 63 831 141 n/a (17) 1,011 17 1,028 214 45 23 13 40 13 22 - 35 108 (5) 80 7 53 n/a (17) 631 17 648 380 (1) 1 (8) (86) (16) (613) (29) (3) 4 (751) (4) (755) (123) 7 (126) (5) (80) (10) (9) (2) 5 (14) 6 (34) 7 (6) 14 4 (366) (4) (370) (385) 41 (32) (6) (104) 47 218 112 (3) (13) 260 13 273 91 52 (103) 8 (40) 3 13 (2) 40 94 1 46 14 47 14 (13) 265 13 278 (5) 66 NOTE 3 Average Balance Sheet and Related Interest continued Net interest income Average interest earnings assets E C O N O M I C E N T I T Y 1998 $M 1997 $M 1996 $M 3,397 102,165 3,392 96,163 3,397 84,770 Interest Margins and Spreads Interest spread represents the difference between the average interest rate earned and the average interest rate paid on funds. Interest margin represents net interest income as a percentage of average interest earning assets. The calculations for Australia and Overseas include intragroup cross border loans/borrowings and associated interest. Australia Interest spread adjusted for interest forgone on non accrual and restructured loans Interest foregone on non accrual and restructured loans Interest Spread Benefit of net free liabilities, provisions and equity Australia Interest Margin Overseas Interest spread adjusted for interest foregone on non accrual and restructured loans Interest foregone on non accrual and restructured loans Interest spread Benefit of net free liabilities, provisions and equity Overseas Interest Margin Group Interest spread adjusted for interest foregone on non accrual and restructured loans Interest foregone on non accrual and restructured loans Interest spread Benefit of net free liabilities, provisions and equity Group Interest Margin % % % 3.22 (0.04) 3.18 0.43 3.61 1.44 (0.04) 1.40 0.57 1.97 2.89 (0.04) 2.85 0.48 3.33 3.30 (0.07) 3.23 0.64 3.87 1.41 (0.02) 1.39 0.36 1.75 2.98 (0.06) 2.92 0.61 3.53 3.78 (0.11) 3.67 0.73 4.40 1.61 (0.03) 1.58 0.32 1.90 3.43 (0.10) 3.33 0.68 4.01 67 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 4 Abnormal Items Abnormal expense items: Restructuring costs (Note 1(aa)) General provision charge for bad and doubtful debts (Note 1(o)) Write down of computer equipment (Note 1(s)) Total Abnormal Items Before Tax Abnormal tax expense (credit) items: Restructuring costs (Note 1(aa)) Tax effecting general provision (Note 1(y)) Write down of computer equipment (Note 1(s)) Total Abnormal Income Tax Expense (Credit) Total Abnormal Items After Tax E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 200 370 - 570 (72) (337) - (409) 161 - - 200 200 - - (72) (72) 128 - - - - - - - - - 200 370 - 570 (72) (337) - (409) 161 - - 200 200 - - (72) (72) 128 NOTE 5 Income Tax Expense Income tax expense shown in the financial statements differs from the prima facie tax charge calculated at current taxation rates on operating profit. Operating profit before abnormal items and income tax 1,912 1,816 1,776 1,550 1,547 Prima facie income tax at 36% Add (or deduct) permanent differences expressed on a tax effect basis: Current Period Increase in general provisions for bad and doubtful debts Specific provisions for offshore bad and doubtful debts not tax effected Non deductible depreciation on buildings Taxation rebates (net of accruals) Non assessable income - life insurance surplus Non deductible goodwill amortisation Employee share acquisition plan Other Prior Periods Other Income tax attributable to operating profit Abnormal income tax expense (credit) (Note 4) 688 654 639 558 557 9 28 50 9 29 35 9 (33) (27) 16 (10) (13) (14) (33) 641 (409) - 9 (35) (27) 15 (10) (23) (43) (23) 588 (72) - 12 (28) (20) 14 - (18) 10 (14) 635 - 28 8 (44) - 14 (10) (25) (20) (32) 506 (409) - 10 (88) - 14 (10) (18) (63) (23) 471 (72) Income tax expense 232 516 635 97 399 68 NOTE 5 Income Tax Expense continued Income tax expense comprises: Current taxation provision Deferred income tax provision Future income tax benefit Notional tax expense - leveraged leases Other Total Income Tax Expense The components of income tax expense consist of the following: Current Australia Overseas Deferred Australia Overseas The significant temporary differences are as follows: Deferred income tax assets arising from: Provisions not tax deductible until expense incurred Other Future income tax benefits (Note 20) Deferred income tax liabilities arising from: Leveraged leasing Lease financing Accelerated tax depreciation Other Total deferred income tax liabilities (Note 23) Future income tax benefits attributable to tax losses carried forward as an asset Future income tax benefits not taken to account Valuation allowance Opening balance Prior year adjustments Benefits now taken to account Benefits not recognised Closing balance (Note 20) E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 245 128 (158) 16 1 232 194 51 245 (13) - (13) 232 272 53 325 437 185 47 214 883 375 97 22 22 - 516 326 49 375 141 - 141 516 82 85 167 439 175 74 67 755 546 20 51 18 - 635 508 38 546 89 - 89 635 149 40 189 407 52 74 125 658 189 43 (146) 9 2 97 189 - 189 (92) - (92) 97 261 32 293 191 36 47 162 436 295 48 45 11 - 399 295 - 295 104 - 104 399 64 83 147 234 55 74 30 393 - - - - - 96 6 (4) 34 132 83 7 (2) 8 96 102 5 (24) - 83 96 6 (4) 23 121 83 7 (2) 8 96 69 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 6 Dividends Provided For, Reserved or Paid Interim dividend (fully franked) of 46 cents per share (1997: 45 cents, 1996: 38 cents) Provision for interim dividend - cash component only Declared final dividend (fully franked) of 58 cents per share (1997: 57 cents, 1996: 52 cents) Provision for final dividend - cash component only Dividends provided for payments in cash or paid Appropriations to Dividend Reinvestment Plan Reserve Interim dividend Final dividend Dividends appropriated to Dividend Reinvestment Plan Reserve Total Dividends Provided For, Reserved or Paid E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M 231 231 203 231 231 321 552 189 214 403 955 291 522 180 239 419 941 301 504 166 162 328 832 321 552 189 214 403 955 291 522 180 239 419 941 Dividend Franking Account The amount of franking credits available for subsequent financial years stands at $474 million. This figure represents the extent to which future dividends could be fully franked at 36%, and is based on the Bank’s franking account at 30 June 1998, which has been adjusted for franking credits that will arise from the payment of income tax payable on profits of the 1998 financial year, franking debits that will arise from the payment of dividends proposed as at the end of the financial year and franking credits that the Bank may be prevented from distributing in the subsequent financial year including $25 million as a result of a compromise with the Australian Taxation Office in respect of the buy back. NOTE 7 Earnings Per Share Earnings Per Ordinary Share (basic and fully diluted) Reconciliation of earnings used in the calculation of earnings per share Operating profit after income tax Less: Outside equity interests Earnings used in calculation of earnings per share Weighted average number of ordinary shares used in the calculation of earnings per share 1998 c 117.2 $M 1,110 (20) 1,090 M 930 E C O N O M I C E N T I T Y 1997 c 117.5 $M 1,100 (22) 1,078 1996 c 115.5 $M 1,141 (22) 1,119 Number of Shares M M 917 969 70 NOTE 8 Cash and Liquid Assets Australia Notes, coins and cash at bankers Money at short call Securities purchased under agreements to resell Bills receivable and remittances in transit Total Australia Overseas Notes, coins and cash at bankers Money at short call Bills receivable and remittances in transit Total Overseas Total Cash and Liquid Assets E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 921 96 328 141 1,486 30 10 - 40 1,526 1,060 37 675 84 1,856 31 - 120 151 2,007 909 - 328 140 1,377 - 16 - 16 1,393 1,060 - 675 84 1,819 - - 111 111 1,930 NOTE 9 Receivables from Other Financial Institutions Australia Overseas Total Receivables from Other Financial Institutions 2,382 1,066 3,448 2,616 2,223 4,839 2,371 834 3,205 2,590 2,037 4,627 NOTE 10 Trading Securities Australia Listed: Australian Public Securities Commonwealth and States Local and semi-government Other securities Unlisted: Commercial paper Certificates of deposit Bills of exchange Medium term notes Other securities Total Australia Overseas Listed: Government securities Eurobonds Bills of exchange Other securities Unlisted: Government securities Commercial paper Other securities Total Overseas Total Trading Securities 237 282 - 336 146 656 263 290 2,210 413 306 514 73 4 402 87 1,799 4,009 130 57 185 189 312 996 288 21 2,178 124 275 - 27 - - 31 457 2,635 237 281 - 336 146 656 263 290 2,209 59 306 - 73 - 1 50 489 2,698 130 57 185 234 312 996 288 21 2,223 124 275 - 27 - - 24 450 2,673 71 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 1,960 - 578 3,769 20 564 1,914 - 527 3,695 - 524 - - 17 - 141 455 8 17 34 5 115 301 - - - - 141 13 - 17 - - 115 22 3,151 4,833 2,595 4,373 179 5 547 539 447 25 - - 648 227 29 182 879 3,707 6,858 323 5 923 367 687 38 333 435 64 78 - 351 796 4,400 9,233 179 5 547 539 447 25 - - 647 227 29 182 527 3,354 5,949 323 5 923 367 676 16 - 46 64 78 - 351 184 3,033 7,406 NOTE 11 Investment Securities Australia Listed: Australian Public Securities Commonwealth and States Treasury notes Other securities and equity investments Unlisted: Australian Public Securities Commonwealth and States Treasury notes Bills of exchange Certificates of deposit Medium term notes Other securities and equity investments Total Australia Overseas Listed: Government securities Treasury notes Certificates of deposit Eurobonds Other securities Unlisted: Government securities Treasury notes Bills of exchange Certificates of deposit Eurobonds Medium term notes Commercial paper Other securities and equity investments Total Overseas Total Investment Securities 72 NOTE 11 Investment Securities continued Gross Unrealised Gains and Losses of Economic Entity Amortised Cost $M At 30 June 1998 Gross Unrealised Losses Gains $M $M Fair Value $M Amortised Cost $M At 30 June 1997 Gross Unrealised Losses $M Gains $M Fair Value $M Australia Australian Public Securities Commonwealth and States Treasury notes Bills of exchange Certificates of deposit Medium term notes Other securities and equity investments Total Australia Overseas Government securities Treasury notes Bills of exchange Certificates of deposit Eurobonds Medium term notes Other securities and equity investments Total Overseas Total Investment Securities 1,960 - 17 - 141 34 - - - 18 - - - - - 1,994 - 17 - 159 3,777 37 34 5 115 130 - - - 13 - - - - - 3,907 37 34 5 128 1,033 59 3,151 111 - - 1,092 3,262 865 4,833 88 231 9 9 944 5,055 204 5 - 1,195 766 29 30 - - 7 53 - 231 3 5 - - - 1 1,201 811 8 25 4 361 338 435 987 445 - 15 1 2 3 22 - - - 1 - 3 - 376 339 436 990 464 - 1,508 83 3,707 173 284 6,858 1,544 47 63 3,817 63 7,079 1,834 4,400 9,233 68 111 342 - 4 13 1,902 4,507 9,562 Investment securities are carried at cost or amortised cost and are purchased with the intent of being held to maturity. The investment portfolio is managed in the context of the full balance sheet of the Bank. Equity derivatives are in place to hedge equity market risk. There are $50 million of net deferred losses on these contracts (1997: $78 million net deferred losses) which offset the above gains and these are disclosed within Note 37. At the end of the financial year $80 million of net deferred losses (1997: nil) are included in the amortised cost value. 73 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 11 Investment Securities continued Maturity Distribution and Average Yield The table analyses the maturities and weighted average yields of the Economic Entity’s holdings of investment securities. 1 to 12 months % $M Maturity Period at 30 June 1998 5 to 10 years 1 to 5 years % % $M $M 10 years or more % $M Total $M Australia Australian Public Securities: Commonwealth and States Bills of exchange Medium Term Notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities Treasury Notes Certificates of Deposit Eurobonds Medium Term Notes Other securities, commercial paper and equity investments Total Overseas Total Investment Securities Maturities at Fair Value 126 17 - 588 731 64 5 1,114 116 - 248 1,547 2,278 2,331 6.76 5.32 - 6.44 6.75 2.24 6.22 6.33 - 4.09 1,512 - 84 - 1,596 67 - 48 234 29 652 1,030 2,626 2,684 5.89 - 9.11 - 9.25 - 7.86 7.03 - 9.12 6.64 - 9.80 0.11 5.93 - 5.51 6.32 - 6.58 322 - 57 104 * 483 73 - 33 416 - 261 783 1,266 1,368 - - - - - - - - 6.29 - - - 341 * 341 - - - - - 347 347 688 696 1,960 17 141 1,033 3,151 204 5 1,195 766 29 1,508 3,707 6,858 7,079 includes Equity investments * Proceeds at or close to maturity of investment securities were $8,681 million (1997: $7,013 million, 1996: $7,956 million). Proceeds from sale of investment securities were $1,787 million (1997: $1,172 million, 1996: $729 million). Realised capital gains were $65 million (1997: realised capital gains $12 million and realised capital losses $8 million, 1996: realised capital losses $10 million). 74 NOTE 12 Loans, Advances and Other Receivables Australia Overdrafts Housing loans Credit card outstandings Lease financing Bills discounted Term loans Redeemable preference share financing Equity participation in leveraged leases Other lending Total Australia Overseas Overdrafts Housing loans Credit card outstandings Lease financing Bills discounted Term loans Redeemable preference share financing Other lending Total Overseas Gross Loans, Advances and Other Receivables Less - Provisions for impairment (Note 13) General provision Specific provision against loans and advances Unearned income Term loans Lease financing Leveraged leases Interest reserved Unearned tax remissions on leveraged leases Net Loans, Advances and Other Receivables Lease receivables, net of unearned income (included above) Current Non current E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 2,841 41,137 2,218 3,594 916 25,676 740 1,615 1,290 80,027 519 6,273 134 60 4 5,189 369 - 12,548 92,575 2,707 37,400 1,823 3,032 1,025 22,939 775 1,455 1,565 72,721 379 5,983 123 28 124 3,977 367 88 11,069 83,790 2,876 41,137 2,217 1,123 917 22,173 125 769 738 72,075 - 125 - - 4 2,260 - - 2,389 74,464 2,719 37,400 1,823 1,045 1,025 19,234 159 866 718 64,989 - 146 - - 88 1,585 - 73 1,892 66,881 (1,076) (279) (690) (241) (995) (232) (604) (211) (425) (473) (295) (102) (109) (2,759) 89,816 (400) (442) (177) (109) (99) (2,158) 81,632 - (130) (42) (93) (23) (1,515) 72,949 - (145) (58) (101) (31) (1,150) 65,731 932 2,249 3,181 816 1,802 2,618 281 712 993 295 605 900 75 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 13 Provisions for Impairment General Provisions Opening balance Abnormal charge Charge against profit and loss Transfer to specific provisions Bad debts recovered Adjustments for exchange rate fluctuations Bad debts written off Closing balance Specific Provisions Opening balance Charge against profit and loss New and increased provisions Write-back of provisions no longer required Transfer from general provision for New and increased provisioning Less write-back of provisions no longer required Net transfer Adjustments for exchange rate fluctuations and other items Bad debts written off Closing balance Total Provisions for Impairment Specific provisions for impairment comprise the following segments: Provisions against loans and advances Provisions for diminution Total Provision Ratios Specific provisions for impairment as % of gross impaired assets net of interest reserved Total provisions for impairment as % of gross impaired assets net of interest reserved General provisions as % of risk weighted assets Charge to profit and loss for bad and doubtful debt comprises: General provisions Specific provisions Total Charge for Bad and Doubtful Debts 76 E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 690 370 165 (155) 48 - 1,118 (42) 1,076 613 - 36 - 80 2 731 (41) 690 604 370 164 (152) 38 2 1,026 (31) 995 521 - 48 - 67 - 636 (32) 604 241 318 211 289 105 (37) 175 (20) 155 (6) 458 (179) 279 1,355 279 - 279 % 152 (90) - - - 6 386 (145) 241 931 241 - 241 % 94 (34) 169 (17) 152 (7) 416 (154) 262 1,257 232 30 262 % 117 (80) - - - 6 332 (121) 211 815 211 - 211 % 33.86 30.24 37.11 29.39 164.44 1.14 $M 116.81 0.79 $M 178.19 1.14 $M 113.51 0.78 $M 165 68 233 36 62 98 164 60 224 48 37 85 NOTE 13 Provisions for Impairment continued Total charge for bad and doubtful debts The charge is required for Specific Provisioning New and increased provisioning Less provisions no longer required Net specific provisioning Provided from general provision Charge to profit and loss General Provisioning Direct write-offs Recoveries of amounts previously written off Movement in general provision Funding of specific provisions Charge to profit and loss Total Charge for Bad and Doubtful Debts Distribution of Bad Debt Expense Commonwealth Bank of Australia CBFC Limited Commonwealth Development Bank ASB Bank Limited Others Distribution of Provisions for Impairment Commonwealth Bank of Australia CBFC Limited Commonwealth Development Bank ASB Bank Limited Others (including consolidation adjustments) E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 233 280 (57) 223 (155) 68 42 (48) 16 155 165 233 1997 $M 1998 $M 98 224 152 (90) 62 - 62 41 (80) 75 - 36 98 263 (51) 212 (152) 60 31 (38) 19 152 164 224 1997 $M 85 117 (80) 37 - 37 32 (67) 83 - 48 85 E C O N O M I C E N T I T Y 1998 $M 1997 $M 224 85 10 5 (5) - 10 9 (6) (1) 233 98 G e n e r a l P r o v i s i o n S p e c i f i c P r o v i s i o n 1998 $M 1997 $M 1998 $M 1997 $M 995 29 16 31 5 1,076 604 28 24 31 3 690 262 6 10 7 (6) 279 211 7 14 6 3 241 77 Commonwealth Bank of Australia and Controlled Entities Notes to and forming part of the accounts continued NOTE 14 Credit Risk Concentrations Management of the Credit Business Credit risk is the potential for loss arising from: • failure of a debtor or counterparty to meet their contractual obligations; and failure to recover the recorded value of equity investments arising from individual transactions. • The Economic Entity has clearly defined credit policies for the approval and management of credit risk. Credit underwriting standards, which incorporate income/repayment capacity, acceptable terms and security and loan documentation tests exist for all products. The Economic Entity relies, in the first instance, on the assessed integrity and ability of the debtor or counterparty to meet its contracted financial obligations for repayment. Collateral security, in the form of real property or a floating charge is generally taken for business credit except for major government, bank and corporate counterparties of strong financial standing. Longer term consumer finance is generally secured against real estate while short term revolving consumer credit is generally unsecured. The credit risk portfolio is divided into two segments - statistically managed and credit risk rated managed. Statistically managed exposures are generally not reviewed unless arrears occur. Credit risk rated managed exposures are required to be reviewed at least annually. Both segments are subject to inspection by the Risk Asset Review function which reports quarterly on its findings to the Board Risk Committee. Facilities in the statistically managed segment become classified for remedial management by centralised units based on arrears status. Impaired assets in this segment are those ‘classified’ facilities which are not well secured and past due 180 days or more. Facilities in the credit risk rated managed segment become classified for remedial management by centralised units based on assessment in the risk rating system, which for each exposure makes an assessment of the risk of default, and then the risk of loss if default should occur. Impaired assets in this segment are those ‘classified’ facilities where either a specific provision for impairment has been raised, the facility is maintained on a cash basis, a loss of principal or interest is anticipated, facilities have been restructured or other assets have been accepted in satisfaction of an outstanding debt. A centralised exposure management system records all significant credit risks borne by the Economic Entity. This system is used to monitor concentrations by client, industry, geography and any other concentrations where increased risk is apparent. Maximum aggregated credit limits apply for debtors or counterparties (refer Large Exposures below). Credit risk is actively monitored and reviewed on a portfolio basis with regular independent reviews undertaken to test the quality of the credit risk portfolio, compliance with policy and underwriting standards, and the effectiveness of management control. The results of the reviews are reported quarterly to the Board Risk Committee. 78 NOTE 14 Credit Risk Concentrations continued The following tables set out the credit risk concentrations of the Economic Entity. Industry Trading Investment Loans Advances and Other Acceptances Contingent Bank R i s k C o n c e n t r a t i o n B y A s s e t C l a s s 3 0 J u n e 1 9 9 8 Securities $M Securities Receivables of Customers $M $M $M Liabilities Derivatives $M $M Total $M Australia Government and Public Authorities 544 1,698 1,216 365 1,034 343 5,200 Agriculture, Forestry and Fishing - - 4,128 523 82 58 4,791 Financial, Investment and Insurance 484 17 2,490 2,549 2,358 6,543 14,441 Real Estate - mortgage Real Estate - construction Personal Lease Financing - - - - Other Commercial and Industrial 1,182 1,436 - 34,505 94 - - 1,197 885 708 - - 14,063 57 242 - - 20,488 5,042 5,623 1,940 - - - 34,599 2,790 14,362 - 1,940 1,303 35,074 Total Australia Overseas 2,210 3,151 80,027 9,700 9,862 8,247 113,197 Government and Public Authorities 74 208 105 - 312 120 Agriculture, Forestry and Fishing - - 640 - - - 819 640 Financial, Investment and Insurance 916 1,195 1,449 - 451 1,934 5,945 Real Estate - mortgage Real Estate - construction Personal Lease Financing - - - - - 6,304 - 2 - 318 - 187 - - - 217 - 173 - - 4 38 - - 6,306 505 259 173 Other Commercial and Industrial 809 2,304 3,342 27 1,580 29 8,091 Total Overseas Gross Balances 1,799 3,707 12,548 27 2,536 2,121 22,738 4,009 6,858 92,575 9,727 12,398 10,368 135,935 Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 3,448 832 140,215 79 Notes to and forming part of the accounts continued NOTE 14 Credit Risk Concentrations continued Commonwealth Bank of Australia and Controlled Entities R i s k C o n c e n t r a t i o n b y A s s e t C l a s s 3 0 J u n e 1 9 9 7 Industry Trading Investment Securities $M Securities $M Loans Advances and Other Acceptances Contingent Bank Receivables of Customers $M $M Liabilities Derivatives $M $M Total $M Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Other Risk Concentrations Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 187 - 1,263 - - - - 728 2,178 131 - - - - - - 326 457 2,635 3,811 - 100 - - - - 922 4,833 707 48 1,539 - - 6 - 2,100 4,400 9,233 1,955 3,185 1,859 32,892 1,138 10,740 4,277 16,675 72,721 28 547 1,494 6,247 151 133 - 2,469 11,069 83,790 115 451 2,431 98 943 264 - 4,524 8,826 - - - - - - - 48 48 417 87 2,958 - 599 56 - 5,835 9,952 179 - 275 - 15 9 - 1,778 2,256 8,874 12,208 201 20 2,858 - 25 - - 1,063 4,167 3 - 1,612 - - - - 6,686 3,743 11,469 32,990 2,705 11,060 4,277 29,747 102,677 1,048 595 4,920 6,247 166 148 - 38 1,653 5,820 6,759 19,883 122,560 4,839 797 128,196 Risk concentrations for contingent liabilities and derivatives are based on the credit equivalent balance in Note 36, Contingent Liabilities and Note 37, Market Risk respectively. 80 NOTE 14 Credit Risk Concentrations continued R i s k C o n c e n t r a t i o n o f I m p a i r e d A s s e t s 3 0 J u n e 1 9 9 8 Industry Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk Total Risk $M 5,200 4,791 14,441 34,599 2,790 14,362 1,940 35,074 113,197 819 640 5,945 6,306 505 259 173 8,091 22,738 135,935 3,448 832 140,215 Impaired Provisions for Impairment Assets $M $M - 20 16 3 8 14 - 113 174 - 1 - 5 10 - - 89 105 279 - 66 65 - 102 9 2 372 616 - 3 2 - 3 2 - 300 310 926 Write-offs $M Recoveries $M Net Write-offs $M - 9 4 11 6 86 6 79 201 - - 3 1 - 6 - 10 20 - (4) (6) - (1) (21) (2) (12) (46) - - - - - (2) - - (2) - 5 (2) 11 5 65 4 67 155 - - 3 1 - 4 - 10 18 221 (48) 173 81 Notes to and forming part of the accounts continued NOTE 14 Credit Risk Concentrations continued Commonwealth Bank of Australia and Controlled Entities Industry Australia Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Australia Overseas Government and Public Authorities Agriculture, Forestry and Fishing Financial, Investment and Insurance Real Estate - mortgage Real Estate - construction Personal Lease Financing Other Commercial and Industrial Total Overseas Gross Balances R i s k C o n c e n t r a t i o n o f I m p a i r e d A s s e t s 3 0 J u n e 1 9 9 7 Total Risk $M Impaired Provisions for Impairment $M Assets $M Write-offs $M Recoveries $M Net Write-offs $M 6,686 3,743 11,469 32,990 2,705 11,060 4,277 29,747 102,677 1,048 595 4,920 6,247 166 148 - 6,759 19,883 - 104 58 4 45 44 3 573 831 - 1 2 - - 1 - 71 75 - 21 22 4 11 12 - 152 222 - 1 2 - - - - 16 19 - 15 4 9 14 58 5 69 174 - - - 1 2 3 - 6 12 122,560 906 241 186 - (5) (8) - (1) (16) (2) (31) (63) - - (2) - (2) (1) - (12) (17) (80) - 10 (4) 9 13 42 3 38 111 - - (2) 1 - 2 - (6) (5) 106 Receivables due from other financial institutions Deposits with regulatory authorities Total Gross Credit Risk 4,839 797 128,196 Large Exposures Concentration of exposure to any debtor or counterparty, other than to governments and banks, is controlled by the Large Credit Exposure Policy. All exposures outside the policy are approved by the Board Risk Committee. The following table shows the aggregate number of the Economic Entity’s corporate exposures (including direct and contingent exposure) which individually were greater than 5% of the Economic Entity’s capital resources (Tier 1 and Tier 2 capital): 10% to less than 15% of Economic Entitys capital resources 5% to less than 10% of Economic Entity’s capital resources 1998 Number 1997 Number 1 1 7 4 82 NOTE 15 Asset Quality Credit Portfolio The Economic Entity manages its credit portfolio in two segments: Statistically Managed Segment This segment comprises selected products where the exposures are generally less than $250,000. This segment is dominated by the housing portfolio. Credit facilities are approved using credit scoring and check sheet techniques. Risk Rated Managed Segment This segment comprises all credit exposures not statistically managed. Management of this segment is based on the credit risk rating system, which for each exposure makes an assessment of the risk of default, and then the risk of loss if default should occur. The Economic Entity’s credit risk portfolio is as follows: Total gross credit risk (Note 14) Less unearned income (Note 12) Credit Risk Credit Segments Statistically managed Risk rated managed Credit Risk 1998 $M 1997 $M 140,215 (1,193) 139,022 128,196 (1,019) 127,177 50,264 88,758 139,022 46,795 80,382 127,177 Charge for bad and doubtful debts for each segment was: C r e d i t S e g m e n t s C h a r g e L o s s R a t e C h a r g e L o s s R a t e Statistically managed Risk rated managed Sub-total Funding to general provisions Total charge for bad and doubtful debts The loss rate is the charge as a percentage of the credit segments. 1998 $M 80 137 217 16 233 1998 % pa 0.16 0.15 0.16 0.01 0.17 1997 $M 61 (38) 23 75 98 1997 % pa 0.13 (0.05) 0.02 0.06 0.08 83 Commonwealth Bank of Australia and Controlled Entities Notes to and forming part of the accounts continued NOTE 15 Asset Quality continued Impaired Assets There are three classifications of Impaired Assets: (a) Non accruals, comprising: • • any credit risk facility against which a specific provision for impairment has been raised; any credit risk facility maintained on a cash basis because of significant deterioration in the financial position of the borrower; and any credit risk facility where loss of principal or interest is anticipated. • All interest charged in the current financial period that has not been received in cash is reversed from profit and loss when facilities become classified as non accrual. Interest on these facilities is only taken to profit if received in cash. (b) Restructured Facilities • credit risk facilities on which the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to profit and loss. Failure to comply fully with the modified terms will result in immediate reclassification to non accruals. (c) Assets Acquired Through Security Enforcement (AATSE), includes: • Other Real Estate Owned (OREO), comprising real estate where the Bank has assumed ownership or foreclosed in settlement of a debt; and • Other Assets Acquired Through Security Enforcement (OAATSE), comprising assets other than real estate where the Bank has assumed ownership or foreclosed in settlement of a debt. E C O N O M I C E N T I T Y Impaired Asset Ratios Gross impaired assets net of interest reserved as % of credit risk net of interest reserved Net impaired assets as % of: Risk weighted assets Total shareholders’ equity 1998 % 0.60 0.58 7.91 1997 % 0.63 0.64 7.92 US GAAP SFAS 114 and 118 - Accounting by Creditors for Impairment of Loans At 30 June 1998, the recorded investment in loans that are considered to be impaired under SFAS 114 was $920 million (of which $920 million were on a non accrual basis). Included in this amount is $726 million of impaired assets for which the related allowance for credit losses is $259 million and $194 million of impaired loans that do not have an allowance for credit losses. The average recorded investment in impaired loans during the year ended 30 June 1998 was $908 million. For the year ended 30 June 1998, the Economic Entity recognised interest income on these loans of $34 million. At 30 June 1997, the recorded investment in loans that are considered to be impaired under SFAS 114 was $896 million (of which $896 million were on a non accrual basis). Included in this amount is $670 million of impaired assets for which the related allowance for credit losses is $226 million and $226 million of impaired loans that do not have an allowance for credit losses. The average recorded investment in impaired loans during the year ended 30 June 1997 was $1,008 million. For the year ended 30 June 1997, the Economic Entity recognised interest income on these loans of $50 million. At 30 June 1996, the recorded investment in loans that are considered to be impaired under SFAS 114 was $1,130 million (of which $1,102 million were on a non accrual basis). Included in this amount is $776 million of impaired assets for which the related allowance for credit losses is $303 million and $325 million of impaired loans that do not have an allowance for credit losses. The average recorded investment in impaired loans during the year ended 30 June 1996 was $1,417 million. For the year ended 30 June 1996, the Economic Entity recognised interest income on these loans of $75 million. 84 E C O N O M I C E N T I T Y E C O N O M I C E N T I T Y Australia 1998 $M Overseas 1998 $M Total 1998 $M Australia 1997 $M Overseas 1997 $M 439 177 616 (85) 531 (174) 357 293 17 310 (17) 293 (105) 188 732 194 926 (102) 824 (279) 545 606 225 831 (100) 731 (222) 509 - - - - - - - - - - - 616 (85) 531 (174) 357 274 183 159 616 265 - - - - - - - - - - - 310 (17) 293 (105) 188 5 43 262 310 - - - - - - - - - - - 926 (102) 824 (279) 545 279 226 421 926 25 290 - - - - - - - - - - - 831 (100) 731 (222) 509 371 283 177 831 288 74 1 75 (9) 66 (19) 47 - - - - - - - - - - - 75 (9) 66 (19) 47 3 12 60 75 16 NOTE 15 Asset Quality continued Non Accrual Loans With provisions Without provisions Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Non Accrual Loans Restructured Loans Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Restructured Loans Other Real Estate Owned (OREO) Gross Balances Less provisions for impairment Net OREO Other Assets Acquired Through Security Enforcement (OAATSE) Gross Balances Less provisions for impairment Net OAATSE Total Impaired Assets Gross Balances Less interest reserved Net Balances Less provisions for impairment Net Impaired Assets Non Accrual Loans by Size of Loan Less than $1 million $1 million to $10 million Greater than $10 million Accruing Loans 90 days past due or more These are loans which are well secured and not classified as impaired assets but which are in arrears 90 days or more. Interest on these loans continues to be taken to profit. Total 1997 $M 680 226 906 (109) 797 (241) 556 - - - - - - - - - - - 906 (109) 797 (241) 556 374 295 237 906 304 85 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y E C O N O M I C E N T I T Y Australia 1998 $M Overseas 1998 $M Total 1998 $M Australia 1997 $M Overseas 1997 $M Total 1997 $M NOTE 15 Asset Quality continued Interest Income Foregone on Impaired Assets Comprises net interest charged but not taken to profit during the year, and interest assessed for loans on which no interest has been charged. Non Accrual Loans Restructured Loans OREO OAATSE Total Interest taken to Profit and Loss on Impaired Assets Non Accrual Loans Restructured Loans OREO OAATSE Total 34 - - - 34 34 - - - 34 7 - - - 7 - - - - - 41 - - - 41 34 - - - 34 52 - - - 52 50 - - - 50 3 - - - 3 - - 5 - 5 Migration of Impaired Assets The following table provides an analysis of the movement in the gross impaired asset balances. Opening balance Plus - new and increased Less - balances written off - return to performing or repaid Closing balance 906 689 (216) (453) 926 55 - - - 55 50 - 5 - 55 1,185 487 (190) (576) 906 Asian Exposures The Economic Entity’s credit risk exposure to Asian countries as at 30 June 1998 is set out below. C u s t o m e r T y p e Country Finance $M 115 263 378 2,065 8 581 12 7 2,673 87 272 27 386 3,437 China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total 86 Corporate/ Multinational $M 110 525 635 509 69 104 33 6 721 256 98 209 563 1,919 Government $M - 29 29 - - 5 - - 5 54 - 18 72 106 Project Finance $M - - - - - - - - - 142 - - 142 142 APL/NZPL $M - 162 162 - 1 59 - - 60 79 - - 79 301 3 0 / 0 6 / 9 8 3 1 / 1 2 / 9 7 Total Exposure $M Total Exposure $M 225 979 1,204 2,574 78 749 45 13 3,459 618 370 254 1,242 5,905 n/a n/a 1,298 2,839 163 658 89 - 3,749 702 740 256 1,698 6,745 NOTE 15 Asset Quality continued Country China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total Country China Hong Kong Japan Malaysia Singapore Taiwan Other Indonesia South Korea Thailand Total E x p o s u r e C a t e g o r y 3 0 / 0 6 / 9 8 3 1 / 1 2 / 9 7 On BS O’standing $M Undrawn Commitments $M Off BS O’standing $M Pre Settle Risk $M APL/ NZPL $M Total Exposure $M Total Exposure $M 152 576 728 1,727 69 338 44 10 2,188 342 283 216 841 3,757 38 185 223 264 - 8 1 3 276 66 - 36 102 601 6 5 11 206 7 332 - - 545 131 48 - 179 735 29 51 80 377 1 12 - - 390 - 39 2 41 511 - 162 162 - 1 59 - - 60 79 - - 79 301 225 979 1,204 2,574 78 749 45 13 3,459 618 370 254 1,242 5,905 n/a n/a 1,298 2,839 163 658 89 - 3,749 702 740 256 1,698 6,745 P r o d u c t C a t e g o r y 3 0 / 0 6 / 9 8 3 1 / 1 2 / 9 7 Trade Finance $M 74 4 78 163 - - 12 - 175 - 138 2 140 393 Lending Bkd outside Asia $M 55 280 335 402 7 36 - - 445 - - 4 4 784 Other Comm Lending APL/NZPL Treasury/ Securities Total Exposure Total Exposure $M 67 300 367 384 8 391 33 10 826 539 164 221 924 2,117 $M - 162 162 - 1 59 - - 60 79 - - 79 301 $M 29 233 262 1,625 62 263 - 3 1,953 - 68 27 95 2,310 $M 225 979 1,204 2,574 78 749 45 13 3,459 618 370 254 1,242 5,905 $M n/a n/a 1,298 2,839 163 658 89 - 3,749 702 740 256 1,698 6,745 Total Exposure - The maximum of the limit or balance utilised for committed facilities, whichever is highest, and the balance utilised for uncommitted facilities. For derivative facilities, balances are reported based on the RBA ‘original exposure’ method. Project Finance - Long term lending for large scale projects (such as mining, infrastructure) where repayment is primarily reliant on the cash flow from the project for repayment. On BS O’standing – On balance sheet outstandings are balances of facilities utilised as reported on the balance sheet. Undrawn Commitments - The excess of limits over utilisations for committed facilities. Further drawdowns are subject to compliance by the borrower with facility conditions. Off BS O’standing – Off balance sheet outstandings are balances of off balance sheet facilities utilised (excluding derivatives). Pre Settle Risk – Pre settlement risk is the balance of derivative exposures (on RBA ‘original exposure’ basis). Trade Finance – Trade related documentary letters of credit and other trade products. APL / NZPL - These are facilities to persons supported primarily by residential property in Australia and New Zealand. Lending Bkd outside Asia - Lending Booked outside Asia are indirect exposures booked outside Asia where there is a relationship with the parent entity (such as through a letter of awareness / letter of comfort). Other – Countries with total exposure of less than $10 million. n/a – not available. Information on Asian Exposures has not been disclosed prior to 31 December 1997. 87 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 16 Deposits with Regulatory Authorities Reserve Bank of Australia Central Banks Overseas Total Deposits with Regulatory Authorities E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 831 1 832 793 4 797 1998 $M 827 1 828 1997 $M 782 4 786 Deposits with the RBA are non callable deposits which are required to be maintained at a level equivalent to 1% of the liabilities of the Bank in Australia. NOTE 17 Shares in and Loans to Controlled Entities Shares in controlled entities at cost or recoverable amount Loans to controlled entities Total Shares in and Loans to Controlled Entities - - - - - - 3,052 2,531 5,583 2,832 2,308 5,140 NOTE 18 Property, Plant and Equipment (a) Land and Buildings Land: At 30 June 1997 valuation At 30 June 1998 valuation Closing balance Buildings: At 30 June 1997 valuation At 30 June 1998 valuation Closing balance Total Land and Buildings - 373 373 - 964 964 1,337 480 - 480 1,039 - 1,039 1,519 - 347 347 - 856 856 451 - 451 914 - 914 1,203 1,365 These valuations were established by the Directors and are lower than valuations prepared by independent valuers. No adjustments have been taken to asset revaluation reserve in 1998 or 1997. (b) Leasehold Improvements At cost Provision for depreciation Closing balance (c) Equipment At cost Provision for depreciation Abnormal write down of computer equipment (Notes 1(s) and 4) Closing balance Total Property, Plant and Equipment NOTE 19 Goodwill Purchased goodwill Accumulated amortisation Total Goodwill 88 254 (129) 125 539 (339) - 200 1,662 223 (104) 119 1,406 (834) (200) 372 2,010 242 (126) 116 335 (216) - 119 1,438 208 (98) 110 1,179 (704) (200) 275 1,750 835 (304) 531 833 (259) 574 784 (294) 490 784 (255) 529 NOTE 20 Other Assets Accrued interest receivable Shares in other companies Accrued fees/reimbursements receivable Securities sold not delivered Future income tax benefits Unrealised gains on trading derivatives (Note 37) Other Total Other Assets E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 794 8 114 1,076 325 8,297 1,245 11,859 868 835 781 8 109 109 32 35 73 489 1,033 473 293 147 167 4,742 8,297 4,742 871 800 1,141 7,502 11,402 7,141 Potential future income tax benefits of the Chief Entity arising from tax losses in offshore centres and timing differences have not been recognised as assets because recovery is not virtually certain. These benefits, which could amount to $132 million (1997: $96 million) will only be obtained if: • The Chief Entity derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; The Chief Entity continues to comply with the conditions for deductibility imposed by tax legislation; and • • No changes in tax legislation adversely affect the Chief Entity in realising the benefit from the deductions for the losses. NOTE 21 Deposits and Other Public Borrowings Australia Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest By borrowing corporations Securities sold under agreements to repurchase Other Total Australia Overseas Certificates of deposit Term deposits On demand and short term deposits Deposits not bearing interest Total Overseas 2,156 21,679 39,997 3,936 3,183 662 7 71,620 2,938 6,201 3,057 70 12,266 1,700 2,156 1,712 22,415 21,679 22,391 35,535 40,229 35,670 3,929 4,962 4,932 2,924 - 662 714 714 8 1 67,225 69,688 65,420 - - 975 551 2,076 5,255 2,230 1,820 39 14 3,219 12 31 105 10,655 3,256 2,416 Total Deposits and Other Public Borrowings 83,886 77,880 72,944 67,836 NOTE 22 Payables to Other Financial Institutions Australia Overseas Total Payables to Other Financial Institutions 1,281 2,116 3,397 394 1,252 379 3,227 1,756 2,861 3,621 3,008 3,240 89 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 215 883 1,098 166 755 921 205 436 641 160 393 553 1 - 1 4 - 4 1 - 1 1 - 1 1,099 925 642 554 289 129 316 137 288 123 314 134 218 236 218 236 122 - 122 - 10 35 30 42 875 15 30 50 51 835 10 - 30 39 830 15 - 50 48 797 6,758 3,850 10,608 6,411 3,743 10,154 6,190 3,049 9,239 5,403 3,352 8,755 319 4,219 1,365 827 3,074 1,922 - 4,219 1,245 - 3,074 1,773 855 6,758 588 6,411 726 6,190 556 5,403 NOTE 23 Income Tax Liability Australia Provision for income tax Provision for deferred income tax Total Australia Overseas Provision for income tax Provision for deferred income tax Total Overseas Total Income Tax Liability NOTE 24 Other Provisions Provision for: Long service leave Annual leave Other employee entitlements Restructuring costs Homes insurance General insurance claims Self insurance/non lending losses Other Total Other Provisions NOTE 25 Debt Issues Short term debt issues Long term debt issues Total Debt Issues Short Term Debt Issues AUD Promissory Notes US Commercial Paper Euro Commercial Paper and Certificates of Deposit Long Term Debt Issues With Less than one Year to Maturity Total Short Term Debt Issues 90 NOTE 25 Debt Issues continued Long Term Debt Issues USD Medium Term Notes AUD Medium Term Notes JPY Medium Term Notes E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 460 605 460 476 681 853 624 798 813 732 813 732 Other Currencies Medium Term Notes 509 690 293 483 Offshore Loans (all JPY) Eurobonds (all AUD) Develop Australia Bonds (all AUD) Total Long Term Debt Issues Maturity Distribution of Debt Issues Less than 3 months 3 months to 12 months Between 1 and 5 years Greater than 5 years Total Debt Issues 558 562 558 562 301 301 301 301 528 - - - 3,850 3,743 3,049 3,352 4,653 4,107 4,085 3,099 2,105 2,304 2,105 2,304 2,376 1,474 2,866 877 2,160 889 2,530 822 10,608 10,154 9,239 8,755 The Bank has a Euro Medium Term Note programme under which it may issue notes (EuroMTNs) up to an aggregate amount of USD5 billion. Notes issued under the programme are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. Subsequent to 30 June 1998, the Bank has issued USD200m EuroMTNs due 1999 (AUD323m). Where any debt is booked in an offshore branch or subsidiary, the amounts have first been converted in to the base currency of the branch at a branch defined exchange rate, before being converted in to the AUD equivalent. When proceeds have been employed in currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into. Exchange Rates Utilised AUD 1.00 = USD GBP JPY NZD HKD DEM CHF INR 30 June 1998 .6128 .3675 86.3201 1.1930 4.7486 1.1091 .9337 8000 30 June 1997 .7457 .4482 85.2464 1.0992 5.7777 1.2954 1.0846 1890 91 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 25 Debt Issues continued Guarantee Arrangements Commonwealth Bank of Australia The due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the Commonwealth Bank’s Act 1959 (as amended) at 30 June 1996. This guarantee is being progressively phased out following the reduction of the Commonwealth’s shareholding in the Bank to below 50% on 19 July 1996. The transitional arrangements for phasing out the Commonwealth’s guarantee are contained in the Commonwealth Bank Sale Act 1995. In relation to the Commonwealth’s guarantee of the Bank’s liabilities, transitional arrangements provide that: • All demand deposits and term deposits will be guaranteed until the end of the day on 19 July 1999, with term deposits outstanding at the end of the day on 19 July 1999 being guaranteed until maturity; and • All other amounts payable under a contract that was entered into, or under an instrument executed, issued, endorsed or accepted by the Bank before 19 July 1996 are guaranteed until their maturity. Under the terms of an agreement reached between the Commonwealth and the Bank, the Bank will report to the Commonwealth annually on the level and maturity profile of outstanding liabilities which are subject to the Commonwealth’s guarantee. The agreement also includes an undertaking from the Bank that it will not seek to extend the maturity profile of its deposit liabilities beyond that required in the normal course of business during the three years following 19 July 1996. Commonwealth Development Bank On 24 July 1996, the Commonwealth of Australia sold its 8.1% shareholding in the Commonwealth Development Bank (CDB) to the Bank for $12.5 million. Under the arrangements relating to the purchase by the Bank of the Commonwealth’s shareholding in the CDB: • All lending assets as at 30 June 1996 have been quarantined in CDB, consistent with the Charter terms on which they were written; The CDB’s liabilities continue to remain guaranteed by the Commonwealth; and • • CDB ceased to write new business or incur additional liabilities from 1 July 1996. From that date, new business that would have previously been written by CDB is being written by the rural arm of the Bank. The due payment of all monies payable by CDB is guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Banks Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth whilst quarantined assets are held. The value of the liabilities under the guarantee will diminish as quarantined assets reach maturity and are repaid. NOTE 26 Bills Payable and Other Liabilities Bills payable Accrued interest payable Accrued fees and other items payable Securities purchased not delivered Unrealised losses on trading derivatives (Note 37) Other liabilities Total Bills Payable and Other Liabilities E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 547 817 500 650 7,790 442 10,746 531 312 592 742 458 434 609 904 4,719 7,790 254 587 7,698 10,234 298 624 377 888 4,719 463 7,369 92 NOTE 27 Loan Capital Tier 1 Capital Exchangeable Exchangeable Undated Tier 2 Capital Extendible Extendible Subordinated Subordinated Subordinated Currency Amount (M) USD300 USD400 USD100 FRNs FRNs FRNs FRNs FRNs Euro MTNs Euro MTNs Euro MTNs USD125 AUD300 USD400 GBP200 JPY30,000 (1) (2) (3) (4) (5) (6) (7) (8) E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1998 $M 1997 $M 422 563 163 1,148 388 517 134 1,039 422 563 163 1,148 388 517 134 1,039 156 300 501 408 483 1,848 2,996 156 300 501 408 397 1,762 2,801 156 300 501 408 483 1,848 2,996 156 300 501 408 397 1,762 2,801 Total Loan Capital (1) USD 300 million Undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into Dated FRNs. Outstanding notes at 30 June 1998 were: Due July 1998 Due July 1999 Due July 2000 Undated Outstanding notes at 30 June 1998 were: Due February 1999 Due February 2000 Undated : : : : : : : USD 225.75 million USD 19 million USD 48.25 million USD 7 million USD 217 million USD 176 million USD 7 million (2) USD 400 million Undated FRNs issued 22 February 1989 exchangeable into Dated FRNs. (3) USD 100 million Undated Capital Notes issued on 15 October 1986. The Bank has entered into separate agreements with the Commonwealth of Australia relating to each of the above issues (the ‘Agreements’) which qualify the issues as Tier 1 capital. The Agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either fully paid ordinary shares to the Commonwealth or (with the consent of the Commonwealth) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price of such shares will be determined by reference to the prevailing market price for the Bank ’s shares. Any one or more of the following events may trigger the issue of shares to the Commonwealth or a rights issue: • A relevant event of default (discussed below) occurs in respect of a note issue and the Trustee of the relevant • • • notes gives notice to the Bank that the notes are immediately due and payable; The most recent audited annual financial statements of the Group show a loss (as defined in the Agreements); The Bank does not declare a dividend in respect of its ordinary shares; The Bank, if required by the Commonwealth and subject to the agreement of the RBA, exercises its option to redeem a note issue; or In respect of Undated FRNs which have been exchanged to Dated FRNs, the Dated FRNs mature. • Any payment made by the Commonwealth pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth to the value of such payment. The relevant events of default differ depending on the relevant Agreement. In summary, they cover events such as failure of the Bank to meet its monetary obligation in respect of the relevant notes; the insolvency of the Bank; any law being passed to dissolve the Bank or the Bank ceasing to carry on general banking business in Australia; and the Commonwealth ceasing to guarantee the relevant notes. In relation to the USD 225.75 million of Dated FRNs which matured in July 1998, the Bank and the Commonwealth agreed to amend the relevant Agreement to reflect that the Commonwealth was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs. 93 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 27 Loan Capital continued (4) USD 125 million Extendible FRNs issued June 1989; due June 1999. (5) AUD 300 million Extendible Floating Rate Stock issued December 1989; due December 2004. The Bank has entered into separate agreements with the Commonwealth relating to each of the above issues (the ‘Agreements’) which qualify the issues as Tier 2 capital. For capital adequacy purposes Tier 2 debt based capital is reduced each year by 20% of the original amount during the last 5 years to maturity. The Agreements provide for the Bank to issue either fully paid ordinary shares to the Commonwealth or (with the consent of the Commonwealth) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price will be determined by reference to the prevailing market price for the Bank’s shares. Any one or more of the following events will trigger the issue of shares to the Commonwealth or a rights issue: • A relevant event of default occurs in respect of a note issue and, where applicable, the Trustee of the relevant • notes gives notice of such to the Bank; or The Bank, if required by the Commonwealth and subject to the agreement of the RBA, exercises its option to redeem such issue. Any payment made by the Commonwealth pursuant to its guarantee in respect of the relevant issue will trigger the issue of shares to the Commonwealth to the value of such payment. (6) USD 400 million Subordinated Euro MTN issued June 1996; due July 2006. (7) GBP 200 million Subordinated Euro MTN issued March 1996; due December 2006. JPY 30 billion Subordinated Euro MTN issued October 1995; due October 2015. (8) NOTE 28 Share Capital Authorised Capital 3,250,000,000 ordinary shares of $2 each Issued and Paid Up Capital Opening balance (ordinary fully paid shares of $2 each) Buy Back Dividend reinvestment plan Employee Share Acquisition Plan Employee Share Subscription Plan Closing balance Shares on Issue As at 30 June 1997 Buy Back Dividend reinvestment plan issues: 1997 final dividend fully paid ordinary shares at $14.55 1998 interim dividend fully paid ordinary shares at $18.06 Employee Share Acquisition Plan issues Employee Share Subscription Plan issues Total shares on issue at 30 June 1998 C H I E F E N T I T Y 1998 $M 1997 $M 6,500 6,500 1,860 (76) 57 4 - 1,845 1,981 (200) 74 5 - 1,860 Number 930,177,235 (38,093,483) 18,511,049 10,093,343 1,640,530 329,600 922,658,274 Employee Share Acquisition Plan An Employee Share Acquisition Plan was approved by shareholders for a 3 year period at the Annual General Meeting on 8 October 1996. On 2 January 1997 the Bank allotted 2,303,665 ordinary shares to 27,755 eligible employees for no consideration under the Employee Share Acquisition Plan. On 18 March 1997 the Bank allotted an additional 1,079 ordinary shares to 13 eligible employees. Each participating eligible employee has been granted one ordinary share and 82 bonus ordinary shares, which effectively represents $1,000 of free shares at $12.04 per share. On 11 December 1997 the Bank allotted 1,640,298 ordinary shares to 28,281 eligible employees for no consideration under the Employee Share Acquisition Plan. On 3 February 1998 the Bank allotted an additional 232 ordinary shares to 4 eligible employees. The 3,025 new eligible employees have been granted one ordinary share and 57 bonus ordinary shares, which effectively represents $1,000 of free shares at $17.16 per share. The 25,260 previously eligible employees have been granted 58 bonus shares at $17.16 per share. The bonus shares have been fully paid up as issued shares utilising the Share Premium Reserve. 94 NOTE 28 Share Capital continued Employee Share Subscription Plan An Employee Share Subscription Plan was approved by shareholders for a 3 year period at the Annual General Meeting on 8 October 1996. On 27 March 1997 a total of 209,400 ordinary shares were issued to 1,149 eligible employees at a purchase price of $12.74 per share. The purchase price is 95% of the weighted average market price of the shares on the ASX during the five trading days immediately before the offer date of 25 February 1997. The market price at date of issue was $12.75 per share. On 25 September 1997 a total of 171,000 ordinary shares were issued to 971 eligible employees at a purchase price of $14.84 per share. The purchase price is 95% of the weighted average market price of the shares on the ASX during the five trading days immediately before the offer date of 26 August 1997. The market value at the date of issue was $17.22 per share. On 27 March 1998 a total of 158,600 ordinary shares were issued to 815 eligible employees at a purchase price of $16.80 per share. The purchase price is 95% of the weighted average market price of the shares on the ASX during the five trading days immediately before the offer date of 24 February 1998. The market value at the date of issue was $18.07 per share. The Employee Share Subscription Plan provides employees of the Bank with the opportunity to purchase ordinary shares at a 5% discount to the market price of the shares at the time of purchase, subject to a one year restriction on the disposal of the shares. At the Board’s discretion up to 300 shares per annum may be acquired by employees who have had at least one year’s continuous service, excluding casual and overseas resident employees. The opportunity to acquire the shares is available twice a year within a period commencing two days and expiring thirty days after the Bank’s half yearly and annual results are announced. Executive Option Plan An Executive Option Plan was approved by shareholders for a 3 year period at the Annual General Meeting on 8 October 1996. A total of 2,100,000 options were initially issued on 16 December 1996 to 25 participating eligible executives, with an exercise price of $11.85 per share and exercise period from 13 November 1999 to 12 November 2001. The exercise price of $11.85 per share was the Market Value (as defined in the Plan Rules) at the Grant Date being 12 November 1996. Market Value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the Grant Date. The market price at date of issue of the options was $11.93 per share. A total of 2,875,000 options were issued on 11 December 1997 to 27 participating eligible executives, with an exercise price of $15.53 per option and exercise period from 4 November 2000 to 3 November 2002. The exercise price of $15.53 per share is the Market Value (as defined in the Plan Rules) at the Grant Date being 3 November 1997 which will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting). Market Value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the Grant Date. The market price at date of issue of the options was $16.85. 300,000 options, from all grants to date, have been forfeited as at 30 June 1998. Eligible executives must hold a minimum number of shares as determined by the Board before they are permitted to take up any options. The minimum holding must be maintained during the five year life of the options. The options cannot be exercised before 13 November 1999 and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. To reach the performance hurdle, the Bank’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of Total Shareholder Return achieved by the companies represented in the ASX ‘Banks and Finance Accumulation Index’, excluding the Bank. If the performance hurdle is not reached after three years, the options may nevertheless be exercisable only if the hurdle is subsequently reached within the remaining life of the options. The plan is limited to no more than 50 executives. The option plan does not grant rights to the option holders to participate in a share issue of any other body corporate. Sale of Government Shareholding and Share Buy Back The Commonwealth Government’s sale of its remaining 50.39% shareholding in the Bank was completed on 22 July 1996. The Commonwealth’s sale included a global offering of 399,103,979 of the Bank’s shares in the form of ‘Instalment Receipts’ and a selective buy back of 100 million shares by the Bank. The final price for the global offering was set by the Government at $10.45 per share payable in two instalments of $6.00 and $4.45 on 22 July 1996 and 14 November 1997 respectively. On 14 May 1996, the Bank’s shareholders, other than the Commonwealth of Australia and its associates, voted to approve the terms of a Buy Back Agreement dated 9 April 1996 pursuant to which the Commonwealth had agreed to sell, and the Bank had agreed to acquire, 100 million of the Bank’s shares pursuant to a selective buy back under the Corporations Law. The price per share paid by the Bank for the buy back shares was $10.008 calculated in accordance with a formula provided in the Buy Back Agreement and based on the gross proceeds of the first instalment due to the Government pursuant to its global offering and the net present value of the final instalment due on 14 November 1997. Payment of $1,001 million for the buy back shares was made to the Commonwealth on 22 July 1996. The buy back shares were cancelled on that date, as required by the Corporations Law. 95 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 28 Share Capital continued The Bank’s shareholders’ equity was reduced by $651 million on 29 December 1997 pursuant to the buy back of 38.1 million shares. The price per share paid by the Bank for the buy back shares was $17.08 calculated in accordance with the buy back offer. In accordance with a compromise reached with the Australian Taxation Office $2 per share of the consideration for each share bought back has been charged to paid up capital ($76 million) and $5 per share against share premium reserve ($191 million). The balance of $10.08 per share is deemed to be a fully franked dividend and charged to retained profits ($384 million). NOTE 29 Outside Equity Interests Share Capital Reserves Retained profits Total Outside Equity Interests E C O N O M I C E N T I T Y 1998 $M 1997 $M 118 130 - - 59 48 177 178 ASB Bank Limited issued- • NZD $50 million non cumulative preference shares on 22 December 1995. The preference shares are non voting, non cumulative, redeemable at the option of ASB Bank and bear a dividend based on a margin above the 5 year bond rate. 57,955,325 ordinary shares to minority shareholders for an issue price of NZD $1 (on a pro rata basis) on 28 June 1996. • NOTE 30 Capital Adequacy In August 1988 the Reserve Bank of Australia (RBA) established guidelines for the capital adequacy of Australian banks, to strengthen their soundness and stability. These guidelines are generally consistent with those proposed by the Committee on Banking Regulations and Supervisory Practices of the Bank for International Settlements. They require Australian banks to have a ratio of capital (comprising ‘Tier 1’ and ‘Tier 2’ capital) to risk adjusted assets and off balance sheet exposures, determined on a risk weighted basis, of at least 8 per cent, of which at least half must be Tier 1 capital. Tier 1, or core, capital includes paid up ordinary shares, retained earnings, reserves, other approved capital resources and minority interest in subsidiaries, less goodwill. Tier 2, or supplementary, capital includes general provisions for bad and doubtful debts and dated bond and note issues. For capital adequacy purposes Tier 2 debt based capital is reduced each year by 20% of the original amount during the last five years to maturity. Risk weighted assets compiled for credit risk purposes are calculated by applying one of five approved categories of risk weight (0, 10, 20, 50 or 100 per cent) to the assets of the Economic Entity, based primarily on the calibre of the counterparty. Off balance sheet exposures are firstly converted to on balance sheet credit equivalents using credit conversion factors relating to the nature of the exposure, then weighted in the same manner as balance sheet assets. The only exception is for derivatives where a maximum weighting of 50% applies. In addition to the capital requirements for credit risk purposes, effective from 1 January 1998, Australian banks are also required to hold sufficient levels of capital to cover market risk of their trading books. Market risk is defined as the risk of losses in on and off balance sheet positions arising from movements in market price. RBA require the measure of market risk to be multiplied by 12.5 (ie the reciprocal of the minimum capital ratio of 8 per cent) to determine a notional Risk Weighted Asset figure. Comparatives for 1997 are not available. The capital adequacy ratio is calculated by taking the total risk weighted assets (credit risk assets plus notional market risk assets) as the denominator and the Economic Entity’s capital base as the numerator. 1998 Actual % 1997 Actual % 8.07 2.82 (0.40) 10.49 8.64 2.82 (0.57) 10.89 Risk Weighted Capital Ratios Tier one Tier two Less RBA statutory deductions Total 96 NOTE 30 Capital Adequacy continued Tier One Capital Total Shareholders’ Equity Eligible Loan Capital * Total Shareholders’ Equity and Loan Capital Less Goodwill Less Preference Shares Total Tier One Capital Tier Two Capital General provisions for bad and doubtful debts FITB related to general provision Dated note and bond issues Preference shares Total Tier Two Capital Tier One and Tier Two Capital Less RBA statutory deductions Total Tier One and Tier Two Capital * Included gross of any related swaps. Risk-weighted assets E C O N O M I C E N T I T Y 1998 $M 1997 $M 6,889 1,306 7,024 1,073 8,195 8,097 (531) (47) (574) (55) 7,617 7,468 1,076 (337) 1,885 42 690 - 1,702 45 2,666 2,437 10,283 (381) 9,905 (487) 9,902 9,418 F a c e v a l u e R i s k W e i g h t s 1998 $M 1997 $M % R i s k - w e i g h t e d B a l a n c e 1997 $M 1998 $M On balance sheet assets Cash, claims on Reserve Bank, short term claims on Australian Commonwealth and State Government and Territories, and other zero-weighted assets (1) Longer term claims on Australian Commonwealth, State and Territory Governments Claims on OECD banks and local governments Advances secured by residential property (2) All other assets Total on balance sheet assets - credit risk (1) Other zero weighted assets include gross unrealised gains on trading derivative financial instruments of $8,297 million 4,954 7,566 46,158 57,004 126,414 7,392 10,533 39,420 54,191 120,051 495 1,513 23,079 57,004 82,091 739 2,107 19,710 54,191 76,747 10% 20% 50% 100% 10,732 8,515 0% (3) (4) - - (1997: $4,742million). (2) The RBA announced on 17 August 1994 that housing loans approved after 5 September 1994 having a loan to market valuation ratio in excess of 80 per cent must be risk weighted at 100 per cent. These loans are reported under ‘All other assets’. (3) The difference between total on balance sheet assets and the Economic Entity’s balance sheet reflects the alternative treatment of some assets and provisions as prescribed in RBA’s capital adequacy guidelines, principally goodwill and general provisions for bad and doubtful debts. (4) Total on-balance sheet assets exclude debt and equity securities in the trading bank and all on-balance sheet positions in commodities as they are included in the calculation of notional market risk weighted assets. 97 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 30 Capital Adequacy continued Off-balance sheet exposures Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions Total off-balance sheet exposures - credit risk Total risk-weighted assets - credit risk Risk-weighted assets - market risk Total risk-weighted assets F a c e v a l u e 1998 $M 1997 $M 1998 $M C r e d i t E q u i v a l e n t 1997 $M R i s k - w e i g h t e d B a l a n c e 1997 $M 1998 $M 2,729 1,593 23,669 2,855 1,380 21,339 2,729 655 9,014 2,855 563 8,790 276,051 304,042 258,990 284,564 9,813 22,211 5,766 17,974 2,188 608 6,010 2,921 11,727 93,818 613 94,431 1,930 524 5,483 1,784 9,721 86,468 N/A 86,468 NOTE 31 Maturity Analysis of Monetary Assets and Liabilities The maturity distribution of monetary assets and liabilities is based on contractual terms. The majority of the longer term monetary assets are variable rate products. Therefore this information is not relied on by the Bank in the management of its interest rate risk. E C O N O M I C E N T I T Y M a t u r i t y P e r i o d A t 3 0 J u n e 1 9 9 8 3 to 12 At Call Overdrafts months months $M 0 to 3 $M $M $M 1 to 5 years $M Over Not 5 years specified $M $M Total $M Assets Cash and liquid assets Receivables due from other financial institutions Trading securities (1) Investment securities Loans, advances and other receivables (2) Bank acceptances of customers Other monetary assets Total monetary assets Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Debt issues and loan capital Other monetary liabilities Total monetary liabilities 1,041 - 485 - - - - 1,526 115 - - 485 - 110 1,751 47,373 431 - - 174 47,978 - - - 2,841 - - 2,841 3,280 4,009 1,383 5,070 8,849 10,444 33,520 51 - 895 11,940 878 2 13,766 - - 2,626 33,052 - 79 35,757 - - 1,934 37,266 - 856 40,056 3,448 2 4,009 - 6,858 20 89,816 (838) 9,727 - 497 11,988 (319) 127,372 - - - - - - 19,788 9,260 6,094 1,371 - 83,886 2,648 8,849 1,783 10,837 43,905 312 878 5,891 34 16,375 6 - 2,544 130 8,774 - - 3,203 - 4,574 - - 183 139 322 3,397 9,727 13,604 11,314 121,928 (1) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. (2) $35 billion of this figure represents principally owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio is less than 5 years. Includes substantial ‘core’ deposits which are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 37. (3) 98 NOTE 31 Maturity Analysis of Monetary Assets and Liabilities continued E C O N O M I C E N T I T Y M a t u r i t y P e r i o d A t 3 0 J u n e 1 9 9 7 0 to 3 At Call Overdrafts months $M $M $M 3 to 12 months $M 1 to 5 years $M Over Not 5 years specified $M $M Total $M Assets Cash and liquid assets Receivables due from other financial institutions Trading securities (1) Investment securities Loans, advances and other receivables (2) Bank acceptances of customers Other monetary assets Total monetary assets Liabilities Deposits and other public borrowings (3) Payables due to other financial institutions Bank acceptances Debt issues and loan capital Other monetary liabilities Total monetary liabilities 1,159 348 - - 225 - 64 1,796 43,787 745 - - 134 44,666 - 725 123 - - - 2,007 4 - - 2,992 - - 2,996 4,144 2,635 2,139 4,782 5,930 6,393 26,748 343 - 2,493 11,504 2,944 224 17,631 - - 3,250 30,776 - 90 34,116 - - 1,351 31,759 - 767 33,877 - - - 4,839 2,635 9,233 (406) 81,632 8,874 - 256 7,794 (150) 117,014 - - - - 4 4 18,208 11,399 4,285 156 45 77,880 2,437 5,930 3,601 7,255 37,431 427 2,944 2,810 754 18,334 12 - 3,918 386 8,601 - - 2,476 - 2,632 - 3,621 - 8,874 150 12,955 8,719 186 381 112,049 (1) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months. (2) $30 billion of this figure represents principally owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio is less than 5 years. Includes substantial ‘core’ deposits which are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 37. (3) 99 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 32 Financial Reporting by Segments (a) Geographical segments Revenue Australia New Zealand Other Countries Operating profit before tax Australia New Zealand Other Countries Operating profit after tax and outside equity interests Australia New Zealand Other Countries Assets Australia New Zealand Other Countries (b) Industry segments Revenue Banking Life Insurance and Funds Management Finance Operating profit before tax Banking Life Insurance and Funds Management Finance Operating profit after tax and outside equity interests Banking Life Insurance and Funds Management Finance Assets Banking Life Insurance and Funds Management Finance E C O N O M I C E N T I T Y $M 1998 % $M 1997 % 7,718 1,115 657 9,490 1,221 148 (27) 1,342 1,044 73 (27) 1,090 110,120 10,846 9,578 130,544 8,767 214 509 9,490 1,158 81 103 1,342 940 84 66 1,090 124,765 427 5,352 130,544 81.4 11.7 6.9 100.0 91.0 11.0 (2.0) 100.0 95.8 6.7 (2.5) 100.0 84.4 8.3 7.3 100.0 92.4 2.3 5.3 100.0 86.3 6.0 7.7 100.0 86.2 7.7 6.1 100.0 95.6 0.3 4.1 100.0 8,088 977 448 9,513 1,454 128 34 1,616 990 63 25 1,078 101,202 9,994 8,907 120,103 8,897 202 414 9,513 1,443 74 99 1,616 941 75 62 1,078 115,368 359 4,376 120,103 85.0 10.3 4.7 100.0 90.0 7.9 2.1 100.0 91.9 5.8 2.3 100.0 84.3 8.3 7.4 100.0 93.5 2.1 4.4 100.0 89.3 4.6 6.1 100.0 87.2 7.0 5.8 100.0 96.1 0.3 3.6 100.0 Other Countries are: United Kingdom, United States of America, Japan, Singapore, Hong Kong, Grand Cayman, Netherlands Antilles and Papua New Guinea. These operations have a greater proportion of wholesale business with a funding base from predominantly wholesale markets where margins are very fine. The overseas balance sheet also supports trading activities. The geographical segments represent the location in which the transaction was booked. 100 NOTE 33 Remuneration of Auditors Amounts paid or due and payable for audit services to: Auditors of the chief entity Other auditors Amounts paid or due and payable for other services to: Auditors of the chief entity E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $’000 1997 $’000 1998 $’000 1997 $’000 2,540 250 2,790 2,432 200 2,632 1,671 - 1,671 1,544 - 1,544 5,040 3,873 5,004 3,448 Total Remuneration of Auditors 7,830 6,505 6,675 4,992 NOTE 34 Commitments for Capital Expenditure Not Provided for in the Accounts Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Commitments for Capital Expenditure Not Provided for in the Accounts NOTE 35 Lease Commitments - Property, Plant and Equipment Commitments in respect of non cancellable operating lease agreements due - Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Lease Commitments - Property, Plant and Equipment Economic Entity’s share of lease commitments of associated entities - Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Total Lease Commitments - Property, Plant and Equipment $M 33 - - - 33 172 143 280 306 901 $M 25 - - - 25 147 116 254 234 751 $M 26 - - - 26 138 117 227 223 705 $M 25 - - - 25 171 136 304 302 913 9 5 9 11 34 101 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 36 Contingent Liabilities The Commonwealth Bank and its controlled entities are involved in a range of transactions that give rise to contingent and/or future liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit. These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposure to any of these transactions is not carried at a level which would have a material effect on the financial condition of the Bank and its controlled entities. Details of contingent liabilities and off balance sheet business (excluding Derivatives – Note 37) are: Credit risk related instruments Guarantees Standby letters of credit Bill endorsements Documentary letters of credit Performance related contingents Commitments to provide credit Other commitments Total credit risk related instruments 1998 $M Face Value 1997 $M E C O N O M I C E N T I T Y Credit Equivalent 1997 $M 1998 $M 1,878 396 455 474 1,120 22,693 975 27,991 1,522 808 525 423 957 19,346 1,993 25,574 1,878 396 455 95 560 8,069 945 12,398 1,522 808 525 85 478 6,851 1,939 12,208 Guarantees represent conditional undertakings by the Economic Entity to support the financial obligations of its customers to third parties. Standby letters of credit are undertakings by the Economic Entity to repay a loan obligation in the event of a default by a customer. Bill endorsements relate to bills of exchange which have been confirmed by the Economic Entity and represent liabilities in the event of default by the acceptor and the drawer of the bill. Documentary letters of credit represent an undertaking to pay an overseas supplier of goods in the event of payment default by a customer who is importing the goods. Performance related contingents involve undertakings by the Economic Entity to pay third parties if a customer fails to fulfil a contractual non-monetary obligation. Commitments to provide credit include all obligations on the part of the Economic Entity to provide funding facilities. Other commitments include the Economic Entity’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. The transactions are categorised and credit equivalents calculated under Reserve Bank of Australia guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Economic Entity in the event of possible non performance by a counterparty. The potential loss (exposure) from direct credit substitutes (guarantees, standby letters of credit and bill endorsements) is the face value of the transaction, where as the exposure to documentary letters of credit and performance related contingents is 20% and 50% respectively of the face value. The exposure to commitments to provide credit is calculated by applying given credit conversion factors to the face value to reflect the duration, the nature and the certainty of the contractual undertaking to provide the facility. Where the potential loss depends on the performance of a counterparty, the Economic Entity utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are generated. Litigation Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Commonwealth Bank or any of its controlled entities. Where some loss is probable an appropriate provision has been made. 102 NOTE 36 Contingent Liabilities continued Fiduciary activities The Economic Entity conducts investment management and other fiduciary activities as trustee, custodian or manager for numerous investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail unit trusts. The amounts of funds concerned, which are not included in the Economic Entity’s balance sheet, are as follows: Funds under trusteeship Funds under management Funds under custody 1998 $M 10,385 21,983 22,300 1997 $M 14,931 23,166 20,724 As an obligation arises under each type of duty the amount of funds has been included where that duty arises. This may lead to the same funds being shown more than once where either Commonwealth Investment Services Limited, Commonwealth Funds Management Limited or Commonwealth Custodial Services Limited acts in more than one capacity in relation to those funds, eg manager and trustee. Commonwealth Custodial Services Limited, acts as trustee of the Commonwealth Bank Approved Deposit Fund and of State Bank Supersafe Approved Deposit Fund. In terms of the relevant Trust Deeds of those Funds, the trustee has an obligation to repay deposits in the Funds. It is not envisaged that any material irrecoverable liabilities will result from these obligations. Commonwealth Custodial Services Limited also acts as Trustee for various controlled superannuation funds and wholesale unit trusts. The Commonwealth Bank of Australia does not guarantee the performance or obligations of its subsidiaries including the Trustee of these funds and unit trusts. Commonwealth Investment Services Limited (CISL) and Commonwealth Funds Management Limited (CFM), as Managers of the various controlled investment funds and retail and wholesale unit trusts have an obligation under the Trust Deeds of those funds, upon request of a unitholder, to repurchase units of those funds or to arrange for the relevant Trustee to redeem units from the assets of the trusts. It is considered unlikely that CISL or CFM would need to repurchase units from their own funds. Commonwealth Funds Management Limited (CFM) acts as trustee and manager of various controlled trusts. CFM has incurred liabilities in its capacity as Trustee, however it has a right of indemnity against the assets of the respective trusts and as at 30 June 1998 the assets of the trusts exceeds those liabilities incurred. As such CFM does not expect to have to meet any of those liabilities from its own funds. Liquidity support In accordance with the Regulations and Procedures governing clearing arrangements contained within the Australian Paper Clearing Stream (Clearing Stream 1) and the Bulk Electronic Clearing Stream (Clearing Stream 2) of the Australian Payments Clearing Association Limited, the Bank is subject to a commitment to provide liquidity support to these clearing streams in the event of a failure to settle by a member institution. Year 2000 systems compliance As reported to the Australian Stock Exchange in May 1998, the Bank expects to have all key applications fully Year 2000 compliant by the end of 1998, with the majority of in house applications having already achieved compliance by June 1998. A three phase programme, comprising discovery, planning and remedy, has been underway since 1996. Phases one and two are complete, and the Bank is currently finalising the remedial phase. The Bank has also begun comprehensive testing, contingency planning and risk mitigation, which will continue throughout 1998 and 1999. This testing will include interorganisational testing of the financial payment systems with other financial institutions which is due to commence in October 1998 and conclude at the end of June 1999. With regard to our property obligations, a special inventory of all building management systems by building engineers, dealing with business continuity and health and safety requirements, has established remediation will occur as follows: • Critical buildings by end December 1998. • Non-critical buildings by June 1999. An inventory of all third party vendor software and hardware has been completed and all upgrades and replacements identified. The majority were implemented by 30 June 1998, with the remainder due for completion by 31 December 1998. The Bank has estimated rectification costs of $115 million, to be expended over three years commencing July 1996. Expenditure to 30 June 1998 on the total programme is $47 million. The Bank is confident it will be ready for the change of the century, and believes that depositors’ funds will not be at risk as a result of the Year 2000 issue. 103 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 36 Contingent Liabilities continued Service agreements The maximum contingent liability for termination benefits in respect of service agreements with the Executive Director and other executives of the Chief Entity and its controlled entities at 30 June 1998 was $10 million (1997: $9 million). NOTE 37 Market Risk The Bank in its daily operations is exposed to a number of market risks. A market risk is the risk of an adverse event in the financial markets that may result in a loss of earnings to the Bank, eg an adverse interest rate movement. Within the Bank, market risk exists in its balance sheet structure and in financial markets trading. Market risk in the balance sheet Market risk in the balance sheet includes liquidity risk, funding risk, interest rate risk and foreign exchange rate risk. Liquidity risk Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Bank manages liquidity risk separately for its domestic AUD obligations and for its foreign currency obligations. In its domestic operations, the Bank ensures that obligations are met day to day in normal market conditions at lowest cost. Protection against an unexpected outflow of funds is provided for within the liability management process and from a stock of high quality liquid assets held surplus to the Reserve Bank of Australia’s Prime Assets Ratio requirements. Foreign currency liquidity risk is managed by ensuring that a positive cumulative cash flow always exists for the next 7 days’ operations. A stock of liquid assets is included in this protective measure. Funding risk Funding risk is the risk of overreliance on a funding source to the extent that change in that funding source would increase funding cost or cause difficulty in raising funds. The Bank has a policy of funding diversification to ensure that overreliance is not placed on any one market sector. The following table outlines the range of financial instruments used by the Economic Entity to raise deposits and borrowings both within Australia and overseas. Funds are raised from well diversified sources and there are no material concentrations in these categories. Australia Cheque Accounts Savings Accounts Term Deposits Cash Management Accounts Debt Issues Bank Acceptances Certificates of Deposit Loan Capital Securities Sold Under Agreements to Repurchase Other Total Australia Overseas Deposits and Interbank Commercial Paper Other Debt Issues Bank Acceptances and Other Total Overseas Total Funding Sources Provisions and Other Liabilities Total Liabilities 104 1998 $M 1997 $M 11,824 23,471 24,531 8,651 8,078 9,700 2,156 2,996 662 1,606 93,675 14,382 1,270 1,260 27 16,939 110,614 13,041 123,655 9,341 21,491 24,842 8,389 7,845 8,826 1,700 2,801 714 1,062 87,011 13,881 1,374 1,014 50 16,319 103,330 9,749 113,079 NOTE 37 Market Risk continued Interest rate risk Interest rate risk in the balance sheet arises from the potential for a change in interest rates to have an adverse effect on the net interest earnings of the Bank in the current reporting period, and in future years. Interest rate risk arises from the structure and characteristics of the Bank’s assets, liabilities and equity, and in the mismatch in repricing dates of its assets and liabilities. The objective is to manage the interest rate risk to secure stable and sustainable net interest earnings in the long term. Next 12 months’ earnings The Bank measures and manages balance sheet interest rate risk from two perspectives: (a) The risk to the net interest earnings over the next 12 months from a change in interest rates is measured on at least a monthly basis. Risk is measured assuming an immediate 1% parallel movement in interest rates across the full yield curve as well as other interest rate scenarios with variations in the size and timing of interest rate movements. Potential variations to net interest earnings are measured using a simulation model which takes into account the projected change in balance sheet level and mix. Assets and liabilities with pricing directly based on market rates are repriced based on the full extent of the rate shock that is applied. Risk on other assets and liabilities (those priced at the discretion of the Bank) is measured by taking into account both the manner in which the products have repriced in the past as well as the expected change in price based on the current competitive market environment. The figures in the table represent the potential change to net interest earnings (expressed as a percentage of expected net interest earnings in the next 12 months) based on a 1% parallel rate shock and the expected change in price of assets and liabilities held for purposes other than trading. (expressed as a % of expected next 12 months’ earnings) Average monthly exposure High month exposure Low month exposure 1998 % 2.8 3.4 2.3 1997 % 1.5 3.0 0.5 Economic value (b) Some of the Bank’s assets and liabilities have interest rate risk that is not captured within the measure of risk to next 12 month’s earnings, as the risk is beyond the next 12 months. To measure this longer term sensitivity, the Bank utilises an economic value at risk analysis. This analysis measures the potential change in the net present value of cashflows of assets and liabilities where repricing dates do not match. Assets and liabilities priced at a variable rate and at the discretion of the Bank are not included in this measure. The economic value at risk is determined by recalculating the net present value using a rate movement based on a 95% confidence level of monthly movements in interest rates. For example, an earnings at risk exposure of $1 million means that in 95 cases out of 100, the expected net present value will not increase or decrease by more than $1 million given historical behaviour in interest rates. The figures in the following table represent the net present value of the expected change in future earnings in all future periods for the remaining term of these existing assets and liabilities held for purposes other than trading. Exposures as at 30 June Average monthly exposure High month exposure Low month exposure 1998 $M 1997 $M 78 25 78 7 18 46 72 8 In each case, all market sensitive transactions (including physical assets and liabilities and derivatives) are included in the risk measures. Prepayment assumptions for measurement of the risk are not a significant issue as the Bank includes mark to market prepayment clauses in most fixed rate lending contracts. The table following represents the Economic Entity’s contractual interest rate risk sensitivity from repricing mismatches as at 30 June 1998 and the corresponding weighted average effective interest rates. The net mismatch represents the net value of assets, liabilities and off balance sheet instruments which may be repriced in the time periods shown. The Bank does not use this contractual repricing information to manage its interest rate risk; the risk is managed using the ‘Next 12 months’ earnings’ and ‘Economic value’ perspectives outlined above. All assets and liabilities are shown according to contractual repricing dates. Options are shown in the gap using delta equivalents of the option face values. 105 Commonwealth Bank of Australia and Controlled Entities Notes to and forming part of the accounts continued NOTE 37 Market Risk continued Interest Rate Risk Sensitivity R e p r i c i n g P e r i o d a t 3 0 J u n e 1 9 9 8 Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M 1 to 5 Over 5 years years $M $M Not Weighted Average Rate % Interest Bearing $M Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch # no rate applicable * no balance sheet amount applicable 1,486 642 - - - - - 844 1.28 2,382 2,210 3,151 1,676 2,210 1,095 77,443 38,845 - 831 - - 87 110,120 45,386 9,700 831 1,448 531 10,938 680 - 53 4,974 - - - - - 5,707 24 - 322 5,858 - - - - - 6,204 - - 332 - - 660 2 - 528 - - 161 7,500 18,578 2,946 (1,258) 9,700 - - - 1,448 - - 531 6 10,845 7,832 19,238 3,482 22,271 - - - - - - - - - - 7.67 4.73 5.58 7.49 - - - - - 5.71 71,620 45,934 6,542 6,250 2,417 4,787 735 4,955 3.43 1,281 9,700 321 1,098 869 8,078 10,120 945 - - - - 1,777 90 103,087 48,746 480 106,083 49,226 2,996 165 - - - - 1,594 - 8,301 953 9,254 - - - 4 - 1,474 - 7,728 367 8,095 165 - - - - 6 - - - - 486 2,152 - 3,068 6,945 - - - - - - 595 - 9,700 321 1,094 869 - 23 10,007 1,353 26,946 - 2,549 26,946 - - 1,196 3,068 6,945 6,712 5 6,717 6,712 5 6,717 * 441 * (1,330) - * (3,811) 595 - 598 735 (650) (641) 2,042 - - - 650 1,371 - - - - - * (4,729) * (4,729) (11,492) (12,700) (7,927) 6,408 (1,208) 4,773 14,335 2,304 (11,392) 8,712 (2,680) (6,763) 4.17 - - - - 5.22 - 7.30 2.97 # # # # # As noted above the cumulative mismatch reflects contractual repricing periods. The balance sheet is managed based on assessments of expected pricing behaviour having regard to historical trends and competitive positioning. 106 NOTE 37 Market Risk continued R e p r i c i n g P e r i o d a t 3 0 J u n e 1 9 9 8 Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M 1 to 5 Over 5 Interest years Bearing years $M $M $M Not Weighted Average Rate % Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps Options FRAs Futures Net Mismatch Cumulative Mismatch # no rate applicable * no balance sheet amount applicable 40 24 - - - - - 16 - 496 1,066 1,799 367 3,707 1,200 12,373 3,136 27 - 197 93 20,424 5,540 27 1 214 1,197 471 680 653 2,853 - - - - 4,657 51 397 272 - 41 132 1,292 1,132 - - - - 2,012 1,305 - - - - - 302 700 3,997 - - - - 4,999 48 - - 12 - 750 (93) 56 - - 1 - - 17 - 1,104 1,093 818 5.92 7.23 8.62 8.37 - - - - 7.58 12,266 6,067 3,735 1,501 609 265 26 63 6.22 27 1 6 2,530 626 2,116 1,657 27 (1) 5 894 209 17,572 8,858 - - 17,572 8,858 310 - - - 353 - 4,398 - 4,398 105 - - - 311 - 1,917 - 1,917 43 - - - 65 - 717 - 717 - - - - 479 - 744 - 744 - - - - 428 - 454 - 454 - 172 172 * * * * 989 - (507) (2) 1,687 - (78) (695) 266 270 590 680 (299) (2,285) - (270) (13) 8 11 (1) (358) - - 7 1 - 2 1 - 417 484 - 484 172 172 - - - - * (2,838) 1,173 * (2,838) (1,665) 1,901 236 26 262 1,968 2,230 13 2,243 437 2,680 6.28 - - - 4.76 - - 5.78 # # # # # # 107 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 37 Market Risk continued R e p r i c i n g P e r i o d a t 3 0 J u n e 1 9 9 7 Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M 1 to 5 Over 5 years years $M $M Not Weighted Average Rate % Interest Bearing $M 1,856 1,269 - - - - - 587 2,616 2,390 2,178 2,178 4,833 1,020 70,645 34,960 - 793 - - 2 101,202 42,612 8,826 793 1,776 574 7,105 10 - 1,006 4,167 - - - - 5 5,188 - - 5 5,002 - - - - 8 5,015 - - 28 - - 1,405 9,214 16,751 - - - - 5 9,253 18,161 - - - - 11 - - 677 1,470 - - - - - 2,147 216 - 692 (919) 8,826 - 1,776 574 7,074 18,826 67,225 42,204 6,164 5,729 4,511 4,229 166 4,222 394 8,826 291 921 830 382 - - 1 - 7,766 1,192 16 7,091 93,344 43,795 800 96,145 44,595 2,801 6,734 10 6,744 - - - - - 1,187 1 7,352 666 8,018 - - - - - 1,949 7 7,685 - 7,685 - - - - - 680 - 5,191 - 5,191 12 - - - - 2,254 25 6,520 - 6,520 - - - - - 504 - 670 1,335 2,005 - 8,826 291 920 830 - 7,042 22,131 - 22,131 6,734 10 6,744 3.87 4.91 5.61 5.97 8.20 - 0.89 - - 2.42 6.42 4.10 5.27 - - - - 5.78 0.05 5.77 3.53 * 3,113 (712) * * * 418 418 140 (782) 448 1,494 (1,756) - (2,562) - 993 - (376) - # # (3,472) (3,054) (728) (3,782) 2,306 9,079 (1,476) 7,603 1,135 (10,425) (1,687) 8,738 Australia Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Goodwill Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Provision for dividend Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Net Mismatch Cumulative Mismatch # no rate applicable * no balance sheet amount applicable 108 NOTE 37 Market Risk continued R e p r i c i n g P e r i o d a t 3 0 J u n e 1 9 9 7 Balance Sheet 6 to 12 1 to 3 Total month months months months $M $M 0 to 1 3 to 6 $M $M $M 1 to 5 Over 5 years years $M $M Not Weighted Average Rate % Interest Bearing $M Overseas Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposits with regulatory authorities Property, plant and equipment Other assets Total Assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Income tax liability Other provisions Debt issues Bills payable and other liabilities Loan Capital Total Liabilities Shareholders’ Equity Outside equity interests in controlled entities Total Shareholders’ Equity Off Balance Sheet Items Swaps FRAs Futures Net Mismatch Cumulative Mismatch # * no rate applicable no balance sheet amount applicable 151 27 71 13 - - - 40 2.43 2,223 457 4,400 10,987 48 4 234 397 18,901 1,510 32 584 1,305 3 1 - 13 3,475 427 14 1,239 4,543 - - - - 6,294 172 9 1,060 745 - - - 1 2,000 - 15 353 1,326 - - - 2 1,696 - 299 792 3,125 - - - 1 4,217 - 88 372 64 - - - - 524 10,655 5,815 2,661 1,274 582 219 - 2,124 3 - - 769 - 8,711 - 8,711 676 - - - 665 - 4,002 - 4,002 422 - - - 199 - 1,895 - 1,895 5 - - - 3 - 590 - 590 3,227 48 4 5 2,388 607 16,934 - 16,934 112 168 280 - - - - 420 - 639 - 639 45 45 * * * 680 478 - * (4,078) * (4,078) 3,103 (37) 419 5,777 1,699 (97) (520) (430) (942) 757 (2,002) 75 11 (810) (53) (1,656) 4 - 1,881 1,828 - - - - 332 - 332 - 332 (28) - - 114 - - (121) 45 3 234 380 695 104 - 45 4 5 - 607 765 - 765 112 123 235 - - - 5.66 6.74 6.94 8.73 0.42 1.29 - 1.11 7.78 6.05 5.87 0.42 - - 3.63 - - 5.58 6.16 # # # 164 1,992 (305) 1,687 109 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 37 Market Risk continued Foreign exchange risk Foreign exchange risk is the risk to earnings caused by a change in foreign exchange rates. The Bank hedges all balance sheet foreign exchange risk except for long term investments in offshore subsidiaries. An adverse movement of 10% in foreign exchange rates would cause the Bank’s capital adequacy ratio to deteriorate by less than 0.3% (1997: less than 0.2%) Net deferred gains and losses Net deferred realised and unrealised gains and losses arising from derivative hedging contracts entered into in order to manage the risk arising from assets, liabilities, commitments or anticipated future transactions, together with the expected term of deferral are shown below. A s a t 3 0 J u n e Within 6 months Within 6 months - 1 year Within 1 - 2 years Within 2 - 5 years After 5 years Net deferred gain (loss) E x c h a n g e R a t e R e l a t e d C o n t r a c t s 1997 1998 $M $M I n t e r e s t R a t e R e l a t e d C o n t r a c t s 1997 1998 $M $M 67 39 181 (20) 348 615 1 4 33 (48) 97 87 63 (6) 12 (63) (14) (8) (14) (49) (58) (75) (72) (268) 1998 $M 130 33 193 (83) 334 607 T o t a l 1997 $M (13) (45) (25) (123) 25 (181) Net deferred gains and losses are only in respect of derivatives and must be considered in the context of the total interest rate and foreign exchange risk of the balance sheet. The deferred gains and losses on both derivatives and on balance sheet assets and liabilities are included in the economic value at risk measure outlined above. Additionally, there are $50 million of net deferred losses on derivatives (1997: $78 million net deferred losses) used to hedge equity risk on investments disclosed within Note 11. Market risk in financial markets trading Traded market risk is the risk of loss from adverse movements in the level or volatility of market prices in interest rate, foreign exchange, equity and commodity markets. Nature of trading activities The Bank’s policy is that exposure to market risk from trading activities is managed in the Financial Markets area of Institutional Banking. The Bank trades and distributes financial markets products and risk management services to clients on a global basis. Provide risk management products and services to customers; The objectives of the Bank’s financial markets activities are to: • • Manage the Bank’s own market risks; • Conduct controlled trading in pursuit of profit, leveraging off the Bank’s market presence and expertise. The Bank maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury and capital market instruments including a broad range of securities and derivatives. Positions are also taken in the interest rate, debt, equity and commodity markets based on views of future market movements. In foreign exchange, the Bank is a participant in all major currencies and is a major participant in the Australian dollar market, providing services for central banks, institutional, corporate and retail customers. Derivatives entered into for trading purposes include swaps, forward rate agreements, futures, options and combinations of these instruments. Trading securities are further detailed in Note 10. Derivatives Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. They include swaps, forward rate agreements, futures, options and combinations of these instruments. The sale of derivatives to customers as risk management products and their use for trading purposes is integral to the Bank’s financial markets activities. Derivatives are also used to manage the Bank’s own exposure to fluctuations in interest and exchange rates. The Bank participates in both exchange traded and OTC derivatives markets. Exchange traded derivatives: The Bank buys and sells exchange traded financial instruments, primarily financial futures and options on financial futures. Exchange traded derivatives have standardised terms and require lodgment of initial and variation margins in cash or other collateral at the exchange, which guarantees ultimate settlement. 110 NOTE 37 Market Risk continued OTC traded derivatives: The Bank buys and sells financial instruments that are traded ‘over-the-counter’, rather than on recognised exchanges. The terms and conditions of these transactions are negotiated between the parties, although the majority conform to accepted market conventions. Industry standard documentation is used, most commonly in the form of a master agreement with individual transaction confirmations. Documentation protects the Bank’s interests should the counterparty default, and provides the ability to net outstanding balances in jurisdictions where the relevant law allows. Profit contribution Income is earned from spreads achieved through market-making and from changes in market value caused by movements in interest and exchange rates, equity prices and other market prices. All trading positions are valued and taken to profit and loss on a mark to market basis. Trading profits also take account of interest, dividends and funding costs relating to trading activities. Note 2 details Financial Markets contribution of $243 million to the profit of the Bank. The contribution is significant and provides important diversification benefits within the Bank’s overall earnings. The risk/reward balance is highlighted by comparing the profit contribution of $243 million to the ‘value at risk’ (VaR) measure, explained in the section following, which has averaged approximately $3 million for the half year ended 30 June 1998. The VaR measure highlights that trading activity is undertaken within a tightly controlled environment where exposure to revenue loss from market price movements is restricted to tolerable levels based on statistical experience. The distribution of daily earnings for the half year ended 30 June 1998 is set out in the following histogram: Distribution of Daily Financial Markets Income s y a D f o r e b m u N 25 20 15 10 5 0 >-1.5 >-1.0 >-0.5 >0 >0.5 >1.0 >1.5 >2.0 >2.5 >3.0 >3.5 >4.0 >4.5 $m Risks and controls The broad categories of risks associated with financial market products are credit risk, liquidity risk and market risk. These risks are independently monitored, controlled and mitigated by a system of limits, the use of various hedging strategies, credit control, daily revaluations of positions, liquidity management and a regime of accounting and systems controls. 111 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 37 Market Risk continued Credit risk occurs if a counterparty defaults in performance of its obligations. Credit risk related to financial market products is assessed on a total basis for each client as part of the Bank’s overall credit management process. The Bank may require lodgement of collateral for credit exposures arising from derivative products, although this is not a common practice. Liquidity risk arises from the possibility that market changes could prevent the Bank readily obtaining prices to allow it to close out its positions. This risk is controlled by concentrating trading activity in highly liquid markets and limiting the Bank’s volume of activity in less liquid markets. Market risk is the risk of loss arising due to adverse price movements in financial markets. The Bank’s major market risks are interest rate risk and exchange rate risk. The market risk management policies of the Bank are approved by the Risk Committee of the Board, which also determines overall market risk appetite. The Risk Committee allocates a total VaR limit and delegates the day to day control and monitoring of market risk to management who set limits for each trading portfolio. The approval of trading limits and the monitoring of compliance are the responsibility of a separate Risk Management function within Institutional Banking. Institutional Banking reports regularly on its trading activity to the Risk Committee. An independent Market Risk Policy Unit monitors the Group market risk profile and integrates policy on market related exposures across the Group. The effectiveness of controls is reviewed regularly by internal audit. Value at risk (VaR) The Bank uses a VaR measure as the primary mechanism for controlling market risk. VaR is an estimate to a 97.5% confidence level of the potential loss that could occur if the Bank’s positions were to be held unchanged for one business day. The VaR measure takes into account correlations between risks, ie where an exposure in one portfolio may be offset in whole or in part by an exposure in another portfolio. Actual outcomes are independently monitored and daily backtesting performed to confirm the validity of the assumptions made in the calculation of VaR. risk type, that is, interest rate, exchange rate, equity, volatility; In addition to the daily report of aggregate VaR, there are daily risk reports by: • • product; • business unit During the year, the Bank introduced an improved VaR measure based on full Historical Simulation. The following table shows the VaR for each trading day since the improved VaR measure was introduced on 2 January 1998. Daily Value-at-Risk 8 9 - n a J - 2 0 8 9 - n a J - 3 1 8 9 - n a J - 2 2 8 9 - b e F - 2 0 8 9 - b e F - 1 1 8 9 - b e F - 0 2 8 9 - r a M - 3 0 8 9 - r a M - 2 1 8 9 - r a M - 3 2 8 9 - r p A - 1 0 8 9 - r p A - 0 1 8 9 - r p A - 1 2 8 9 - r p A - 0 3 8 9 - y a M - 1 1 8 9 - y a M - 0 2 8 9 - y a M - 9 2 8 9 - n u J - 9 0 8 9 - n u J - 8 1 8 9 - n u J - 9 2 $m 5.0 4.5 4.0 3.5 3.0 2.5 2.0 112 NOTE 37 Market Risk continued The Bank trades in numerous products and markets. This provides significant diversification of risk. The following table provides a summary of VaR by product: Risk Type Interest rate risk Foreign exchange risk Implied volatility risk Equities risk Diversification benefit Total Half year to 30 June 1998 High* $M 4.55 2.08 0.89 0.37 - 4.41 Average $M 2.92 1.12 0.30 0.13 (1.29) 3.18 Low* $M 1.94 0.47 0.16 0.00 - 2.26 * The high and low figures for each risk category may not occur on the same day. A diversification benefit therefore cannot be calculated. In addition to monitoring VaR at a 97.5% confidence level, monitoring is also performed daily at a 99% confidence level, and for the worst case outcome over the historical period used for simulation. This additional monitoring provides a deeper understanding of the risk profile and provides a perspective on possible stress scenarios that may adversely impact the trading portfolio. VaR provides a statistical estimate of the risk at the chosen confidence level, and not the size of losses that could potentially arise in extreme conditions. Recognising this limitation of VaR, monthly stress tests covering a variety of scenarios are also performed to simulate the impact of extreme market movements on the trading portfolios. Comparative data on this new basis prior to 2 January 1998 is not available due to the material change in the basis of measurement, which now takes full account of diversification and correlation effects. The previous VaR risk measure ignored correlations between risks, ie where a risk in one portfolio may be offset in whole or in part by a risk in another portfolio. For comparative purposes previously published VaR measures on an uncorrelated basis up to 31 December 1997 are included. Average VaR During June 1998 Half $M N/A N/A 3 C o r r e l a t e d Actual VaR as at 30 June 1998 Actual VaR as at 31 Dec 1997 Actual VaR as at 30 June 1997 $M N/A N/A 3 $M N/A N/A 4 $M N/A N/A 3 Interest rate risk Exchange rate risk Total Maximum VaR During U n c o r r e l a t e d Minimum VaR During Average VaR During Dec 1997 Half $M June 1997 Year $M Dec 1997 Half $M June 1997 Year $M Dec 1997 Half $M June 1997 Year $M Interest rate risk Exchange rate risk Total 12 8 N/A 15 12 N/A 4 3 N/A 7 3 N/A 9 5 14 10 6 16 113 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 37 Market Risk continued Derivative contracts The following table details the Bank’s outstanding derivative contracts as at the end of the year. Each derivative type is split between those held for ‘Trading’ purposes and for ‘Other than Trading’ purposes. Derivatives classified as ‘Other than Trading’ are transactions entered into in order to manage the risks arising from non traded assets, liabilities and commitments in Australia and our offshore centres. The ‘Face Value’ is the notional or contractual amount of the derivatives. This amount is not necessarily exchanged and predominantly acts as reference value upon which interest payments and net settlements can be calculated and on which revaluation is based. The ‘Credit Equivalent’ is a number calculated using a standard Reserve Bank of Australia formula and is disclosed for each product class. This amount is a measure of the on balance sheet loan equivalent of the derivative contracts, which includes a specified percentage of the face value of each contract plus the market value of all contracts with an unrealised gain at balance date. The Credit Equivalent does not take into account any benefits of netting exposures to individual counterparties. The accounting policy for derivative financial instruments is set out in Note 1(gg). 114 NOTE 37 Market Risk continued Derivatives: Exchange rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total options purchased and sold Total exchange rate related contracts Interest rate related contracts Forwards Trading Other than trading Total Forwards Swaps Trading Other than trading Total Swaps Futures Trading Other than trading Total Futures Options purchased and sold Trading Other than trading Total options purchased and sold Total interest rate related contracts Equity risk related contracts Swaps Other than trading Options purchased and sold Other than trading Total equity risk related contracts Total derivatives exposures 1998 $M Face Value 1997 $M E C O N O M I C E N T I T Y Credit Equivalent 1997 $M 1998 $M 119,979 - 119,979 126,294 - 126,294 5,880 - 5,880 3,045 - 3,045 11,940 5,231 17,171 8,040 4,533 12,573 775 1,146 1,921 720 554 1,274 84 - 84 98 - 98 - - - - - - 35,272 - 35,272 172,506 16,058 - 16,058 155,023 824 - 824 8,625 242 - 242 4,561 11,739 2,586 14,325 14,950 2,037 16,987 4 - 4 11 3 14 37,849 30,128 67,977 24,961 25,799 50,760 1,005 608 1,613 701 483 1,184 39,410 726 40,136 53,001 134 53,135 - - - - - - 7,030 65 7,095 129,533 5,675 313 5,988 126,870 51 65 116 1,733 52 - 52 1,250 - 376 - 9 449 449 302,488 10 182 10 558 282,451 10,368 - 9 5,820 115 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 37 Market Risk continued The fair or market value of trading derivative contracts, disaggregated into gross unrealised gains and gross unrealised losses, are shown below. In line with the Bank’s accounting policy, these unrealised gains and losses are recognised immediately in profit and loss, and together with net realised gains on trading derivatives and realised and unrealised gains and losses on trading securities, are reported within trading income under foreign exchange earnings or other financial instruments (refer Note 2). In aggregate, derivatives trading was profitable for the Bank during the year. Exchange rate related contracts Forward contracts Gross unrealised gains Gross unrealised losses Swaps Gross unrealised gains Gross unrealised losses Futures Gross unrealised gains Gross unrealised losses Options purchased and sold Gross unrealised gains Gross unrealised losses Net Unrealised Gains on Exchange Rate Related Contracts Interest rate related contracts Forward contracts Gross unrealised gains Gross unrealised losses Swaps Gross unrealised gains Gross unrealised losses Futures Gross unrealised gains Gross unrealised losses Options purchased and sold Gross unrealised gains Gross unrealised losses Net Unrealised Losses on Interest Rate Related Contracts Net Unrealised Gains (Losses) on Trading Derivative Contracts 1998 $M Fair Value 1997 $M E C O N O M I C E N T I T Y Average Fair Value 1997 1998 $M $M 4,332 (3,697) 635 2,321 (2,377) (56) 3,988 (3,687) 301 1,900 (1,984) (84) 1,662 (1,925) (263) 670 (493) 177 1,218 (1,326) (109) 1,066 (596) 470 5 (4) 1 - - - 2 (2) - - - - 602 (406) 196 569 142 (124) 18 139 401 (297) 104 297 64 (71) (7) 379 5 (7) (2) 8 (15) (7) 5 (9) (4) 7 (12) (5) 1,648 (1,725) (77) 1,535 (1,675) (140) 1,596 (1,681) (85) 1,083 (1,524) (441) 7 (10) (3) 23 (28) (5) 13 (14) (1) 21 (23) (2) 36 (16) 20 (62) 507 43 (7) 36 (116) 23 41 (12) 30 (60) 237 33 (10) 23 (425) (46) In accordance with the accounting policy set out in Note 1(gg) the above trading derivative contract revaluations have been presented on a gross basis on the balance sheet. Unrealised gains on trading derivatives (Note 20) Unrealised losses on trading derivatives (Note 26) Net unrealised gains (losses) on trading derivatives 8,297 (7,790) 507 4,742 (4,719) 23 116 NOTE 38 Superannuation Commitments The Economic Entity sponsors a range of superannuation plans for its employees worldwide. Details of major plans with assets in excess of $10 million are: Name of Plan Officers’ Superannuation Fund (OSF) Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA(UK)SBS) Financial Details of Defined Benefits Plans Type Defined Benefits and Accumulation Form of Benefit Indexed pensions and lump sums Defined Benefits and Accumulation Indexed pensions and lump sums Net Market Value of Assets Present Value of Accrued Benefits Difference between Net Market Value of Assets and Present Value of Accrued Benefits Difference as a percentage of plan assets Value of Vested Benefits O S F C B A ( U K ) S B S 30/06/97 $M 5,302 4,022 1,280 24% 4,022 01/01/97 $M 85 54 31 36% 45 Total $M 5,387 4,076 1,311 24% 4,067 The above values have been extracted from financial statements and actuarial assessments of each plan which have been prepared in accordance with relevant accounting and actuarial standards and practices. Contributions For the plans listed in the above table, entities of the Economic Entity contribute to the respective plans in accordance with the Trust Deeds following the receipt of actuarial advice. With the exception of contributions corresponding to salary sacrifice benefits, the Chief Entity ceased contributions to the OSF from 8 July 1994. Contributions to the OSF corresponding to salary sacrifice benefits ceased from 1 July 1997. An actuarial assessment of the OSF, as at 30 June 1997, has been completed during the year ended 30 June 1998. In line with the actuarial advice contained in the assessment, the Chief Entity does not intend to make contributions to the OSF until after consideration of the next actuarial assessment of the OSF as at 30 June 2000. Management of OSF The Board of Directors of the Trustee of the OSF comprises an equal number of member and Chief Entity representatives. 117 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities Incorporated in Extent of Beneficial Interest if not 100% Contribution to Consolidated Profit 1998 $M 1997 $M NOTE 39 Controlled Entities AUSTRALIA The Commonwealth Bank of Australia carries on business in various countries throughout the world. All other entities carry on business in their countries of incorporation. (a) Banking 897 857 Commonwealth Bank of Australia (Australia only) Controlled Entities: Commonwealth Development Bank of Australia Limited CBA Investments Limited Antarctic Shipping Pty Ltd Balga Pty Limited * Binya Pty Limited * Brookhollow Ave Pty Limited * (1) CBA Specialised Finance Limited Share Investments Pty Limited CBA Investments (No 2) Pty Ltd CBA Indemnity Co. Pty Limited CBA International Finance Pty Limited Collateral Leasing Pty Limited Chullora Equity Investments (No.2) Pty Limited * Chullora Equity Investments (No.3) Pty Limited * Commonwealth Connect Insurance Limited Commonwealth Investments Pty Limited Hazelwood Investment Company Pty Limited Darontin Pty Limited * Infravest (No. 1) Limited Infravest (No. 2) Limited Micropay Pty Limited Perpetual Stock Pty Limited * Retail Investor Pty Limited Sparad (No. 16) Pty Limited * Sparad (No. 20) Pty Limited * Sparad (No. 24) Pty Limited * Sparad (No. 29) Pty Limited * Sparad (No. 30) Pty Limited * Sparad (No. 31) Pty Limited * (b) Finance CBFC Group CBFC Limited CBFC Leasing Pty Limited Commonwealth Securities Limited Group Commonwealth Securities Limited Share Direct Nominees Pty Limited * Comsec Nominees Pty Limited * Fleet Care Services Pty Limited * Leaseway Australia Pty Limited 118 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 62 58 NOTE 39 Controlled Entities continued (c) Life Insurance and Funds Management Commonwealth Custodial Services Limited Commonwealth Life Limited Group Commonwealth Life Limited CLL Investments Limited CIF (Hazelwood) Pty Limited Commonwealth Investment Services Limited Group Commonwealth Investment Services Limited CISL (Hazelwood) Pty Limited Commonwealth Funds Management Limited Group Commonwealth Funds Management Limited CFM (ADF) Limited CFML Nominees Pty Limited NEW ZEALAND (a) Banking CINZ Group # Commonwealth Investments New Zealand Limited ASB Bank Limited ASB Finance Limited ASB Management Services Limited ASB Properties Limited ASB Superannuation Nominees Limited OTHER OVERSEAS (a) Banking Commonwealth Bank of Australia (Offshore Branches) CBA Asia Limited # Commbank International NV Resources and Investment Finance Limited CBA (Europe) Finance Limited Brigidina Investments Limited (2) Senator House Investments (UK) Limited (3) (b) Finance Central Real Estate Holdings Group Central Real Estate Holdings Corporation Wilshire 10880 Corporation Wilshire 10960 Corporation CTB Australia Limited SBV Asia Limited Incorporated in Extent of Beneficial Interest if not 100% Contribution to Consolidated Profit 1998 $M 1997 $M 84 75 Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand 73 63 (30) 21 Singapore Netherlands Antilles Papua New Guinea United Kingdom Jersey United Kingdom USA USA USA Hong Kong Hong Kong 4 4 75% 75% 75% 75% 75% 51% Operating Profit After Tax and Outside Equity Interests 1,090 1,078 Non-operating controlled entities are excluded from the above list. (1) Incorporated during the year (2) Wholly owned subsidiary of Share Investments Pty Limited (3) Wholly owned subsidiary of CBA International Finance Pty Limited # * Controlled entities not audited by Ernst & Young Small proprietary companies not requiring audit 119 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 40 Investments in Associated Entities EDS (Australia) Pty Limited (1) IPAC Securities Limited PT Bank BII Commonwealth Electronic Financial Technologies Pty Ltd (1) Interest acquired on 26 September 1997. Book Value $M 239 25 12 - Principal Activities Balance Date Extent of Ownership Interest % 35 50 50 50 Information Technology Services Funds Manager Banking in Indonesia Financial Technology Development 31 December 30 June 31 December 30 June Share of associates’ profits (losses) after notional goodwill amortisation Operating profits before income tax Income tax expense Operating profits (losses) after income tax Carrying amount of investments in associated entities Opening balance New investments Share of associates’ profits (losses) Foreign exchange adjustment Closing balance E C O N O M I C E N T I T Y 1998 $M 2 (4) (2) 60 248 (2) (30) 276 The share of associates net profit for the year ended 30 June 1998 represents the share of associates retained profits at year-end. There were no other movements in reserves for the year. The Economic Entity’s share of operating lease commitments is disclosed in Note 35. NOTE 41 Standby Arrangements and Unused Credit Facilities (of controlled entities that are borrowing corporations and entities subject to the Financial Corporations Act 1974) E C O N O M I C E N T I T Y 1998 $M Unused Available Available 1997 $M Unused (a) Financing arrangements accessible Bank overdraft Bill facilities (b) Financing arrangements provided Wholesale finance Other facilities 17 5 22 1 - 1 10 - 10 - - - - 1 1 - - - 13 1 14 3 - 3 120 NOTE 42 Related Party Disclosures Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, under an Australian Securities Commission Class Order No. 97/1016 dated 9 July 1997, from making disclosures of any loan made, guaranteed or secured by a bank to related parties (other than directors) and financial instrument transactions (other than shares and share options) of a bank where a director of the relevant entity is not a party and where the loan or financial instrument transaction is lawfully made and occurs in the ordinary course of banking business and either on an arm’s length basis or with the approval of a general meeting of the relevant entity and its ultimate chief entity (if any). The exemption does not cover transactions which relate to the supply of goods and services to a bank, other than financial assets or services. The Class Order does not apply to a loan or financial instrument transaction which any director of the relevant entity should reasonably be aware that if not disclosed would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. A condition of the Class Order is that the Bank must lodge a statutory declaration, signed by two directors, with the Australian Securities Commission accompanying the annual return. The declaration provides confirmation that the bank has systems of internal control and procedures to provide assurance that any financial instrument transactions of a bank which are not entered into on an arm’s length basis are drawn to the attention of the Directors so that they may be disclosed. Directors The name of each person holding the position of Director of the Commonwealth Bank during the financial year is: (Chairman) (Deputy Chairman) (Managing Director) (Executive Director - Retired 11 July 1997) M A Besley AO J T Ralph AO D V Murray I K Payne N R Adler A C Booth K E Cowley AO J M Schubert G H Slee AM F J Swan B K Ward Details of remuneration received or due and receivable by Directors are set out in Note 43. Loans to Directors Loans are made to Directors in the ordinary course of business of the Bank and on an arm’s length basis. Loans to Executive Directors have been made on normal commercial terms and conditions. Under the Australian Securities Commission Class Order referred to above, disclosure is limited to the aggregate amount of loans made, guaranteed or secured by: the Chief Entity to its Directors; • • banks which are controlled entities to their Directors; and • non bank controlled entities to Directors (and their related parties) of those entities. The aggregate amount of such loans outstanding at 30 June 1998 was: $468,000 to Directors of the Chief Entity (1997: $690,897); and • $1,191,900 to Directors of related entities (1997: $1,159,760). • The aggregate amount of such loans received and repayments made was: Directors of the Chief Entity Normal terms and conditions (1) Directors of related entities Normal terms and conditions (2) L O A N S R E C E I V E D R E P A Y M E N T S M A D E 1998 $ 1997 $ 1998 $ 1997 $ - 52,000 111,000 278,256 186,663 178,692 154,522 207,905 (1) Directors: I K Payne, A C Booth, B K Ward (2) Directors: G J Judd, R J Norris, G A Thorby, W W Moyes, W G Ward-Holmes 121 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 42 Related Party Disclosures continued Shares of Directors The aggregate number of shares acquired by, disposed of and held by Directors and their director related entities in the Commonwealth Bank during the financial year ended 30 June 1998, were: Director M A Besley J T Ralph D V Murray I K Payne (retired 11/7/97) N R Adler A C Booth K E Cowley (appointed 30/9/97) J M Schubert G H Slee F J Swan (appointed 11/7/97) B K Ward Held 30 June 1997 IR 2,050 2,150 33,750 650 8,300 - Ordinary 9,071 9,659 17,191 2,537 1,777 283 2,517 2,660 3,000 - 1,140 600 Shares Acquired Shares Disposed Of Ordinary Ordinary 1,219 - 5,100 700 633 1,689 IR - 1,500 - 516 769 8,000 349 170 2,127 111 647 31 - 605 292 219 191 - - - - - - - Held 30 June 1998 Ordinary 10,602 10,942 47,530 9,946 1,021 8,000 5,261 2,538 1,908 1,660 IR - Instalment Receipts evidence full beneficial ownership in an ordinary share. A second instalment of $4.45 was payable on the IRs by 14 November 1997 at which time they became fully paid ordinary shares. All shares were acquired by Directors on normal terms and conditions or under the employee share scheme, as appropriate. Additionally D V Murray was granted 500,000 options during the year bringing his total holdings to 800,000 under the Executive Option Plan. Refer Note 28 for details. Other Transactions of Directors and Other Related Parties Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed above) of Directors of the Chief Entity and banks which are controlled entities occur in the ordinary course of business of the banks on an arm ’s length basis. Under the Australian Securities Commission Class Order referred to above, disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with a Director of the entity concerned. All such financial instrument transactions that have occurred between the banks and their Directors have been trivial or domestic and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Directors, director related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by non bank controlled entities. All such transactions that have occurred with Directors, director related entities and other related parties have been trivial or domestic and were in the nature of lodgement of deposit and debenture monies. Controlled Entities Transactions with related parties in the Economic Entity are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally arise out of the provision of banking services, the acceptance of funds on deposit, the granting of loans and other associated financial activities. The Bank was negotiating to sell certain infrastructure assets to CISL Infrastructure Trust, a controlled entity, as at 30 June 1998 as a prelude to being on sold into the market. The sale is on an arms length basis, the sale price based on independent valuations and negotiations with third party underwriters. The Bank’s results at 30 June 1998 include unrealised gains and losses on infrastructure assets. Support services are provided by the Bank such as provision of premises and/or equipment, availability of transfer payment and accounting facilities through data processing etc, and are transfer charged to the respective user entity at commercial rates. Refer to Note 39 for details of controlled entities. The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 17. Amounts due to controlled entities are disclosed in the balance sheet of the Bank. Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2. All transactions between Group entities are eliminated on consolidation. 122 NOTE 42 Related Party Disclosures continued Commonwealth Development Bank of Australia (‘CDB’) On 24 July 1996 the Commonwealth Government sold its 8.1% shareholding in the CDB to the Bank. Commonwealth Guarantee of the Bank’s Liabilities The liabilities of the Bank and its controlled entity, Commonwealth Development Bank of Australia, as at 30 June 1996 were guaranteed by the Commonwealth under a statute of the Australian Parliament. Such guarantee is being progressively phased out following the Government sell-down on 19 July 1996. Refer Note 25 for full details of transitional measures. The removal of the guarantee has not materially affected either the borrowing costs or the borrowing capabilities of the Bank. NOTE 43 Remuneration of Directors Total amount received or due and receivable by non-executive Directors of the Chief Entity for the year ended 30 June 1998 was: Non-Executive Directors Mr M A Besley, AO Mr J T Ralph, AO Mr N R Adler Ms A C Booth Mr K E Cowley AO (2) Dr J M Schubert Mr G H Slee, AM Mr F J Swan (3) Ms B K Ward Fees (1) $ 165,720 90,380 61,430 61,430 40,843 64,413 74,413 72,660 64,413 (1) Includes Directors’ and Committees’ fees. (2) Mr Cowley was appointed a Director on 30 September 1997. (3) Mr Swan was appointed a Director on 11 July 1997. Total amount received or due and receivable by executive and non executive Directors (includes accumulated benefits due to Directors who retired during the year) 3,608,073 2,766,887 The number of executive and non-executive Directors whose remuneration fell within these bands was: C H I E F E N T I T Y 1998 $ 1997 $ Remuneration (Dollars) 10,000 0 - $ $ 50,000 40,001 - $ $ 60,000 50,001 - $ $ 70,000 60,001 - $ $ 70,001 - $ $ 80,000 $ 90,001 - $ 100,000 $ 120,001 - $ 130,000 $ 160,001 - $ 170,000 $ 170,001 - $ 180,000 $ 650,001 - $ 660,000 $1,060,001 - $1,070,000 $1,320,001 - $1,330,000 $1,840,001 - $1,850,000 Number - 1 - 4 2 1 - 1 - - 1 - 1 11 # * ** Number 1 - 7 1 1 - 1 - 1 1 - 1 - 14 # * Remuneration includes retirement payment to Mr I K Payne who retired on 11 July 1997. Remuneration includes retirement allowance scheme payments to Mr I Deveson and Mr G M Pemberton who were paid during the financial year, but actually retired during previous years. ** Remuneration includes retirement allowance scheme payment to Mr G Gleeson. 123 Commonwealth Bank of Australia and Controlled Entities Notes to and forming part of the accounts continued NOTE 43 Remuneration of Directors continued Total amount received or due and receivable by executive and non executive Directors of the Bank and controlled entities E C O N O M I C E N T I T Y 1998 $ 1997 $ 4,272,934 3,331,388 Remuneration includes share options granted to executive directors under the Executive Option Plan in 1996 and 1997. The fair value of the options has been determined in accordance with the principles of US SFAS 123 ‘Accounting for Stock-Based Compensation’. Refer to Notes 28 and 47(c) for details of the Executive Option Plan. NOTE 44 Remuneration of Executives The following table shows remuneration for the five highest paid members of the senior executive team who were officers of the Bank at 30 June 1998. Senior Executive Team Name & Position Year Base Pay (1) Bonus Other Compensation (2) Total Compensation Option (3) Grant Exercise (3) Price Date First Exercisable D V Murray Managing Director & CEO A E Long Head of Customer Service Division M A Katz Head of Institutional Banking M J Ullmer Group General Manager Financial & Risk Management J F Mulcahy Head of Banking & Financial Services 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 $ $ 1,000,000 800,000 500,000 312,000 600,000 470,000 (4) 496,712 n/a 450,000 400,000 175,000 120,000 160,000 125,000 150,000 n/a 500,000 380,000 200,000 160,000 $ 265,700 85,540 223,573 181,081 133,500 58,790 245,440 n/a 126,000 49,160 $ Number 1,715,700 1,285,540 898,573 613,081 893,500 653,790 892,152 n/a 500,000 300,000 150,000 75,000 250,000 150,000 200,000 n/a $ 15.53 11.85 15.53 11.85 15.53 11.85 15.53 n/a 4 Nov 2000 13 Nov 1999 4 Nov 2000 13 Nov 1999 4 Nov 2000 13 Nov 1999 4 Nov 2000 n/a 826,000 589,160 250,000 150,000 15.53 11.85 4 Nov 2000 13 Nov 1999 (1) Base Pay is calculated on a Total Cost basis and includes any FBT charges related to employee benefits including motor vehicles. (2) Other Compensation includes, where applicable, superannuation, housing (including FBT), car parking (including FBT), and other payments. (3) Option Grants are a right to buy ordinary shares at an exercise price which is the Market Value ( as defined in the Plan Rules) at the date of issue of the options, plus a premium representing the time value component of the value of options. The ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. To reach the performance hurdle, the Bank’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of Total Shareholder Return achieved by companies represented in the ASX’s ‘Bank’s and Finance Accumulation Index’, excluding the Bank. If the performance hurdle is not met, the options will have nil value. The options have a maximum term of five years and are exercisable after three years. Refer Note 28. (4) From commencement of employment in October 1997. Two executives retired during the year. Their total emoluments, including retirement and resignation benefits put them into the group of the five highest paid executives in the year but they are not included in the table because they were not in the Bank’s employ at 30 June 1998. 124 NOTE 44 Remuneration of Executives continued The following table shows the number of executives whose remuneration fell within the stated bands: E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 1997 1998 1997 Remuneration (Dollars) $ 120,000 - $ 129,999 $ 190,000 - $ 199,999 $ 200,000 - $ 209,999 $ 210,000 - $ 219,999 $ 230,000 - $ 239,999 $ 250,000 - $ 259,999 $ 260,000 - $ 269,999 $ 280,000 - $ 289,999 $ 290,000 - $ 299,999 $ 300,000 - $ 309,999 $ 310,000 - $ 319,999 $ 320,000 - $ 329,999 $ 330,000 - $ 339,999 $ 340,000 - $ 349,999 $ 350,000 - $ 359,999 $ 360,000 - $ 369,999 $ 370,000 - $ 379,999 $ 380,000 - $ 389,999 $ 390,000 - $ 399,999 $ 400,000 - $ 409,999 $ 420,000 - $ 429,999 $ 430,000 - $ 439,999 $ 440,000 - $ 449,999 $ 460,000 - $ 469,999 $ 470,000 - $ 479,999 $ 490,000 - $ 499,999 $ 500,000 - $ 509,999 $ 540,000 - $ 549,999 $ 560,000 - $ 569,999 $ 600,000 - $ 609,999 $ 610,000 - $ 619,999 $ 620,000 - $ 629,999 $ 650,000 - $ 659,999 $ 670,000 - $ 679,999 $ 780,000 - $ 789,999 $ 890,000 - $ 899,999 $ 920,000 - $ 929,999 $ 930,000 - $ 939,999 $ 950,000 - $ 959,999 $1,060,000 - $1,069,999 $1,070,000 - $1,079,999 $1,320,000 - $1,329,999 $1,840,000 - $1,849,999 Total number of executives Number 1 - - 1 - 2 - - 1 2 - 1 - - 1 2 - 4 1 1 3 2 1 2 1 - - 1 - 1 - 1 - - 1 1 1 1 1 1 1 - 1 37 # # # # Number - 1 1 - 1 - 1 1 - 1 1 2 2 2 - 2 2 1 3 - - - - 1 - 1 1 - 1 1 1 1 1 1 - - - - - - - 1 - 31 Number 1 - - 1 - 2 - - 1 2 - 1 - - 1 2 - 4 1 1 3 2 1 2 1 - - 1 - 1 - 1 - - 1 1 1 1 1 1 1 - 1 37 # # # # Number - 1 1 - 1 - 1 1 - 1 1 2 2 2 - 2 2 1 3 - - - - 1 - 1 1 - 1 1 1 1 1 1 - - - - - - - 1 - 31 125 Notes to and forming part of the accounts continued NOTE 44 Remuneration of Executives continued Commonwealth Bank of Australia and Controlled Entities E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $ 1997 $ 1998 $ 1997 $ Total amount received or due and receivable by executives (includes accumulated benefits due to executives who retired during the year). 19,779,164 13,384,814 19,779,164 13,384,814 # Includes termination payments to 4 retired, resigned, or retrenched executives during the 1997/98 financial year. An executive is a person who works in Australia and is either a participant in the Bank’s Executive Option Plan or is otherwise directly accountable and responsible to the Managing Director for strategic direction or operational management functions. Participation in the Executive Option Plan is limited to executives who, in the opinion of the Managing Director and the Board are able by virtue of their responsibility, experience and skill to influence the generation of shareholder wealth. Remuneration is based on amounts paid and accrued with respect to the financial year, and includes share options granted to executives under the Executive Option Plan in 1996 and 1997. The fair value of options has been determined in accordance with the principles of US SFAS 123 ‘Accounting for Stock-Based Compensation’. Refer to Notes 28 and 47(c) for details of the Executive Option Plan. 1997 comparatives have been restated where appropriate. The Bank’s Policy in respect of executives is that: • reward executives for Group, business unit and individual performance against appropriate benchmarks/goals; align the interests of executives with those of shareholders; link executive reward with the strategic goals and performance of the Bank; ensure total remuneration is competitive by market standards; Remuneration will be competitively set so that the Bank can seek to attract, motivate and retain high quality local and international executive staff; Remuneration will incorporate, to a significant degree, variable pay for performance elements, both short term and long term focussed as appropriate, which will: - - - - Remuneration will be reviewed annually by the Remuneration Committee through a process that considers Group, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices; Remuneration systems will complement and reinforce the Bank’s leadership and succession planning systems; and Remuneration and terms and conditions of employment will be specified in an individual contract of employment and signed by the executive and the Bank. • • • • 126 E C O N O M I C E N T I T Y C H I E F E N T I T Y 1998 $M 1997 $M 1996 $M 1998 $M 1997 $M NOTE 45 Statements of Cash Flows Note (a) Reconciliation of Cash For the purposes of the Statements of Cash Flows, cash includes cash at bankers, money at short call, at call deposits with other financial institutions and settlement account balances with other banks. Notes, coins and cash at bankers Other short term liquid assets Receivables due from other financial institutions - at call Payables due to other financial institutions - at call Cash and Cash Equivalents at end of year 951 247 2,925 (2,160) 1,963 1,091 241 3,502 (1,516) 3,318 479 1,270 3,625 (1,073) 4,301 909 157 2,681 (1,772) 1,975 1,060 195 3,294 (1,134) 3,415 Note (b) Cash Flows presented on a Net Basis Cash flows arising from the following activities are presented on a net basis in the Statements of Cash Flows: • • • • customer deposits to and withdrawals from deposit accounts; borrowings and repayments on loans, advances and other receivables; sales and purchases of trading securities; and proceeds from and repayment of short term debt issues. Note (c) Reconciliation of Operating Profit After Income Tax to Net Cash Provided by Operating Activities Operating profit after income tax (Increase) decrease in interest receivable Increase (decrease) in interest payable Net (increase) decrease in trading securities 1,110 1,100 1,141 883 948 (13) 80 171 (33) 78 75 (646) 5 556 (125) 2,374 (32) (591) - 487 Net (gain) loss on sale of investment securities (101) (4) 10 (119) (4) Charge for bad and doubtful debts Depreciation and amortisation Other provisions Increase (decrease) in income taxes payable Increase (decrease) in deferred income taxes payable (Increase) decrease in future income tax benefits Amortisation of discount on debt issues Amortisation of premium (discount) on investment securities Unrealised (gain) loss on revaluation of trading securities Abnormal item Other 233 233 98 280 113 293 224 197 85 249 (74) 36 63 (71) 34 46 128 (158) 261 26 (484) 492 (241) (222) 97 22 256 (13) (147) 200 47 91 61 50 139 56 89 - 85 45 43 (146) 260 29 (484) 492 (180) (240) 48 45 256 (31) (147) 200 64 Net Cash provided by Operating Activities 887 2,391 4,611 517 2,072 Note (d) Non Cash Financing and Investing Activities Shares issued under the Dividend Reinvestment Plan $452 million (1997: $426 million) and Employee Share Acquisition Plan $28 million (1997: $28 million). 127 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 45 Statements of Cash Flows continued Note (e) Acquisition of Controlled Entities During 1997, the Bank acquired 100% of the share capital of Commonwealth Funds Management and Leaseway and the 8.1% minority interest in Commonwealth Development Bank. Details of controlled entities acquired during the financial year are as follows: E C O N O M I C E N T I T Y 1998 $M 1997 $M 1996 $M Consideration Cash paid on acquisition Fair value of net tangible assets acquired Cash Investment securities Loans, advances and other receivables Property, plant and equipment Other assets Outside equity interest Income tax liability Other provisions Bills payable and other liabilities Discount on acquisition Goodwill Outflow of cash on acquisition Cash payments Less cash and cash equivalents acquired - 88 - - - - - - - - - - - - - - 22 2 15 4 6 28 (3) (5) (6) 63 (16) 41 88 - - - 88 (22) 66 - - - - - - - - - - - - - - - - Financing Facilities Note (f) Standby funding lines with overseas banks as at 30 June 1998 amounted to AUD equivalent $21 million (1997: $21 million). 128 NOTE 46 Disclosures about Fair Value of Financial Instruments These amounts represent estimates of net fair values at a point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the amounts estimated. While the estimated net fair value amounts are designed to represent estimates at which these instruments could be exchanged in a current transaction between willing parties, many of the Economic Entity’s financial instruments lack an available trading market as characterised by willing parties engaging in an exchange transaction. In addition, it is the Bank’s intent to hold most of its financial instruments to maturity and therefore it is not probable that the net fair values shown will be realised in a current transaction. The estimated net fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. In addition, the value of long-term relationships with depositors (core deposit intangibles) and other customers (credit card intangibles) are not reflected. The value of these items is significant. Because of the wide range of valuation techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of the Bank’s net fair value information with that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated net fair value disclosures and to realise that because of these uncertainties, the aggregate net fair value amount should in no way be construed as representative of the underlying value of the Commonwealth Bank of Australia. Assets Cash and liquid assets Receivables due from other financial institutions Trading securities Investment securities Loans, advances and other receivables Bank acceptances of customers Deposit accounts with regulatory authorities Other assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Debt issues Bills payable and other liabilities Loan Capital Asset and liability hedges - unrealised gains/(losses) (Refer Note 37) E C O N O M I C E N T I T Y 1998 1997 Carrying Value $M Net Fair Value $M Carrying Value $M Net Fair Value $M 1,526 1,526 3,448 3,448 4,009 4,009 6,858 7,079 2,007 4,839 2,635 9,233 2,007 4,839 2,635 9,562 89,816 92,646 81,632 84,958 9,727 9,727 8,874 8,874 832 832 797 797 12,054 12,518 7,301 7,560 83,886 84,305 77,880 78,439 3,397 3,397 9,727 9,727 3,621 8,874 3,621 8,874 10,608 10,828 10,154 10,276 10,616 10,856 2,996 3,170 557 - 7,590 2,801 - 7,574 2,847 (259) The net fair value estimates were determined by the following methodologies and assumptions: Liquid assets and bank acceptances of customers The carrying values of cash and liquid assets, receivables due from other financial institutions and bank acceptances of customers approximate their net fair value as they are short term in nature or are receivable on demand. Securities Trading securities are carried at net market/net fair value and investment securities have their net fair value determined based on quoted market prices, broker or dealer price quotations. 129 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 46 Disclosures about Fair Value of Financial Instruments continued Loans, advances and other receivables The carrying value of loans, advances and other receivables is net of general and specific provisions for doubtful debts and interest/fees reserved. For variable rate loans, excluding impaired loans, the carrying amount is a reasonable estimate of net fair value. The net fair value for fixed rate loans was calculated by utilising discounted cash flow models (ie the net present value of the portfolio future principal and interest cash flows), based on the maturity of the loans. The discount rates applied were based on the current benchmark rate offered for the average remaining term of the portfolio plus an add-on of the average credit margin of the existing portfolio, where appropriate. The net fair value of impaired loans was calculated by discounting expected cash flows using a rate which includes a premium for the uncertainty of the flows. For shares in companies, the estimated net fair values are based on quoted market prices. Statutory deposits with central banks In Australia, and several other countries in which the Economic Entity operates, the law requires that the Economic Entity lodge regulatory deposits with the local central bank at a rate of interest below that generally prevailing in that market. The net fair value is assumed to be equal to the carrying value as the Economic Entity is only able to continue as a going concern with the maintenance of these deposits. All other financial assets The net fair value includes the value of the net worth and the business in force of CLL (known as the embedded value), which has been actuarially assessed to be $480 million as at 30 June 1998 (1997: $400 million), $445 million (1997: $365 million) in excess of carrying value in the Chief Entity. Also included in this category are fees receivable, unrealised income and investments in associates ($276 million) where the carrying amount is considered to be a reasonable estimate of net fair value. Other financial assets are net of goodwill, future income tax benefits and prepayments/unamortised payments as these do not constitute a financial instrument. Deposits and other public borrowings The net fair value of non interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, is the carrying value as at 30 June. Discounted cash flow models based upon deposit type and its related maturity, were used to calculate the net fair value of other term deposits. Short term liabilities The carrying value of payables due to other financial institutions and bank acceptances approximate their net fair value as they are short term in nature and reprice frequently. Debt issues and loan capital The net fair values of debt issues and loan capital were calculated based on quoted market prices as at 30 June. For those debt issues where quoted market prices were not available, a discounted cash flow model using a yield curve appropriate to the remaining maturity of the instrument was used. All other financial liabilities This category includes interest payable and unrealised expenses payable for which the carrying amount is considered to be a reasonable estimate of net fair value. For liabilities which are long term, net fair values have been estimated using the rates currently offered for similar liabilities with remaining maturities. Other provisions including provision for dividend, income tax liability and unamortised receipts are not considered financial instruments. Asset and liability hedges Net fair value of asset and liability hedges is based on quoted market prices, broker or dealer price quotations. Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued The net fair value of these items was not calculated as estimated fair values are not readily ascertainable. These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not presently sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. The net fair value may be represented by the present value of fees expected to be received, less associated costs. The overall level of fees involved is not material. 130 NOTE 46 Disclosures about Fair Value of Financial Instruments continued Other off-balance sheet financial instruments The net fair value of trading and investment derivative contracts (foreign exchange contracts, currency swaps, exchange rate futures, currency options, forward rate agreements, interest rate swaps, interest rate futures, interest rate options), were obtained from quoted market prices, discounted cash flow models or option pricing models as appropriate. The fair value of these instruments are disclosed in Note 37. NOTE 47 Differences between Australian and United States Accounting Principles The consolidated financial statements of the Bank are prepared in accordance with Generally Accepted Accounting Principles in Australia (‘Australian GAAP’, refer Note 1) which differ in some respects from Generally Accepted Accounting Principles in the United States (‘US GAAP’). The following are significant adjustments between net profit, shareholders’ equity and consolidated balance sheets disclosed in these accounts and which would be reported in accordance with US GAAP. Footnote 1998 $M 1997 $M 1996 $M Consolidated Statements of Profit and Loss Net profit reported under Australian GAAP Restatement of deferred tax balances resulting from change in tax rate Tax effect of increase in general provision for bad and doubtful debts Employee share compensation Unrealised net gain on available for sale securities Pension expense adjustment Adjustment on adoption of new ISC Life Insurance Rules Net income according to US GAAP Earnings per share according to US GAAP (cents) Shareholders’ Equity Shareholders’ equity reported under Australian GAAP, excluding outside equity interests Tax effect of foreign currency translation reserve Reinstatement of the deferred tax asset relating to general provision for bad and doubtful debts Provision for final cash dividend Unrealised net gain(loss) on available for sale securities Prepaid pension cost Tax effect of prepaid pension cost Shareholders’ equity according to US GAAP Consolidated Balance Sheets Total assets reported under Australian GAAP Reinstatement of the deferred tax asset relating to general provision for bad and doubtful debts at year end Assets relating to life insurance statutory funds Unrealised net gain(loss) on available for sale securities Prepaid pension cost Total assets according to US GAAP (a) (a) (c) (f) (i) (k) (a) (a) (d) (f) (i) (i) (a) (e) (f) (i) 1,090 - (248) (1) (65) 20 - 796 85.6 6,712 (15) - 321 198 648 (233) 7,631 1,078 - 28 (57) - 44 (11) 1,082 118.0 6,846 (20) 248 291 24 616 (222) 7,783 1,119 16 50 - - 45 - 1,230 127.0 7,190 (10) 221 301 9 548 (197) 8,062 130,544 120,103 109,285 - 7,959 309 648 139,460 248 7,249 37 616 128,253 221 6,307 14 548 116,375 131 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 47 Differences between Australian and United States Accounting Principles continued (a) Income Tax Deferred Income Tax Assets and Liabilities Australian GAAP follows the liability method of tax-effect accounting. The tax-effect of timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is disclosed as a future income tax benefit (FITB) or a provision for deferred income tax. Amounts are offset where the tax payable and the realisable benefit are expected to occur in the same period. Permanent differences are differences between taxable income and pre-tax accounting profit where the related income or expense items will never be included in either taxable income or pre-tax accounting profit. The Bank has applied SFAS 109 ‘Accounting for Income Taxes’ in the preparation of its US GAAP information. The differences between the effect of applying the provisions of SFAS 109 and the accounting policy adopted in the Australian Financial Statements are as follows: • Australian GAAP requires that an announcement of the Government’s intention to change the rate of company income tax in advance of periods in which the change will occur is adequate evidence for the deferred tax balances to be restated. This treatment is not permitted under SFAS 109 ‘Accounting for Income Taxes’ which requires that the deferred tax liabilities and assets be adjusted in the financial year in which a change in the tax rate is enacted. The restatement of the deferred tax balances resulting from the 1995 Australian tax rate change in respect of the 1996 financial year is included as a US GAAP adjustment; and • under Australian GAAP the criterion for recognition of timing differences is assurance beyond any reasonable doubt and for tax losses ‘virtual certainty’. The recognition criterion under US GAAP is that the tax benefit is probable. The general provision for bad and doubtful debts has been tax effected as at 1 January 1998. This reflects the adoption of a balance sheet risk based dynamic provisioning methodology which satisfies the recognition requirement that utilisation of the provision be assured beyond reasonable doubt. Previously the related deferred tax asset associated with the Bank’s general provision was not recognised. For US GAAP recognition purposes, the related deferred tax asset is recognised. The 1998 US GAAP net income adjustment of $248 million represents the cumulative deferred tax asset previously recognised as income for US GAAP. (Also refer Note 1(o)). Similarly for US GAAP purposes, the tax effect of the foreign currency translation reserve is booked as a deferred tax liability. Investment Securities Income from tax exempt securities does not exceed $500,000. Tax related to gains/losses on investment securities sales is $37 million (1997: $1.4 million, 1996: $3.6 million benefit). Pension Plans (b) In accordance with Australian GAAP, contributions to company sponsored defined benefit pension plans are expensed as incurred. Other than by way of a note to the financial statements, any surplus or deficit is not reflected in the consolidated accounts. US GAAP pension expense, for defined benefit pension plans, is determined using defined methodology that is based on concepts of accrual accounting. This methodology, which requires several types of actuarial measurements, results in net amounts of expense and the related plan surplus or deficiency being recorded in the financial statements of the sponsor systematically over the working lives of the employees covered by the plan. As a result US GAAP reconciliation adjustments are required. The disclosure requirements of SFAS 87 ‘Employers Accounting for Pensions’ have been included at footnote (j) within this note. The Bank has adopted SFAS 87 later than the effective date specified in the accounting standard. To introduce the information required under SFAS 87 as from the effective date was not feasible. Accordingly an allocation of the pension obligation/asset has been taken directly to equity based on the number of years elapsed between the effective date and the date of adoption by the Bank. The adoption date for the purposes of the US GAAP reconciliation information is 1 July 1994 and the remaining amortisation period at the adoption date was ten years. Employee Share Compensation (c) In the Consolidated Statements of Changes in Shareholders’ Equity the Employee Share Acquisition Plan share issue is shown as a reduction to shareholder reserves. Under US GAAP, SFAS 123 ‘Accounting for Stock Based Compensation’, this employee share scheme would be considered as part of employee compensation and charged to profit and loss. The grants of shares are in respect of the Bank’s performance for the prior years. 132 NOTE 47 Differences between Australian and United States Accounting Principles continued Employee Share Compensation continued (c) Further, under US GAAP, in accordance with the Employee Share Acquisition Plan an accrual for the probable grant of shares is required. Also under US GAAP, the fair value of the options issued under the Executive Option Plan is included as part of employee compensation and charged to profit and loss. The fair value of the options (issued on 16 December 1996), being 45c per option, has been determined using Black-Scholes option pricing model with the following assumptions at the date of issue: expected volatility of 17.5%, risk free interest rate of 6.94%, dividend rate of 8.18%, expected life of 39 months and a 50% probability for the performance hurdle. The fair value of options (issued on 11 December 1997), being 89c per option, has also been determined using Black-Scholes option pricing model with the following assumptions at the date of issue: expected volatility of 19.1%, risk free interest rate of 5.88%, dividend rate of 5.96% expected life of 39 months and a 50% probability for the performance hurdle. Movement in Executive Options during the year Options outstanding at 1 July 1997 Options granted during the year Options forfeited during the year (December 1996 plan) Options forfeited during the year (December 1997 plan) Options outstanding at 30 June 1998 Number 2,100,000 2,875,000 (225,000) (75,000) 4,675,000 Exercise Price 11.85 15.53 11.85 15.53 Outstanding options at 30 June 1998 December 1996 options December 1997 options Number 1,875,000 2,800,000 Exercise Price 11.85 15.53 Expiry Date 12 Nov 2001 3 Nov 2002 The weighted average exercise price for options outstanding at 30 June 1998 is $14.05. The weighted average remaining contractual life of these options is 4 years. The other disclosure requirements of SFAS 123 ‘Accounting for Stock-Based Compensation’ in respect of the employee share plans are included in Note 28. Provisions (d) The term ‘provisions’ is used in Australian GAAP to designate accrued expenses with no definitive payment date. Provisions, principally disclosed in Note 24 comply in all material respects with US GAAP with the exception of the provision for the final cash dividend (Note 6), which is not formally declared until the meeting of directors shortly after the balance date. Under US GAAP, dividends are recorded as liabilities only if formally declared prior to balance date. This difference in treatment has been amended in the US GAAP reconciliation of shareholders’ equity. The provision for restructuring costs at 30 June 1998 of $122 million (refer Note 24) includes staff redundancy costs of $85 million. The abnormal restructuring charge also includes staff redundancy costs of $37 million which had been incurred at 30 June 1998. The restructuring charge allows for 3,000 redundancies. A total of 800 redundancies under the relevant restructuring programmes occurred by 30 June 1998 and approximately 2,200 further are planned. The redundancies principally involve rationalisation of processing and administration functions, implementation of the new organisational structure and reconfiguration of delivery systems. Life Insurance Controlled Entity (e) For Australian GAAP the assets of the statutory funds and the liabilities of the funds to its policyholders are excluded from the consolidated balance sheet (Note 1 (jj)). An adjustment has been made for this in relation to US GAAP. All related investments are brought to account at market values. 133 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 47 Differences between Australian and United States Accounting Principles continued Life Insurance Statutory Fund Assets The following fair value table of the investments of the life company shows the unrealised gains/losses by major category: At 30 June 1998 At 30 June 1997 Fair Value $M Gross Unrealised Amortised Cost Losses Gains $M $M $M Fair Value $M Gross Unrealised Amortised Cost Losses Gains $M $M $M Investments Government securities Australia Overseas Local and semi-government securities Equity investments Promissory notes Certificates of deposit Bank accepted bills Other investments Cash Other assets 791 177 729 2,026 - - 22 1,112 3,062 40 7,959 28 16 22 488 - - - 36 - - 590 - 1 - 763 162 707 134 1,672 - - - 1 - - 136 - - 22 1,077 3,062 40 7,505 578 17 973 1,611 869 1,034 795 1,024 290 58 7,249 31 1 34 343 6 12 6 28 - - 461 - - - 30 - - - 1 - - 31 547 16 939 1,298 863 1,022 789 997 290 58 6,819 Fair Value Maturity Distribution of Debt Securities The tables analyse the maturities on a fair value basis: At 30 June 1998 At 30 June 1997 Maturing Maturing Maturing Maturing 1 year Between Between After 10 Years or less 1 and 5 years $M 5 and 10 years $M Total $M $M Maturing Maturing Maturing Maturing After 10 Years 1 year Between Between 5 and 1 and or less 10 years 5 years $M $M $M 465 82 358 - - - 559 - - 1,464 113 46 106 - - - - - - 265 86 31 18 - - - 791 177 729 - - 22 302 1,112 - 3,062 40 - 437 5,933 1 - 188 869 637 795 313 290 58 3,151 370 1 711 - 272 - 409 - - 1,763 165 3 46 - - - - - - 214 Total $M $M 42 13 28 - 125 - 302 - - 510 578 17 973 869 1,034 795 1,024 290 58 5,638 Investments Government securities Australia Overseas Local and semi-government Promissory notes Certificates of deposit Bank accepted bills Other investments Cash Other assets $M 127 18 247 - - 22 251 3,062 40 3,767 134 NOTE 47 Differences between Australian and United States Accounting Principles continued Available For-Sale Securities under US GAAP (f) Under Australian GAAP, only two categories of securities prevail, namely Investment and Trading Securities. Investment securities are purchased by the Bank with the intent to ‘hold to maturity’. Trading securities are purchased and held for the short term, primarily with the intention of making profits from anticipated movements in market rates. Government securities, held in the investment securities portfolio, were sold during the year following the change in the Reserve Bank of Australia maximum holding for regulatory requirements. As a result, all Investment Securities have been reclassified as Available-for-Sale securities for the purposes of US GAAP disclosure. Any capital gain or loss realised on sale is taken to profit and loss at that time. The cost of available-for-sale securities sold is calculated on a specific identification basis. Under US GAAP, these securities are revalued to market and the difference between carrying value and market value is taken to shareholders’ equity. Trading securities under Australian GAAP include infrastructure equity securities on hand at 30 June 1998. These securities are revalued to market with the unrealised gain or loss at balance sheet date taken to profit and loss. Under US GAAP these securities are classified as ‘Available-for-Sale’ and the unrealised gain taken to shareholders’ equity rather than profit and loss. The disclosure requirements of SFAS 115 ‘Accounting for Certain Investments in Debt and Equity Securities’ in respect of available-for-sale securities have been included at footnote (m) within this note. Net Profit (g) Under US GAAP the concept of ‘operating profit’ is not recognised. Net profit under Australian GAAP is operating profit after tax including ‘abnormal items’ and after deducting outside equity interests. In performing the US GAAP profit reconciliation, the net profit reported using Australian GAAP is after deducting goodwill amortisation and abnormal items. 135 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 47 Differences between Australian and United States Accounting Principles continued Consolidated Balance Sheet (h) The following reconciliations are of significant adjustments to Australian GAAP balance sheet categories disclosed in these accounts and which would be reported in accordance with US GAAP: Footnote 1998 $M 1997 $M 1996 $M Assets Available for sale securities under Australian GAAP Reclassification to available for sale securities Restatement of available for sale securities to fair value According to US GAAP Investment securities under Australian GAAP Reclassification to available for sale securities According to US GAAP Trading securities under Australian GAAP Reclassification to available for sale securities According to US GAAP Other assets under Australian GAAP Deferred tax assets on general provision for bad and doubtful debts Assets relating to life insurance statutory funds Prepaid pension cost According to US GAAP Liabilities Income tax liability under Australian GAAP Tax effect of foreign currency translation reserve Deferred tax liability on unrealised gain on available for sale securities Deferred tax liability on pension income According to US GAAP Provision for dividend under Australian GAAP Reversal of provision for final cash dividend According to US GAAP Bills payable and other liabilities under Australian GAAP Liabilities relating to life insurance statutory funds According to US GAAP (f) (f) (f) (f) (a) (e) (i) (a) (f) (i) (d) (e) - 6,999 309 7,308 6,858 (6,858) - 4,009 (141) 3,868 11,859 - 7,959 648 20,466 1,099 15 111 233 1,458 321 (321) - 10,746 7,959 18,705 - 2,129 37 2,166 9,233 (2,129) 7,104 2,635 - 2,635 7,502 248 7,249 616 15,615 925 20 13 222 1,180 291 (291) - 7,698 7,249 14,947 - 2,838 14 2,852 8,394 (2,838) 5,556 2,883 - 2,883 5,268 221 6,307 548 12,344 1,050 10 5 197 1,262 301 (301) - 5,992 6,307 12,299 136 NOTE 47 Differences between Australian and United States Accounting Principles continued Details of Pension Expense and Reconciliation of Funded Status of Pension Plans (i) The Bank and its controlled entities sponsor a range of superannuation (pension) plans for its employees worldwide. The Bank’s accounting policy for superannuation expense, under Australian GAAP reporting, is set out in Note 1(ll) of the financial statements. The superannuation expense principally represents the annual funding, determined after having regard to actuarial advice, to provide for future obligations of defined benefit plans. Other details of the Bank’s major superannuation plans are set out in Note 38 of the financial statements. For US GAAP purposes, the Bank adopted the disclosure requirement of SFAS 87 ‘Employers’ Accounting for Pensions’ for the major defined benefit fund, the Officers’ Superannuation Fund (OSF), commencing 1 July 1994. Other defined benefit funds are immaterial for US GAAP reconciliation purposes. For the financial year ended 30 June 1996, the Bank adopted 30 June as the measurement date for plan assets and obligations. Effective from the financial year ended 30 June 1997, the Bank has adopted 31 March as the measurement date for plan assets and obligations. The plan assets consist primarily of listed equities, debt securities and property. The OSF does not hold any equity in the Bank’s paid capital. Amounts on deposit with the Bank at 30 June 1998 totalled $73 million (1997: $145 million and 1996: $4 million). Other investments with the Bank and/or controlled entities at 30 June 1998 were $40 million (1997: $10 million and 1996: $92 million). The table displays the elements of the net pension expense for each financial year and the funded status as at 30 June 1996, 31 March 1997 and 31 March 1998 for the OSF. The assumptions used in the calculations were a discount rate of 6.50% (1997: 8.00%, 1996: 9.00%), compensation increase rate of 4.25% (1997: 4.50%, 1996: 5.00%) and return on assets of 7.50% (1997: 8.25%, 1996: 9.00%). Pension plan 1998 $M 1997 $M 1996 $M Service cost Interest cost Actual return on assets Net amortisation and deferral of costs Employer financed benefits within Accumulation Division Net periodic pension (cost) income Expensed employer contribution Less tax effect Pension expense adjustment - see US GAAP Reconciliation Fund status at measurement date: Vested benefit obligation Non vested benefit obligation Accumulated benefit obligation Effect of future salary projections Projected benefit obligation Fair value of assets Funded status Assets not recognised: Transitional obligation assets Unrecognised net loss Unrecognised prior service costs Employer contribution from measurement date to balance date Prepayment of pension costs (80) (328) 911 (447) (24) 32 - 32 (12) 20 3,032 328 3,360 1,004 4,364 (5,279) (915) 414 (147) - - (648) (62) (344) 353 141 (21) 67 1 68 (24) 44 2,924 312 3,236 876 4,112 (4,896) (784) 483 (315) - - (616) (68) (342) 425 69 (14) 70 1 71 (26) 45 2,563 198 2,761 1,061 3,822 (4,815) (993) 552 (107) - - (548) Additionally, a deferred tax liability has been taken up for US GAAP reconciliation purposes in respect of the above prepayment of pension costs. 137 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 47 Differences between Australian and United States Accounting Principles continued (j) Employee Benefits - Post Retirement Benefits Other Than Pensions Health Care Subsidies The Bank provides a benefit to employees including retirees who were members of the ‘Commonwealth Bank Health Society (Friendly Society)’ (CBHS) as at 6 July 1995 and met certain criteria. The benefit provided by the Bank is in the form of financial assistance to eligible employees and retirees with their private health insurance premium. All staff who joined the CBHS on or after 7 July 1995 are not eligible for any benefits. The CBHS is a friendly society registered under the Friendly Societies Act 1989 (NSW) and a health benefit organisation under the National Health Act 1953. As at 30 June 1996, the agreement between the Bank and the Finance Sector Union provided for those members of the CBHS who were retired as at 30 June 1995 an ongoing fixed subsidy indexed to a maximum of the movements in the Consumer Price Index whenever the members’ health insurance premiums in CBHS increase. Eligible members who retired between 30 June 1995 and 31 July 1996 are provided with a fixed ongoing premium subsidy in accordance with their benefit category. Other than the subsidised health insurance premium, which is fully provided for, the Bank does not have a post retirement health care liability. Concessional housing loans The Bank provides housing loans at concessional interest rates to assist with private housing for staff who meet certain criteria. Except for certain executive and senior executive staff whose remuneration package excludes a post retirement concessional interest rate loan, the Bank provides post retirement interest concessions for all retirees on the following basis. Staff with housing loans prior to 1 April 1997 and taken into retirement may be repaid over the remainder of the specified term of the loan. Borrowings on or after 1 April 1997 but before 1 April 2002 may be retained in retirement until 1 April 2007 at which time the concession will cease. Borrowings after 1 April 2002 may be retained into retirement for a period of five years at which time the concession will cease. No new or additional loans are offered at concessional interest rates after retirement. Australian GAAP Compliance Effective 1 July 1994 the Bank adopted the Australian Accounting Standard AASB 1028: ‘Accounting for Employee Entitlements’ with respect to the liabilities arising from the post retirement benefits described above. AASB 1028: ‘Accounting for Employee Entitlements’ specifies that employee post retirement benefit liabilities are calculated as the present value of the estimated future cash flows due to the services of employees provided up to the reporting date. The adequacy of the full provision for employee post retirement benefits liabilities in the financial statements is determined in accordance with the requirements of AASB 1028 after considering that employee post retirement benefits carry limited risks, and after obtaining actuarial advice. US GAAP Compliance Prior to the adoption of AASB 1028 the Bank accounted for its obligation for employee entitlements substantially in accordance with SFAS 43 ‘Accounting for Compensated Absences’. Other than the disclosures discussed above, there are no US GAAP adjustments or further disclosures under SFAS 106 ‘Employers’ Accounting for Post Retirement Benefits Other than Pensions’. Life Insurance (k) Under Australian GAAP, transitional adjustments on adoption of the new Insurance and Superannuation Commission Rules for financial reporting were made directly to retained earnings at the beginning of the 1997 financial year. Under US GAAP such adjustments were included as part of 1997 financial year profits. 138 NOTE 47 Differences between Australian and United States Accounting Principles continued Property and Other Non-Current Asset Revaluations (l) Each year a review of non-current assets is performed to assess the recoverable amount of non-current assets. The ‘recoverable amount test’ is in accordance with the Australian accounting standard which requires future cash flows associated with non-current assets to be discounted at a rate which reflects the risk involved. With respect to the determination of the fair value of non-current assets and the recognition of losses from impairments, the requirements under Australian accounting standards and the requirements of SFAS 121 ‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of’ are essentially the same. Australian GAAP allows non-current assets including property, plant and equipment to be revalued upwards direct to an asset revaluation reserve. Assets with a carrying amount greater than their recoverable amount may be revalued to their recoverable amount. Impairments to asset values, where there is an amount in the revaluation reserve relating to the relevant asset class, are taken to reduce the revaluation reserve. Impairments to asset values otherwise must be recorded in the profit and loss. Any subsequent upward reversing revaluations to the same asset class are recorded as revenue in the profit and loss. With the exception of land, all revalued assets are depreciated over their assessed useful lives. Upward revaluations of property, plant and equipment are not allowed under US GAAP, except as part of accounting for business combinations under the Purchase Method. US GAAP requires impairments of non-current assets to be recorded in the profit and loss account. Once such impairments have been recorded, subsequent recoveries to the income statement are not allowed. A discounted cash flow methodology was used in arriving at the valuation at which the Bank’s property is carried. No asset writedowns were necessary in 1998, 1997 or 1996. At 30 June 1998, 1997 and 1996 the asset revaluation reserve shows a nil balance. Any US GAAP adjustment of revalued assets to an historical cost basis would not be material in the income statement, shareholders’ equity or carrying value of the property assets. (m) Available-For-Sale Securities Amortised Cost $M At 30 June 1998 Gross Unrealised Losses Gains $M $M Fair Amortised Cost $M Value $M At 30 June 1997 Gross Unrealised Losses Gains $M $M Fair Value $M - - - - - - - - 161 337 36 - - - 1,072 3,190 427 34 5 - 138 - - 38 2,098 17 - 179 1,960 17 - 141 Australia Australian Public Securities Commonwealth and States Bills of exchange Certificates of deposit Medium Term Notes Other securities and equity investments Total Australia Overseas Government securities Treasury Notes Bills of exchange Certificates of deposit Eurobonds Medium Term Notes Other securities and equity investments Total Overseas Total Available for Sale Securities Proceeds at or close to maturity of available-for-sale securities during 1998 were $8,681 million (1997: $6,479 million, 1996: $6,170 million). 204 5 - 1,195 766 29 232 5 - 1,201 811 25 - - 47 987 - - 1,557 3,831 7,308 1,508 3,707 6,897 351 1,385 2,129 31 - - 7 66 - 3 - - 1 21 4 99 128 178 148 252 589 1,183 3,477 3 3 39 - - 1 1 - - 278 744 50 50 - - - - - - - 36 - 2 2 - - 463 34 5 - 278 780 - - 46 986 - - 354 1,386 2,166 Proceeds from sale of available-for-sale securities during the year were $1,787 million (1997: $1,172 million, 1996: $729 million). Government securities, held in the investment securities portfolio, were sold during the year following the change in the Reserve Bank of Australia maximum holding for regulatory requirements. As a result, all Investment Securities have been reclassified as Available-for-Sale securities. The fair value of Available-for-Sale securities includes the fair value of derivative hedges. Realised capital gains were $65 million and realised capital losses were $80 million, (1997: realised capital gains $12 million, realised capital losses $8 million, 1996: realised capital losses $10 million). 139 Notes to and forming part of the accounts continued Commonwealth Bank of Australia and Controlled Entities NOTE 47 Differences between Australian and United States Accounting Principles continued (m) Available-For-Sale Securities continued Maturity Distribution and Average Yield The table analyses the maturities and weighted average yields of the book value of the Economic Entity’s holdings of available-for-sale securities: A t 3 0 J u n e 1 9 9 8 Australia Australian Public Securities Commonwealth and States Bills of exchange Medium Term Notes Other securities, commercial paper and equity investments Total Australia Overseas Government securities Treasury Notes Certificates of Deposit Eurobonds Medium Term Notes Other securities, commercial paper and equity investments Total Overseas Total Available for Sale Securities Maturities at Fair Value A t 3 0 J u n e 1 9 9 7 Australia Australian Public Securities Commonwealth and States Bills of exchange Certificates of Deposit Other securities and equity investments Total Australia Overseas Bills of exchange Certificates of Deposit Other securities and equity investments Total Overseas Total Available for Sale Securities Maturities at Fair Value * includes equity investments 140 M a t u r i n g 1 year or less % $M M a t u r i n g b e t w e e n 1 and 5 years % $M M a t u r i n g b e t w e e n 5 and 10 years % $M M a t u r i n g a f t e r 10 years % $M Total $M 126 17 - 627 770 64 5 1,114 116 - 248 1,547 2,317 2,446 6.76 1,512 - 5.32 84 - 5.89 - 9.11 322 - 57 6.44 - 1,596 - 104 * 483 6.75 2.24 6.22 6.33 - 4.09 67 - 48 234 29 652 1,030 2,626 2,748 9.25 - 7.86 7.03 - 9.12 73 - 33 416 - 261 783 1,266 1,418 6.64 - 9.80 0.11 5.93 - 5.51 6.32 - 6.58 - - - 341 * 341 - - - - - 347 347 688 696 - 1,960 17 - 141 - - 1,072 3,190 204 - - 5 - 1,195 766 - 29 - 6.29 1,508 3,707 6,897 7,308 M a t u r i n g 1 year or less % $M M a t u r i n g b e t w e e n 1 and 5 years % $M M a t u r i n g b e t w e e n 5 and 10 years % $M M a t u r i n g a f t e r 10 years % $M Total $M 7.96 - - - - 6.69 - - 5.69 5.44 2.20 9.14 5.91 6.13 - 34 5 102 141 47 931 351 1,329 1,470 1,521 421 - - - 421 - 56 - 56 477 463 6 - - - 6 - - - - 6 6 5.40 - - - - - - - - - 176 * 176 - - - - 176 176 - - - - - - - 427 34 5 278 744 47 987 351 1,385 2,129 2,166 NOTE 47 Differences between Australian and United States Accounting Principles continued Impairment of Assets (n) SFAS 114 ‘Accounting by Creditors for Impairment of a Loan’ as amended by SFAS 118 ‘Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures’, requires the value of an impaired loan to be measured as the present value of future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. No adjustment is required in the US GAAP reconciliation as the estimated fair value of the impaired loans is not materially different from the carrying value as at 30 June 1998. Newly Issued Statements of the Financial Accounting Standards Board (o) The Financial Accounting Standards Board (FASB) of the United States of America has recently issued Statements of Financial Accounting Standards (SFAS) Nos. 130, 131, 132 and 133 which are not applicable to the financial year ending 30 June 1998. The Bank does not believe that, except for SFAS 133, these standards would materially impact the financial position and results of operations if they were applicable at 30 June 1998. SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ would be likely to have a material impact on the financial position and results of operations if it were applicable at 30 June 1998. As of the date of this report the Bank is yet to determine what this impact would be upon application of the standard. 141 Directors’ Statement Commonwealth Bank of Australia and Controlled Entities In the opinion of the Directors of the Commonwealth Bank of Australia: • • • • the profit and loss statement and statement of cash flows are drawn up so as to give a true and fair view of the results and cash flows of the company for the financial year ended 30 June 1998; the balance sheet is drawn up so as to give a true and fair view of the state of affairs of the company as at 30 June 1998; at the date of this statement, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due; and the consolidated financial statements of the economic entity have been made out in accordance with Divisions 4A and 4B of Part 3.6 of the Corporations Law so as to give a true and fair view of: - the results and cash flows of the economic entity, constituted by the company and the entities it controlled from time to time during the financial year, for the financial year ended 30 June 1998; and the state of affairs of the economic entity, constituted by the company and the entities it controlled at the year’s end, as at 30 June 1998. - The financial statements of the Chief Entity and the Economic Entity have been made out in accordance with applicable Accounting Standards and other mandatory reporting requirements. The Directors have elected to adopt AASB 1016: Accounting for Investments in Associates, for the financial year ended 30 June 1998, in accordance with section 285(3) of the Corporations Law. Signed in accordance with a resolution of the Directors. M A Besley AO Chairman 12 August 1998 D V Murray Managing Director 142 Independent Audit Report To the members of the Commonwealth Bank of Australia. Scope We have audited the financial statements of the Commonwealth Bank of Australia for the financial year ended 30 June 1998, as set out on pages 50 to 142, including the Statement by Directors. The financial statements include the accounts of Commonwealth Bank of Australia, and the consolidated accounts of the economic entity comprising the Commonwealth Bank of Australia and the entities it controlled at the year’s end or from time to time during the financial year. The company’s directors are responsible for the preparation and presentation of the financial statements and the information they contain. We have conducted an independent audit of these financial statements in order to express an opinion on them to the members of the company. Our audit has been conducted in accordance with Australian and United States Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly by the Directors in accordance with applicable Accounting Standards, statutory requirements and other mandatory professional reporting requirements, so as to present a view which is consistent with our understanding of the company’s and economic entity’s financial position, the results of their operations and cash flows. The names of the entities controlled during all or part of or at the end of the financial year, of which we have not acted as auditor, are disclosed in Note 39. We have, however, received sufficient information and explanations concerning these controlled entities to enable us to form an opinion on the consolidated accounts. The audit opinion expressed in this report has been formed on the above basis. Audit Opinion In our opinion, the financial statements of the Commonwealth Bank of Australia are properly drawn up: (a) so as to give a true and fair view of: (i) the state of affairs of the company and economic entity as at 30 June 1998 and 1997, and of the company’s results of operations and cash flows for each of the two years ended 30 June 1998 and the economic entity’s results of operations and cash flows for each of the three years ended 30 June 1998; and (ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Australian Corporations Law to be dealt with in the financial statements; (b) (c) in accordance with the provisions of the Corporations Law; and in accordance with applicable Accounting Standards and other mandatory professional reporting requirements. Accounting principles generally accepted in Australia vary in certain respects from accounting principles generally accepted in the United States. The application of the United States principles would have affected the determination of consolidated net income for each of the years in the three year period ended 30 June 1998 and the determination of consolidated financial position as at 30 June 1998, 1997 and 1996 to the extent summarised in Note 47 to the financial statements. ERNST & YOUNG Sydney Date: 12 August 1998 S C Van Gorp Partner 143 13 2221 For your everyday banking including the ability to pay bills using Telephone staff available weekdays 8:00 a.m. to 8:00 p.m. Automated service 7:00 a.m. to 11:00 p.m. 13 2224 To apply for a home loan or to open an account 8:00 a.m. to 10:00 p.m. everyday 13 1998 Business Line For a full range of business banking solutions Weekdays 8:00 a.m. to 8:00 p.m. 1 800 240 889 Telephone Typewriter For our hearing or speech impaired customers Weekdays 8:00 a.m. to 8:00 p.m. 13 15 19 Share Direct Easy, low cost access to the stock market By phone or Internet at www.comsec.com.au 13 2423 Commonwealth Connect Insurance Ltd For all your home insurance needs or visit www.commbank.com.au/insurance 13 2420 Commonwealth Connect Insurance Ltd For home insurance claims assistance 24 hours a day, 365 days a year 13 2015 General enquiries on retirement and superannuation products, life insurance or managed investments Weekdays 8:00 a.m. to 8:00 p.m. 144
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