2006
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www.commbank.com.au
Commonwealth Bank of Australia ACN 123 123 124
AnnuAl RepoRt 2006
Chairman’s Statement
Chief Executive Officer’s Statement
Highlights
Banking Analysis
Funds Management Analysis
Insurance Analysis
Shareholder Investment Returns
Presentation of Financial Information
Integrated Risk Management
Description of Business Environment
Corporate Governance
Directors’ Report
Five Year Financial Summary
Financial Statements
Income Statements
Balance Sheets
Statements of Recognised Income and Expense
Statements of Cash Flows
Notes to the Financial Statements
Directors’ Declaration
Independent Audit Report
Shareholding Information
International Representation
Contact Us
Corporate Directory
Contents
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4
6
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20
24
27
28
29
33
36
43
71
73
74
75
76
77
79
233
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239
240
241
Premium, Business and Corporate and Institutional businesses
delivered a solid result driven by moderate revenue growth and
good expense control. Demand from the corporate sector led to
an increase of 18 percent in lending and finance assets during
the period. CommSec continued to trade well, confirming its
position as the country’s leading online broker.
In the competitive New Zealand banking market, our subsidiary,
ASB, again significantly outperformed its major competitors
delivering underlying NPAT growth of 22 percent to NZ$400
million. ASB achievements included its fifteenth straight year of
market share growth in home loans, strong commercial lending
and continued productivity improvement. Credit quality remained
sound.
The Funds Management business produced an outstanding
result. Underlying net profit before tax increased 23 percent over
the prior year to $563 million. Underlying NPAT, which was up
14 percent, was impacted by one-off costs and an increase in
the effective tax rate from 21.9 percent to 28.4 percent due to
the phasing out of
tax relief. Funds under
Administration grew by 23 percent to $152 billion as a result of
strong net fund flows and favourable investment markets. First
Choice maintained its retail support base attracting over 25
percent of retail inflows in the platform market. First Choice has
now exceeded $25 billion in funds under administration in less
than four years.
transitional
The Insurance business delivered a 38 percent increase in
underlying NPAT to $215 million.
Dividends & Capital
The Board again declared a record final dividend of 130 cents
per share – a 16 percent increase on last year’s final dividend.
The final dividend, which is fully franked, will be paid on 5
October 2006. This will take total dividends for the year to 224
cents per share – up 14 percent on last year. Over the last three
years dividends have grown at an annual compound rate of 13
percent.
The Bank continues to issue new shares to satisfy the
requirements of its Dividend Reinvestment Plan which is capped
at 10,000 shares per shareholder.
During the year dividend and interest payments were also made
to the holders of the Bank’s various capital securities: PERLS,
PERLS II, Trust Preferred Securities, ASB Capital Preference
Shares and ASB Capital No 2 Preference Shares.
to actively manage
It
The Bank continued
successfully completed an issue of US$700 million Tier 1 hybrid
capital and an issue of $1,166 million of PERLS III. These capital
issues were off-set by the redemption of the total $700m of
PERLS and a $500 million share buyback in the second half of
the year.
its capital.
The Bank’s credit ratings remained unchanged.
Chairman’s Statement
Introduction
The 2006 financial year has been an important one for the
Commonwealth Bank. We have again delivered a very good
financial result and made a record dividend payment to
shareholders. The Which new Bank program has been
financial benefits and
completed, delivering significant
productivity gains to the Bank. We have also seen a smooth
transition from outgoing CEO David Murray to Ralph Norris, who
has put in place a strategy which will build on the significant
Which new Bank benefits.
Results
The Bank reported a statutory net profit after tax (NPAT) for the
12 months to 30 June 2006 of $3,928 million – an increase of 16
percent on the prior year. Cash NPAT grew 16 percent to
$4,053 million with cash return on equity increasing from 18.8
percent to 21.3 percent.
Excluding the one-off gain of $145 million from the sale of the
Bank’s Hong Kong based insurance business, cash earnings
per share were up 15 percent to 304.6 cents per share. Over the
past three years, the Bank has delivered earnings per share
growth (excluding the profit on the Hong Kong sale) at an annual
compound rate of 14 percent, exceeding the initial Which new
Bank earnings target.
Some of the highlights were:
• Strong growth in banking income, underpinned by profitable
growth across all major product lines;
• A substantial increase in Funds under Administration, to
$152 billion, reflecting robust inflows and continued strength
in investment markets;
•
Increases in insurance premiums, operating margins and a
favourable claims experience;
• Strong growth in earnings from ASB in the competitive New
Zealand market;
• Sound expense management and continued productivity
improvement; and
• Continued strength in credit quality across the portfolio.
The Banking business delivered a full year underlying NPAT of
$3,227 million – an increase of 11 percent on the prior year. This
performance was underpinned by continued volume growth in
home loans, improvements in business lending volumes and
good expense control. Credit quality remained sound with bad
debts expense as a proportion to risk weighted assets stable.
The Australian Retail Banking business performed well with
underlying NPAT up 13 percent. Highlights for the year included
strong revenue growth, good margin and expense control and
further productivity gains. Home loan revenues in particular,
were up 16 percent on the prior year driven, in the second half,
by an improvement in the performance of our branches. The
personal lending and credit cards segments of the market,
where the low rate “Yellow” credit card was launched in the
second half, remained competitive. Deposit balances grew with
NetBank Saver continuing
inflows with
approximately 63 percent being new funds to the Bank.
to attract good
2 Commonwealth Bank of Australia Annual Report 2006
Outlook
The Australian economy performed well in the 2006 financial
year. Business credit growth has been solid, supported by
infrastructure and capacity expansion while consumer credit
growth moderated.
The overall environment for the financial services industry is
expected to remain highly competitive and as a result margin
pressure will continue. Domestic credit quality, high employment
levels and business confidence are strong and provide a positive
outlook. Economic growth is likely to remain solid although
higher oil prices, increasing domestic and international interest
rates, geopolitical instability particularly in the Middle East and
the health of the Chinese economy are all factors which could
potentially impact the Australian economy.
Going into the new financial year we remain confident that we
will be a tougher competitor and will continue to deliver both
revenue growth and productivity improvements. Taking all of
these factors into account, and in the absence of any exogenous
shocks, we expect to see good profit growth for the 2007 fiscal
year with the Bank delivering earnings per share growth which
meets or exceeds the average of our peers.
Corporate Governance and Board Performance
This year has been another busy year for the Board and I would
like to thank my fellow Directors for their contribution and
commitment. I would especially like to acknowledge the
contribution of Tony Daniels and Barbara Ward who will retire
from the Board at the Bank’s Annual General Meeting on 3
November.
Tony and Barbara have been Directors during a period when the
Bank has undergone considerable change. Their contributions
to the functions of the Board have been significant and their
expert insights into the specific issues dealt with by the People &
Remuneration Committee (of which Tony has been a member)
and the Audit Committee (on which Barbara served) have been
a great assistance in dealing with complex issues covered by
those Committees. We wish Tony and Barbara well in the future.
Chairman’s Statement
I also want to formally welcome our new CEO, Ralph Norris,
who replaced retiring CEO David Murray on 22 September
2005. David and Ralph worked closely together to ensure that a
seamless transition was achieved and on behalf of the Board I
thank them for the significant contribution they both made to the
Bank’s successful year.
We have recently announced the appointment of two Directors.
David Turner, CEO of Brambles, and Jane Hemstritch,
Managing Director for Asia Pacific, Accenture, join the Board
effective 1 August 2006 and 9 October 2006 respectively. Both
bring a wide range of skills to the Board and will, I am sure,
make significant contributions to the Bank.
Conclusion
This has been a challenging year for the Bank. We have
witnessed significant change with the appointment of Ralph
Norris as CEO and with the successful completion of Which new
Bank. The fact that we have also been able to maintain the
momentum in the business and again deliver a very good
financial result is a tribute to the commitment and hard work of
all of our people. It is our employees who deliver our success
and they deserve to be congratulated for their efforts.
Finally I would like to thank all our customers and shareholders
for their continuing support of the Commonwealth Bank.
John Schubert
Chairman
23 August 2006
Commonwealth Bank of Australia Annual Report 2006 3
Chief Executive Officer’s Statement
Introduction
The 2006 financial year has been characterised by both
significant change and real achievements. The year’s success
again demonstrates the depth of the talent pool that we have at
the Bank and the commitment of our people to realising our
vision of creating Australia’s finest financial services organisation
through excelling in customer service.
At an operational level the Bank maintained its momentum from
last year and reported a very good result. In a competitive
environment we have delivered cash earnings per share growth
(excluding the impact of the sale of our Hong Kong insurance
business) of 15 percent. Cash return on equity, again excluding
the Hong Kong sale, was up 250 basis points to 21.3 percent. A
particularly pleasing aspect of the result was that all of our
business performed well.
In a competitive market we continued to focus on profitable
growth, avoiding business which we perceived to have a high
risk profile or which did not meet our return criteria. As a result
our credit quality remains strong. We are confident going into the
new financial year but recognise that business will remain
competitive. However, we do not plan to trade off credit quality
for growth.
As well as delivering a very good financial result, Which new
Bank concluded successfully. This three year $1.5 billion
program was brought in on time and within budget and delivered
on all of its major financial and productivity goals. Total financial
benefits for the year were $1,044 million against an initial target
of $900 million. Annual compound earnings per share growth
over the three years (excluding the profit on the sale of the Hong
Kong insurance business) was 14 percent – significantly ahead
of the 10 percent promised at the outset. Dividends also grew at
13 percent ensuring that shareholders benefited from Which
new Bank. The productivity objectives we set for Banking, Funds
Management and Insurance were also met.
In addition Which new Bank has provided a strong platform on
which to build for the future. In particular the successful roll out
of CommSee within the Retail Bank has provided our people
with the tools to deliver improved service to our customers. We
have also extended CommSee to our Business Bank which will
help us grow that business in the future.
With Which new Bank drawing to a close we have focused on
how we can build on its success to realise our vision of
becoming Australia’s finest financial services organisation. We
identified four strategic priorities to lift business performance and
growth: Customer service; Business Banking; Technology and
Operational Excellence; and Trust and Team Spirit. In addition
to these priorities the Bank will continue to consider growth
opportunities in selected markets.
Customer Service
Customer service remains the Bank’s top strategic priority and
while more than 60 percent of our customers tell us they are
satisfied with our service we still have some way to go before we
achieve a level of service which we are happy with. However,
we have made real progress in 2006:
• We have begun to embed our Sales and Service culture,
which has been at the core of our subsidiary ASB’s success,
and have appointed a senior ASB executive to lead the
program which we have called “SUCCESS”;
4 Commonwealth Bank of Australia Annual Report 2006
• We are continuing to invest in our branches:
− We refurbished another 133 branches;
− We increased customer facing staff in the retail bank by
450 and have plans to replicate this in 2007;
− We are building new branches and are now opening 65
branches for business on Saturdays; and
− We have introduced new and improved products which
we believe will make us more competitive. These include
the new “Yellow” credit card, NetBank Saver and new
pricing options for the streamline accounts. We also
removed NetBank fees during the year.
While we have yet to see these improvements reflected in formal
customer satisfaction surveys we are beginning to see evidence
of improvements in service levels through feedback from our
customers including a substantial reduction in the level of
customer complaints.
Business Banking
While we have strong relationships with a significant proportion
of Australian businesses we have failed in the last few years to
capture an appropriate share of this growing market segment.
During the year we began a number of initiatives to improve our
performance in business banking.
These included:
• We have restructured the business to better align it with the
needs of our business customers;
• We are
increasing our business banking
“footprint”
increasing the number of business bankers, adding new
business banking centres and putting business bankers back
into selected branches;
• We have rolled out our CommSee for Business across the
network which provides us with the information platform to
support the selective growth of the “footprint”;
• We have built CommBiz, our new internet business banking
offering, which we will begin rolling out to our customers
shortly; and
• We have developed a new and improved portfolio of
business banking products and simplified our business
banking processes and approval procedures.
Technology and Operational Excellence
The initiatives in this area are designed to deliver greater
efficiency across the Bank and we have already made good
progress in achieving our objectives which include $200 million
in cost savings.
Progress to date includes:
•
In Technology we have a new team in place and we have
reorganised our Enterprise IT function into a co-ordinated
structure;
• We have taken the first steps to restructure our relationship
with our IT providers with the execution of new Enterprise
Processing Systems and telecommunications agreements
which will deliver savings and improved service levels to the
Bank; and
• We have introduced a more focussed approach to group
wide procurement – building on the progress we have made
over the last three years.
Our goal is to improve our efficiency and achieve cost savings
including the reduction of IT costs by approximately $200 million.
Chief Executive Officer’s Statement
Trust and Team Spirit
The commitment, engagement and enthusiasm of our people go
to the heart of our success as an organisation and our ability to
deliver on our strategies. Over the year we have put in place a
number of initiatives in this area including:
• Recent management changes have strengthened the Bank’s
leadership team while building greater collaboration across
the organisation and better aligning the organisation with the
needs of our customers;
• We have increased our focus on our people with the
introduction of a number of initiatives designed to enhance
their wellbeing; and
• We have continued to support our community making
significant commitments to a range of initiatives including
financial literacy, environmental partnerships and one-off
assistance for communities in need of help.
We are already beginning to see positive results with improved
engagement, positive feedback from our people and the
community and a substantial decrease in employee injury rates.
Looking Ahead
I am very pleased with the progress we made in 2006.
Financially we had a very good year and we have momentum
going into the 2007 year. The successful completion of Which
new Bank and the strategic initiatives which we are building on
this platform will enhance our competitiveness in the coming
year. Obviously the changes associated with the transition to a
new CEO placed some pressures on the organisation last year
but these are abating as we move into the new year. As a result
I believe that we will be a tougher competitor this year, better
able to meet the challenges of what continues to be a
competitive market place.
The Bank’s ability to deliver the strong performance we have
seen over the last three years would not have been possible
without the goodwill and commitment of our people. In taking
over as CEO, I am very grateful for the high level of support I
the organisation and have been
have received across
enormously impressed with the quality and skills of our people.
As far as the transition into this role is concerned I would
particularly like to thank David Murray and the Board for their
encouragement, counsel and support.
It is a great privilege to lead this organisation and I am confident
that we can continue to deliver for our people, our customers
and our shareholders.
Thank you.
Ralph Norris
Chief Executive Officer
23 August 2006
Commonwealth Bank of Australia Annual Report 2006 5
Highlights
Financial Performance and Business Review
Performance Highlights
Net Profit after
Income Tax
Statutory basis
Cash basis
Cash basis ex HK sale
Full year
Half year
30/06/06
$M
3,928
4,053
3,908
30/06/05
$M
3,400
3,492
3,492
30/06/06
$M
1,929
1,992
1,992
31/12/05
$M
1,999
2,061
1,916
The Bank’s net profit after tax (“statutory basis”) for the year
ended 30 June 2006 was $3,928 million, an increase of 16% on
the prior year. The final dividend of $1.30 is another record and
the total dividend for the year is $2.24 per share.
The net profit after tax on a cash basis excluding the profit from
the sale of the Hong Kong insurance business (“cash basis ex
HK sale”) increased 12% to $3,908 million.
A more consistent comparison of profit growth is cash earnings
per share (excluding the profit from the sale of the Hong Kong
insurance business) which increased 15% on the prior year to
304.6 cents.
The cash EPS compound annual growth rate (excluding the
profit from the sale of the Hong Kong insurance business) for the
three years covering the Which new Bank strategy (2004-2006)
was 15%.
The performance over the year was supported by:
• Strong growth in banking income, following average interest
earning asset growth of 12% to $275 billion and net interest
margin contraction of seven basis points (after adjusting for
the impact of AIFRS);
• Growth in Funds under Administration of 23% to $152 billion
supported by both strong inflows and continued strength in
investment markets;
• Solid growth in insurance premiums, operating margins and
favourable claims experience;
• Continued strength in credit quality across the portfolio; and
• Underlying expense growth of 5% with continued productivity
improvements.
to
The Bank’s results include the full impact of the adoption of
Australian equivalent
International Financial Reporting
Standards (“AIFRS”) from 1 July 2005. Comparative figures
have also been adjusted to an AIFRS basis, other than for the
impact of those standards related to financial instruments and
insurance. Most significantly, the current year includes the
expense of $123 million associated with distributions on hybrid
financial instruments. Changes to the Bank’s accounting policies
and explanations of the key changes are covered in Note 1 to
the Financial Statements on pages 79-114.
The result for the six months to 30 June 2006 was solid with net
profit after tax (“cash basis”), excluding the profit from the sale of
the Hong Kong insurance business in the first half result,
increasing by 4% to $1,992 million.
Financial Condition
The Group’s assets increased by $32 billion to $369 billion
(2005: $337 billion) over the year.
Total lending assets increased by $30 billion from $236 billion to
$266 billion at 30 June 2006 reflecting growth across a range of
lending products.
6 Commonwealth Bank of Australia Annual Report 2006
The Bank maintains a strong capital position. The Tier One
Capital Ratio increased from 7.46% to 7.56% during the year
reflecting the issue of hybrid securities during the second half of
the year. The Total Capital Ratio decreased from 9.75% at 30
June 2005 to 9.66% at 30 June 2006 impacted by the growth in
Risk Weighted Assets. Risk Weighted Assets increased from
$190 billion to $216 billion at 30 June 2006 attributable to strong
growth in lending assets particularly in the business/corporate
sector. The Bank’s credit ratings remained unchanged.
The Bank adopted the Australian equivalent of International
Financial Reporting Standards (“AIFRS”) on 1 July 2005. APRA
required
the previous Australian GAAP
(“AGAAP”) accounting principles to continue for regulatory
capital purposes until the introduction of revised prudential
standards which take effect on 1 July 2006.
reporting under
The revised prudential standards that apply from 1 July 2006 will
impact Tier 1 Capital and Capital Base. However, APRA has
granted transition relief in relation to changes to their prudential
regulations from 1 July 2006, until 31 December 2007.
A number of significant capital management initiatives were
undertaken to actively manage the Bank’s Tier One capital
during the year, including the Dividend Reinvestment Plan
(“DRP”), issue of Tier One hybrid capital, issue of PERLS III to
replace expiring PERLS instruments, and completion of a $500
million on-market share buyback.
As required by APRA, the Bank’s investment in its life insurance
and funds management companies is deducted from regulatory
capital to arrive at the Bank’s Capital Ratios. The Bank’s
insurance and funds management companies held an estimated
$642 million excess over regulatory capital requirements at 30
June 2006 in aggregate.
The Bank has an integrated risk management framework to
identify, assess and manage risks in the business. The Bank’s
risk profile is measured by the difference between capital
available to absorb loss and risk as assessed by economic
capital required. This risk framework is described more fully
elsewhere in this report.
Dividends
The final dividend declared is 130 cents per share which takes
the full year dividend to a record of 224 cents, an increase of 27
cents or 14% on the prior year. The dividend payment is fully
franked and will be paid on 5 October 2006 to owners of
ordinary shares at the close of business on 18 August 2006
(“record date”). Shares were quoted ex–dividend on 14 August
2006.
Dividends per Share (cents)
240
220
200
180
160
140
120
100
224
197
183
150
154
Jun 02
Jun 03
Jun 04
Jun 05
Jun 06
Group Performance Summary
Net interest income (1)
Other banking income (1)
Total Banking Income
Funds management income
Insurance income
Total Operating Income
Shareholder investment returns
Profit on sale of the Hong Kong insurance business
Total Income
Operating expenses
Which new Bank
Total Operating Expenses
Bad debts expense
Net profit before income tax
Corporate tax expense (2)
Minority interests (3)
NPAT (“cash basis”)
Defined benefit superannuation plan expense
Treasury shares
NPAT (“statutory basis”)
Represented by:
Banking
Funds management
Insurance
NPAT (“underlying basis”)
Shareholder investment returns
Which new Bank
Cash NPAT ex Hong Kong Sale
Profit on sale of Hong Kong insurance business
NPAT (“cash basis”)
Highlights
Full Year Ended
Half Year Ended
30/06/06
$M
6,514
3,036
9,550
1,543
742
11,835
101
145
12,081
5,994
-
5,994
398
5,689
1,605
31
4,053
(25)
(100)
3,928
3,277
400
215
3,842
66
-
3,908
145
4,053
30/06/05
$M
6,026
2,845
8,871
1,247
747
10,865
237
-
11,102
5,719
150
5,869
322
4,911
1,409
10
3,492
(53)
(39)
3,400
2,913
351
156
3,420
177
(105)
3,492
-
3,492
Jun 06 vs
Jun 05 %
8
7
8
24
(1)
9
(57)
-
9
(5)
-
(2)
(24)
16
(14)
large
16
53
large
16
11
14
38
12
(63)
-
12
-
16
30/06/06
$M
3,259
1,591
4,850
828
356
6,034
37
-
6,071
3,027
-
3,027
210
2,834
829
13
1,992
(6)
(57)
1,929
1,638
217
112
1,967
25
-
1,992
-
1,992
31/12/05
$M
3,255
1,445
4,700
715
386
5,801
64
145
6,010
2,967
-
2,967
188
2,855
776
18
2,061
(19)
(43)
1,999
1,589
183
103
1,875
41
-
1,916
145
2,061
Jun 06 vs
Dec 05 %
-
10
3
16
(8)
4
(42)
-
1
(2)
-
(2)
(12)
(1)
(7)
28
(3)
68
(33)
(4)
3
19
9
5
(39)
-
4
-
(3)
(1) Due to a change in accounting policy regarding classification of interest expense on certain non traded derivatives, a reclassification of $29 million between Net Interest
Income and Other Banking Income has occurred in the half year ended 31 December 2005. There was no impact on total banking income or on profit.
(2) For purposes of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis.
(3) Minority interests includes preference dividends paid to holders of preference shares in ASB Capital.
Shareholder Summary
Full Year Ended
30/06/06
30/06/05
Jun 06 vs
Jun 05 %
Half Year Ended
30/06/06
31/12/05
Dividend per share – fully franked (cents)
Dividend cover – cash (times)
Earnings per share (cents) (1)
Statutory – basic
Cash basis – basic
Cash basis – basic excluding the sale of Hong Kong
Dividend payout ratio (%)
Statutory
Cash basis
Weighted avg no. of shares – statutory basic (M)
Weighted avg no. of shares – cash basic (M) (1)
Return on equity – cash (%)
224
1. 4
308. 2
315. 9
304. 6
73. 3
71. 0
1,275
1,283
21. 3
197
1. 3
259. 6
264. 8
264. 8
77. 0
74. 9
1,260
1,269
18. 8
14
n/a
19
19
15
(370)bpts
(390)bpts
1
1
250bpts
130
1. 2
151. 1
154. 9
154. 9
86. 5
83. 7
1,277
1,285
20. 8
94
1. 7
157. 1
160. 9
149. 5
60. 6
58. 8
1,273
1,281
21. 7
(1) Fully diluted EPS and weighted average number of shares (fully diluted) are disclosed in Note 7 to Financial Statements.
Jun 06 vs
Dec 05 %
38
n/a
(4)
(4)
4
large
large
-
-
(90)bpts
Credit Ratings
Fitch Ratings
Moody’s Investor Services
Standards & Poor's
Long–term
AA
Aa3
AA-
Short–term
F1+
P-1
A-1+
Affirmed
Jun 06
Jun 06
Jun 06
The Bank continues to maintain a strong capital position which is reflected in its credit ratings which remained unchanged for the year.
Additional information regarding the Bank’s capital is disclosed in Note 35 to the Financial Statements.
Commonwealth Bank of Australia Annual Report 2006 7
Highlights
Balance Sheet Summary
Lending assets (1)
Total assets
Total liabilities
Shareholders’ equity
Assets held and FUA
On balance sheet:
Banking assets
Insurance funds under administration
Other insurance and internal funds management assets
Off balance sheet:
Funds under administration
30/06/06
$M
266,096
369,103
347,760
21,343
340,254
20,792
8,057
369,103
130,721
499,824
31/12/05
$M
254,947
351,193
331,343
19,850
321,477
21,217
8,499
351,193
115,757
466,950
As at
30/06/05
$M
235,862
337,404
314,761
22,643
304,620
22,959
9,825
337,404
100,105
437,509
Jun 06 vs
Dec 05 %
4
Jun 06 vs
Jun 05 %
13
5
5
8
6
(2)
(5)
5
13
7
9
10
(6)
12
(9)
(18)
9
31
14
(1) Lending assets comprise Loans, Advances, and Other Receivables (gross of provisions for impairment and excluding securitisation) and bank acceptances of
customers.
Key Performance Indicators
Banking
Underlying NPAT ($M) (1)
Net interest margin (%) (2) (3)
Average interest earning assets ($M) (4)
Average interest bearing liabilities ($M) (4)
Expense to income (%)
Funds Management
Underlying NPAT ($M) (1)
Operating income to average funds under
administration (%)
Funds under administration – spot ($M)
Expense to average FUA (%)
Insurance
Underlying NPAT ($M) (1)
Inforce premiums ($M)
Expense to average inforce premium (%)
Capital Adequacy
Tier 1 (%)
Total (%)
Adjusted Common Equity (%)
Full Year Ended
30/06/06
30/06/05
3,227
2. 34
274,798
255,100
47. 7
2,913
2. 43
244,708
255,597
50. 6
Jun 06 vs
Jun 05 %
11
(9)bpts
12
14
6
Half Year Ended
30/06/06
31/12/05
1,638
2. 29
282,553
263,203
47. 4
1,589
2. 39
267,169
247,129
48. 1
400
351
14
217
183
1. 12
151,513
0. 71
1. 08
123,064
0. 72
4bpts
23
1
1. 14
151,513
0. 72
1. 10
136,974
0. 70
215
1,223
36. 7
7. 56
9. 66
4. 50
156
1,265
45. 5
7. 46
9. 75
4. 91
38
(3)
19
10bpts
(9)bpts
(41)bpts
112
1,223
33. 6
7. 56
9. 66
4. 50
103
1,216
40. 5
7. 54
9. 81
5. 00
Jun 06 vs
Dec 05 %
3
(10)bpts
6
7
1
19
4bpts
11
(3)
9
1
17
2bpts
(15)bpts
(50)bpts
(1) Underlying NPAT excludes Which new Bank expenses and shareholder investment returns.
(2) Net Interest Margin for the half year ended 31 December 2005 has been restated due to a change in accounting policy regarding classification of interest expense on
certain non traded derivatives.
(3) After adjusting for AIFRS the underlying variance is seven basis points (full year) and nine basis points (half year). Refer to Note 4 to the Financial Statement for the
reconciliation of Net Interest Margin.
(4) Average interest earning assets and average interest bearing liabilities have been adjusted to remove the impact of securitisation. Refer to Note 4 to the Financial
Statements, Average Balance Sheet.
Important Dates for Shareholders
Ex-Dividend Date
Record Date
Final Dividend Payment
Annual General Meeting
2007 Interim Results Announced
8 Commonwealth Bank of Australia Annual Report 2006
14 August 2006
18 August 2006
5 October 2006
3 November 2006
14 February 2007
Highlights
Cash EPS Performance 2003-2006 (cents) (1)
Underlying NPAT By Segment ($M) (1)
304.6
+ 15%
264.8
202.6
206.6
Banking
Funds Management
Insurance
3,842
400
3,420
351
4,000
3,500
3,000
3,078
2,674
274
2,500
233
2,000
Jun 03
Jun 04
Jun 05
Jun 06
Jun 03
Jun 04
Jun 05
Jun 06
Banking Underlying Expense to Income
Lending Assets ($B)
52.0%
50.8%
49.4%
47.7%
266
+ 13%
236
206
175
280
100
Jun 03
Jun 04
Jun 05
Jun 06
Jun 03
Jun 04
Jun 05
Jun 06
320
300
280
260
240
220
200
180
160
55%
54%
53%
52%
51%
50%
49%
48%
47%
46%
45%
Funds Under Administration ($B)
Annual Inforce Premiums – Australia & New Zealand ($M)
152
+ 23%
123
110
99
1,223
+ 6%
1,152
1,073
992
90
900
Jun 03 Jun 04 Jun 05 Jun 06
Jun 03
Jun 04
Jun 05
Jun 06
(1) 2006 and 2005 presented on an AIFRS basis excluding the profit from sale of the Hong Kong insurance business.
Commonwealth Bank of Australia Annual Report 2006 9
Banking Analysis
Financial Performance and Business Review
Performance Highlights
The full year underlying net profit after tax of $3,227 million for
the Banking business increased 11% on the prior year.
The performance during the year was underpinned by:
• Continued strong volume growth in home loans, up 10%
since June 2005 to $155 billion;
• Domestic deposit volume growth of 7% since June 2005 to
Personal Lending average balances have increased by 11%
since June 2005 and 4% since December 2005. This result has
been driven by strong growth in margin loans. Credit card and
personal loan growth has been impacted by the repayment of
low margin student loans and strong price based competition
particularly in credit cards.
Average balances for Business, Corporate and Institutional
lending increased 17% since June 2005 and 12% since
December 2005.
$151 billion including 11% growth in savings accounts;
Net Interest Margin
• Significant improvement in business lending volumes, up
20% since June 2005 to $76 billion;
• Net interest margin (after adjusting for AIFRS) decreased
seven basis points over the year in a competitive market;
• Good expense control, with operating expenses increasing
4% compared with the prior year; and
• Credit quality of the overall portfolio remaining sound.
The underlying NPAT for the second half of the year increased
3% to $1,638 million. The second half performance is impacted
by seasonality, including three fewer days, but reflects similar
themes to those for the full year.
More comprehensive disclosure of business highlights by key
product category is contained on pages 14-19.
Net Interest Income
Net interest income increased by 8% compared with the prior
year to $6,514 million. The growth was driven by a strong
increase in average interest earning assets of 12% offset by a
seven basis point reduction in net interest margin, excluding the
impact of AIFRS. The introduction of AIFRS has not had a
material impact on the growth rates for the year.
During the second half of the year, net interest income increased
2% compared to the prior half after adjusting for AIFRS and
three fewer days. This was the result of 6% growth in average
interest earning assets offset by net interest margin contraction
of nine basis points (after adjusting for AIFRS).
Average Interest Earnings Assets
12%
274,798
42,175
232,623
244,708
39,276
205,432
)
M
$
(
s
t
e
s
s
A
g
n
n
r
a
E
i
t
s
e
r
e
n
t
I
e
g
a
r
e
v
A
300,000
250,000
200,000
150,000
100,000
50,000
0
Jun 05
Jun 06
Non-Lending Interest Earning Assets (Excl Bank Accept)
Lending Interest Earning Assets
Average interest earning assets increased by $30 billion over
the year to $275 billion, reflecting a $27 billion increase in
average lending interest earning assets and a $3 billion increase
in average non-lending interest earning assets.
Home lending growth continues to be the largest contributor to
the increase in average interest earning assets. Average home
loan balances increased by 12% since 30 June 2005 and 4%
since December 2005. Following a slight decline in the first six
months, domestic home loan market share has remained stable
over the second half. In New Zealand, ASB Bank continues to
grow ahead of the industry.
10 Commonwealth Bank of Australia Annual Report 2006
After adjusting for the impact of AIFRS, net interest margin of
2.34% decreased seven basis points compared with the prior
year. The key drivers of the margin reduction were:
Pricing: includes asset and deposit price margin which has
contributed a reduction of three basis points. Most of the price
margin pressure is due to strong competition in the business and
corporate segment. Both home loan and deposit margins were
relatively stable over the year;
Funding mix: average lending asset growth of 13% continues to
outpace average retail deposit growth of 8%, resulting in a
greater reliance on wholesale funding which has moved from
43% in June 2005 to 45% in June 2006. The change in funding
mix has resulted in a two basis point margin contraction; and
Asset mix: strength in business and corporate lending has out
paced home loan growth. This has increased margin by one
basis point. Average non lending interest earning assets have
increased by $3 billion resulting in margin reduction of three
basis points.
NIM Movement since June 2005
2.45% (0.02%)
2.43%
(0.02%)
(0.03%)
7 bpts
(0.02%)
(0.02%)
2.34%
2.60%
2.50%
2.40%
2.30%
2.20%
2.10%
2.00%
Jun 05
AGAAP
AIFRS
Transition
Jun 05
Restated
AIFRS
Volatility
Pricing
Funding
Mix
Asset Mix
(including
liquids)
Jun 06
Year
During the second half of the year net interest margin excluding
the volatility associated with AIFRS, decreased by nine basis
points.
This was mainly due to:
• Business Lending price pressure of four basis points due to
competitive pricing and the full impact of large, lower margin
institutional loans written in the first half of the year;
• Home Loan margin pressure of three basis points due to
timing of the cash rate increase and strong price competition;
and
• Funding mix, asset mix, deposit pricing and non lending
interest earning assets contributed two basis points to the
decline.
Over the last quarter of the year net interest margin was stable
at approximately 2.29%.
Additional information, including the average balance sheet, is
set out Note 4 to the Financial Statements.
Key Performance Indicators
Net interest income
Other banking income
Total banking income
Operating expenses
Which new Bank
Total operating expenses
Bad debts expense
Net profit before income tax
Income tax expense
Minority interests
NPAT ("cash basis")
NPAT("underlying basis") (1)
(1) Underlying basis excludes Which new Bank expenses.
Productivity and other measures
Net interest margin (%) (1)
Expense to income (%)
Expense to income – underlying (%)
Effective corporate tax rate (%)
Banking Analysis
Full Year Ended
Half Year Ended
30/06/06
$M
6,514
3,036
9,550
4,558
-
4,558
398
4,594
1,339
28
3,227
3,227
30/06/05
$M
6,026
2,845
8,871
4,380
112
4,492
322
4,057
1,220
3
2,834
2,913
Jun 06 vs
Jun 05 %
8
7
8
(4)
-
(1)
(24)
13
(10)
large
14
11
30/06/06
$M
3,259
1,591
4,850
2,298
-
2,298
210
2,342
691
13
1,638
1,638
31/12/05
$M
3,255
1,445
4,700
2,260
-
2,260
188
2,252
648
15
1,589
1,589
Jun 06 vs
Dec 05 %
-
10
3
(2)
-
(2)
(12)
4
(7)
13
3
3
2. 34
47. 7
47. 7
29. 1
2. 43
50. 6
49. 4
30. 1
(9)bpts
6
3
(100)bpts
2. 29
47. 4
47. 4
29. 5
2. 39
48. 1
48. 1
28. 8
(10)bpts
1
1
70bpts
(1) After adjusting for AIFRS the underlying variance is seven basis points (full year) and nine basis points (half year). Refer to Note 4 to the Financial Statements for the
reconciliation of Net Interest Margin.
Total Banking NPAT (“Underlying Basis”)
Australian Retail Products
Premium, Business & Corporate and Institutional
Products
Asia Pacific
Other
Total Banking NPAT (“Underlying Basis”)
Other Banking Income
30/06/06
$M
1,635
800
505
175
3,115
(79)
3,036
Full year
30/06/05
$M
1,545
733
440
127
2,845
-
2,845
Commissions
Lending fees
Trading income
Other income
Non trading derivatives
Other banking income
30/06/06
$M
820
411
261
138
1,630
(39)
1,591
31/12/05
$M
815
389
244
37
1,485
(40)
1,445
Excluding the non-trading derivatives impact of AIFRS, other
banking income increased 9% over the year.
The introduction of AIFRS requires certain derivatives to be
measured at fair value which may result in increased volatility in
future periods.
Other Banking Income
$M
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2,845
127
440
733
1,545
3,115
175
505
800
1,635
Jun 05
Jun 06
Commissions
Lending Fees
Trading Income Other
1,794
1,038
364
31
3,227
1,589
1,009
291
24
2,913
13
3
25
29
11
900
537
182
19
1,638
894
501
182
12
1,589
1
7
-
58
3
Half year
Factors impacting other banking income were:
• Commissions: increased by 6% on the prior year to $1,635
million. The increase was mainly driven by volume increases
including a 30% increase in CommSec trading volume;
• Lending fees: increased by 9% compared with the prior year
to $800 million. After adjusting for AIFRS which required $25
million of net fee income to be deferred, lending fee growth
was up 13% compared with the prior year. The result was
driven by an increase in lending volumes in the business and
corporate lending portfolios together with higher volumes in
overdraft facilities;
• Trading income increased 15% on the prior year to $505
million reflecting favourable market conditions; and
• Other income increased $48 million on the prior year. The
current year includes $32 million in relation to the Mastercard
initial public offering. The prior year includes $52 million
relating to tax consolidation legislation impacting the leasing
business. Excluding these items, the increase was mainly
due to structured transactions and leasing income.
Other income in the second half increased by $101 million to
$138 million. After adjusting for the impact of AIFRS and
timing of asset sales, other income was flat.
The other banking income result excluding the impact of AIFRS
and timing of asset sales, increased by 5% compared to the
prior half. This result was driven by similar themes to those for
the full year.
Commonwealth Bank of Australia Annual Report 2006 11
Banking Analysis
Operating Expenses
Provisions for Impairment
Underlying operating expenses within the Banking business
increased by 4% from the prior year to $4,558 million. Operating
expenses were impacted by:
• Average salary increases of 4% reflecting labour market
movements and other inflation-related expense increases;
• Commencement of a number of projects supporting the
strategic priorities of the Bank (including customer service
and business banking initiatives) totalling $40 million; partly
offset by
• Ongoing realisation of expense savings as a result of Which
new Bank efficiency initiatives.
Impairment provisions as at 30 June 2006 have been assessed
under AIFRS. The prior year provisions have not been restated
for AIFRS, but have been assessed using the previous
Australian GAAP methodology and are not comparable to the
current period.
Total provisions for impairment at 30 June 2006 were $1,217
million excluding the pre-tax equivalent General Reserve for
Credit Losses ($500 million). The addition of the collective
provision and General Reserve for Credit Losses (which is
required by APRA) is 0.71% expressed as a percentage of risk
weighted assets. The current level continues to reflect:
During the second half of the year operating expenses increased
2% to $2,298 million, mainly driven by the commencement of
initiatives supporting the Bank’s strategic priorities.
• A major portion of the credit portfolio is in home loans which
have a lower risk weighting compared with other portfolios;
• The continuing strong asset quality in the business lending
Banking Expense to Income Ratio
book; and
• A level of impaired assets which is at the lower end of levels
achieved over the past decade.
Risk Weighted Assets on Balance Sheet ($M)
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
110,971
92,510
78,981
71,873
0
0
0
2,951
3,348
Risk Weighting
0%
Risk Weighting
20%
Risk Weighting
50%
Risk Weighting
100%
Jun 2005
Jun 2006
Gross Impaired Assets ($M)
400
300
200
100
0
395
396
326
Jun 05
Dec 05
Jun 06
The underlying Banking expense to income ratio improved from
49.4% as at June 2005 to 47.7% in June 2006 representing a
productivity improvement of 3%. On an AGAAP basis, the Bank
met its Which new Bank productivity target of 48%, with the
expense to income ratio down to 47.1%. The improvement
reflects strong income growth and good expense control,
including the ongoing realisation of Which new Bank savings.
Productivity
49.4%
47.7%
48.0%
47.1%
52%
50%
48%
46%
44%
42%
40%
Jun 05
Jun 06
Which new Bank
Target
AGAAP Equivalent
AIFRS
Bad Debts Expense
The total charge for Bad Debts for the year was $398 million,
which is 18 basis points of Risk Weighted Assets. This is the first
year where provisions are calculated in accordance with AIFRS.
During the second half the Bad Debts expense increased by
12% to $210 million. This was driven by growth in risk weighted
assets and an increase in provisioning for unsecured lending.
Gross impaired assets were $326 million as at 30 June 2006,
compared with $395 million at June 2005.
The Bank remains well provisioned, with total provisions for
impairment as a percentage of gross impaired assets of 373%.
Taxation Expense
The corporate tax charge for the year was $1,339 million, an
effective tax rate of 29.1%.
The effective tax rate for the second half of the year was 29.5%
compared to 28.8% in the first half.
12 Commonwealth Bank of Australia Annual Report 2006
Total Banking Assets & Liabilities
Interest earning assets
Home loans including securitisation
Less: securitisation
Home loans
Personal
Business and corporate
Loans, advances and other receivables (1)
Non lending interest earning assets
Total interest earning assets
Other assets (2)
Total assets
Interest bearing liabilities
Transaction deposits
Savings deposits
Investment deposits
Other demand deposits
Total interest bearing deposits
Deposits not bearing interest
Deposits and other public borrowings
Other interest bearing liabilities
Total interest bearing liabilities
Securitisation debt issues
Non interest bearing liabilities
Total liabilities
Provisions for Impairment
Collective Provisions
Individually assessed provisions
Total provisions
General reserve for credit losses (pre-tax equivalent)
Total provisions including general reserve for credit losses
Banking Analysis
30/06/06
$M
31/12/05
$M
30/06/05
$M
Jun 06 vs
Dec 05 %
Jun 06 vs
Jun 05 %
As at
167,121
(12,607)
154,514
17,228
76,044
247,768
40,283
288,069
52,185
340,254
37,079
41,421
67,364
20,325
166,189
7,037
173,226
99,976
266,165
13,505
44,515
324,185
1,046
171
1,217
500
1,717
159,339
(9,124)
150,215
15,967
71,502
237,684
39,431
277,115
44,362
321,477
34,287
40,030
67,462
19,573
161,352
7,371
168,723
95,538
256,890
9,849
40,316
307,055
1,041
179
1,220
404
1,624
150,678
(10,818)
139,859
15,668
63,549
219,076
36,273
255,349
49,271
304,620
34,694
38,461
66,087
21,806
161,048
6,978
168,026
72,935
233,983
12,144
41,422
287,549
1,390
157
1,547
-
1,547
5
38
3
8
6
4
2
4
18
6
8
3
-
4
3
(5)
3
5
4
37
10
6
-
(4)
-
24
6
11
17
10
10
20
13
11
13
6
12
7
8
2
(7)
3
1
3
37
14
11
7
13
(25)
9
(21)
-
11
Asset Quality (3)
Risk weighted assets ($M) (4)
Net impaired assets ($M)
General provisions as a % of risk weighted assets
Collective provisions plus general reserve for credit
losses (pre-tax equivalent)/risk weighted assets (%)
Specific provisions for impairment as a % of gross
impairment assets net of interest reserved (%)
Individually assessed provisions for impairment as a %
of gross impaired assets net of interest reserved
Bad debt expense as a % of risk weighted assets
annualised (%)
Full Year Ended
Half Year Ended
30/06/06
$M
216,438
155
-
30/06/05
$M
189,559
219
0. 73
Jun 06 vs
Jun 05 %
14
(29)
-
30/06/06
$M
216,438
155
-
30/06/06
$M
202,667
217
-
Jun 06 vs
Dec 05 %
7
(29)
-
0.71
-
-
41. 8
-
52. 5
0. 18
0. 17
1bpt
-
-
-
0. 71
0. 71
-
52. 5
0. 19
-
45. 2
0. 19
-
-
16
-
(1) Gross of provisions for impairment which are included in Other Assets.
(2) Other assets include Bank acceptances of customers, provision for impairment and securitisation assets.
(3) Asset quality coverage ratios are not comparable to prior periods due to AIFRS.
(4) No AIFRS adjustment is made to Risk Weighted Assets in the prior periods as the APRA prudential requirement is to apply previous Australian GAAP
(‘AGAAP’).
Commonwealth Bank of Australia Annual Report 2006 13
Banking Analysis
Australian Retail
The Australian Retail Product segment performed strongly over
the year, with underlying profit after tax increasing by 13% to
$1,794 million. This result is highlighted by strong revenue
growth, good expense control and further productivity gains.
Business Review
Over the year, a number of initiatives were introduced to
improve the service experience for our customers including:
• The
rollout of CommSee,
the Bank’s state-of-the-art
customer management system, across our 1,000 strong
branch network and seven call centres;
• The implementation of CommServe, a training program
designed to ensure our people are able to obtain maximum
value from CommSee in improving Sales and Service
outcomes. Over 14,000 staff undertook CommServe training
during the 2006 financial year;
• The refurbishment of a further 133 branches, taking to 384
the number of branches refurbished over the past three
years into a design/layout more conducive to effective sales
and service;
• An additional 450 frontline customer service staff;
•
Improved access to Australia’s largest electronic banking and
branch network through two new Streamline products with
flat monthly fees, and the removal of transaction fees from
NetBank;
• The introduction of a low interest rate credit card (“Yellow”) to
meet growing customer demand in this segment of the
market; and
• The pilot of a new customer service model which enables our
frontline staff to spend more time on customer service and
empowers our branch managers to make decisions about
their business best suited to local conditions.
Home Loans
Home loan income has been impacted by the transition to
AIFRS which required $35 million of net expenses to be
deferred. After adjusting for this, revenue increased 13%
compared to the prior year and was driven by solid volume
growth of 11% and stable margins over the year.
Whilst second half revenue growth was flat, this was impacted
by seasonal factors including three fewer calendar days in the
half. From a product growth perspective, second half
performance was strong, underpinned by record volume
approvals in the June quarter. Second half balance growth was
7%.
Market share fell by 26 basis points over the year to 18.8%. All
of this reduction occurred in the first half, where the Bank’s
internal distribution channels underperformed reflecting in part
the changes to systems and training required. Market share has
stabilised over the second half through improved sales in
proprietary channels, and selective product changes to raise
competitiveness.
Full year average margins have been stable, but were lower in
the second half mainly due to timing factors relating to passing
on the May 2006 cash rate increase together with a higher
volume of lower margin fixed rate lending towards the end of the
year.
Consumer Finance (Personal Loans and Credit Cards)
Total income in the Consumer Finance portfolio grew by 11%
over the year. The current year includes $32 million in relation to
the Mastercard initial public offering.
14 Commonwealth Bank of Australia Annual Report 2006
Total Consumer Finance balances (combined Personal Loans
and Credit Cards) decreased by 1% over the year to $11 billion.
Second half growth was 1%. Full year growth was impacted by
the repayment of low margin student loans in the first half. The
market has been characterised by strong price based
competition particularly in credit cards.
In March, the Bank launched a new low-rate credit card
(“Yellow”) to meet customer demand in this segment of the
results have been encouraging, with
market. Early
approximately 80,000 accounts opened since it launched.
Deposits
Deposit revenue increased 6% compared to the prior year,
reflecting a combination of strong volume growth, relatively
stable margins and higher other banking income.
Deposit balances grew by 8% over the year to $77 billion, with
cyclical factors resulting in relatively stronger growth in the first
half of the year. NetBank Saver balances grew by $4 billion, with
approximately 63% being new funds to the Bank. Total deposit
growth was slightly below market, as the Bank continues to
pursue a balanced strategy aimed at optimising both growth and
revenue outcomes. Net interest margin reduced slightly over the
year.
In May, the Bank announced new pricing options on its main
personal transaction account “Streamline”, allowing customers
unlimited transactions for a fixed monthly fee. These changes
provide customers with a greater level of certainty in their day-to-
day banking whilst further consolidating the Bank’s competitive
position in this segment of the market.
Operating Expenses
Expense growth was held to 3% over the full year. This result
reflects further productivity gains within the business, with the
expense to income ratio falling from 46.2% as at June 2005 to
43.6% as at June 2006. Employee numbers increased by 475
full-time equivalents to 17,253 full-time equivalents as at June
2006,
frontline customer service
in
employees. Higher frontline employee expenses have been
substantially offset by productivity and other expense savings
elsewhere in the business.
increases
reflecting
Bad Debts
Total Bad Debts Expense for retail products for the full year was
$354 million, an increase of 33%. Credit quality on the home
loan portfolio remained high with percentage losses at historic
lows. Credit card losses as a percentage of balances were
stable at 1.96%. Personal loan losses peaked mainly as a result
of business booked in 2004. Subsequent tightening of policy and
the introduction of new scorecards has improved the quality of
more recent business.
Market Share Percentage
Home Loans (1)
Credit Cards (1) (2)
Personal lending
(APRA and other households) (3)
Household Deposits
Retail deposits
30/06/06 31/12/05 30/06/05
19. 0
22. 8
18. 8
21. 4
18. 8
20. 5
16. 1
29. 3
22. 2
16. 0
29. 6
22. 9
16. 7
29. 8
23. 0
(1) Comparatives have been restated due to a reclassification between home
loans and personal loans by another ADI.
(2) As at 31 May 2006.
(3) Personal lending market share includes personal loans and margin loans.
Australian Retail
Full Year to June 2006
Banking Analysis
Home loans
Consumer finance
Retail deposits
Australian Retail products
Home loans
Consumer finance
Retail deposits
Australian Retail products
Home loans
Consumer finance
Retail deposits
Australian Retail products
Net
Interest
Income $M
1,239
727
1,953
3,919
Other
Banking
Income $M
151
368
700
1,219
Total
Banking
Income $M
1,390
1,095
2,653
5,138
Total
Banking
Income $M
1,194
985
2,514
4,693
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
2,240
354
1,794
Full Year to June 2005
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
2,168
266
1,589
Half Year to June 2006
Net
Interest
Income $M
615
363
978
1,956
Other
Banking
Income $M
74
195
351
620
Total
Banking
Income $M
689
558
1,329
2,576
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
1,108
198
900
As At
30/06/05
$M
129,913
10,720
140,633
119,094
16,382
34,061
19,197
2,172
71,812
Jun 06 vs
Dec 05 %
7
1
6
4
Jun 06 vs
Jun 05 %
11
(1)
11
11
-
5
(1)
(5)
2
4
12
3
9
8
Major Balance Sheet Items (gross of impairment)
Home loans (incl securitisation)
Consumer finance (1)
Total assets – Australian Retail products
Home loans (net of securitisation)
Transaction deposits
Savings deposits
Other demand deposits
Deposits not bearing interest
Total liabilities – Australia Retail products
(1) Retail Consumer Finance includes personal loans and credit cards.
30/06/06
$M
144,834
10,640
155,474
132,227
16,993
38,071
19,818
2,362
77,244
31/12/05
$M
135,990
10,507
146,497
126,866
17,077
36,306
19,977
2,478
75,838
Australian Home Loan Approvals by State (1) (2)
Australian Home Loan Balances by State (2)
QLD 19%
(Jun 05: 18%)
QLD 17%
(Jun 05: 16%)
NSW 34%
(Jun 05: 37%)
NSW 39%
(Jun 05: 40%)
VIC 24%
(Jun 05: 25%)
VIC 27%
(Jun 05: 28%)
Other 8%
(Jun 05: 8%)
WA 9%
(Jun 05: 8%)
Other 9%
(Jun 05: 10%)
WA 14%
(Jun 05: 10%)
(1) As at 31 May 2006.
(2) Half year averages.
Commonwealth Bank of Australia Annual Report 2006 15
Banking Analysis
Premium, Business & Corporate and
Institutional
The Premium, Business & Corporate and Institutional product
segment delivered underlying net profit after tax of $1,038
million, an increase of 3% compared to the prior year. The result
has been impacted by the transition to AIFRS, which has
decreased current year income by $55 million in relation to
deferrals, and one-off inclusion of income recognised in relation
to tax consolidation legislation changes in the prior year of $52
million. After adjusting for these items, underlying net profit after
tax growth was 11%.
structured products, capital markets services (including IPOs
and placements) and margin lending.
Financial markets income has increased 14% compared to the
prior year following improved trading conditions and increased
customer flows. Continued strength in investment markets has
also resulted in strong CommSec trading volumes while margin
lending balances increased 34% over the year.
During the second half, revenue increased by 5% due to a
strong March quarter which saw high levels of retail equities
trades and increased leverage of high value clients from the
Institutional Banking segment.
Business Review
Lending and Finance
The Premium, Business & Corporate and Institutional product
segment performed well over the year, with the performance
highlights including:
•
Institutional Banking customers gave the Bank a strong
rating in the latest East & Partners customer satisfaction
survey. Of the major banks, CBA retained number one status
as principal and secondary transaction bank of the Top 500
corporates and the highest average rating in all key
relationship management categories;
• Development of dedicated mobile lenders, strong servicing
for third party brokers, the introduction of a dedicated
acquisition sales force for corporate clients and foreign
exchange sales force;
• Recent establishment of
five distribution
teams being
Institutional Banking, Corporate Financial Services,
Agribusiness, Local Business Banking and Private Client
Services which all provide greater focus on each of these
segments as the Bank expands its business banking
footprint;
• The introduction of the Business Online Saver high yield
investment account, the Commonwealth Portfolio Loan
product and the Business Line of Credit, all of which have
reached $1 billion in balances;
• CommSec has achieved record
trading volumes and
substantial margin lending balance growth during the year.
On 30 June 2006, CommSec executed 47,406 trades to the
value of $683 million in turnover. This set an Australian
broking industry record for the highest number of trades and
turnover by a broker in a single day;
• Successful
implementation of
the CommSee customer
management system across the business providing Bank
employees with a common IT platform and access to
common client information; and
• Further extended specialised client service teams that are
now capable of supporting all business clients centrally for
most servicing activities.
Outcomes by key product category are summarised below.
Corporate Banking
Corporate Banking
transaction services and merchant acquiring.
includes commercial and corporate
This line of business achieved income growth of 1% for the year
reflecting an increasingly competitive environment. Merchant
acquiring in particular has been subject to intense competition in
the second half of the year but has increased transaction
volumes over the year, which allows the Bank to continue to
leverage its scale position.
Financial Markets
Financial Markets includes financial markets and wholesale
(including CommSec) and
operations, equities broking
16 Commonwealth Bank of Australia Annual Report 2006
Lending and Finance includes asset finance, structured finance
and general business lending.
Lending and Finance income has been impacted by the
transition to AIFRS which required $55 million of net income to
be deferred. In addition, the one-off inclusion of income
recognised in relation to tax consolidation legislation changes
impacted the leasing business by $52 million in the prior year.
After adjusting for these items, Lending and Finance income
increased by 8%.
Lending and Finance assets have increased $16 billion or 18%
compared with the prior year. The increase has been driven by
continued growth in the Australian and New Zealand syndicated
loan market and an increase in volume in structured finance
transactions. Bank acceptances have increased by 9% since
June 2005 (6% growth since December 2005).
During the second half, revenue increased by 12% due to the
continued strong volume of structured finance transactions and
the timing of asset sales in the second half including Bankstown
and Camden Airports.
Operating Expenses
Operating expenses of $1,570 million was contained to 2%
growth compared to the prior year. This was driven by general
salary increases and higher employee numbers, mainly to
support volume growth in the Financial Markets business, partly
offset by significant IT related savings.
Market Share
Business lending market share (including bank acceptances)
declined during the year by 10 basis points to 13.1%. The
movement from half to half reflects the volatility in the
institutional and corporate lending businesses. Institutional
lending is particularly sensitive to major funding requirements
and is heavily impacted by relative levels of participations in
syndicated loan deals.
Asset Finance market share has decreased by 90 basis points
to 14.5% since June 2005. The decline reflects the maturity of
this business segment, which has been characterised by
aggressive price competition coupled with competitor expansion.
Equities Trading market share increased 70 basis points over
the year. This result was supported by a 51% increase in value
traded compared to market growth of 26%.
Market Share Percentage
Business Lending
Asset finance
Equities trading (CommSec)
30/06/06 31/12/05 30/06/05
13. 2
15. 4
3. 6
13. 5
15. 1
4. 3
13. 1
14. 5
4. 3
Banking Analysis
Premium, Business & Corporate and
Institutional
Full Year to June 2006
Corporate Banking
Financial Markets
Lending and Finance
Premium, Business & Corporate and
Institutional products
Corporate Banking
Financial Markets
Lending and Finance
Premium, Business & Corporate and
Institutional products
Corporate Banking
Financial Markets
Lending and Finance
Premium, Business & Corporate and
Institutional products
Net
Interest
Income $M
558
287
751
Other
Banking
Income $M
394
642
441
Total
Banking
Income $M
952
929
1,192
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
1,596
1,477
3,073
1,570
68
1,038
Full Year to June 2005
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
Total
Banking
Income $M
945
814
1,204
2,963
1,536
39
1,009
Half Year to June 2006
Net
Interest
Income $M
282
144
382
Other
Banking
Income $M
184
331
249
Total
Banking
Income $M
466
475
631
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
808
764
1,572
791
31
537
Major Balance Sheet Items (gross of impairment)
Interest earning lending assets
Bank acceptances of customers
Non lending interest earning assets
Margin loans
Other assets (1)
Total assets – Premium, Business & Corporate and
Institutional products (2)
Transaction deposits
Other demand deposits
Deposits not bearing interest
Certificates of deposits and other
Dues to other financial institutions
Liabilities at fair value through the Income Statement
Debt issues
Loan capital
Other non interest bearing Liabilities
Total liabilities – Business, Corporate and Institutional
products Australia (2)
Banking Sheet by Product Segment
Assets
Corporate Banking
Financial Markets
Lending and Finance
Other (2)
Total assets – Premium, Business & Corporate and
Institutional products
Liabilities
Corporate Banking
Financial Markets
Lending and Finance
Other (2)
Total liabilities – Business, Corporate and Institutional
products Australia
(1) Other assets include intangible assets and derivative assets.
30/06/06
$M
66,343
18,310
35,471
5,758
19,947
145,829
16,426
37,821
3,520
20,178
11,333
2,085
77,848
9,744
36,703
31/12/05
$M
60,949
17,263
35,320
4,664
15,711
133,907
14,155
37,074
3,675
19,243
9,852
2,630
69,854
9,129
31,628
As At
30/06/05
$M
51,584
16,786
33,993
4,311
19,773
126,447
14,457
34,601
3,651
16,367
7,964
1,580
65,463
8,356
32,927
215,658
197,240
185,366
3,546
36,228
101,601
4,454
2,982
29,680
94,671
6,574
3,299
34,104
85,935
3,109
145,829
133,907
126,447
20,799
71,594
27,303
95,962
18,592
70,098
25,145
83,405
18,659
67,398
21,658
77,651
215,658
197,240
185,366
Jun 06 vs
Dec 05 %
9
6
-
23
27
Jun 06 vs
Jun 05 %
29
9
4
34
1
9
16
2
(4)
5
15
(21)
11
7
16
9
19
22
7
(32)
9
12
2
9
15
9
15
14
9
(4)
23
42
32
19
17
11
16
7
6
18
43
15
11
6
26
24
16
(2) Includes Group Funding, Balance Sheet Management and other capital not directly attributed to the product based segments above.
Commonwealth Bank of Australia Annual Report 2006 17
Other Asia Pacific Business
The highlights in this region during the year were:
• Purchase of the remaining 49% of the Colonial National Bank
in Fiji from the Fiji Government in January 2006. Fiji loans
and advances increased by 34% during 2006 to $484 million
although liquidity and interest rate volatility issues in the Fiji
economy resulted in a more subdued performance in the
second half of the year;
• Acquisition of a 19.9% interest in Hangzhou City Commercial
Bank (HZB) for $102 million. HZB is one of the top five City
Commercial Banks by assets in mainland China. When
combined with our investment in Jinan City Commercial
Bank, the Bank now holds interests in two of the top 10 City
Commercial Banks in China;
• Finalisation of the first stage of the Capability Transfer
Program with Jinan City Commercial Bank;
• Development of a mortgage broking business in Shanghai;
and
• Continuation of the branch expansion program in PT Bank
Commonwealth in Indonesia with six new branches added
during the year.
Market Share
Market share in New Zealand increased in all major asset
categories and retail deposits. Home loan market share
increased seven basis points to 23.1% ranking ASB Bank
second in the market.
Retail deposit market share in New Zealand was 20.3% at 30
June 2006, an increase of 82 basis points from June 2005.
Fiji lending asset market share increased from 20.5% at 30 June
2005 to 22.5% as at 31 May 2006.
Market Share Percentage
NZ lending for housing
NZ retail deposits
30/06/06 31/12/05 30/06/05
23. 0
19. 5
23. 1
20. 3
23. 2
19. 9
Banking Analysis
Asia Pacific
Asia Pacific Banking
retail,
business/commercial and rural banking operations in New
Zealand, Fiji, Indonesia and China.
the Bank’s
incorporates
Underlying net profit after tax for Asia Pacific businesses
increased 25% to $364 million(1) compared to the prior year.
ASB Bank in New Zealand represents the majority of the
business.
ASB Bank
The New Zealand economy was characterised during 2006 by
higher interest rates under the Reserve Bank of New Zealand’s
tightening of monetary policy and strong competition in both
deposits and lending. Despite these pressures ASB Bank again
achieved solid growth in its asset and liability products. New
Zealand lending balances grew strongly again in 2006, however,
growth rates were slower than 2005 due to tighter economic
conditions. Home lending balances grew by 18% to NZD 26.0
billion, commercial loans by 13% to NZD 4.5 billion and rural
loans also by 13% to NZD 3.8 billion.
Retail deposit balances of NZD 20.4 billion were 12% higher
than 2005. FastSaver and term investments contributed most of
the growth in deposits.
Margins continued to come under pressure although competitive
pressure eased in the second half of the year.
ASB Bank underlying net profit after tax for the year was NZD
400 million,(1) an increase of 22% over the prior year. This was
driven by:
• Continued growth in home lending volumes above market
growth rates. This is the 15th year of market share growth in
this segment;
• Strong growth in commercial/business and rural lending;
• Success of the Fastsaver deposit product introduced in
November 2004 with balances growing by more than 75% by
the end of the year;
• Net interest margin pressure over the year in a very
competitive environment. Most of
this pressure was
evidenced in the first half with net interest margin flat in the
second half;
• Continued productivity
improvements with expense
to
income ratio of 43.1% for the year; and
• Sound credit quality.
Other performance highlights include:
• For the fourth consecutive year, ASB Bank was recognised
as New Zealand’s “Bank of the Year” by the UK based
Banker Magazine; and
• ASB Bank continued its leading position in Personal and
Business Banking customer satisfaction among the major
banks.
Underlying net profit after tax increased 6% in the second half to
NZD 205 million.(1) This reflected slower market volume growth,
stabilisation of margins and three fewer days.
(1) Represents Group Management view for the product segment rather than
statutory view.
18 Commonwealth Bank of Australia Annual Report 2006
Asia Pacific
ASB
Other
Asia Pacific
ASB
Other
Asia Pacific
ASB
Other
Total Banking Income – Asia Pacific
Major Balance Sheet Items
(gross of impairment) (1)
Home lending
Other lending assets
Non lending interest earning assets
Other assets
Total Assets – Asia Pacific
Debt Issues
Deposits (2)
Liabilities at fair value through the Income Statement
Other Liabilities
Total Liabilities – Asia Pacific
Balance Sheet by Segment
Assets
ASB
Other
Total Assets – Asia Pacific
Liabilities
ASB
Other
Total Liabilities – Asia Pacific
Banking Analysis
Full Year to June 2006
Net
Interest
Income $M
680
43
723
Other
Banking
Income $M
291
52
343
Total
Banking
Income $M
971
95
1,066
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
521
20
364
Total
Banking
Income $M
878
39
917
Full Year to June 2005
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
490
18
291
Half Year to June 2006
Net
Interest
Income $M
338
23
361
Other
Banking
Income $M
138
38
176
Total
Banking
Income $M
476
61
537
Expenses
$M
Bad Debts
$M
Underlying
Profit after
Tax $M
261
8
182
30/06/06
$M
22,287
10,531
4,812
1,321
38,951
744
18,040
11,727
772
31,283
36,724
2,227
38,951
29,306
1,977
31,283
31/12/05
$M
23,349
11,157
5,523
1,044
41,073
182
19,256
13,691
848
33,977
38,981
2,092
41,073
31,933
2,044
33,977
As At
30/06/05
$M
20,765
12,132
3,664
979
37,540
6,939
23,006
-
426
30,371
35,593
1,947
37,540
29,658
713
30,371
Jun 06 vs
Dec 05 %
(5)
(6)
(13)
27
(5)
Jun 06 vs
Jun 05 %
7
(13)
31
35
4
large
(6)
(14)
(9)
(8)
(6)
6
(5)
(8)
(3)
(8)
(89)
(22)
-
81
3
3
14
4
(1)
large
3
(1) 30 June 2006 balance sheet impacted by deterioration of the NZD (11% over the full year).
(2) Asia Pacific Deposits exclude deposits held in other overseas countries (30 June 2006: A$4 billion and 31 December 2005: A$4 billion and 30 June 2005: A$4 billion).
Commonwealth Bank of Australia Annual Report 2006 19
Funds Management Analysis
Financial Performance and Business Review
• The continued rationalisation of
legacy systems and
products; and
• Strengthening of the control and operating environment,
particularly around unit pricing of investment style products
within the life insurance entities.
Investment Performance
Investment performance has been good with 14 out of 18 major
funds exceeding benchmark on a one year basis and 11 out of
18 major funds exceeding benchmark on a three year basis.
Importantly, the investment performance of the two flagship
Australian Equity funds were well ahead of benchmark on a one
year basis with rankings in first and second quartiles.
Operating Income
Operating income for the year increased by 23% to $1,552
million. Income growth was supported by a 23% increase in
funds under administration to $152 billion at 30 June 2006 and a
significant improvement in sales, particularly within the offshore
businesses. The acquisition of Gandel’s Joint Venture interest in
October 2005 has also contributed $45 million in revenue during
the year. This contributed three basis points to gross margin.
During the second half of the year, operating income increased
by 16% to $832 million. This result was driven by an 11%
increase in the funds under administration and an additional $29
million contribution from the Gandel Joint Venture acquisition.
Excluding the impact of the Gandel acquisition, margin was
stable. This reflects good margins on FirstChoice, strong inflows
into higher margin International products and the maintenance of
funds under administration levels on the higher margin legacy
retail products.
Operating Expenses
Operating expenses (excluding volume expenses) of $765
million were up $123 million or 19% compared to the prior year.
This includes:
• The acquisition of Gandel’s Joint Venture interest which
increased expenses $28 million in the current year; and
• Expenses in relation to the Unit Pricing control and process
improvement program, totalling $55 million. This is expected
to incur additional expenses of $20-30 million in the next 12
months.
Excluding the expenses associated with Gandel and the Unit
Pricing initiative, expenses increased 6% compared to the prior
year, reflecting average salary increases of 4% and performance
based remuneration within the asset management business.
Volume expenses, driven predominantly by stronger sales and
growth in funds under administration, increased 44%.
Expenses to average funds under administration for the year
was 0.71%, an improvement on the prior year of one basis point.
Taxation
The corporate tax expense for the year was $164 million,
representing an effective tax rate of 28.4% compared with
21.9% for the prior year. The increase in the effective tax rate,
amounting to $27 million, is due to the phasing out of transitional
tax relief on investment style funds management products within
life insurance legal entities.
Performance Highlights
Full year underlying net profit after tax of $400 million increased
14% over the year for the Funds Management business
reflecting strong revenue growth across the business.
Underlying profit before tax increased by 23%. The after tax
result was impacted by $27 million due to a significantly higher
effective tax rate primarily due to the phasing out of the
transitional tax relief on investment style products within the life
insurance entities, which ceased at the end of the last financial
year ($27 million).
The underlying profit after tax result for the second half of the
year increased 19% to $217 million also underpinned by strong
revenue growth.
Funds under administration grew by 23% to $152 billion as at 30
June 2006. The growth in funds under administration was the
result of strong net fund flows and favourable investment
markets.
Business Review
Industry growth has been positive and industry retail flows have
remained strong over the year.
Total funds flow performance for the year was strong with $11
billion of net inflows (up $10 billion on the prior year) due to the
continuing success of FirstChoice, significant
into
Avanteos, including $5 billion in net flows from the Goldman
Sachs JB Were strategic alliance, excellent sales results in the
International businesses and good
into domestic
wholesale funds. An improvement in fund flows was achieved
across most channels,
Independent Financial
including
Advisors, Institutional Clients and the Bank Network.
inflows
inflows
The success of FirstChoice has underpinned recent growth in
retail market share, with the Bank increasing share and
maintaining its number one position in the overall retail market.
In the latest Plan for Life market share statistics, FirstChoice
received in excess of 25% of net flows in the platform market
over the year. A recently published survey from ASSIRT showed
that 50% of advisors in the market used FirstChoice as one of
their platforms.
Investment performance during the year was good, in both
absolute terms and against benchmark and this contributed to
the improving fund flows.
Other key developments within the business during the year
included:
• Continued platform enhancements and new product offerings
including the development of a self managed super offering
“YourChoice”, to capitalise on this rapidly growing sector of
the market;
• Strategic alliance formed between Avanteos and Goldman
Sachs JB Were, which has contributed $5 billion of additional
net funds flow;
• A funds management joint venture has been established to
operate within China, with approval being received from the
China Securities Regulatory Commission;
• Further improvement in Bank planner performance, with a
16% increase in productivity for the year;
• Acquisition of the Gandel Group’s interests in the Colonial
First State Property Retail Trust Limited and Gandel Retail
Management Trust Ltd, which provides funds management
and property management services to a number of Colonial
First State Retail Property trusts;
20 Commonwealth Bank of Australia Annual Report 2006
Funds Management Analysis
Key Performance Indicators
Operating income – external
Operating income – internal
Total operating income
Shareholder investment returns
Funds management income
Volume expense
Operating expenses
Which new Bank
Total operating expenses
Net profit before income tax (“cash basis”)
Net profit before income tax (“underlying basis”) (1)
Corporate tax expense (2)
Minority interests
Net profit after income tax (“cash basis”)
Net profit after income tax (underlying basis) (1)
Full Year Ended
Half Year Ended
30/06/06
$M
1,543
9
1,552
14
1,566
224
765
-
989
577
563
164
3
410
400
30/06/05
$M
1,247
10
1,257
33
1,290
156
642
36
834
456
459
100
7
349
351
Jun 06 vs
Jun 05 %
24
(10)
23
(58)
21
(44)
(19)
-
(19)
27
23
(64)
(57)
17
14
30/06/06
$M
828
4
832
7
839
125
405
-
530
309
302
87
-
222
217
31/12/05
$M
715
5
720
7
727
99
360
-
459
268
261
77
3
188
183
Jun 06 vs
Dec 05 %
16
(20)
16
-
15
(26)
(13)
-
(15)
15
16
(13)
-
18
19
(1) Underlying basis excludes shareholder investment returns and Which new Bank expenses.
(2) For purpose of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis (2006: $193 million).
Funds under Administration
Funds under administration – average
Funds under administration – spot
Net flows
Total retail net flows
Productivity and Other Measures
Operating income to average funds under
administration (%)
Operating expenses to average funds under
administration (%)
Effective corporate tax rate (%)
139,082
151,513
10,830
8,235
116,262
123,064
456
2,190
20
23
large
large
147,684
151,513
8,135
6,870
130,179
136,974
2,695
1,365
13
11
large
large
1. 12
0. 71
28. 4
1. 08
0. 72
21. 9
4bpts
1
large
1. 14
0. 72
28. 2
1. 10
0. 70
28. 7
4bpts
(3)
(50)bpts
$M
700
600
500
400
300
200
100
351
T
A
P
N
g
n
y
l
r
e
d
n
U
i
5
0
n
u
J
Underlying Net Profit After Tax growth of 14% on the prior year
295
(68)
(123)
(55)
400
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Commonwealth Bank of Australia Annual Report 2006 21
Funds Management Analysis
Funds under Administration
Market Share
Funds under Administration (spot balances) have increased by
23% over the year to $152 billion. The growth in Funds under
Administration has been driven by a combination of positive net
fund flows, strong investment markets, albeit lower in the second
half of the year, and positive absolute investment performance
which exceeded benchmark across many of our funds. Net
inflows for the year were $11 billion, representing a substantial
improvement on the prior year. Investment returns contributed
$17 billion for the year and $6 billion for the second half of the
year.
Average Funds under Administration of $139 billion were 20%
higher than the prior year.
The key drivers of net funds flows were:
• Continuation of market
into FirstChoice
leading
capturing in excess of 25%(1) of the market net flows.
FirstChoice has now exceeded $25 billion in funds under
administration in less than four years;
flows
The Australian retail market share increased from 14.5% at 30
June 2005 to 15.7% at 31 March 2006. The business has
achieved strong net flows in retail Funds under Administration in
recent quarters and has also been favourably impacted by the
inflow from the strategic alliance with Goldman Sachs JB Were
which contributed 1% to market share growth.
The most recent Plan for Life survey (March 2006) showed the
Bank ranking No. 1 for total retail net flows and No. 1 for retail
investment
Improvement
flows excluding cash
performance has also aided market share gains.
trusts.
in
Market Share Percentage (2)
Australian retail – administrator view
New Zealand retail
Platforms (Masterfunds)
(2) 2006 figures are as at 31 March..
30/06/06 31/12/05 30/06/05
14. 5
15. 2
10. 2
15. 7
15. 0
12. 5
14. 6
15. 0
10. 8
• Significant inflows associated with the Goldman Sachs JB
Were strategic alliance of $5 billion;
• Reduced net outflows on Australian equity funds due partly
to improved investment performance;
• A turnaround in net flows into wholesale products, which
achieved positive net flows of $1.3 billion for the year;
• Good flows into higher margin equity products and mandates
in the International business;
• Net outflows from the cash management product due to
competition from attractively priced retail deposit products;
• Property net outflows following the planned sell-down of
assets within a closed end fund; and
• Net outflows in other retail products which include closed
legacy products, which is consistent with prior periods.
(1) Nine months to March 2006 (source: Plan for Life).
2006 FirstChoice - Fund Manager Destination
2006 FirstChoice - Sources of Funds
CBA Third
party 9%
(Jun 05: 10%)
Online brokers
1%
(Jun 05: 1%)
Other advisors
35%
(Jun 05: 31%)
Self Directed
9%
(Jun 05: 11%)
CBA 44%
(Jun 05: 45%)
Branch
Network 46%
(Jun 05: 47%)
External 56%
(Jun 05: 55%)
22 Commonwealth Bank of Australia Annual Report 2006
Funds Management Analysis
Funds under Administration
FirstChoice & Avanteos
Cash management
Other retail (1)
Australian retail
Wholesale
Property
Other (2)
Domestically sourced
Internationally sourced
Total – Funds under Administration
Funds under Administration
FirstChoice & Avanteos
Cash management
Other retail
Australian retail
Wholesale
Property
Other
Domestically sourced
Internationally sourced
Total – Funds under Administration
Funds under Administration
FirstChoice & Avanteos
Cash management
Other retail
Australian retail
Wholesale
Property
Other
Domestically sourced
Internationally sourced
Total – Funds under Administration
Opening
Balance
30/06/05
$M
19,069
4,182
36,069
59,320
24,894
13,456
2,886
100,556
22,508
123,064
Opening
Balance
30/06/04
$M
12,075
4,414
34,705
51,194
23,955
12,624
3,033
90,806
19,077
109,883
Opening
Balance
31/12/05
$M
24,770
3,966
36,647
65,383
28,012
13,750
3,349
110,494
26,480
136,974
Full Year Ended 30 June 2006
Outflows
$M
(5,886)
(3,061)
(7,904)
(16,851)
(11,810)
(2,144)
(481)
(31,286)
(9,432)
(40,718)
Investment
Income
$M
3,190
152
4,353
7,695
3,682
1,520
454
13,351
3,835
17,186
Full Year Ended 30 June 2005
Outflows
$M
(4,265)
(3,425)
(7,875)
(15,565)
(13,350)
(1,172)
(786)
(30,873)
(7,931)
(38,804)
Investment
Income
$M
1,153
232
3,951
5,336
3,177
1,668
391
10,572
2,453
13,025
Half Year Ended 30 June 2006
Outflows
$M
(3,258)
(1,548)
(3,937)
(8,743)
(5,901)
(1,008)
(308)
(15,960)
(4,551)
(20,511)
Investment
Income
$M
1,425
113
1,459
2,997
1,753
859
(85)
5,524
805
6,329
Inflows
$M
19,219
2,417
3,450
25,086
13,099
1,074
192
39,451
12,097
51,548
Inflows
$M
10,377
2,961
4,417
17,755
10,841
1,207
248
30,051
9,209
39,260
Inflows
$M
12,655
1,159
1,799
15,613
6,001
304
95
22,013
6,633
28,646
FX
(3)
&
Other
(4)
Movements
$M
(217)
-
(413)
(630)
(50)
3
657
(20)
453
433
FX
(3)
&
Other
(4)
Movements
$M
(271)
-
871
600
271
(871)
-
-
(300)
(300)
FX
(3)
&
Other
(4)
Movements
$M
(217)
-
(413)
(630)
(50)
4
657
(19)
94
75
Closing
Balance
30/06/06
$M
35,375
3,690
35,555
74,620
29,185
13,909
3,708
122,052
29,461
151,513
Closing
Balance
30/06/05
$M
19,069
4,182
36,069
59,320
24,894
13,456
2,886
100,556
22,508
123,064
Closing
Balance
30/06/06
$M
35,375
3,690
35,555
74,620
29,815
13,909
3,708
122,052
29,461
151,513
(1) Includes stand alone retail and legacy retail products.
(2) Includes life company assets sourced from retail investors but not attributable to a funds management product (e.g. premiums from risk products). These amounts
do not appear in retail market share data.
(3) Includes foreign exchange gains and losses from translation of internationally sourced business.
(4) Other movements represent the re-alignment of funds to correctly classify source of funds.
Commonwealth Bank of Australia Annual Report 2006 23
Insurance Analysis
Financial Performance and Business Review
Performance Highlights
The Insurance business has delivered a strong result for the
year to June 2006 with underlying profit after tax increasing by
38% to $215 million.
After adjusting(1) the operating results following the sale of the
Hong Kong insurance business, underlying net profit after tax
increased by 35% to $206 million.
The result was underpinned by:
• Solid inforce premium and operating margin growth in
Australia and New Zealand;
• Positive experience variations; and
• Good expense control.
The underlying net profit after tax result, on the same basis, for
the second half increased 19% and was driven by similar
themes to those mentioned above.
The full year cash net profit after tax of $416 million includes the
profit from the sale of the Hong Kong insurance business of
$145 million. The cash net profit after tax for the year, excluding
the profit on sale of the Hong Kong insurance business,
decreased by 12% mainly due to lower shareholder investment
returns. This was the result of the relative strength of investment
market indices in the prior year.
The Bank continues to be the largest life insurer in the
Australian, New Zealand and Fiji markets.
Business Review
Australia
The Australian business, CommInsure, delivered a strong result
for the year. Highlights include:
• Maintaining number one market share position for Australian
risk premiums with 13.5% of the life insurance risk market;
• Launch of a Guaranteed Index Tracked Annuity Product and
a Travel Insurance product; and
• Productivity improvements through continued simplification
and rationalisation of systems and processes.
Underlying net profit after tax was up 32% to $125 million
compared to the prior year.
Key drivers of the performance for the year were:
The Sovereign strategy has been to focus on growth in new
business market share and this was successfully achieved in
2006 with 33.2% of new business sales at 31 March 2006
compared to 30.4% for the same period last year. This enabled
Sovereign to grow inforce premiums to NZD 367 million or 14%.
Sovereign retained it’s number 1 market share in inforce
premium growing from 30.7% to 31.1% at 30 April 2006.
Asia
During the year the Hong Kong based life insurance, pensions
administration and financial planning businesses were sold to
Sun Life Financial on 18 October 2005.
The Asian insurance businesses now consist of the joint venture
life insurance businesses in China, Vietnam and Indonesia.
The underlying profit after tax in the Asia business was $13
million.
Operating Income
After adjusting(1) the operating results following the sale of the
Hong Kong insurance business, operating income of $700
million was up 13% compared to the prior year.
Life insurance income on the same basis increased 11% on the
prior year. This reflects strong volume growth and favourable
claims experience in both the Australian and New Zealand
businesses.
General Insurance income of $73 million was up 35% on the
prior year. The result was supported by inforce premium growth
of 10% over the year together with favourable claims experience
despite the impact of claims associated with Cyclone Larry.
Operating Expenses
After adjusting(1) for the operating results following the sale of the
Hong Kong insurance business, operating expenses of $423
million were slightly lower compared to the prior year.
On an AGAAP basis, underlying expenses to average inforce
premiums of 36% has exceeded the Which new Bank target of
42%. Productivity improved over the second half following
continued strength in revenue growth.
Volume expenses have increased as a result of increased
inforce premiums.
• Life and General Insurance premium growth, with inforce
Corporate Taxation
premiums increasing by 8% for the year;
• Sales volume growth, particularly within General Insurance
(up 13%) and Group Risk products (up 8%); and
• Positive claims experience
in both Life and General
Insurance products, despite the impact of claims associated
with Cyclone Larry in the second half of the year.
Cash net profit after tax decreased 3% for the year, impacted
mainly by lower shareholder investment returns.
New Zealand
The effective corporate tax rate (excluding the impact of the sale
of the Hong Kong insurance business) for the year was 27.3%
compared with 22.4% in the prior year. The increase in the
effective corporate tax rate is due to recognition of tax losses in
the prior year.
life
The
predominantly under the Sovereign brand.
insurance operations
in New Zealand operate
Sovereign’s underlying profit after tax was $77 million for the
year, an increase of 48% on the prior year. The main drivers of
this result were:
• Strong growth in new business sales of risk products
resulting in market share growth and improved margins;
• Positive persistency experience; and
• Good investment returns.
24 Commonwealth Bank of Australia Annual Report 2006
(1) Adjusted to remove the contribution to income, expenses, and operating
result, of the Hong Kong insurance business for 2005 and 2006
Insurance Analysis
Key Performance Indicators
Insurance
Life insurance operating income
General insurance operating income
Total operating income
Shareholder investment returns
Profit on sale of the Hong Kong insurance business
Total insurance income
Volume expense
Other operating expenses (1)
Which new Bank
Total operating expenses
Net profit before income tax
Corporate tax expense (2)
Net profit after income tax (“cash basis”)
Net profit after income tax (“underlying basis”) (3)
Productivity and Other Measures
Expenses to average inforce premiums (%)
Expenses to average inforce premiums
(underlying %) (3)
Effective corporate tax rate including impact of profit on
sale of Hong Kong insurance business (%)
Full Year Ended
Half Year Ended
30/06/06
$M
30/06/05
$M
Jun 06 vs
Jun 05 %
30/06/06
$M
31/12/05
$M
Jun 06 vs
Dec 05 %
669
73
742
87
145
974
181
275
-
456
518
102
416
215
36. 7
36. 7
27. 3
693
54
747
204
-
951
218
333
2
553
398
89
309
156
45. 5
45. 3
22. 4
(3)
35
(1)
(57)
-
2
17
17
-
18
30
(15)
35
38
19%
19%
large
332
34
356
30
-
386
86
117
-
203
183
51
132
112
33. 6
33. 6
27. 9
347
39
386
57
145
588
95
158
-
253
335
51
284
103
40. 5
40. 5
26. 8
(7)
(13)
(8)
(47)
-
(34)
9
26
-
20
(45)
-
(54)
9
17%
17%
large
(1) Operating expenses include $9 million internal expenses relating to the asset management of shareholder funds (June 2005: $10 million).
(2) For purpose of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis (2006: $138 million).
(3) Underlying basis excludes shareholder investment returns, the profit on the sale of the Hong Kong insurance business and Which new Bank expenses.
Sources of Profit from Insurance Activities
The Margin on Services profit from ordinary activities
after income tax is represented by:
Planned profit margins
Experience variations
Other
General insurance operating margins
Operating margins
After tax shareholder investment returns
Profit on sale of the Hong Kong insurance business
Net profit after income tax (“cash basis”)
Full Year Ended
Half Year Ended
30/06/06
$M
30/06/05
$M
Jun 06 vs
Jun 05 %
30/06/06
$M
31/12/05
$M
Jun 06 vs
Dec 05 %
146
48
-
21
215
56
145
416
122
27
(8)
13
154
155
-
309
20
78
-
62
40
(64)
-
35
77
29
(2)
8
112
20
-
132
69
19
2
13
103
36
145
284
12
53
large
(38)
9
(44)
-
(54)
Geographical Analysis of Business Performance
Australia
New Zealand
Asia
Total
Full Year Ended
Net Profit after Income Tax
(“cash basis”)
Operating margins
After tax shareholder investment returns
Profit on sale of Hong Kong business
Net profit after income tax
30/06/06
$M
125
56
-
181
30/06/05
$M
94
92
-
186
30/06/06
$M
77
17
-
94
30/06/05
$M
52
22
-
74
30/06/06
$M
13
(17)
145
141
30/06/05
$M
8
41
-
49
30/06/06
$M
215
56
145
416
30/06/05
$M
154
155
-
309
Australia
New Zealand
Asia
Total
Half Year Ended
Net Profit after Income Tax
(“cash basis”)
Operating margins
After tax shareholder investment returns
Profit on sale of Hong Kong business
Net profit after income tax
30/06/06
$M
70
21
-
91
31/12/05
$M
55
35
-
90
30/06/06
$M
39
7
-
46
31/12/05
$M
38
10
-
48
30/06/06
$M
3
(8)
-
(5)
31/12/05
$M
10
(9)
145
146
30/06/06
$M
112
20
-
132
31/12/05
$M
103
36
145
284
Commonwealth Bank of Australia Annual Report 2006 25
Insurance Analysis
Annual Inforce Premiums (1)
General insurance (3)
Personal life
Group life
Total
Australia
New Zealand
Asia (4)
Total
Annual Inforce Premiums (1)
General insurance (3)
Personal life
Group life
Total
Australia
New Zealand
Asia (4)
Total
Annual Inforce Premiums (1)
General insurance
Personal life
Group life
Total
Australia
New Zealand
Asia
Total
Opening
Balance
30/06/05
$M
215
785
265
1,265
856
296
113
1,265
Opening
Balance
30/06/04
$M
192
703
272
1,167
815
258
94
1,167
Opening
Balance
31/12/06
$M
225
740
251
1,216
895
321
-
1,216
Full Year Ended 30 June 2006
Sales/New
Balances
$M
70
137
71
278
231
47
-
278
Lapses
$M
(49)
(81)
(48)
(178)
(166)
(12)
-
(178)
Other
(2)
Movements
$M
-
(109)
(33)
(142)
-
(29)
(113)
(178)
Full Year Ended 30 June 2005
Sales/New
Balances
$M
62
164
74
300
228
48
24
300
Lapses
$M
(39)
(89)
(87)
(215)
(187)
(15)
(13)
(215)
Other
(2)
Movements
$M
-
7
6
13
-
5
8
13
Half Year Ended 30 June 2006
Sales/New
Balances
$M
35
65
31
131
110
21
-
131
Lapses
$M
(24)
(39)
(24)
(87)
(83)
(4)
-
(87)
Other
(2)
Movements
$M
-
(34)
(3)
(37)
(1)
(36)
-
(37)
Closing
Balance
30/06/06
$M
236
732
255
1,233
921
302
-
1,223
Closing
Balance
30/06/05
$M
215
785
265
1,265
856
296
113
1,265
Closing
Balance
30/06/06
$M
236
732
255
1,223
921
302
-
1,223
(1) Inforce premium relates to risk business. Savings products are disclosed within Funds Management.
(2) Includes foreign exchange movements.
(3) General insurance inforce premiums includes approximately $46 million of badged premium (June 2005: $40 million).
(4) Other movements represent the sale of the Hong Kong insurance business.
Inforce Premiums
Inforce premiums increased by 9% on the prior year excluding
the impact of the sale of the Hong Kong insurance business and
the deterioration of the New Zealand dollar against the
Australian dollar in the second half of the year. This was
achieved through consistent growth in both Australia and New
Zealand. General Insurance premiums increased by 10% for the
year.
Market Share Percentage – Annual Inforce Premiums
Australia (total risk) (1)
Australia (individual risk) (1)
New Zealand (1)
(1) As at 31 March 2006.
Australia maintained its leading position of inforce premiums with
13.5% of market share in total life insurance at 31 March 2006.
Sovereign increased its leading market position in New Zealand
with an increase to 31.1%, from 30.7% in June 2005.
30/06/06
13. 5
12. 4
31. 1
31/12/05
13. 5
12. 6
30. 9
30/06/05
13. 8
13. 0
30. 7
26 Commonwealth Bank of Australia Annual Report 2006
Shareholder Investment Returns
Shareholder Investment Returns
Funds management business
Insurance business (1)
Profit on sale of Hong Kong insurance business
Shareholder investment returns before
income tax
Income tax expense
Shareholder investment returns after tax
Full Year Ended
Half Year Ended
30/06/06
$M
14
87
145
246
35
211
30/06/05
$M
33
204
-
Jun 06 vs
Jun 05 %
(58)
(57)
-
237
60
177
4
42
19
30/06/06
$M
7
30
-
37
12
25
31/12/05
$M
7
57
145
Jun 06 vs
Dec 05 %
-
(47)
-
209
23
186
(82)
48
(87)
(1) Excluding profit on sale of the Hong Kong insurance business.
Shareholder Investment Asset Mix ($M)
Local equities
International equities
Property
Sub-total
Fixed interest
Cash
Income
Total
Shareholder Investment Asset Mix (%)
Local equities
International equities
Property
Sub-total
Fixed interest
Cash
Income
Total
Shareholder investment returns of $246 million pre tax include a
$145 million profit on the sale of the Bank’s Hong Kong
insurance business.
international
Domestic and
investment markets performed
strongly for the year to June 2006, with the benchmark
S&P/ASX200 price index increasing by 19% and the MSCI
World index by 15%. All other asset classes (fixed interest,
property and cash) posted positive returns.
As at 30 June 2006
Australia
$M
41
-
307
348
New Zealand
$M
1
25
8
34
342
823
1,165
1,513
191
132
323
357
Asia
$M
-
-
-
-
23
9
32
32
Total
$M
42
25
315
382
556
964
1,520
1,902
As at 30 June 2006
Australia
%
New Zealand
%
Asia
%
Total
%
3
-
20
23
23
54
77
100
-
7
2
9
54
37
91
100
-
-
-
-
72
28
100
100
2
1
17
20
29
51
80
100
Excluding the profit on sale of the Hong Kong insurance
business, shareholder investment returns for the year of $101
million (pre tax) represent a significant decrease due to the
relative strength of the indices in the prior year.
the second half shareholder
returns,
During
excluding the profit from the sale of the Hong Kong insurance
business, decreased 42% to $37 million. This was also mainly
due to weakening in the indices over the second half.
investment
Commonwealth Bank of Australia Annual Report 2006 27
Presentation of Financial Information
"Operating Expenses – Which new Bank” refers to incremental
expenses associated with the Which new Bank Program. These
incremental costs principally relate to restructuring and IT
development expenses. “Operating expenses – Which new
Bank” plus “operating expenses — comparable business” is
equal
"operating expenses".
Management believes it is meaningful to highlight these items in
an analysis of our results.
the AIFRS measure
to
"Underlying profit" refers to profit after tax, “cash basis”, before
operating expenses - initiatives including Which new Bank and
shareholder investment returns, and profit on sale of the Hong
Kong insurance business. "Underlying profit" is referred to
across all our businesses. The underlying profit is the result of
our core operating performance. Management believes it is
meaningful to highlight the underlying profit in order to show
performance on a comparable basis, in particular excluding the
volatility of equity markets and Which new Bank expenses.
"Underlying" productivity ratios:
• Exclude expenses of “Which new Bank”;
• Exclude shareholder
investment
returns
from
funds
management and life insurance income;
• Exclude policyholder tax from the funds management income
and life insurance income lines; and
• Exclude the effect of profit on sale of the Hong Kong
insurance business.
"Underlying" productivity ratios have been presented to provide
what management believes to be a more relevant presentation
of our productivity ratios. Management believes that these
adjustments enable comparison of our productivity ratios from
period to period to be more meaningful as it reflects our core
operating performance.
Definitions
In this Annual Report, the Bank presents its profit from ordinary
activities after tax on a “statutory basis”, which is calculated in
accordance with the Australian equivalent of International
Financial Reporting Standards (“AIFRS”). This Annual Report is
the first under AIFRS (for more details refer to the Financial
Statements, Note 1). The Bank also presents its results on a
“cash basis”. "Cash basis" is defined by management as net
profit after tax and minority interests, before treasury share
valuation adjustments and defined benefit superannuation plan
expense. Management believes "cash basis" is a meaningful
measure of the Bank’s performance and provides the basis for
the determination of the Bank’s dividends. Also for the year
ended 30 June 2004 the Bank added back the non-recurring
‘Which new Bank’ costs in considering the amount to be
distributed as dividends to shareholders.
The Bank also presents its earnings per share on a statutory
basis and on a cash basis. Earnings per share on a statutory
basis are affected by the impact of changes in the treasury
share valuation adjustments and defined benefit superannuation
plan expense. "Earnings per share (cash basis)" is defined by
management as net profit after tax and outside equity interests,
before treasury share valuation adjustments and defined benefit
superannuation plan expense, divided by the weighted average
of the Bank’s ordinary shares outstanding over the relevant
period. This measure shows the "cash basis" net profit after tax,
as described above, per share.
28 Commonwealth Bank of Australia Annual Report 2006
Risk Management
The integrated risk management framework identifies, assesses,
manages and reports risks and risk adjusted returns on a
consistent and reliable basis.
Independent review is carried out through the audit task
assurance roles.
The Bank’s risk profile is measured by the difference between
capital available to absorb loss and risk as assessed by
economic capital required.
Economic capital is defined as the potential risk of loss of one
year’s earnings, measured at a standard consistent with an AA
credit rating.
Economic capital is derived from underlying exposures to credit,
market, operational and insurance risks in the banking, and
wealth management (insurance and
funds management)
businesses of the Bank. In the banking business, economic
capital is a measure of the potential risk of loss of cash earnings.
In the wealth management businesses, economic capital is a
measure of the potential risk of loss of the fair value of the
business. This is then adjusted so as to allow comparison
between the banking and wealth management businesses
economic capital.
The following sections describe the integrated risk management
framework components.
Credit Risk
Credit risk is the potential of loss arising from failure of a debtor
or counterparty to meet their contractual obligations. The
measurement of credit risk is based on an internal credit risk
rating system, and utilises analytical tools to calculate expected
and unexpected loss for the credit portfolio. This includes
consideration of the probability of default (PD) and the loss given
default (LGD) that would consequently be experienced.
Various risks are considered when calculating both PD and
LGD. Such consideration includes the potential for default by a
borrower
economic,
environmental and/or other risks. Similarly, consideration is
given to any potential adverse impact arising from these risks in
relation to any security offered in support of loan facilities.
to management,
industry,
due
Credit risk arises in the banking business from lending activities,
the provision of guarantees including letters of credit and
commitments to lend, investment in bonds and notes, financial
markets transactions and other associated activities. In the
insurance business credit risk arises from investment in bonds
and notes, loans, and from reliance on reinsurance. The funds
management business does not generally involve credit risk
from a shareholder perspective.
the
The Bank uses a diversified portfolio approach
management of credit risk (refer to Note 16 to the Financial
Statements) comprised of the following:
for
• A system of industry limits and targets for exposures by
industry;
• A process
for considering
the
risk associated with
correlations between large exposures;
Integrated Risk Management
• A large credit exposure policy for aggregate exposures to
individual, commercial and industrial client groups tiered by
credit risk rating and loan duration; and
• A system of country limits for geographic exposures.
These policies assist in the diversification of the credit portfolio.
The credit portfolio is managed in two distinct segments:
Retail Segment:
Comprises exposures that are generally less than $1 million and
is dominated by the housing loan portfolio. Secured commercial
lending within this limit is presently being trialled using a
scorecard model. Other consumer products managed within this
segment are credit cards, personal loans and some leasing
business.
Risk Rated Segment:
Comprises all other credit exposures. Management is based on
the
internal credit risk rating system, which makes an
assessment of the potential for default for each exposure and
the amount of loss if default should occur.
Provisions for impairment are raised where there is objective
evidence of impairment and at an amount adequate to cover
assessed credit related losses. Credit losses arise primarily from
loans but also from other credit instruments such as bank
acceptances, contingent
liabilities, guarantees and other
financial instruments and assets acquired through security
enforcement.
A centralised exposure management system records all
significant credit exposures of the Bank. Customers, industry,
geographic and other significant groupings of exposure are
regularly monitored.
A centralised portfolio model is used to assess risk and return on
an overall portfolio basis and for segments of the portfolio. The
model also assists in determining economic capital, collective
provision requirements, and credit portfolio stress testing.
Off Balance Sheet Arrangements
As detailed in Note 1 (ii), the Bank conducts a Loan
Securitisation program through which it packages and sells
loans as securities to investors. Liquidity facilities are provided at
arm’s length to the program by the Bank in accordance with the
Australian Prudential Regulation Authority (“APRA”) Prudential
Guidelines. These
facilities are disclosed within
Contingent Liabilities as commitments to provide credit.
liquidity
The Bank is involved with a number of special purpose entities
(“SPEs”) in the ordinary course of business, primarily to provide
funding and financial services to our customers. Under AIFRS
these entities are consolidated in the financial statements if they
meet the criteria of control. The definition of control depends
upon substance rather than form including consideration of
exposure to the majority of benefits or risks of the SPE, and
accordingly, determination of the existence of control involves
management judgment. The Bank has no off balance sheet
financing entities that it is considered to control.
Commonwealth Bank of Australia Annual Report 2006 29
Integrated Risk Management
Market Risk
Market risk is the potential for change in the value of on and off
balance sheet positions caused by a change in the value,
volatility or relationship between market rates and prices.
Market risk arises from the mismatch between assets and
liabilities in both the banking and insurance businesses and from
controlled trading undertaken in pursuit of profit. The Bank is
exposed to diverse financial instruments including interest rates,
foreign currencies, equities and commodities and transacts in
both physical and derivative instruments.
A discussion and analysis of the Bank’s market risk is contained
in Note 43 to the Financial Statements. Information on trading
securities is further contained in Note 10 to the Financial
Statements. Note 2 to the Financial Statements contains
financial markets trading income contribution to the Bank.
The following table provides a summary of VaR by product.
In the trading book of the banking business, market risk is
measured by a Value-at-Risk (VaR) model. This model uses the
distribution of historical changes in market prices to assess the
potential for future losses. The VaR model takes into account
correlations between risks and the potential for movements in
one portfolio to offset movements in another. Actual results are
back-tested to check the validity of the VaR model. In addition,
because the VaR model cannot encompass all possible
outcomes, tests covering a variety of stress scenarios are
regularly performed to simulate the effect of extreme market
conditions.
VaR Expressed based on 97.5%
confidence
Average VaR During
June 2006
Half Year $M
Average VaR During
December 2005
Half Year $M
Average VaR During
June 2005
Half Year $M
Average VaR During
December 2004
Half Year $M
Group
Interest rate risk
Exchange rate risk
Implied volatility risk
Equities risk
Commodities risk
Prepayment risk
ASB Bank
Diversification benefit
Credit speed
Total
3. 16
0. 65
0. 61
0. 10
1. 20
0. 33
0. 30
(2. 26)
4. 09
5. 97
10. 06
2. 65
0. 53
0. 61
0. 08
0. 36
0. 28
0. 36
(1. 40)
3. 47
5. 74
9. 21
3. 44
0. 26
0. 49
0. 04
0. 18
0. 38
0. 22
(0. 98)
4. 03
4. 85
8. 88
3. 68
0. 58
0. 53
0. 22
0. 34
0. 54
0. 26
(1. 64)
4. 51
4. 67
9. 18
VaR Expressed based on 99.0%
confidence
Average VaR During
June 2006
Half Year $M
Average VaR During
December 2005
Half Year $M
Average VaR During
June 2005
Half Year $M
Average VaR During
December 2004
Half Year $M
Group
Interest rate risk
Exchange rate risk
Implied volatility risk
Equities risk
Commodities risk
Prepayment risk
ASB Bank
Diversification benefit
Credit speed
Total
4. 01
0. 77
0. 80
0. 13
1. 61
0. 33
0. 40
(3. 04)
5. 01
7. 09
12. 10
3. 36
0. 62
0. 95
0. 09
0. 45
0. 28
0. 48
(1. 93)
4. 30
6. 81
11. 11
4. 78
0. 31
0. 73
0. 05
0. 21
0. 38
0. 32
(1. 28)
5. 50
5. 75
11. 25
4. 72
0. 70
0. 70
0. 30
0. 41
0. 54
0. 34
(2. 01)
5. 70
5. 54
11. 24
In the non-traded book of the banking business, a range of
techniques is adopted to measure market risk. These include
simulation of the effects of market price changes on assets and
liabilities for business activities where there are no direct
measures of the effects of market prices on those activities.
Liquidity risk is the risk that assets cannot be liquidated in time to
meet maturing obligations. Limits are set to ensure that holdings
of liquid assets do not fall below prudent levels. The liquid assets
held include assets that are eligible for repurchase by the
Reserve Bank of Australia (over and above those required to
meet the Real Time Gross Settlement obligations), certificates of
deposits and bills of exchange accepted by other banks,
overnight interbank loans and high quality securities. More
detailed comments on the Bank’s liquidity and funding risks are
provided in Note 43.
30 Commonwealth Bank of Australia Annual Report 2006
in
life
the
insurance business arises
Market risk
from
mismatches between assets and liabilities. Guaranteed returns
are offered on some classes of policy. These liabilities may not
be capable of being easily hedged through matching assets.
Wherever possible, the Bank segregates policyholder’s funds
from shareholder’s funds and sets investment mandates that are
appropriate for each.
The investment mandates for assets in policyholder’s funds
attempt to match asset characteristics with the nature of policy
obligations. The ability to match asset characteristics with policy
obligations may be constrained by a number of factors including
regulatory constraints, the lack of suitable investments as well as
by the nature of the policy liabilities themselves. A large
proportion of policyholder’s assets are held for investment linked
policies where the policyholder takes the risk of falls in the
market value of the assets.
A smaller proportion of policyholder’s assets are held to support
policies where life companies have guaranteed either the
principal invested or the investment return (‘guaranteed policies’)
where investment mandates for these classes of policies
emphasise lower volatility assets such as cash and fixed
interest. The Bank no longer sells guaranteed policies. Inforce
business contains guaranteed policies sold in the past and on
which the Bank continues to collect premiums.
Liquidity risk is not a significant issue in life insurance
companies. The life insurance companies in the Bank hold
substantial investments in highly liquid assets such as listed
shares, government bonds and bank deposits. Furthermore,
processing time for claims and redemptions enables each
company to forecast and manage its liquidity needs.
Derivatives
Derivative instruments are contracts whose value is derived from
one or more underlying financial instruments or indices defined
in the contract. The Bank enters into derivatives transactions
including 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 market risk. The Bank participates in both exchange
traded and Over the Counter (“OTC”) derivatives markets.
The Bank recognises all derivative financial instruments in the
balance sheet at their fair value. Refer Note 1 (ff) to the financial
statements for further information.
Exchange Traded Derivatives
Exchange traded derivatives are executed through a registered
exchange, for example the Sydney Futures Exchange and the
Australian Stock Exchange. The contracts have standardised
terms and require lodgement of initial and variation margins in
cash or other collateral at the Exchange, which guarantees
ultimate settlement.
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 supported by
individual transaction confirmations. The 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.
Operational and Strategic Business Risk
The Bank’s operational and strategic business risk management
framework supports the achievement of its financial and
business goals.
Operational Risk is defined as the risk of economic gain or loss
resulting from:
Inadequate or failed internal processes and methodologies;
•
• People;
• Systems; or
• External events.
Integrated Risk Management
Strategic Business Risk is defined as the risk of economic gain
or loss resulting from changes in the business environment
caused by the following factors:
• Economic;
• Competitive;
• Social trends; or
• Regulatory.
Each business manager is responsible for the identification and
assessment of these risks, and for maintaining appropriate
internal controls. The Bank’s operational risk framework and
governance structures supports these efforts through a suite of
risk mitigating policies, the reporting of internal loss incidents
and key risk indicators, qualitative and quantitative assessment
of risk exposures, and skilled operational risk professionals
embedded throughout the Bank.
The Bank’s operational
risk measurement methodology
combines expert assessment of individual risk exposures with
internal loss data to calculate operational risk economic capital
and determine potential loss.
The Bank continues to benchmark and monitor its insurance risk
transfer program for efficiency and effectiveness. This is
primarily achieved through a methodology that optimises total
shareholder returns and determines the most appropriate blend
of insurance risk transfer and economic capital.
Business Continuity Management
Business Continuity Management (“BCM”) within the Bank
involves the development, maintenance and testing of advance
action plans to respond to defined risk events. This ensures that
business processes continue with minimal adverse impact on
customers, staff, products, services and brands.
BCM constitutes an essential component of the Bank’s risk
management process by providing a controlled response to
potential operational risks that could have a significant impact on
the Bank’s critical processes and revenue streams. It includes
both cost-effective responses to mitigate the impact of risk
events or disasters and crisis management plans to respond to
crisis events.
A comprehensive BCM program including plan development,
implemented across all
testing and education has been
business units.
Compliance Risk Management
Compliance risk is the risk of legal or regulatory sanctions,
material financial loss, or loss of reputation that the Bank may
suffer as a result of its failure to comply with the requirements of
relevant
industry and Bank standards and codes,
principles of good governance and accepted community and
ethical standards.
laws,
The Bank’s Compliance Risk Management Framework (CRMF)
is a key element of the Bank’s integrated risk management
framework. The CRMF is broadly consistent with the Australian
Standard on Compliance Programs; as such it fulfils the Bank’s
obligations under the Corporations Act 2001 and its Australian
Financial Services Licence. The CRMF incorporates a number
of components including Minimum Group Standards, Group
Obligations Register and Guidance Notes that detail specific
requirements and accountabilities. These are complemented by
Business Unit compliance frameworks including obligations
registers, standards and procedures.
Commonwealth Bank of Australia Annual Report 2006 31
Integrated Risk Management
The Framework provides for the assessment of compliance
risks, implementation of controls, monitoring and testing of
framework effectiveness,
the escalation, remediation and
reporting of compliance incidents and control weaknesses.
The Bank's compliance strategy is based on two fundamental
principles:
• Line Management in each Business Unit are responsible for
ensuring their business is and remains compliant with
legislative, regulatory, industry code and organisational
requirements by implementing and monitoring controls; and
• Business Unit Compliance and Group Compliance work
together to independently monitor, overview and report on
compliance to management, compliance committees and the
Board.
Security Risk
Security risk is defined as threats associated with theft and
fraud, information and IT security, protective security and crisis
management.
The Bank’s security risk management framework forms part of
the operational risk framework and sets out the key roles,
responsibilities and processes for security risk management
across the Bank.
Insurance Risk
There are two risk types that are considered to be unique to life
insurance businesses. These are the risks that the incidence of
mortality (death) and morbidity (illness and injury) claims are
higher than assumed when pricing life insurance policies, or is
greater than best estimate assumptions used to determine the
fair value of the business.
Insurance risk may arise through reassessment of the incidence
of claims, the trend of future claims and the effect of unforeseen
diseases or epidemics. In addition, in the case of morbidity, the
time to recovery may be longer than assumed. Insurance risk is
controlled by ensuring underwriting standards adequately
identify potential risk, retaining the right to amend premiums on
the use of
risk policies where appropriate and
reinsurance. The experience of the Bank’s life insurance
business and those of the industry as a whole are reviewed
annually.
through
32 Commonwealth Bank of Australia Annual Report 2006
Description of Business Environment
Australia
Competitive Landscape
Financial services providers in Australia offer a wide range of
products and services to retail and business customers,
encompassing for the most part banking, funds management
and insurance.
The domestic competitive landscape includes the four major
banks (including Commonwealth Bank of Australia), regional
banks, smaller players (including foreign banks) and both local
and international non-bank financial intermediaries.
Each of the major banks offers a full range of financial products
and services through branch networks, electronic channels and
third party intermediaries across Australia. The regional banks,
whilst smaller than the majors, now mostly operate across state
borders, or nationally. They have experienced strong growth
primarily in mortgage lending, facilitated by the proliferation of
non-bank mortgage originators and brokers. Non-bank financial
intermediaries such as building societies and credit unions
compete strongly in the areas of accepting deposits and
for owner-occupied
residential mortgage
lending, mainly
housing. Other non-bank
include
investment banks, fund managers, finance companies, and a
diverse range of product and service specialists.
intermediaries
financial
In recent years, a number of local and global new entrants are
attacking segments of the market where margins are typically
the widest, including product markets such as deposits, housing
loans and credit cards, and on distribution markets such as
mortgage broking and business banking broking.
Trends
The Australian financial services sector has performed strongly
in the last decade, largely driven by strong growth in lending.
More recently however, the expectation is for lower credit growth
going forward. This, together with the encroachment of new
entrants, may lead to intensifying competition, and to ongoing
downward pressure on margins.
in
Substantial growth has also occurred
funds under
management, especially within the superannuation (pension
funds) industry. Future growth will be underpinned by the
Australian Government’s continued encouragement of long-term
through private superannuation and compulsory
saving
employer pension contributions, as well as
recent
establishment of the Future Fund (designed to address the
public sector’s superannuation liabilities). This growth potential
from
continues
international fund managers to boutique players. The major
banks have expanded into funds management and/or insurance,
either through acquisition or through agreements with third
parties. The corporate bond market in Australia has also
benefited from the growth in funds under management with
many of the major Australian corporates now directly accessing
capital markets domestically and around the world.
to attract new entrants
this market,
the
to
Changes in the financial needs of consumers, deregulation, and
technology developments have also changed the mode of
competition. In particular, the development of electronic delivery
channels and the reduced reliance on a physical network
facilitate the entry of new players from related industries, such
telecommunication companies and utilities.
as
Technological change has provided opportunities for new
entrants with differing combinations of expertise and has
enabled the unbundling of the value chain.
retailers,
New Zealand
in Australia,
the New Zealand banking system
As
is
characterised by strong competition. The Bank’s activities in
New Zealand are conducted through ASB Group. Banks in New
Zealand are free to compete in almost any area of financial
activity. There is strong competition with non-bank financial
institutions in the areas of funds management and the provision
of insurance.
New Zealand banking activities are led by four financial services
groups, all owned by Australian based banks operating through
nationwide branch networks. There is also the Government-
owned Kiwibank, operating nationwide, and TSB Bank,
operating in the main centres. Both banks offer retail and
business banking services through branches. In addition, there
are several
the
wholesale banking sector.
institutions operating
financial
largely
in
Through its wholly owned subsidiaries, Sovereign Group and
ASB Group Investments, ASB Group also competes in the New
Zealand insurance and investment market.
Financial System Regulation in Australia
Australia has by international standards a high quality financial
financial products and services
system which
consistently regardless of the type of financial institutions
providing them.
regulates
Since July 1998, financial services regulators in Australia have
comprised four separate agencies: The Reserve Bank of
Australia, the Australian Prudential Regulation Authority, the
Australian Securities and Investments Commission and the
Australian Competition and Consumer Commission. Each
agency has system wide responsibilities for the different
objectives of government oversight of the financial system. A
description of these agencies and their general responsibilities
and functions is set out below.
Reserve Bank of Australia (“RBA”) – is responsible for monetary
policy, financial system stability and regulation of the payments
system.
Australian Prudential Regulation Authority (“APRA”) – has
responsibility for the prudential supervision of banks, building
insurance
societies and credit unions,
companies,
funds
(pension funds). Unless an institution is authorised under the
Banking Act 1959 or exempted by APRA, it is prohibited from
engaging in the general business of deposit-taking.
friendly societies and superannuation
life and general
Australian Securities and Investments Commission (“ASIC”) –
has responsibility for monitoring, regulating and enforcing
company and financial services laws and promoting market
integrity and consumer protection across the financial services
sector and the payments system.
Australian Competition and Consumer Commission (“ACCC”) –
has responsibility for competition policy and consumer protection
across all sectors of the economy.
The Corporations Act 2001 provides for a single licensing
regime for sales, advice and dealings in financial products and
services, consistent and comparable financial product disclosure
and a single authorisation procedure for financial exchanges and
clearing and settlement facilities. The current financial services
regulatory framework is intended to facilitate innovation and
promote business while at the same time ensuring consumer
protection and market integrity.
Commonwealth Bank of Australia Annual Report 2006 33
Description of Business Environment
The Government passed into law in June 2004 a package of
proposals (known as CLERP 9) dealing with audit regulation and
corporate disclosure. CLERP 9 is designed to ensure Australia
has an effective regulatory and disclosure framework that
provides the structures and incentives for a fully informed
market.
Supervisory Arrangements
The Bank is an authorised deposit-taking institution under the
Banking Act and is subject to prudential regulation by APRA as
a bank.
In carrying out its prudential responsibilities, APRA closely
monitors the operations of banks to ensure that they operate
within the prudential framework it has laid down, and that they
follow sound management practices.
APRA currently supervises banks by a system of off-site
examination. It closely monitors the operations of banks through
the collection of regular statistical returns and regular prudential
consultations with each bank’s management. APRA also
conducts a program of specialised on-site visits to assess the
adequacy of individual banks’ systems for identifying, measuring
and controlling risks associated with the conduct of these
activities.
In addition, APRA has established arrangements under which
each bank’s external auditor reports to APRA regarding
observance of prudential standards and other supervisory
requirements.
The prudential framework applied by APRA is embodied in a
series of prudential standards and other requirements including:
(i) Capital Adequacy
Under APRA capital adequacy guidelines, Australian banks are
required to maintain a ratio of capital (comprising Tier One and
Tier Two capital components) to risk-weighted assets of at least
8%, of which at least half must be Tier One capital. Regulatory
capital requirements are measured for the Bank (“Level 1”) and
for the Bank together with its banking subsidiaries (“Level 2”).
APRA capital requirements are generally consistent with those
agreed upon by the Basel Committee on Banking Supervision.
APRA has advised that a third level of capital adequacy (“Level
3”) for conglomerate groups will be implemented to coincide with
Basel II. For information on the capital position of the Bank and
Basel II, see Note 35 Capital Adequacy.
(ii) Funding and Liquidity
APRA exercises liquidity control by requiring each bank to
develop a liquidity management strategy that is appropriate for
itself. Each policy is formally approved by APRA. A key element
of the Group’s liquidity policy is the holding of a stock of high
quality liquid assets to meet day to day fluctuations in liquidity.
The liquid assets held are assets that are available for
repurchase by the RBA (over and above those required to meet
the Real Time Gross Settlement (“RTGS”) obligations, AUD
Certificates of Deposits/Bills of other banks and AUD overnight
interbank loans) and other highly liquid market securities. More
detailed comments on the Group’s liquidity and funding risks are
provided in Note 43.
(iii) Large Credit Exposures
APRA requires banks to ensure that, other than in exceptional
circumstances, individual credit exposures to non-bank, non-
government clients do not exceed 25% of the capital base.
Exposure to authorised deposit taking institutions (“ADIs”) is not
to exceed 50% of the capital base. Prior consultation must be
held with APRA if a bank intends to exceed set thresholds. For
information on the Bank’s large exposures refer to Note 16 to
the Financial Statements.
34 Commonwealth Bank of Australia Annual Report 2006
(iv) Ownership and Control
In pursuit of transparency and risk minimisation, the Financial
Sector (Shareholding) Act 1998 embodies the principle that
regulated financial institutions should maintain widespread
ownership. The Act applies a common 15% shareholding limit
for authorised deposit taking institutions, insurance companies
and their holding companies. The Treasurer has the power to
approve acquisitions exceeding 15% where this is in the national
interest, taking into account advice from the ACCC in relation to
competition considerations and APRA on prudential matters.
The Treasurer may also delegate approval powers to APRA
where one financial institution seeks to acquire another.
The Government’s present policy is that mergers among the four
major banks will not be permitted until the Government is
satisfied that competition from new and established participants
in the financial industry, particularly in respect of small business
lending, has increased sufficiently.
Proposals for foreign acquisition of Australian banks are subject
to approval by the Treasurer under the Foreign Acquisitions and
Takeovers Act 1975.
(v) Banks’ Association With Non-Banks
There are formal guidelines (including maximum exposure limits)
that control investments and dealings with subsidiaries and
associates. A bank’s equity associations with other institutions
should normally be in the field of finance. APRA has expressed
an unwillingness to allow subsidiaries of a bank to exceed a size
which would endanger the stability of the parent. No bank can
enter into any agreements or arrangements for the sale or
disposal of its business, or effect a reconstruction or carry on
business in partnership with another bank, without the consent
of the Commonwealth Treasurer.
(vi) Fit & Proper and Governance
From 1 October 2006, all ADIs will be subject to APRA’s new
“Fit and Proper” and “Governance” prudential standards. All
ADIs will be required to have and implement a Board approved
Fit and Proper policy covering all of their responsible persons
(directors and designated members of senior management etc).
ADIs will also have to comply with APRA’s Governance
prudential standard which sets out requirements for board size
and composition, independence of directors and other APRA
governance matters.
(vii) Supervision of Non-Bank Group Entities
The Australian life insurance company subsidiaries, general
the superannuation
insurance company subsidiaries and
trustees of the group also come within the supervisory purview
of APRA.
APRA’s prudential supervision of both life insurance and general
insurance companies is exercised through the setting of
minimum standards for solvency and financial strength to ensure
obligations to policyholders can be met. Trustees operating
APRA regulated superannuation entities are now required to
hold a Registrable Superannuation Entity (“RSE”) licence from
APRA.
insurance companies are subject
General
to prudential
standards including capital adequacy, liability valuation, risk
management and reinsurance arrangements. Compliance with
APRA regulation for general insurance companies is monitored
through regular returns, lodgement of an audited annual return,
and auditor certification covering prudential matters.
Description of Business Environment
financial reporting,
The financial condition of life insurance companies is monitored
through regular
lodgement of audited
accounts, the preparation of a financial conditions report
(prepared by the company’s approved actuary) and supervisory
inspections.
From 1 October 2006 life and general insurance companies will
be subject to similar Fit & Proper and Governance requirements
as those to apply to ADIs.
Critical Accounting Policies and Estimates
The Notes to the Financial Statements contain a summary of the
Group’s significant accounting policies. Certain of these policies
are considered to be more important in the determination of the
Group’s financial position, since they require management to
make difficult, complex or subjective judgements, some of which
may relate to matters that are inherently uncertain. These
decisions are reviewed by a Committee of the Board.
These policies include judgements as to levels of provisions for
impairment for loan balances, and actuarial assumptions in
determining life insurance policy liabilities. An explanation of
these policies and the related judgements and estimates
involved is set out below.
Provisions for Impairment
Provisions for impairment are raised where there is objective
evidence of impairment and at an amount adequate to cover
assessed 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.
Individually Assessed Provisions
Individually Assessed provisions are raised where there is
objective evidence of impairment and full recovery of principal is
considered doubtful.
Individually Assessed 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. The provisions are established
based primarily on estimates of the realisable (fair) value of
collateral taken and are measured as the difference between the
asset’s carrying amount and the present value of the expected
future cash flows (excluding future credit losses that have not
been incurred), discounted at the financial asset’s original
effective interest rate. Short term balances are not discounted.
Individually Assessed provisions (in bulk) are also made against
retail segments to cover facilities which are not well secured and
past due 180 days or more, against the credit risk rated segment
for exposures aggregating to less than $250,000 and 90 days or
more past due, and against credit risks identified in specific
segments in the credit risk rated portfolio. These provisions are
derived primarily by reference to historical ratios of write-offs to
balances in default.
Individually Assessed provisions are provided for from the
collective provision.
Collective Provision
All other loans and advances that do not have an individually
assessed provision are assessed collectively for impairment.
The collective provision is maintained to reduce the carrying
amount of portfolios of similar loans and advances to their
estimated recoverable amounts at the balance sheet date.
The evaluation process is subject to a series of estimates and
judgements.
In the credit risk rated segment, the risk rating system, including
the frequency of default and loss given default rates, loss
history, and the size, structure and diversity of individual credits
are considered. Current developments in portfolios (industry,
geographic and term) are reviewed.
In the retail segment, the history of defaults and losses, and the
size, structure and diversity of portfolios are considered.
In addition, management considers overall indicators of portfolio
performance, quality and economic conditions. Changes in
these estimates could have a direct impact on the level of
provision determined.
The amount required to bring the collective provision to the level
assessed is taken to profit and loss as set out in Note 15.
Life Insurance Policyholder Liabilities
Life insurance policyholder liabilities on life insurance contracts
are accounted for under AASB 1038: Life Insurance Business. A
significant area of judgement is in
the determination of
policyholder liabilities, which involve actuarial assumptions.
All policyholder liabilities are recognised in the Statement of
Financial Position and are measured at net present values or, if
not materially different, on an accumulation basis after allowing
for acquisition expenses. They are calculated in accordance with
the principles of Margin on Services (“MoS”) profit reporting as
set out in Actuarial Standard AS 1.04: Valuation of Policy
Liabilities issued by the Life Insurance Actuarial Standards
Board.
The areas of judgement where key actuarial assumptions are
made in the determination of policyholder liabilities are:
• Business assumptions including:
− Amount, timing and duration of claims/policy payments
− Policy lapse rates
− Long term maintenance expense levels
• Long term economic assumptions for discount and interest
rates, inflation rates and market earnings rates; and
• Selection of methodology, either projection or accumulation
method. The selection of the method is generally governed
by the product type.
The determination of assumptions relies on making judgements
on variances from long term assumptions. Where experience
differs from long term assumptions:
• Recent results may be a statistical aberration; or
• There may be a commencement of a new paradigm
requiring a change in long term assumptions.
The Group’s actuaries arrive at conclusions regarding the
statistical analysis using their experience and judgement.
Additional information on the accounting policy is set out in Note
1(hh) Life Insurance Business, and Note 38 Life Insurance
Business details the key actuarial assumptions.
International Financial Reporting Standards
On 1 July 2005 the Bank commenced application of the
Australian equivalent of
International Financial Reporting
Standards (“AIFRS”). This is in line with the conversion deadline
set out by the Financial Reporting Council of Australia.
Descriptions of the key AIFRS issues are set out in Note 1 (nn)
of the Financial Statements.
Commonwealth Bank of Australia Annual Report 2006 35
Corporate Governance
Board of Directors
Charter
The role and responsibilities of the Board of Directors are set
out in the document entitled “Board Charter and Description of
Board and Management Roles”. The responsibilities include:
• The corporate governance of the Bank, including the
establishment of Committees;
• Oversight of the business and affairs of the Bank by:
− Establishing, with management, and approving
the
strategies and financial objectives;
− Approving major corporate and capital initiatives and
limits
in excess of
approving capital expenditure
delegated to management;
− Establishing appropriate systems of risk management;
and
− Monitoring the performance of management;
• Approving documents (including reports and statements to
shareholders) required by the Bank’s Constitution and
relevant regulation;
• Appointment of the Chief Executive Officer; and
• Approval of the Bank’s major HR policies and overseeing the
development strategies for senior and high performing
executives.
The Board carries out the legal duties of its role in accordance
with the Bank’s values of trust, honesty and integrity and having
regard
the Bank’s customers, staff,
shareholders and the broader community in which the Bank
operates.
interests of
the
to
The Board delegates to the Chief Executive Officer the authority
to achieve the Bank objective of creating long term shareholder
value for its shareholders through providing financial services to
sustained best-in-industry
its
performance in safety, community reputation and environmental
impact.
customers and providing
Composition
There are currently 11 Directors of the Bank and details of their
experience, qualifications, special responsibilities and attendance
at meetings are set out in the Directors’ Report.
Membership of the Board and Committees is set out below:
Board Membership
Committee Membership
Director (1)
J M Schubert
R J Norris
R J Clairs
Non-Executive,
independent
Executive
Non-Executive,
independent
A B Daniels (2) Non-Executive,
C R Galbraith
S C H Kay
W G Kent
F D Ryan
F J Swan
B K Ward (2)
D Turner (3)
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
Non-Executive,
independent
J Hemstritch (4) Non-Executive,
independent
Board Performance
& Renewal
Chairman
People
& Remuneration
Member
Audit
Chairman
Chief Executive Officer
Chairman
Member
Risk
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Chairman Member
Member
Chairman
Member
Member
Member
(1) Mr. D V Murray retired as Chief Executive Officer and Director on 22 September 2005
(2) Mr. A B Daniels and Ms. B K Ward will retire at the Bank’s Annual General Meeting on 3 November 2006.
(3) Mr. D Turner was appointed to the Board with effect from 1 August 2006. In accordance with the Bank’s Constitution and the ASX Listing Rules, he will stand for
election at the Annual General Meeting to be held on 3 November 2006.
(4) Mrs. J Hemstritch was appointed to the Board with effect from 9 October 2006. In accordance with the Bank’s constitution and the ASX Listing Rules, she will stand for
election at the Annual General Meeting to be held on 3 November 2006.
The Constitution of the Bank specifies that:
• The Chief Executive Officer and any other executive director
shall not be eligible to stand for election as Chairman of the
Bank;
• The number of Directors shall not be less than 9 nor more
than 13 (or such lower number as the Board may from time
to time determine). The Board has determined that the
number of directors shall be 12; and
• At each Annual General Meeting one-third of Directors (other
than the Chief Executive Officer) shall retire from office and
may stand for re-election.
36 Commonwealth Bank of Australia Annual Report 2006
for existing Directors,
The Board has established a policy that, with a phasing in
term of directors’
provision
appointments would be limited to 12 years (except where
succession planning for Chairman and appointment of Chairman
requires an extended term. On appointment, the Chairman will be
expected to be available for that position for five years).
the
Independence
Review
Corporate Governance
The Board regularly assesses the independence of each
Director. For this purpose an independent Director is a non-
executive Director whom the Board considers to be independent
of management and free of any business or other relationship
that could materially interfere with the exercise of unfettered and
independent judgment.
themselves
to conduct
to being required
In addition
in
accordance with the ethical policies of the Bank, Directors are
required to be meticulous in their disclosure of any material
contract or relationship in accordance with the Corporations Act
and this disclosure extends to the interests of family companies
and spouses. Directors are required to strictly adhere to the
constraints on their participation and voting in relation to matters
in which they may have an interest in accordance with the
Corporations Act and the Bank's policies.
Each Director may from time to time have personal dealings with
the Bank. Each Director is involved with other companies or
professional firms which may from time to time have dealings
with the Bank. Details of offices held by Directors with other
organisations are set out in the Directors' Report and on the
Bank's website. Full details of related party dealings are set out
in notes to the Company's accounts as required by law.
All the current non-executive Directors of the Bank have been
assessed as
that
determination, the Board has taken into account (in addition to
the matters set out above):
independent Directors.
reaching
In
• The specific disclosures made by each Director as referred to
above;
• Where applicable, the related party dealings referrable to
each Director, noting that those dealings are not material
under accounting standards;
• That no Director is, or has been associated directly with, a
substantial shareholder of the Bank;
• That no non-executive Director has ever been employed by
the Bank or any of its subsidiaries;
• That no Director is, or has been associated with a supplier,
professional adviser, consultant to or customer of the Bank
which is material under accounting standards; and
• That no non-executive Director personally carries on any role
for the Bank other than as a Director of the Bank.
The Bank does not consider that term of service on the Board is
a factor affecting a Director's ability to act in the best interests of
the Bank. Independence is judged against the ability, integrity
and willingness of the Director to act. The Board has established
a policy limiting Directors' tenures to ensure that skill sets remain
appropriate in a dynamic industry.
Education
Directors participate in an induction program upon appointment
and in a refresher program on a regular basis. The Board has
established a program of continuing education to ensure that it is
kept up to date with developments in the industry both locally
and globally. This includes sessions with local and overseas
experts in the particular fields relevant to the Bank’s operations.
The Board has in place a process for annually reviewing its
performance, policies and practices. These reviews seek to
identify where improvements can be made and also assess the
quality and effectiveness of information made available to
Directors. Every two years, this process is facilitated by an
external consultant, with an internal review conducted in the
intervening years. The review process includes an assessment
of the performance of the Board Committees and each Director.
the
the performance
After consideration of
assessment, the Board will determine its endorsement of the
Directors to stand for re-election at the next Annual General
Meeting.
results of
The non-executive Directors meet at least annually, without
management, in a forum intended to allow for an open
discussion on Board and management performance. This is in
addition to the consideration of the Chief Executive Officer’s
performance and remuneration which is conducted by the Board
in the absence of the Chief Executive Officer.
The Chairman meets at least annually with members of the
senior executive team to discuss with them the Board’s
performance and level of involvement from their perspective.
Selection of Directors
The Board Performance and Renewal Committee has
developed a set of criteria for director appointments which have
been adopted by the Board. The criteria are aimed at creating a
Board capable of challenging, stretching and motivating
management
to achieve sustained outstanding company
performance in all respects. These criteria, which are reviewed
annually, aim to ensure that any new appointee is able to
contribute to the Board constituting a competitive advantage for
the Bank and:
• Be capable of operating as part of an exceptional team;
• Contribute outstanding performance and exhibit impeccable
values;
• Be capable of inputting strongly to risk management, strategy
and policy;
• Provide skills and experience required currently and for the
future strategy of the Bank;
• Be excellently prepared and receive all necessary education,
input and
• Provide
questions to management from their experience and skill;
and
important and significant
insights,
• Vigorously debate and challenge management.
The Committee regularly reviews the skill base and experience
of existing Directors to enable identification of attributes required
in new Directors.
An executive search firm is engaged to identify potential
candidates based on the identified criteria.
Candidates for appointment as Directors are considered by the
Board Performance and Renewal Committee, recommended for
decision by the Board and, if appointed, stand for election, in
accordance with the Constitution, at the next general meeting of
shareholders.
Commonwealth Bank of Australia Annual Report 2006 37
Corporate Governance
The Bank has adopted a policy whereby, on appointment, a
letter is provided from the Chairman to the new Director setting
out the terms of appointment and relevant Board policies
including time commitment, code of ethics and continuing
education. All current Directors have been provided with a letter
confirming the terms of their appointment. A copy of the form of
letter of appointment appears on the Bank’s website.
Policies
Board policies relevant to the composition and functions of
Directors include:
• The Board will consist of a majority of independent non-
executive Directors and the membership of the Board
Performance and Renewal, People & Remuneration and
Audit Committees should consist solely of independent non-
executive Directors. The Risk Committee should consist of a
majority of independent non-executive Directors;
• The Chairman will be an independent non-executive Director.
The Audit Committee will be chaired by an independent non-
executive Director other than the Board Chairman;
• The Board will generally meet regularly with an agenda
designed to provide adequate information about the affairs of
the Bank, allow the Board to guide and monitor management
and assist in involvement in discussions and decisions on
strategy. Matters having strategic implications are given
priority on the agenda for regular Board meetings. In
addition, ongoing strategy is the major focus of at least two of
the Board meetings annually;
• The Board has an agreed policy on the basis on which
Directors are entitled
to company
documents and information and to meet with management;
and
to obtain access
• The Bank has
in place a procedure whereby, after
appropriate consultation, Directors are entitled to seek
independent professional advice, at the expense of the Bank,
to assist them to carry out their duties as Directors. The
policy of the Bank provides that any such advice is generally
made available to all Directors.
Ethical Standards
Conflicts of Interest
In accordance with the Constitution and the Corporations Act
2001, Directors are required to disclose to the Board any
material contract in which they may have an interest. In
compliance with section 195 of the Corporations Act 2001 any
Director with a material personal interest in a matter being
considered by the Board will not be present when the matter is
being considered and will not vote on the matter. In addition, any
director who has a conflict of interest in connection with any
matter being considered by the Board or a Committee does not
receive a copy of any paper dealing with the matter.
Share Trading
The restrictions imposed by law on dealings by Directors in the
securities of the Bank have been supplemented by the Board of
Directors adopting guidelines which further limit any such
dealings by Directors, their spouses, any dependent child, family
company or family trust.
38 Commonwealth Bank of Australia Annual Report 2006
The guidelines provide, that in addition to the requirement that
Directors not deal in the securities of the Bank or any related
company when they have or may be perceived as having
relevant unpublished price-sensitive information, Directors are
only permitted to deal within certain periods. These periods
include between three and 30 days after the announcement of
half yearly and final results and from the date of the annual
general meeting until 14 days after the Annual General Meeting.
Further, the guidelines require that Directors not deal on the
basis of considerations of a short term nature or to the extent of
trading
to
executives of the Bank.
those securities. Similar restrictions apply
in
In addition, Bank policy prohibits:
• For Directors and executives who report to the Chief
Executive Officer, any hedging of publicly disclosed
shareholding positions; and
• For executives, any trading (including hedging) in positions
prior to vesting of shares or options.
Remuneration Arrangements
Details of the governance arrangements and policies relevant to
remuneration are set out in the Directors’ Report - Remuneration
Report.
Audit Arrangements
Audit Committee
The Charter of the Audit Committee incorporates a number of
is
to ensure
policies and practices
independent and effective. Among these are:
the Committee
that
• The Audit Committee consists entirely of independent non-
executive Directors, all of whom have familiarity with financial
management and at least one has expertise in financial
accounting and reporting. The Chairman of the Bank is not
permitted to be the Chairman of the Audit Committee;
• At least twice a year the Audit Committee meets the external
auditors and the chief internal audit executive and also
separately with the external Auditors independently of
management;
• The Audit Committee is responsible for nominating the
external auditor
for appointment by
the Board
shareholders. The Audit Committee approves the terms of
the contract with the external auditor, agrees the annual audit
plan and approves payments to the Auditor;
to
• The Audit Committee discusses and receives assurances
from the external auditors on the quality of the Bank’s
systems, its accounting processes and its financial results. It
also receives a report from the Auditors on any significant
matters raised by the Auditors with management;
• All material accounting matters requiring exercise of
judgement by management are specifically reviewed by the
Audit Committee and reported on by the Committee to the
Board; and
• Certified assurances are received by the Audit Committee
and the Board that the Auditors meet the independence
requirements as recommended by the Corporations Act and
the Securities and Exchange Commission (“SEC”) of the
USA.
In carrying out these functions, the Committee:
The policy also ensures that the Auditors do not:
Corporate Governance
• Reviews the financial statements and reports of the Group;
• Reviews accounting policies to ensure compliance with
current laws, relevant regulations and accounting standards;
• Conducts any investigations relating to financial matters,
records, accounts and reports which it considers appropriate;
and
• Reviews all material matters requiring exercise of judgment
by management and reports those matters to the Board.
the absence of
The Committee regularly considers,
management and the external auditor, the quality of the
information received by the Committee and, in considering the
financial statements, discusses with management and the
external auditor:
in
• The financial statements and their conformity with accounting
reporting and statutory
standards, other mandatory
requirements; and
• The quality of the accounting policies applied and any other
significant judgments made.
The external audit partner attends meetings of the Audit
Committee by invitation and attends the Board meetings when
the annual and half yearly accounts are approved and signed.
The Committee, at least annually, meets separately with each of
the chief internal audit executive and the external auditor,
without management, as part of the process of ensuring
independence of the audit functions.
The Board has determined that Fergus Ryan is an “audit
committee financial expert” within the meaning of that term as
described in the SEC rules. Although the Board has determined
that this individual has the requisite attributes defined under the
rules of the SEC, his responsibilities are the same as those of
the other Audit Committee members. He is not an auditor, does
not perform “field work” and is not a full time employee. The
SEC has determined that an audit committee member who is
designated as an audit committee financial expert will not be
deemed to be an “expert” for any purpose as a result of being
identified as an audit committee financial expert. The Board has
also determined that Fergus Ryan is independent within the
meaning of
the definition of audit committee member
independence used by the New York Stock Exchange.
is
in
responsible
the preparation of
for oversight of
The Audit Committee
management
financial
statements and financial disclosures. The Audit Committee
relies on the information provided by management and the
external auditor. The Audit Committee does not have the duty to
plan or conduct audits to determine whether the Bank’s financial
statements and disclosures are complete and accurate.
the Bank’s
Non-Audit Services
The Board has in place an Independent Auditor Services Policy
which only permits the Independent Auditor to carry out audit
services which are required by statute and related services
which are an extension of, or an adjunct to, those audit services.
All other non-audit services are prohibited unless the Audit
Committee determines otherwise in any particular case. The
objective of this policy is to avoid prejudicing the independence
of the Auditors.
• Assume the role of management or act as an employee;
• Become an advocate for the Bank;
• Audit their own work;
• Create a mutual or conflicting interest between the Auditor
and the Bank;
• Require an indemnification from the Bank to the Auditor;
• Seek contingency fees; nor
• Have a direct financial or business interest or a material
indirect financial or business interest in the Bank or any of its
affiliates, or an employment relationship with the Bank or any
of its affiliates.
Under the policy, the Auditor shall not provide the following
services:
• Bookkeeping or services relating to accounting records or
financial statements of the Bank;
• Financial information systems design and implementation;
• Appraisal or valuation services and fairness opinions;
• Actuarial services;
•
• Management functions, including acting as an employee;
• Human resources;
• Broker-dealer, investment adviser or investment banking
Internal audit outsourcing services;
services;
• Legal services; or
• Expert services unrelated to the audit.
In general terms, the permitted services are:
• Audit services to the Bank or an affiliate;
• Related services connected with
lodgement of
statements or documents with the ASX, ASIC, APRA, SEC
or other regulatory or supervisory bodies;
the
• Services reasonably related to the performance of the audit
services;
• Agreed upon procedures or comfort letters provided by the
Auditor to third parties in connection with the Bank’s
financing or related activities; and
• Other services pre-approved by the Audit Committee.
Auditor
Ernst & Young was appointed as the Auditor of the Bank at the
1996 Annual General Meeting and continues in that office.
The audit partner from Ernst & Young attends the Annual
General Meetings of the Bank and is available to respond to
shareholder audit related questions.
The Bank currently requires that the partner managing the audit
for the external auditor be changed within a period of five years.
The Chief Executive Officer is authorised to appoint and remove
the chief internal audit executive only after consultation with the
Audit Committee.
The SEC has requested that the Bank produce documents and
information relating to all services provided by the Bank’s
external auditors, Ernst & Young, since July 1, 2000, that may
impact on the independence of the external auditors under U.S.
rules. The Bank understands that the SEC has made similar
requests to certain other Australian companies registered with
the SEC and their accounting firms.
Commonwealth Bank of Australia Annual Report 2006 39
Corporate Governance
The Bank has produced the documents and information
requested, which include information regarding a number of
engagements in each fiscal year involving the “secondment” of
Ernst & Young personnel to entities in the Commonwealth Bank
Group, including the internal audit department, and non-
management assistance in relation to portions of the financial
statements.
In addition, the Committee ratifies the Group’s operational risk
policies for approval by the Board and reviews and informs the
Board of the measurement and management of operational risk.
Operational risk is a basic line management responsibility within
the Group consistent with the policies established by the
Committee. A range of insurance policies maintained by the
Group mitigates some operational risks.
The Committee meets, at least annually, with the Chief Risk
Officer, in the absence of other management to allow the
Committee to form a view on the independence of the function.
Framework
The Bank has in place an integrated risk management
framework to identify, assess, manage and report risks and risk
adjusted returns on a consistent and reliable basis.
A full description of the functions of the framework and the
nature of the risks is set out in the section of the Annual Report
entitled Integrated Risk Management and in Notes 16 and 43 to
the Financial Statements.
Board Performance and Renewal Committee
The Board Performance and Renewal Committee of the Board
critically reviews, at least annually, the corporate governance
procedures of the Bank and the composition and effectiveness
of the Commonwealth Bank of Australia Board and the boards of
the major wholly owned subsidiaries. The policy of the Board is
that the Committee shall consist solely of independent non
executive directors. The Chief Executive Officer attends the
meeting by invitation.
In addition to its role in proposing candidates for director
appointment for consideration by the Board, the Committee
reviews fees payable to non-executive directors and reviews,
and advises the Board in relation to Chief Executive Officer
succession planning.
Continuous Disclosure
in place
securities.
“Guidelines
The Bank’s
The Corporations Act 2001 and the ASX Listing Rules require
that a company discloses to the market matters which could be
expected to have a material effect on the price or value of the
company’s
for
Communication between the Bank and Shareholders” sets out
the processes to ensure that shareholders and the market are
provided with full and timely information about the Bank’s
activities in compliance with continuous disclosure requirements.
Management procedures are
the
Commonwealth Bank Group to ensure that all material matters
which may potentially require disclosure are promptly reported to
the Chief Executive Officer, through established reporting lines,
or as a part of the deliberations of the Bank’s Executive
Committee. Matters reported are assessed and, where required
by the Listing Rules, advised to the market. A Disclosure
Committee has been
the
requirements for disclosure of information to the market. The
Company Secretary is responsible for communications with the
ASX and for ensuring that such information is not released to
any person until the ASX has confirmed its release to the
market.
to provide advice on
throughout
formed
financial
relationships with
In addition, Ernst & Young has reported to the Bank’s Audit
Committee and to the SEC that, during the past three fiscal
years, certain Ernst & Young professionals maintained deposit
accounts or had other
the
Commonwealth Bank Group that are prohibited by the SEC’s
auditor independence rules. Ernst & Young has advised that the
deposit accounts and other financial relationships were generally
small in size and that they have been terminated or rectified. In
2004, Ernst & Young also reported to the Bank’s Audit
Committee regarding (i) certain small non-consolidated trusts
managed by a subsidiary of the Bank in Fiji, where three Ernst &
Young partners in Fiji owned a company that was appointed as
trustee of the trusts prior to the Bank’s acquisition of the
manager, and (ii) certain non-operating indirect subsidiaries of
the Bank in the United Kingdom, where the Ernst & Young firm
in Edinburgh was appointed as liquidator of those subsidiaries.
Those activities may also be impermissible under the SEC rules.
If the SEC determines that the above matters or any other
services provided by Ernst & Young to the Commonwealth Bank
Group did not comply with applicable rules, the SEC may
impose or negotiate a broad range of possible sanctions.
Examples of sanctions imposed on audit firms or other
companies for breaches of the SEC’s rules have included fines,
the entry of cease-and-desist orders or injunctions, or a
requirement to engage a different accounting firm to perform
procedures and report on aspects of the relevant accounts or
financial statements that may have been impacted by auditor
independence concerns. Although the Bank cannot predict the
nature of any future action by the SEC, based on information
currently available to the Bank, the Bank does not believe the
outcome of the SEC’s ongoing inquiry will have a material
adverse financial effect on the Commonwealth Bank Group.
Risk Management
Risk Committee
The Risk Committee oversees credit, market, and operational
risks assumed by the Bank in the course of carrying on its
business.
The Committee considers the Group’s credit policies and
ensures that management maintains a set of credit underwriting
standards designed to achieve portfolio outcomes consistent
with the Group’s risk/return expectations. In addition, the
Committee
the Group’s credit portfolios and
recommendations by management for provisioning for bad
debts.
reviews
The Committee approves risk management policies and
procedures for market, funding and liquidity risks incurred or
likely to be incurred in the Group’s business. The Committee
reviews progress in implementing management procedures and
identifying new areas of exposure relating to market, funding
and liquidity risk.
40 Commonwealth Bank of Australia Annual Report 2006
Ethical Policies
Values Statement
The Bank demands the highest standards of honesty and loyalty
from all its people and strong governance within the Bank.
Our values statement – “trust, honesty and integrity” - reflects
this standard.
Statement of Professional Practice
The Bank has adopted a code of ethics, known as a Statement
of Professional Practice, which sets standards of behaviour
required of all employees and directors including:
• To act properly and efficiently in pursuing the objectives of
the Bank;
• To avoid situations which may give rise to a conflict of
interest;
• To know and adhere to the Bank’s Equal Employment
Opportunity policy and programs;
• To maintain confidentiality in the affairs of the Bank and its
customers; and
• To be absolutely honest in all professional activities.
These standards are regularly communicated to staff. In
addition, the Bank has established insider trading guidelines for
staff to ensure that unpublished price sensitive information about
the Bank or any other company is not used in an illegal manner.
Our People
The Bank is committed to providing fair, safe, challenging and
rewarding work, recognising the importance of attracting and
retaining high quality staff and consequently, being in a position
to excel in customer service.
There are various policies and systems in place to enable
achievement of these goals, including:
• Fair Treatment Review;
• Equal Employment Opportunity;
• Occupational Health and Safety;
• Recruitment and selection;
• Performance management;
• Talent management and succession planning;
• Remuneration and recognition;
• Employee share plans; and
• Supporting Professional Development.
Behaviour Issues
The Bank is strongly committed to maintaining an ethical
workplace, complying with legal and ethical responsibilities.
Policy requires staff to report fraud, corrupt conduct, mal-
administration or serious and substantial waste by others. A
system has been established which allows staff to remain
anonymous, if they wish, for reporting of these matters.
The policy has been extended to include reporting of auditing
and accounting issues, which will be reported to the Chief
Compliance Officer by
the Chief Security Officer, who
administers the reporting and investigation system. The Chief
Security Officer reports any such matters
the Audit
Committee, noting the status of resolution and actions to be
taken.
to
Corporate Governance
Governance Philosophy
The Board has consistently placed great importance on the
governance of the Bank, which it believes is vital to the well-
being of
the corporation. The Bank has adopted a
comprehensive framework of Corporate Governance Guidelines
which are designed to properly balance performance and
conformance and thereby allow the Bank to undertake, in an
effective manner, the prudent risk-taking activities which are the
basis of its business. The Guidelines and the practices of the
Bank comply with all the current best practice recommendations
set by the ASX Corporate Governance Council.
US Sarbanes-Oxley Act
On 30 July 2002, a broad US financial reporting and corporate
governance reform law, called the Sarbanes-Oxley Act of 2002
(“SOX Act”), was enacted. A number of provisions of this Act
apply to the Group because it has certain securities registered
with the SEC under the Securities Exchange Act of 1934
(“Exchange Act”).
Under the Exchange Act, the Bank files periodic reports with the
SEC, including an Annual Report on Form 20-F. Pursuant to the
requirements of the SOX Act, the SEC has adopted rules
requiring that the Group’s Chief Executive Officer and Chief
Financial Officer personally provide certain certifications with
respect to the disclosure contained in the Annual Report on
Form 20-F.
Certifications and disclosures
In respect of this Annual Report and as at the date of this annual
report, the Group’s Chief Executive Officer and Chief Financial
Officer make the following Sarbanes-Oxley related certifications:
• That they have reviewed the report;
• That based on their knowledge, the report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were
made, not misleading with respect to the periods covered by
the report;
• That based on their knowledge, the Financial Statements,
and other financial information included in the report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the Group as of, and for, the
periods presented in the report;
• That they are responsible for establishing and maintaining
disclosure controls and procedures (as defined in the US
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Group
and have:
− Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under their supervision, to ensure that material
information
its
consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period
in which the report is being prepared;
the Group,
including
relating
to
− Evaluated the effectiveness of those disclosure controls
and procedures, with the assistance of other members of
the Group’s management, and presented in this report
their conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Commonwealth Bank of Australia Annual Report 2006 41
Code of Ethics
The Group is required to disclose in its annual report on Form
20-F that it has adopted a written code of ethics that applies to
all employees of the Group, including its Chief Executive Officer,
Chief Financial Officer and principal accounting officers or
controllers or persons performing similar functions. The Group
has adopted such a code.
Company Secretaries
The details of the Bank’s Company Secretaries, including their
experience and qualifications are set out below.
John Hatton has been Company Secretary of
Commonwealth Bank of Australia since 1994.
the
From 1985-1994, he was a solicitor with the Bank’s Legal
Department.
He has a Bachelor of Laws degree from Sydney University and
was admitted as a solicitor in New South Wales. He is a Fellow
of Chartered Secretaries Australia and a Member of the
Australian Institute of Company Directors.
Carla Collingwood was appointed a Company Secretary to the
Bank in July 2005
From 1994 until 2005, she was a solicitor with the Bank’s Legal
Services Department, before being appointed to the position of
General Manager, Secretariat. She holds a Bachelor of Laws
degree (Hons.) and a Graduate Diploma in Company Secretary
Practice from Chartered Secretaries Australia.
Corporate Governance
• Disclosed in this report any change in the Group’s internal
control over financial reporting that occurred during the
period covered by this report that has materially affected, or
is reasonably likely to materially affect, the Group’s internal
control over financial reporting; and
• That they have disclosed, based on their most recent
evaluation of internal control over financial reporting, to the
Group’s auditors and the Audit Committee of the Group’s
Board of Directors:
− All significant deficiencies (if any) in the design or
operation of internal controls over financial reporting
which are reasonably likely to adversely affect the
Group’s ability to record, process, summarise and report
financial data; and
− Any
fraud, whether or not material,
involves
management or other employees who have a significant
role in the Group’s internal control over financial reporting.
that
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Group’s disclosure controls
and procedures as at 30 June 2006. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have
each concluded that the Group’s disclosure controls and
procedures are effective.
Changes in internal control over financial reporting
The following change in internal controls over financial reporting
occurred during the year ended 30 June 2006 that has materially
affected our internal controls over financial reporting:
• From 1 July 2005 a number of new processes and controls
were implemented and existing processes and controls
enhanced to address the transition to International Financial
Reporting Standards, refer to Note 1 (nn) to the Financial
Statements.
No other changes in our internal controls over financial reporting
occurred during the year ended 30 June 2006 that have
materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
Compliance with future requirements of the SOX Act
(Section 404)
New rules of the SOX Act in respect of internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) come into effect for the Group for the year ended
30 June 2007 (being the first financial year for the Group ending
after 15 July 2006). These rules require that the Group’s Chief
Executive Officer and Chief Financial Officer personally provide
certain certifications with respect to internal controls over
financial reporting in the Group’s 30 June 2007 annual report on
Form 20-F. The certifications required by the Group’s Chief
Executive Officer and Chief Financial Officer are as follows:
• That they designed internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under their supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles.
42 Commonwealth Bank of Australia Annual Report 2006
report,
together with
The Directors of the Commonwealth Bank of Australia submit
their
the
Commonwealth Bank of Australia (the ‘Bank’) and of the Group,
being the Bank and its controlled entities, for the year ended 30
June 2006.
report of
financial
the
The names of the Directors holding office during the financial
year and until the date of this report are set out below together
with details of Directors’ experience, qualifications, special
responsibilities and organisations in which each of the Directors
has declared an interest.
John M Schubert, Chairman
Dr Schubert has been a member of the Board since 1991 and
Chairman since November 2004. He is Chairman of the Board
Performance & Renewal Committee and a member of the Risk
and People & Remuneration Committees. He holds a Bachelor’s
Degree and PhD in Chemical Engineering and has executive
experience in the petroleum, mining and building materials
industries. Dr Schubert is the former Managing Director and
Chief Executive Officer of Pioneer International Limited and the
former Chairman and Managing Director of Esso Australia Ltd.
Chairman: G2 Therapies Limited.
Directors’ Report
A B (Tony) Daniels, OAM
Mr Daniels has been a member of the Board since March 2000
and is a member of the People & Remuneration and Risk
Committees. He has extensive experience in manufacturing and
distribution, being Managing Director of Tubemakers of Australia
for eight years to December 1995, during a long career with that
company. In addition to serving as a director of various public
companies, he has also worked with government
in
superannuation, competition policy and export facilitation. Mr.
Daniels will retire from the Board at the Annual General Meeting
on 3 November 2006.
Director: O'Connell St Associates.
Other Interests: Australian Institute of Company Directors
(Fellow) and Australian Institute of Management (Fellow).
Mr Daniels is a resident of New South Wales. Age 71.
Colin R Galbraith, AM
Mr Galbraith has been a member of the Board since June 2000
and is a member of the Board Performance & Renewal
Committee, and the Audit and Risk Committees. He is a special
advisor for Gresham Partners Limited.
Director: BHP Billiton Limited, BHP Billiton Plc, and Qantas
Airways Limited.
Chairman: BHP Billiton Community Trust.
Director: GasNet Australia (Group) and OneSteel Limited.
Other
Interests: Academy of Technological Science and
Engineering (Fellow), Institute of Engineers (Fellow), and AGSM
Advisory Board (Member).
Other Interests: CARE Australia (Director) and Royal Melbourne
Hospital Neuroscience Foundation (Trustee). Allens Arthur
Robinson (Special Advisor).
Dr Schubert is a resident of New South Wales. Age 63.
Mr Galbraith is a resident of Victoria. Age 58.
Ralph J Norris, DCNZM, Managing Director and Chief
Executive Officer
Mr Norris was appointed as Managing Director and Chief
Executive Officer with effect from 22 September 2005. Mr Norris
has been Chief Executive Officer and Managing Director of Air
New Zealand since February 2002 and had been a Director of
that company since August 1998. He retired from that Board in
August 2005 to take up his position with the Bank. He is a
member of the Risk Committee.
Prior to his appointment at Air New Zealand, Mr Norris had a 30
year career in banking. He was Chief Executive Officer of ASB
Bank Limited from March 1991 until September 2001 and Head
of International Financial Services from August 1999 until 2001.
In August 2005, Mr Norris retired from the Board of Fletcher
Building Limited where he had been a Director since 2001.
Other Interests: New Zealand Institute of Management (Fellow)
and New Zealand Computer Society (Fellow).
Mr Norris is a resident of New South Wales. Age 57.
Reg J Clairs, AO
Mr Clairs has been a member of the Board since March 1999
and is Chairman of the People & Remuneration Committee and
a member of the Risk Committee. As the former Chief Executive
thirty-three years
Officer of Woolworths Limited, he had
experience in retailing, branding and customer service.
Director: David Jones Limited and The Cellnet Group.
Other Interests: Australian Institute of Company Directors
(Member).
Mr Clairs is a resident of Queensland. Age 68.
S Carolyn H Kay
Ms Kay has been a member of the Board since March 2003 and
is also a member of the People & Remuneration and Risk
Committees. She holds Bachelor Degrees in Law and Arts and a
Graduate Diploma
in Management. She has extensive
experience in international finance. She was a senior executive
at Morgan Stanley in London and Melbourne for 10 years and
prior to that she worked in international banking and finance both
as a lawyer and banker in London, New York and Melbourne.
Director: Symbion Health Limited, Brambles Industries Ltd,
Brambles Industries Plc.
Other Interests: Australian Institute of Company Directors
(Fellow). Allens Arthur Robinson (External Member of the
Board), Starlight Foundation (Director).
Ms Kay is resident in New South Wales. Age 44.
Warwick G Kent, AO
Mr Kent has been a member of the Board since June 2000 and
is a member of the Audit and Risk Committees. He was
previously a Director of Colonial Limited, appointed 1998. He
was Managing Director and Chief Executive Officer of BankWest
until his retirement in 1997. Prior to joining BankWest, Mr Kent
had a long and distinguished career with Westpac Banking
Corporation.
Chairman: Coventry Group Limited and West Australian
Newspapers Holdings Limited.
Director: Hoyts Corporation Pty Ltd.
Other Interests: Walter and Eliza Hall Trust (Trustee), Australian
Institute of Company Directors (Fellow), Australian Society of
CPAs (Fellow), Finsia (Senior Fellow) and the Chartered
Institute of Company Secretaries (Fellow).
Mr Kent is a resident of Western Australia. Age 70.
Commonwealth Bank of Australia Annual Report 2006 43
Directors’ Report
Fergus D Ryan
Mr Ryan has been a member of the Board since March 2000
and is Chairman of the Audit Committee and a member of the
Risk Committee. He has extensive experience in accounting,
audit, finance and risk management. He was a senior partner of
Arthur Andersen until his retirement in August 1999 after thirty
three years with that firm including five years as Managing
Partner Australasia. Until November 2002, he was Strategic
Investment Co-ordinator and Major Projects Facilitator for the
Commonwealth Government.
Member: Prime Minister's Community Business Partnership and
Chairman of the Partnership Sub Committee on Corporate
Social Responsibility.
Director: Australian Foundation Investment Company Limited,
Clayton Utz, National Australia Day Council and Deputy
Chairman for National Library of Australia.
Other Interests: Committee for Melbourne (Patron), Pacific
Institute (Counsellor) and Special Committee for Mature Age
Workers (Chairman).
Mr Ryan is a resident of Victoria. Age 63.
Frank J Swan
Mr Swan has been a member of the Board since July 1997 and
is Chairman of the Risk Committee and a member of the Board
Performance and Renewal Committee. He holds a Bachelor of
Science degree and has twenty three years senior management
experience in the food and beverage industries.
Chairman: Foster's Group Limited and Centacare Catholic
Family Services.
Other Interests: Institute of Directors (Fellow), Australian Institute
of Company Directors (Fellow) and Australian Institute of
Management (Fellow).
Mr Swan is a resident of Victoria. Age 65.
Barbara K Ward
Ms Ward has been a member of the Board since 1994 and is a
member of the Audit and Risk Committees. She holds a
Bachelor of Economics and Master of Political Economy and
has experience in policy development and public administration
as a senior ministerial adviser and experience in the transport
and aviation industries, most recently as Chief Executive of
Ansett Worldwide Aviation Services. Ms Ward will retire from the
board at the Annual General Meeting on 3 November 2006.
Chairperson: Country Energy.
Director: Lion Nathan Limited, Allco Finance Group Limited,
Multiplex Limited and Multiplex Funds Management Limited.
Other Interests: Sydney Opera House Trust (Trustee), Australia
Day Council of New South Wales (Member) and Australian
Institute of Company Directors (Member).
David V Murray, Retired 22 September 2005
Mr Murray had been a member of the Board and Chief
Executive Officer since June 1992 and was a member of the
Risk Committee. He holds a Bachelor of Business, Master of
Business Administration, an honorary PhD from Macquarie
University and has thirty-eight years experience in banking.
Chairman: Future Fund Australia and Business/Industry/Higher
Education Collaboration Council.
Director: Tara Anglican School for Girls Foundation Limited.
Other Interests: International Monetary Conference (Member),
Asian Bankers’ Association (Member), Australian Bankers’
Association (Member), Asia Pacific Bankers' Club (Member),
Business Council of Australia (Member), and the Financial
Sector Advisory Council (Member).
Mr Murray is a resident of New South Wales. Age 57.
David J Turner, appointed 1 August 2006
Mr Turner is CEO of Brambles, having occupied that role since
October 2003. He joined Brambles as Chief Financial Officer in
August 2001 having previously been Finance Director of GKN
plc. Mr Turner has also served as a member of the Board of
Whitbread plc from December 2000 until March 2006. He is a
Fellow of The Institute of Chartered Accountants in England and
Wales and has wide experience in finance, international
business and governance.
Director: Brambles Enterprises Limited, Brambles Finance
Limited, Brambles Holdings (UK) Limited, Brambles Industries
Limited, Brambles Industries plc, Brambles Limited, CHEP
International Inc.
Mr Turner is a resident of New South Wales. Age 61.
Jane Hemstritch, appointment effective 9 October 2006
Mrs Hemstritch is Managing Director - Asia Pacific, Accenture
Limited, having been appointed to that role in November 2004.
She is a member of Accenture's global executive leadership
team and oversees the management of Accenture's business
portfolio in Asia Pacific. Mrs Hemstritch joined the company in
1982, became a partner in 1988 and has held several leadership
roles within that organisation prior to being appointed to her
current position. She holds a Bachelor of Science Degree in
Biochemistry and Physiology and has professional expertise in
technology, communications, change management and
accounting. She also has experience across the financial
services,
telecommunications, government, energy and
manufacturing sectors and in business expansion in Asia.
Other Interests: Institute of Chartered Accountants in Australia
(Fellow), Institute of Chartered Accountants in England and
Wales (Fellow), Business Council of Australia (Member) and
Chief Executive Women Inc. (Member)
Ms Ward is a resident of New South Wales. Age 52.
Mrs Hemstritch is a resident of Victoria. Age 53.
44 Commonwealth Bank of Australia Annual Report 2006
Other Directorships
The Directors held directorships on other listed companies within the last three years as follows:
Directors’ Report
Director
Company
J M Schubert
BHP Biliton Limited
BHP Biliton Plc
Qantas Limited
Worley Group Limited
R J Norris
Air New Zealand Limited
Fletcher Building Limited
R J Clairs
David Jones Limited
Cellnet Group Limited
A B Daniels
The Australian Gas Light Company
Orica Limited
C R Galbraith
OneSteel Limited
GasNet Australia Group
S C H Kay
W G Kent
Symbion Health Limited
Brambles Industries Limited
Brambles Industries Plc
West Australian Newspaper Holdings Limited
Coventry Group Limited
Perpetual Trustees Australia Limited (Group)
F D Ryan
Australian Foundation Investment Company Limited
F J Swan
B K Ward
Foster’s Group Limited
National Foods Limited
Southcorp Limited
Lion Nathan Limited
Multiplex Group
Allco Finance Group Limited
Directors’ Meetings
Date Appointed
Date of Ceasing
(if applicable)
01/06/2000
29/06/2001
23/10/2000
28/11/2002
18/02/2002
17/04/2001
22/02/1999
01/07/2004
04/08/1999
01/03/1995
25/10/2000
17/12/2001
28/09/2001
01/06/2006
01/06/2006
02/02/1998
01/07/2001
01/05/1998
08/08/2001
25/10/1999
11/03/1997
26/05/2005
20/02/2003
26/10/2003
29/04/2005
28/02/2005
30/08/2005
09/08/2005
18/10/2005
17/12/2003
31/07/2005
30/06/2005
29/07/2005
The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the
Directors of the Commonwealth Bank of Australia during the financial year were:
Director
J M Schubert
R J Norris
R J Clairs
A B Daniels
C R Galbraith
S C H Kay
W G Kent
F D Ryan
F J Swan
B K Ward
D V Murray
(1) The number of meetings held during the time the Director was a member of the Board.
No. of Meetings
(1)
Held
9
7
9
9
9
9
9
9
9
9
2
No. of Meetings
Attended
9
7
9
9
9
9
9
9
9
9
2
Commonwealth Bank of Australia Annual Report 2006 45
Directors’ Report
Committee Meetings
Risk Committee
Audit Committee
People & Remuneration
Committee
Director
J M Schubert
R J Norris
R J Clairs
A B Daniels
C R Galbraith
S C H Kay
W G Kent
F D Ryan
F J Swan
B K Ward
D V Murray
Director
J M Schubert
C R Galbraith
F J Swan
No. of Meetings
(1)
Held
6
5
6
6
6
6
6
6
6
6
1
No. of Meetings
Attended
6
5
6
5
6
6
6
6
5
6
1
No. of Meetings
(1)
Held
6
No. of Meetings
Attended
5
No. of Meetings
(1)
Held
8
No. of Meetings
Attended
8
6
6
6
6
6
6
6
5
8
8
8
8
8
8
Board Performance & Renewal
Committee
No. of Meetings
(1)
Held
4
4
4
No. of Meetings
Attended
4
4
4
(1) The number of meetings held during the time the Director was a member of the relevant committee
Principal Activities
integrated
financial services
institutional banking, superannuation,
The Commonwealth Bank Group is one of Australia’s leading
including retail,
providers of
business and
life
insurance, general insurance, funds management, broking
services and finance company activities. The principal activities
of the Commonwealth Bank Group during the financial year
were:
(i) Banking
The Group provides a full range of retail banking services
including housing loans, credit cards, personal loans, savings
and cheque accounts, and demand and term deposits. The
Group has leading domestic market shares in home loans, credit
cards, retail deposits and discount stockbroking, and is one of
Australia’s largest issuers of personal loans. The Group also
offers a full range of commercial products including business
loans, equipment and trade finance, and rural and agribusiness
products. For our corporate and institutional clients, we offer a
broad range of structured finance, equities and advisory
solutions, financial markets and equity markets solutions,
transactions banking, and merchant acquiring.
The Group has full service banking operations in New Zealand,
Fiji and Indonesia.
The Group also has wholesale banking operations in London,
New York, Hong Kong, Singapore, Indonesia, China, Tokyo and
Malta.
(ii) Funds Management
The Group is Australia’s largest funds manager and largest retail
funds manager in terms of its total value of Funds under
Administration, and is Australia’s largest manager in retail
superannuation, allocated pensions and annuities by funds
under management. The Group’s funds management business
is managed as part of the Wealth Management division. This
business manages a wide range of wholesale and retail
investment, superannuation and retirement funds. Investments
are across all major asset classes including Australian and
International shares, property, fixed interest and cash.
46 Commonwealth Bank of Australia Annual Report 2006
The Group also has funds management businesses in New
Zealand, the UK and Asia.
(iii) Insurance
The Group provides term life insurance, investment contracts,
annuities, master trusts, investment products and household
general insurance.
The Group is Australia’s largest insurer based on life insurance
assets held.
Life insurance operations are also conducted in New Zealand,
where the Group has the leading market share, and throughout
Asia and the Pacific.
There have been no significant changes in the nature of the
principal activities of the Group during the financial year.
Consolidated Profit
Consolidated operating profit after tax and minority interests for
the financial year ended 30 June 2006 was $3,928 million (2005:
$3,400 million).
The net operating profit for the year ended 30 June 2006 after
tax, and before superannuation plan expense, treasury share
valuation adjustment, shareholder investment returns, and sale
of the Hong Kong insurance business was $3,842 million. This is
an increase of $422 million or 12% over the year ended 30 June
2005.
The principal contributing factors to the profit increase were
strong growth in banking income following growth in average
interest earning assets. Funds management and insurance
income growth was also strongly supported by growth in Funds
under Administration and solid growth in inforce premiums.
Underlying Expense growth was 5%, driven by average salary
increases, the commencement of spend on a number of
strategic initiatives and, ongoing compliance expenditure partly
offset by the realisation of expense savings from Which new
Bank initiatives.
During the period September 2003 to June 2006, the Bank
implemented the Which new Bank program, a program of
investment focused on improving customer service and people
engagement and simplifying processes. The Bank made
significant progress during this time, and financial targets for the
program were met and, in some cases, exceeded.
In March 2006, the Bank announced an evolutionary strategic
direction that builds directly on the progress achieved through
Which new Bank and the Bank’s inherent strengths. The
lift business
strategy
performance and growth: Customer Service; Business Banking;
Technology and Operational Excellence; and Trust and Team
Spirit.
four key priorities
focuses on
to
Dividends
The Directors have declared a fully franked (at 30%) final
dividend of 130 cents per share amounting to $1,668 million.
The dividend will be payable on 5 October 2006 to shareholders
on the register at 5pm on 18 August 2006. Dividends paid in the
year to 30 June 2006 were as follows:
• As declared in the 30 June 2005 Annual Report, a fully
franked final dividend of 112 cents per share amounting to
$1,435 million was paid on 23 September 2005. The
payment comprised cash disbursements of $1,172 million
with $262 million being reinvested by participants through the
Dividend Reinvestment Plan; and
•
In respect of the year to 30 June 2006, a fully franked interim
dividend of 94 cents per share amounting to $1,211 million
was paid on 5 April 2006. The payment comprised cash
disbursements of $992 million with $219 million being
reinvested
the Dividend
Reinvestment Plan.
participants
through
by
Review of Operations
An analysis of operations for the financial year is set out in the
Highlights and Analysis sections
for Banking, Funds
Management and Insurance on pages 6 to 13, 20 to 21 and 24
to 25. A review of the financial condition of the Bank is set out in
the Highlights on page 6.
Changes in State of Affairs
During the year, the Bank continued to make significant
progress in implementing a number of strategic initiatives.
The initiatives are designed to ensure a better service outcome
for the Bank’s customers.
Progress within the major initiatives included the following:
• The implementation of CommServe, a training program
designed to ensure our people are able to obtain maximum
value from CommSee (the Bank’s state-of-the-art customer
management system) in improving Sales and Service
outcomes. Over 14,000 staff undertook CommServe training
during 2006;
• The refurbishment of a further 133 branches, taking to 384
the number of branches refurbished over the past 3 years
into a design/layout more conducive to effective sales and
service;
•
Improved access to Australia’s largest electronic banking and
branch network through two new Streamline products with
flat monthly fees, and the removal of transaction fees from
NetBank;
• The introduction of the Business Online Saver high yield
investment account, the Commonwealth Portfolio Loan
product and the Business Line of Credit, all of which have
reached $1 billion in balances;
Directors’ Report
• Continued platform enhancements and new product offerings
including the development of a self managed super offering
“YourChoice”, to capitalise on this rapidly growing sector of
the market;
• Strategic alliance formed between Avanteos and Goldman
Sachs JB Were, which has contributed $5.0 billion of
additional net funds flow;
• Acquisition of the Gandel Group’s interests in the Colonial
First State Property Retail Trust and Gandel Retail
Management Trust, which provides funds management and
property management services to a number of Colonial First
State Retail Property trusts;
On 22 September 2005 the Managing Director and Chief
Executive Officer Mr. David Murray retired from the Group, and
the Board appointed Mr. Ralph Norris to take over the role. Mr.
Norris was previously Managing Director and Chief Executive
Officer of Air New Zealand Limited, and prior to that was
Managing Director and Chief Executive Officer of ASB Bank
Limited.
The Hong Kong insurance business was sold during the year for
a profit of $145 million.
There were no other significant changes in the state of affairs of
the Group during the financial year.
Events Subsequent to Balance Date
On 11 July 2006 the appointment of Mr. David Turner as a
Director was announced. Mr. Turner’s appointment is effective
from 1 August 2006.
On 20 July 2006 the Bank concluded agreements to dispose of
all holdings in its Loy Yang investment to several parties, for total
net proceeds of approximately $175 million. This has resulted in
a profit on sale of approximately $70 million.
On 25 July 2006 the appointment of Mr. David Craig as Chief
Financial Officer was announced. Mr. Craig’s appointment is due
to commence in September 2006.
On 8 August 2006 the retirement of Mr Tony Daniels and Ms
Barbara Ward from the Board of the Bank and the appointment
of Mrs Jane Hemstritch as a Director of the Bank was
announced. Mr Daniels and Ms Ward will retire at the Bank’s
Annual General Meeting on 3 November 2006 and Mrs
Hemstritch’s appointment will take effect from 9 October 2006.
The Directors are not aware of any other matter or circumstance
that has occurred since the end of the financial year that has
significantly affected or may significantly affect the operations of
the Group, the results of those operations or the state of affairs
of the Group in subsequent financial years.
Business Strategies and Future Developments
Accommodation Strategy
On 12 July 2006 the Bank announced its strategy to relocate
approximately 5,000 staff from the Sydney central business
district to Sydney Olympic Park or Parramatta by 2009-2010.
This would result in rationalisation of the existing Sydney CBD
property space.
At this stage, it is not anticipated this will have a material
financial impact on the Bank’s financial results.
In the majority of cases the relocations are in line with the Bank’s
lease expiry profile. Where lease expiries occur beyond the
relocation dates opportunities will be taken to sub-let the space
in order to avoid shortfalls in rentals.
Commonwealth Bank of Australia Annual Report 2006 47
Directors’ Report
Business Strategies
Articles 19.2 and 19.4 apply:
Business strategies, prospects and future developments, which
may affect the operations of the Group in subsequent financial
years, are referred to in the Chairman’s Statement on page 2. In
the opinion of the Directors, disclosure of any further information
on likely developments in operations would be unreasonably
prejudicial to the interests of the Group.
Environmental Regulation
The Bank and its controlled entities are not subject to any
particular or significant environmental regulation under a law of
the Commonwealth or of a State or Territory, but can incur
environmental liabilities as a lender. The Bank has developed
credit policies to ensure this is managed appropriately.
Directors’ Shareholdings
Particulars of shares held by Directors in the Commonwealth
Bank or in a related body corporate are set out in the
Remuneration Report within this report.
Options
An Executive Option Plan
(“EOP”) was approved by
shareholders at the Annual General Meeting on 8 October 1996
and its continuation was further approved by shareholders at the
Annual General Meeting on 29 October 1998. At the 2000
Annual General Meeting, the EOP was discontinued and
shareholders approved the establishment of the Equity Reward
Plan (“ERP”). The last grant of options to be made under the
ERP was the 2001 grant, with options being granted on 31
October 2001, 31 January 2002 and 15 April 2002. A total of
3,007,000 options were granted by the Bank to 81 executives in
the 2001 grant. During the financial year, the performance
hurdle for the 2001 ERP grant was met. All option grants have
now met their specified performance hurdles. During the
financial year and for the period to the date of this report
2,741,600 shares were allotted by the Bank consequent to the
exercise of options granted under the EOP and ERP. Full details
of the Plan are disclosed in Note 33 to the financial statements.
No options have been allocated since the beginning of the
2001/2002 financial year.
The names of persons who currently hold options in the Plan are
entered in the register of option holders kept by the Bank
pursuant to Section 170 of the Corporations Act 2001. The
register may be inspected free of charge.
For details of the options previously granted to the Chief
Executive Officer, being a Director, refer to the Remuneration
Report within this report.
Directors’ Interests in Contracts
A number of Directors have given written notices, stating that
they hold office in specified companies and accordingly are to be
regarded as having an interest in any contract or proposed
contract that may be made between the Bank and any of those
companies.
Directors’ and Officers’ Indemnity
Articles 19.1, 19.2 and 19.3 of the Commonwealth Bank of
Australia’s Constitution provides:
“19. Indemnity
19.1 Persons to whom articles 19.2 and 19.4 apply
(a) to each person who is or has been a director, secretary or
senior manager of the company; and
(b) to such other officers, employees, former officers or former
employees of the company or of its related bodies corporate as
the directors in each case determine,
(each an “Officer” for the purposes of this article).
19.2 Indemnity
The company must indemnify each Officer on a full indemnity
basis and to the full extent permitted by law against all losses,
liabilities, costs, charges and expenses (“Liabilities”) incurred by
the Officer as an officer of the company or of a related body
corporate.
19.3 Extent of indemnity
The indemnity in article 19.2:
(a) is enforceable without the Officer having to first incur any
expense or make any payment;
(b) is a continuing obligation and is enforceable by the Officer
even though the Officer may have ceased to be an officer of the
company or its related bodies corporate; and
(c) applies to Liabilities incurred both before and after the
adoption of this constitution.”
An indemnity for employees, who are not directors, secretaries
or senior managers, is not expressly restricted in any way by the
Corporations Act 2001.
The Directors, as named on pages 43 and 44 of this report, and
the Secretaries of the Commonwealth Bank of Australia, being J
D Hatton, H J Broekhuijse (resigned 12 July 2005) and C F
Collingwood (appointed 12 July 2005) are indemnified under
article 19.1, 19.2 and 19.3 as are all the senior managers of the
Commonwealth Bank of Australia.
A deed poll has been executed by Commonwealth Bank of
Australia consistent with the above articles in favour of each
secretary and senior manager of the Bank, each director,
secretary and senior manager of a related body corporate of the
Bank (except where in the case of a partly owned subsidiary the
person is a nominee of an entity which is not a related body
corporate of the Bank unless the Bank's Chief Executive Officer
has certified that the indemnity shall apply to that person), and
any employee of the Bank or any related body corporate of the
Bank who acts as a director or secretary of a body corporate
which is not a related body corporate of the Bank.
Directors’ and Officers’ Insurance
The Commonwealth Bank has, during the financial year, paid an
insurance premium in respect of an insurance policy for the
benefit of those named and referred to above and the directors,
secretaries, executive officers and employees of any related
bodies corporate as defined in the insurance policy. The
insurance grants indemnity against liabilities permitted to be
indemnified by the company under Section 199B of the
Corporations Act 2001. In accordance with commercial practice,
the insurance policy prohibits disclosure of the terms of the
policy including the nature of the liability insured against and the
amount of the premium.
48 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Remuneration Report
Introduction
Changes since 2005
People & Remuneration Committee
Compensation Policy
Compensation Structure
Current Target Potential Compensation Mix for Executives
Short Term Incentive (STI) Arrangements
Long Term Incentive (LTI) Arrangements
Summary of performance hurdles for Employee Reward Plan (ERP) grants
Bank Performance
Short Term Performance – 2005/2006
Cash NPAT performance 2002 – 2006
Cash EPS performance 2002 – 2006
Long Term Performance
LTI Grant Performance
Share Price
Dividends per Share
Directors’ Compensation
Managing Director and CEO
Non-Executive Directors
Details of Components of Non-Executive Directors’ fees
Directors’ Retirement Allowance Scheme
Compensation of Directors
Compensation of Executives
Termination Arrangements
STI Allocations to Executives for the Year Ended 30 June 2006
LTI Allocations to Executives (under 2005 ERP Grant) in the Year Ended 30 June 2006
Equity Holdings of Key Management Personnel and Other Executives
Shares held by Directors
Shares held by Executives
Option Holdings of Key Management Personnel and Other Executives
Shares Vested and Options Exercised During the Year
Loans to Key Management Personnel and Other Executives
Terms and Conditions of Loans
Other Transactions of Key Management Personnel, Other Executives and Other Related Parties
Audit
51
51
51
51
52
53
53
53
54
55
55
55
55
56
56
56
56
57
57
57
58
58
59
60
61
62
62
63
63
64
65
66
67
68
68
68
Commonwealth Bank of Australia Annual Report 2006 49
Directors’ Report - Remuneration Report
To assist readers a number of key terms and abbreviations used in the Remuneration Report are set out below
Term
Definition
Australian Equivalent
to International
Financial Reporting
Standards (AIFRS)
Australian Generally
Accepted Accounting
Principles (AGAAP)
Base Compensation
The Australian equivalent to International Financial Reporting Standards (AIFRS) adopted by the Bank from 1
July 2005.
The financial reporting standards adopted by the Bank up to the year ended 30 June 2005. The 2005
comparatives have been restated for AIFRS.
Calculated on a total cost basis and includes any Fringe Benefits Tax charges related to employee benefits
including motor vehicles.
Board
The Board of Directors of the Bank.
Committee
The People and Remuneration Committee of the Board of Bank.
Compensation
All forms of consideration paid, payable or provided by the Bank, or on behalf of the Bank, in exchange for
services rendered to the Bank.
Earnings Per Share
(EPS)
Equity Reward Plan
(ERP)
Fixed Compensation
The portion of a company's net profit after tax allocated to each outstanding share of common stock.
The Bank's long term incentive scheme.
Consists of Base Compensation, as well as employer contributions to superannuation. For further details please
refer to page 53.
Group
Commonwealth Bank of Australia and its subsidiaries.
International
Financial Reporting
Standards (IFRS)
Reporting standards which have been adopted by the International Accounting Standards Board (IASB), an
independent, international organisation supported by the professional accountancy bodies. The objective is to
achieve uniformity and transparency in the accounting principles used by businesses and other organisations for
financial reporting globally.
Key Management
Personnel
Persons having authority and responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise) of that entity. In addition to Key
Management Personnel, there are separate disclosure requirements for Directors and Executives of the Bank.
Long Term Incentive
(LTI)
LTI grants to Executives are delivered in the form of ordinary shares in the Bank that vest if, and to the extent
that, a performance hurdle is met. For further details please refer to page 53.
Options
A right to acquire a Bank share on payment of an exercise price if relevant performance hurdles are met.
Other Executives
Other Executives are those who are not Key Management Personnel but are amongst the Executives for whom
disclosure is required in accordance with section 300A(1)(c) of the Corporations Act 2001.
Peer Group
The group of competitors that the Bank's long term incentive plan is compared to in order to determine if the
performance hurdle is met.
Performance Hurdle
The criteria relating to the Bank's long term incentive plan that must be met in order for shares to partially or fully
vest within the plan.
Reward Shares
Shares in the Bank granted under the Equity Reward Plan and subject to a performance hurdle.
Short Term Incentive
(STI)
Compensation paid with direct reference to the individual’s performance over the preceding financial year. For
further details please refer to page 53.
Salary Packaging
An arrangement where an employee agrees to forego part of his or her base compensation in return for non-
cash benefits of a similar value.
STI Deferral
Withholding a portion of short term incentives in cash for one year for the CEO and Executives who, in a
reporting sense, are no more than two levels removed from the CEO. For further details please refer to page 53.
Total Shareholder
Return (TSR)
TSR is calculated by combining the reinvestment of dividends and the movement in the Bank’s share price. TSR
is utilised as a performance hurdle for the Bank's long term incentive plan.
50 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
the Bank and
Introduction
This report details the Bank’s compensation policy for Directors
and Key Management Personnel and the links between the
performance of
individual compensation
outcomes. Compensation arrangements, including details of
equity holdings, loans and other transactions for Directors and
Key Management Personnel of the Bank, are also disclosed. In
compiling
the disclosure
requirements of accounting standard AASB124 as well as those
prescribed by the Corporations Act 2001.
the Bank has met
this report
Changes since 2005
Changes arising from revision of Accounting Standards
The 2005 Remuneration Report was compiled in accordance
the disclosure requirements of accounting standard
with
AASB1046 as well as those prescribed by the Corporations Act
2001. Following publication of the 2005 Report, AASB1046 was
replaced by AASB124.
The key differences in reporting under the revised AASB124 are:
• Disclosure of compensation for ‘Key Management Personnel’
as opposed to ‘Specified Executives’ previously. AASB1046
defined a ‘Specified Executive’ as someone who is directly
accountable and responsible for the strategic and operational
management of an organisation. In 2005, the Bank was
required to disclose details of compensation for the five
employees, excluding Directors, with the greatest authority in
this area. The Bank took the view that all members of its
Executive Committee have significant influence over the
strategic direction of the Bank, and accordingly defined all
nine of its Group Executives as Specified Executives for
disclosure purposes. This approach is consistent with the
definition of Key Management Personnel required under
AASB124, used in compiling the 2006 report;
• Changes in the sub-categories of compensation that are
reported. AASB124 requires the breakdown to be in five
categories – short term benefits, post-employment benefits,
other long term benefits, termination benefits and share-
based payments. This differs from AASB1046 which required
four categories – primary benefits, post employment benefits,
equity benefits and other benefits; and
• AASB124 requires the Bank to use a fair value calculation to
determine the value of reward shares to be disclosed for
each Executive. The fair value approximates the number of
shares that are expected to vest in the participants over the
expected vesting period. This has resulted in changes in the
calculation of long term incentives (LTI) values being
disclosed since 2004/05, including some negative values for
Executives who forfeited their entitlements to reward shares
upon exiting the Bank.
Long Term Incentive (LTI) design change – Equity
Reward Plan (ERP)
In 2006 the Bank reviewed and will implement the following
changes to ERP design features for future grants:
• Restriction of re-testing from four occasions to one occasion,
12 months after initial testing, at which time a maximum of
50% only of the original grant may vest; and
• The use of a straight line vesting scale with 50% vesting at
the 51st percentile, through to 100% vesting at the 75th
percentile. Previous vesting commenced when Bank
performance met the 50th percentile, with 100% vesting at
the 75th percentile, but the scale was tiered with accelerated
straight line vesting where performance exceeded the 67th
percentile.
People & Remuneration Committee
The Bank’s compensation arrangements are overseen by the
People & Remuneration Committee of the Board, which
currently consists of Mr R J Clairs (Chairman), Mr A B Daniels,
Ms S C H Kay and Dr J M Schubert. The Committee’s activities
are governed by its terms of reference which is available on the
Bank’s website at http://shareholders.commbank.com.au.
The Committee considers changes in compensation policy likely
to have a material impact on the Bank and is informed of
leadership performance, legislative compliance on employment
issues, industrial agreements and incentive plans operating
across the Bank.
The Committee also considers senior appointments and
compensation arrangements for senior management. The full
Board approves the compensation arrangements, performance
reviews and talent reviews for the Chief Executive Officer (CEO)
and Group Executives (senior direct reports to the CEO), as
outlined in the Corporate Governance Statement.
The policy of the Board is that the Committee shall consist
entirely of independent Non-Executive Directors. The CEO
attends Committee meetings by invitation but does not attend in
relation to matters that can affect him.
Compensation Policy
The Bank’s compensation systems complement and reinforce its
performance culture,
talent management
leadership and
systems. The compensation systems aim to:
• Attract and retain high calibre employees;
• Align individual and Bank goals; and
• Ensure
total compensation
is competitive by market
standards. Fixed compensation is generally set at the market
median and total compensation up to the 75th percentile for
performance. In this regard the Bank is careful not to
generate upward pressure on the market.
For Executives, this also aims to reward with an appropriate mix
of compensation according to their level in the organisation, with
a significant weighting towards both short term and long term
variable (‘at risk’) pay linked to performance. This weighting
increases at higher levels in the organisation. This focus aims to:
• Reward Executives
for Bankwide, business unit and
individual performance against targets set by reference to
appropriate benchmarks and against behavioural standards;
• Align the interests of Executives with those of shareholders;
and
• Link Executive
reward with
the strategic goals and
sustainable performance of the Bank.
In determining appropriate levels of Executive compensation,
the People & Remuneration Committee engages an external
consultant to provide independent advice. This ensures that the
compensation of Executives is set competitively compared to the
market. It also helps the Committee understand movements and
trends in Executive compensation that should be factored into
considerations regarding the compensation of Executives.
Compensation and terms and conditions of employment are
specified in an individual contract of employment with each
Executive, which is signed by the Executive and the Bank.
Commonwealth Bank of Australia Annual Report 2006 51
Directors’ Report - Remuneration Report
Compensation Structure
Compensation of the Bank’s Executives consists of three key elements:
• Fixed compensation;
• Short Term Incentive (STI); and
• Long Term Incentive (LTI).
The ‘mix’ of these components for each Executive varies according to their role, as outlined below.
The following diagram illustrates the annual cycle of the Bank’s compensation arrangements for senior executives.
Beginning of Year 1
1 July
1 January
End of Year 1
30 June
End of Year 2
The following is set for
each Executive :
• Fixed
Compensation
• STI (1) Potential
•
LTI (3) Potential
• Performance Plans
set (Including Key
Results Areas &
Behaviours)
• Mid Year Performance
• Annual Performance
Reviews conducted &
Reviews conducted
(cid:23)
50% of STI payment
deferred in cash (2) for 12
months
(cid:23)
Deferred STI (1) (2) paid in cash
after 12 months
(cid:23)
Performance Plans for
remainder of year
confirmed
• STI (1) payments
determined
(cid:23)
• Continuous
development
opportunities reviewed
(cid:23) Other 50% of STI (1)
payment paid in cash (2)
(cid:25)
(cid:25)
(cid:91)
End of Year 3
(first LTI measurement)
•
If TSR meets at least 51st percentile of LTI (3) peer group
shares fully vest and LTI (3) grant is closed
(cid:91)
(cid:22)
•
If TSR does not meet at least 51st percentile of LTI (3) peer
comparator group of companies at the 3 year point, no LTI
(3) shares vest at this point
End of Year 4
(second & final LTI measurement)
•
•
LTI (3) performance is re-tested
If TSR meets at least 51st percentile, a
maximum of 50% of the original allocation
will vest, otherwise, nothing vests.
•
In any case, LTI (3) grant is closed
(1) STI refers to Short Term Incentive
(2) STI deferral applies generally to the CEO and to executives who, in a reporting sense, are no more than three levels removed from the CEO. Payment is subject to
forfeiture on resignation or misconduct, including misrepresentation of performance outcomes.
(3) LTI refers to Long Term Incentive. LTI grant allocations are made by September each year. After three years the grant is measured against the performance hurdle to
assess what portion of the grant, if any, will vest at that time. Some re-testing can occur after that time. Refer to page 53 for further detail.
(4) Maximum vesting period of four years applies to all future LTI grants. Refer page 53 for further details.
The following table generally summarises the eligibility of each compensation element by Employee Group
Fixed
Compensation
Short Term
Incentive (STI)
Long Term
Incentive (LTI)
STI Deferral
(1)
Salary Packaging
(2)
CEO
Group Executive
Executive General Manager
General Manager
Executive Manager
Australian Workplace Agreement
Other Staff
((cid:51)) Eligible
((cid:85)) Ineligible
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:85)
(cid:85)
(cid:85)
(cid:51)
(cid:51)
(cid:51)
(cid:85)
(cid:85)
(cid:85)
(cid:85)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:85)
(1) STI Deferral also applies to certain General Managers and Executive Managers with relatively high levels of STI payments.
(2) Salary packaging refers to the option for employees to sacrifice base compensation for other benefits.
52 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Fixed Compensation
Variable (‘At Risk’) Compensation
Fixed compensation consists of base compensation (which is
calculated on a total cost basis and includes any FBT charges
related to employee benefits including motor vehicles) as well
as employer contributions to superannuation.
The relationship of fixed and variable compensation (potential
short term and long term incentives) is approved for each level
of executive management by the People & Remuneration
Committee.
Fixed compensation is competitively set so that the Bank can
attract, motivate and retain high calibre local and international
Executives.
Fixed compensation is reviewed annually by the People &
Remuneration Committee through a process that considers
relevant comparative compensation in the market and internal
and, where appropriate, external advice on policies and
practices. As noted above, the Committee has access to
external advice independent of management.
The Bank’s compensation structure is designed to motivate
employees for quality short and long term performance. The
mix between short term and long term variable components
maintains a focus on the sustainable short term performance of
the Bank, whilst ensuring a clear line of sight in positioning the
Bank for its longer term success.
The current target mix of compensation components for
Executives is illustrated in the following table.
Current target potential compensation mix for executives
CEO
Group Executives
Executive General Managers
General Managers
Fixed Component
(base compensation and
Superannuation) %
25
STI
Component
%
25
LTI
Component
%
50
30
40
50
30
30
35
40
30
15
the structure
Where market practice requires,
for some
specialist (high revenue-generating) roles differs from that which
to Executive management. For such
applies generally
specialists, a greater proportion of the variable component of
compensation may be in short term rather than long term
incentives but the overall mix of compensation is still heavily
weighted towards ‘at risk’ pay.
For payments made in recognition of performance for the year
ended 30 June 2006, where STI deferral applies, the STI
payments are delivered in two components –
• 50% paid as immediate cash payment; and
• 50% in cash deferred for one year. Generally, the Executive
will need to be an employee of the Bank at the end of the
deferral period to receive this portion.
Short Term Incentive (STI) Arrangements
Long Term Incentive (LTI) Arrangements
Employees at all levels of the Bank participate in STI
arrangements.
Actual STI payments for Executives depend on the extent to
which operating targets and behaviour standards set at the
beginning of the financial year are met.
Depending on the Executive’s level within the organisation, any
actual STI payments received are based on a combination of
Bankwide, business unit and individual performance.
On an annual basis, after consideration of performance against
Key Result Areas, the Board approves an overall performance
rating for the Bank and each business unit. The Executive’s
manager assesses individual performance based on the Bank’s
Performance
(Performance
and
Management) system.
Feedback
Review
Executives generally do not receive a performance payment if
their individual performance is not ‘meeting expectations’. Such
situations would be under active performance management.
The aggregate of annual STI payments available for Executives
across the Bank is subject to the approval of the People &
Remuneration Committee. In the case of the CEO and Group
Under the Bank’s Equity Reward Plan (ERP), LTI grants to
Executives are delivered in the form of ordinary shares in the
Bank that vest in the Executive if and to the extent that a
performance hurdle is met.
LTI grants are made to Executives who are able to directly
influence the generation of shareholder wealth and thus the
Bank’s performance against the relevant hurdle. Participation is
thus restricted to Executives who, in a reporting sense, are no
more than three levels removed from the CEO.
The quantum of grants made to each Executive depends on
their level within the organisation and has regard to the desired
mix between fixed compensation, short term and long term
incentive as well as the performance and potential of the
individual Executive.
The Bank’s LTI plans do not allow the participants to hedge
their exposure to unvested shares or reduce the risk associated
with the performance hurdles in any way. The Bank has never
put in place any enablers to facilitate hedging arrangements.
Commonwealth Bank of Australia Annual Report 2006 53
Directors’ Report - Remuneration Report
No value will accrue to the Executive unless the Bank’s Total
Shareholder Return (TSR) at least meets the 51st percentile of
a peer comparator group of companies over a three to four year
period. This was the 50th percentile prior to the 2006 grant. The
percentage of shares vesting in the Executive rises with
increased performance. To receive the full value of the LTI
grant, the Bank’s performance must be in the top quartile of the
peer group.
The ERP arrangements represent a restriction of re-testing from
the previous four occasions to one occasion, 12 months after
initial testing, at which time a maximum of 50% only of the
original grant may vest.
The table below provides a summary of the ERP grants from
previous years that were in operation during the year ended 30
June 2006.
Summary of performance hurdle for Employee Reward Plan (ERP) grants
Performance measurement
From
To
Additional measurement
opportunities
Expiry Date if
Exercisable
Status as at
30 June 2006
Vesting Scale
Performance Hurdle (2)
2002 Grant
(1)
2003 Grant
2004 Grant
2005 Grant
2 Aug 2002
3 Oct 2005
Every Six months from
3 Aug 2005 until
2 Oct 2007
2 Oct 2007
1 Aug 2003
2 Oct 2006
Every Six months from
2 Aug 2006 until
1 Oct 2008
1 Oct 2008
23 Sept 2004
24 Sept 2007
Every Six months from
24 Sept 2007 until
23 Sept 2009
23 Sept 2009
15 Jul 2005
16 Jul 2008
Every Six months from
16 July 2008 until
15 July 2010
14 July 2010
30th percentile
50th percentile
51st percentile
40th percentile
<50th percentile = Nil shares
50th – 67th percentile = 50% - 75% of shares
68th -75th percentile = 76% - 100% of shares
TSR vs Peer Group. Where the rating is at least at the 50th percentile on the third anniversary of the grant, the
shares will vest at a time nominated by the Executive, within the half yearly windows, over the next two years.
The vesting percentage will be the higher of the rating determined at the third anniversary of the grant and the
rating determined at the half yearly measurement point at which the Executive nominates that the shares will
vest.
Where the rating is below the 50th percentile on the third anniversary of the grant, the shares can still vest if the
rating reaches the 50th percentile at one of the half yearly measurement points prior to the fifth anniversary, but
the maximum vesting will be 50%.
(1) The 2002 Grant did not meet the performance hurdle at the first or second measurement points.
(2) Amendments have been made for the 2006 grant to adopt a straight line vesting scale with 50% vesting at the 51st percentile, through to 100% vesting at the 75th
percentile. Previous vesting commenced when Bank performance met the 50th percentile, with 100% vesting at the 75th percentile but the scale was tiered with
accelerated straight line vesting where performance exceeded the 67th percentile. A restriction of re-testing from four occasions to one occasion, 12 months after
initial testing, at which time a maximum of 50% only of the original grant may vest has also been implemented for 2006 and future grants.
The use of a relative TSR based hurdle ensures an alignment
between comparative shareholder return and reward
for
Executives.
In assessing whether the performance hurdles for each grant
have been met, the Bank receives independent data from
Standard & Poor’s which provides both the Bank’s TSR growth
from the commencement of each grant and that of the peer
group (excluding the Bank). The Bank’s performance against
the hurdle is then determined by ranking each company in the
peer group and the Bank in order of TSR growth from the
commencement of each grant. A weighting for each company in
the market
the peer group
capitalisation of the relevant company by the total market
capitalisation of the peer group. The Bank’s percentile ranking is
determined by aggregating the calculated weighting of each
company ranked below the Bank.
is determined by dividing
The peer group chosen for comparison reflects the Bank’s
business mix and currently consists of:
Adelaide Bank
Macquarie Bank
AMP
National Australia Bank
Australian & New Zealand
Banking Group
QBE insurance
AXA
St George
Bank of Queensland
Suncorp-Metway
Bendigo Bank
Westpac Banking Group
IAG
The Bank is excluded from this group.
Further details of the ERP are in Note 33 to the Financial
Statements.
54 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Bank Performance
Short Term Performance – 2005/2006
The Bank’s Short Term Incentive framework is underpinned by
a performance management system through which all staff are
assessed on outcomes and behaviours. Staff have common
Key Result Areas in Customer Service, People Engagement
and Business Outcomes. All executives of the Bank in roles of
General Manager and above are assessed in relation to a
‘Special Task’ / Project which is designed to ensure continuing
focus beyond business as usual and to enhance Bankwide
collaboration.
Summary of Bank Performance
Within the Key Result Areas, particular emphasis is given to the
Bank’s four strategic priorities of Customer Service, Business
Banking, Technology and Operational Excellence and Trust
and Team Spirit when assessing performance.
Below is a description of the Bank’s performance in each of the
Key Result Areas.
Key Result Area
Customer Service
People Engagement
Business Outcomes
Commentary
the
times,
turnaround
implementation of CommSee and CommServe,
The Bank’s vision is ‘to be Australia’s finest financial services organisation through excelling in customer
service’. The Bank has made progress as a result of the Which new Bank program, through enhanced
further branch
customer
refurbishments and, more recently, the introduction of new products, removal of transaction fees from
NetBank and the opening of some branches on Saturdays for convenient banking.
In March 2006 the Bank announced an evolutionary strategic direction for the next phase of the Bank’s
development. The strategy draws on the Bank’s strengths and attributes and identifies areas of opportunity
and brings together these two elements to ensure customers benefit in a way that is important to them.
It is expected that the impact during 2006/2007 of service initiatives already completed and being
implemented will add further to the Bank’s competitiveness, customer satisfaction levels and ultimately the
Bank’s market share in profitable areas.
There have been solid people engagement improvements driven from the Which new Bank program.
This result is supported by enhanced employee satisfaction readings, key culture change measures, a
continuing safety improvement focus and the implementation of enhanced leadership, performance
management and talent management frameworks.
This progress is reflective of the Bank’s commitment to its people. The evolutionary strategy builds on the
success of the Which new Bank program and includes a strategic priority relating to Trust and Team spirit.
Through strengthening leadership, developing and valuing our people and working collaboratively business
performance will be lifted and growth will continue.
The Bank exceeded its net profit after tax (NPAT) targets for the year ended 30 June 2006. Cash NPAT
increased by 16% compared to the prior year. This result includes the profit from the sale of the Hong Kong
insurance business of $145 million. Excluding this item, cash NPAT increased 12%. Underlying NPAT also
increased by 12%.
All Which new Bank market commitments were either met or exceeded.
The result was delivered through strong performances across the business driven by strong growth in
Banking Income. Fund flows and investment returns have also been strong, insurance growth has been
good and productivity continues to improve.
The following graphs illustrate the Bank’s NPAT and earnings per share (EPS) performance on a cash basis over the last five years.
The graphs note the years where AIFRS accounting arrangements have been in place. Please see Note 1 to the Bank’s Financial
Statements for further information regarding the impact of AIFRS requirements on these measures.
Cash NPAT performance 2002 to 2006
Cash EPS performance 2002 to 2006
4,053
3,492
2,501
2,579
2,695
n
o
i
l
l
i
M
$
4400
4000
3600
3200
2800
2400
2000
1600
1200
s
t
n
e
C
320
300
280
260
240
220
200
180
160
140
120
100
315.9
264.8
197.3
202.6
206.6
Jun 02
Jun 03
Jun 04
Jun 05
Jun 06
Jun 02
Jun 03
Jun 04
Jun 05
Jun 06
AGAAP
AIFRS
AGAAP
AIFRS
Commonwealth Bank of Australia Annual Report 2006 55
Directors’ Report - Remuneration Report
Long Term Performance
Dividends per Share
Long term performance is measured on the Bank’s Total
Shareholder Return (TSR) relative to its peers.
The Bank’s dividend per share has increased consistently over
the past five years.
All future LTI grants require the Bank’s performance to reach at
least the 51st percentile for 50% of the shares granted to vest.
All of the shares granted will only vest if the Bank’s performance
reaches the 75th percentile.
2002, 2003, 2004 and 2005 LTI Grant Performance
For these LTI grants, the Bank’s relative TSR performance must
reach at least the 50th percentile for 50% of the shares granted
to vest. All of the shares granted will only vest if the Bank’s
performance reaches the 75th percentile.
As at 30 June 2006, the Bank’s performance was tracking under
the 50th percentile for the 2002 and 2005 grants. The 2003
grant is currently at the 50th percentile and the 2004 grant has
reached the 51st percentile.
Share Price
The Bank’s share price has trended upward over the last five
years, with a steeper incline over the last 18 months.
Share Price ($)
Dividends Per Share (cents)
240
220
200
180
160
140
120
100
224
197
183
150
154
Jun 02
Jun 03
Jun 04
Jun 05
Jun 06
52
47
42
37
32
27
22
Jul-01
Jan-0 2
Jul-02
Jan-0 3
Jul-03
Jan-0 4
Jul-04
Jan-0 5
Jul-05
Jan-0 6
Jul-06
56 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Directors’ Compensation
Ralph Norris (Managing Director and CEO)
Summary of Compensation Arrangements
The Bank appointed Mr Ralph Norris as Managing Director and
CEO effective 22 September 2005. Mr Norris’ compensation
consists of fixed and variable (at risk) components. For the year
ended 30 June 2006, fixed compensation, which comprises
base compensation (calculated on a total cost basis and
includes any FBT charges related to employee benefits including
motor vehicles) as well as employer contributions
to
superannuation, was 46% of total compensation.
The variable (at risk) compensation consists of short and long-
term incentives.
Short Term Incentives (STIs) are delivered in two components:
50% made as an immediate cash payment and 50% in deferred
cash. Performance is measured against Key Result Areas, with
payment subject to the approval of the Board. The Board has
assessed Mr Norris’ performance for the year. The Bank has
approved a total STI payment of $1.3 million.
This assessment took into account the following factors:
• Progress in relation to the Bank’s four strategic priorities of
Customer Service, Business Banking, Technology and
Operational Excellence and Trust and Team Spirit;
• Business and financial results;
• Recruitment and development of top management;
• Employee engagement initiatives;
• The Bank’s sales and service culture; and
• Relationships with external stakeholders
the
general community, investors, regulators, Government and
the media.
including
Long Term Incentives (LTIs) are delivered in the form of Reward
Shares under the Bank’s Equity Reward Plan, and no value will
accrue unless the Bank’s Total Shareholder Return (TSR) at
least meets the 50th percentile of the comparator group of
companies for the 2005 grant and the 51st percentile for the
2006 grant and beyond. At the 2005 Annual General Meeting
(AGM), the Board sought and was granted the approval of
shareholders for a maximum of $12,000,000 to be allocated to
Mr Norris in three tranches prior to the 2007 AGM.
The total variable compensation for the year ended 30 June
2006 was 54% of total compensation.
The Board determines Mr Norris’ compensation, pursuant to the
Constitution, as part of the terms and conditions of his
appointment. Those terms and conditions are established in a
contract of employment with Mr Norris which was effective from
22 September 2005 with compensation subject to review
annually by the Board. Mr Norris’ compensation arrangements
are detailed on page 59 (Compensation of Directors) and follow
the same principles as other Executives except in relation to the
Bank seeking shareholder approval of LTI grants.
Mr Norris’ contract provides for no end date, although he may
resign at any time by giving six months notice. The Bank may
terminate Mr Norris’ employment,
than
misconduct, on twelve months notice in his first year of service
and six months notice thereafter. In the latter case the Bank will
pay all fixed compensation and any outstanding statutory
entitlements. Any unvested STI or LTI amounts will be payable
at the discretion of the Board.
in cases other
There is also a provision allowing Mr Norris to terminate the
agreement if a material change to his status occurs and to
receive benefits as if the Bank had terminated his employment.
On exit from the Bank Mr Norris is entitled to receive his
statutory entitlements of accrued annual and long service leave
as well as accrued superannuation benefits. This arrangement is
the same for all Executives.
Non-Executive Directors
Compensation Arrangements
Compensation for Non-Executive Directors consists of base and
committee fees within a maximum of $3,000,000 per annum as
approved by shareholders at the Annual General Meeting held
on 5 November 2004. As indicated at the time of approval the
total compensation for Non-Executive Directors is less than that
approval. This will allow for additional Board members to be
appointed to continue having an appropriate mix of skills and
experience as well as to accommodate compensation increases
in the future, when justified. No component of Non-Executive
Director compensation is contingent upon performance.
On appointment to the Board, Non-Executive Directors enter into
a service agreement with the Bank in the form of a letter of
appointment. The letter of appointment, a copy of which appears
on the Bank's website, summarises the Board policies and
terms, including compensation, relevant to the office of Director.
All Non-Executive Directors have entered into a form of service
agreement.
The policy of the Board is that the aggregate amount of fees
should be set at a level which provides the Bank with the
necessary degree of flexibility to enable it to attract and retain
the services of directors of the highest calibre.
The Board Performance and Renewal Committee annually
reviews the fees payable to individual Non-Executive Directors
and takes into account relevant factors and, where appropriate,
receives external advice on comparable compensation. The
Committee decided to defer the review of fees to December
2006.
Non-Executive Directors have 20% of their annual fees applied
to the mandatory on-market acquisition of shares in the Bank. In
addition, in 2005/06, Non Executive Directors could voluntarily
elect to sacrifice up to a further 50% of their fees for the
acquisition of shares (the Board subsequently approved the
removal of this limit).
The Bank’s Non-Executive Directors’ fee structure provides for a
base fee for all Bank Directors of $160,000, and a base
Chairman’s fee of $560,000. In addition, amounts are payable
where Directors are members of, or chair a Committee. Details
of the breakdown of each Non-Executive Directors' fees is
provided on page 58. The Bank also contributes to compulsory
superannuation on behalf of Non-Executive Directors.
Commonwealth Bank of Australia Annual Report 2006 57
Directors’ Report - Remuneration Report
Details of Components of Non-Executive Directors’ fees
Director
J M Schubert
R J Clairs
A B Daniels
C R Galbraith
S C H Kay
W G Kent
F D Ryan
F J Swan
B K Ward
Total
Board
Compensation
(1)
$
560,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
Committee Compensation
People and
Remuneration
$
20,000
35,000
20,000
-
20,000
-
-
-
-
Audit
$
-
-
-
25,000
-
25,000
45,000
-
25,000
Risk
$
20,000
20,000
20,000
20,000
20,000
20,000
20,000
35,000
20,000
Total
$
600,000
215,000
200,000
205,000
200,000
205,000
225,000
195,000
205,000
1,840,000
95,000
120,000
195,000
2,250,000
(1) Non-Executive Directors sacrifice 20% of these fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP).
Retirement Benefits
Under the Directors’ Retirement Allowance Scheme, which was
approved by shareholders at the 1997 Annual General Meeting,
Directors previously accumulated a retirement benefit on a pro
rata basis to a maximum of four years’ total emoluments after
twelve years’ service. No benefit accrued until the Director had
served three years on the Board. In 2002 the Board decided to
discontinue
the Directors’ Retirement Allowance Scheme
without affecting the entitlements of the then existing Non-
Executive
Directors. After that time, new Directors have not been entitled
to participate in the scheme.
The Board resolved with effect from the 2004 Annual General
Meeting to terminate accrual of further benefits under the
Scheme and freeze the entitlements of current members until
their respective retirements. This approach has resulted in
compensation arrangements being expressed in a more
transparent manner.
The entitlements of the Non-Executive Directors under the Directors’ Retirement Allowance Scheme are:
Directors’ Retirement Allowance Scheme
Director
J M Schubert
R J Clairs
A B Daniels
C R Galbraith
S C H Kay (1)
W G Kent
F D Ryan
F J Swan
B K Ward
Total
Increase in Accrued Benefit in Year
$
-
-
-
-
-
-
-
-
-
Entitlement as at 30 June 2005
$
636,398
202,989
160,618
159,092
-
159,092
168,263
266,173
370,180
2,122,805
(1) Ms Kay was appointed a Director after the closure of the scheme.
58 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Compensation of Key Management Personnel and Other Executives
Individual compensation details for Directors for the year ended 30 June 2006 are set out below
Compensation of Directors
Short Term Benefits
Cash
Fixed (1)
$
Cash STI
payment
At Risk
$
STI
Deferred
in Cash
At Risk
$
Post Employment
Benefits
Equity Benefits
Other Benefits
Super-
annuation
Fixed (2)
$
Retirement
Allowance
Fixed (3)
$
STI
Deferred
in Shares
At Risk
$
LTI
Reward
Shares
At Risk
$
NEDSP
Fixed (1)
$
Termi-
nation
Benefits
$
Other
Benefits
$
Total
Compensation
$
Chairman (commenced as Chairman on 26 November 2004)
-
-
-
-
43,082
30,869
-
12,157
-
-
-
-
119,666
85,747
-
-
-
-
641,413
471,760
Managing Director and CEO (commenced in role on 22 September 2005. See notes to the “Compensation of Executives” table for details of individual items)
171,529
139,075
159,562
131,831
163,551
130,220
921,642
-
478,665
342,987
J M Schubert
2006
2005
R J Norris (4)
2006
2005
R J Clairs
2006
2005
A B Daniels (5)
2006
2005
C R Galbraith
2006
2005
S C Kay
2006
2005
W G Kent
2006
2005
F D Ryan
2006
2005
F J Swan
2006
2005
B K Ward
2006
2005
D V Murray (4) (6)
2006
2005
Total Compensation for Directors
2006
2005
3,068,193
3,328,730
351,500
1,757,500
155,573
124,478
163,551
130,220
163,551
135,831
179,507
145,398
159,562
165,976
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
650,000
-
1,248,358
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
15,438
12,517
-
11,865
14,720
11,720
14,361
14,938
14,720
11,720
16,156
13,086
14,002
11,203
14,720
12,225
-
-
-
18,201
-
15,159
-
8,542
-
-
-
8,542
-
12,723
-
8,087
-
17,225
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
483,045
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
42,882
34,769
39,891
32,958
40,888
32,555
39,891
41,494
40,888
32,555
44,877
36,350
38,893
31,120
40,888
33,958
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
846,963
-
4,150,008
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
229,849
204,562
199,453
191,813
219,159
183,037
213,814
222,408
219,159
183,037
240,540
207,557
208,468
174,888
219,159
199,239
7,740,398
4,976,115
(retired 22 September 2005. See notes to the “Compensation of Executives” table for details of individual items)
-
760,000
-
760,000
1,395,557
142,500
-
-
112,500
431,250
(2,891,623)
1,124,865
-
-
8,772,464
-
-
760,000
650,000
760,000
2,791,114
274,839
-
100,636
112,500
431,250
(2,408,578)
1,124,865
448,764
392,808
8,772,464
-
846,963
-
14,281,420
7,173,128
(1) For Non-Executive Directors, this includes that portion of base fees and committee fees paid as cash. Non-Executive Directors also sacrifice 20% of their fees on a mandatory basis under the
Non-Executive Directors Share Plan (NEDSP). Further detail on the NEDSP is contained in Note 33 to the Financial Statements.
(2) Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives.
(3) For Non-Executive Directors this represents the increase in their accrued benefit in the year under the Director’s Retirement Allowance Scheme which was approved by shareholders at the
1997 Annual General Meeting. See page 58 regarding discontinuance of the Scheme.
(4) Refer to page 57 for explanatory information for each compensation component.
(5) Mr Daniels turned 70 during the year ended 30 June 2005. The Bank’s compulsory superannuation obligations cease after a person reaches age 70.
(6) Mr Murray’s termination benefit represents a pro rata entitlement to Performance Units granted in place of the Reward Shares originally granted under the 2002, 2003 and 2004 ERP
arrangements that were automatically forfeited when he retired from the Bank. The Performance Units may vest in him at a future date, depending on the performance of the relevant grant. He
may receive all, some or none of these Performance Units, depending on the performance of the grant over the relevant periods. This arrangement is consistent with termination arrangements
for Executives who have unvested ERP Reward Shares when they retire from the Bank.
Commonwealth Bank of Australia Annual Report 2006 59
Directors’ Report - Remuneration Report
Individual compensation details for Executives for the year ended 30 June 2006 are set out below:
Compensation of Executives
Short Term Benefits
Cash
(1)
Fixed
$
Non
Monetary
Fixed
$
(2)
Cash STI
payment
(3)
At Risk
$
STI
Deferred in
Cash
At Risk
(4)
$
Post
Employment
Benefits
Super-
annuation
(5)
Fixed
$
Equity Benefits
Other Benefits
STI
Deferred
in Shares
At Risk
(6)
$
LTI
Reward
Shares
(7)
At Risk
$
Termi-
nation
Benefits
(8)
$
Other
Benefits
(9)
$
Total
Compensation
$
Group Executive, Premium Business Services (resigned on 24 March 2006)
-
-
9,837
10,260
10,260
10,260
10,260
10,260
10,260
10,260
117,500
-
833,465
718,300
839,500
783,500
-
292,500
634,500
605,000
-
292,500
382,485
327,250
506,000
425,000
324,000
357,500
382,485
327,250
1,026,000
932,500
Group Executive, People Services
Group Executive, Enterprise IT (commenced in the role on 10 April 2006)
506,000
425,000
Group Executive, Group Strategic Development
324,000
357,500
M A Cameron Group Executive, Retail Banking Services
2006
2005 (10)
L G Cupper
2006 (11)
2005 (10)
S I Grimshaw Group Executive, Premium Business Services
2006
2005 (10)
H D Harley
2006
2005 (10)
M R Harte
2006
2005 (10)
M A Katz
2006 (12)
7,490
2005 (10)
10,260
R V McKinnon Group Executive, Technology Services (resigned on 31 December 2005)
2006 (12)
5,130
2005 (10)
10,260
G L Mackrell Group Executive, International Financial Services
2006
2005 (10)
J K O’Sullivan General Counsel
2006
755,600
2005 (10)
728,000
G A Petersen Group Executive, Wealth Management
542,233
2006
2005 (10)
437,000
Total Compensation (13)
2006
2005 (10) (13)
(240,000)
240,000
2,014,109
2,852,250
2,214,109
2,852,250
6,527,775
6,342,300
282,449
217,500
331,200
295,000
363,400
315,000
-
240,000
291,200
295,000
282,449
217,500
363,400
315,000
-
382,500
293,750
560,000
710,000
628,000
775,227
950,000
-
382,500
64,575
-
64,575
-
10,260
10,260
10,260
10,260
10,260
10,260
84,017
92,340
50,330
68,400
21,250
40,000
80,907
84,985
94,400
52,000
59,995
51,700
42,500
160,625
346,920
190,436
643,900
45,000
48,750
185,625
396,886
274,675
74,000
67,500
60,500
56,500
708,500
-
70,000
275,625
560,429
369,986
57,500
207,500
449,894
273,868
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
115,825
-
72,500
277,500
(1,293,780)
453,878
3,564,028
-
(35,625)
138,750
(542,201)
191,324
31,280
-
50,625
198,125
419,034
270,349
50,000
150,000
313,517
186,873
102,543
72,200
27,612
103,227
219,233
110,538
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,058,110
1,785,821
1,734,296
1,705,560
2,752,689
2,505,871
2,065,231
2,046,628
1,070,975
-
3,175,795
2,525,038
(466,416)
1,420,334
1,997,626
1,821,719
1,846,177
1,717,133
1,466,779
1,168,225
1,896,325
538,285
383,862
1,696,977
869,932
2,321,927
3,595,308
-
115,825
-
17,701,262
16,696,329
-
-
-
-
-
-
-
-
-
-
-
-
2,176,632
3,381,338
2,977,254
83,756
7,119,902
3,426,047
Executive General Manager, Enterprise IT
-
-
721,000
1,125,000
721,000
1,125,000
12,139
11,585
162,504
625,012
147,989
94,741
Chief Executive Officer, Colonial First State Global Asset Management (commenced in role 1 June 2005)
Executive General Manager, Global Markets and Group Treasury
10,260
855
886,000
-
886,000
-
10,260
10,260
2,420,000
831,110
3,630,000
1,246,665
67,164
5,568
38,563
37,080
-
-
194,994
-
317,243
678,946
168,236
106,986
412,000
400,000
Other Executives (14)
J Beggs
2006
2005
W Negus
2006
2005
M Touw (15)
2006
2005
Total Compensation for Executives
2006
2005
8,408,211
7,334,633
932,836
77,333
535,600
515,000
104,537
103,455
6,241,109
4,808,360
7,251,109
5,223,915
2,014,191
592,518
863,609
3,000,935
1,381,151
2,523,654
3,595,308
-
115,825
-
29,975,050
23,587,470
Amounts in the above table reflect compensation for the time the Executive has been in a Key Management Personnel role, i.e. pro-rating is applied relative to the date the Executive
commenced or ceased a Key Management Personnel role. Compensation earned as an Executive prior to appointment to a Key Management Personnel role is not included in the amounts
shown for that Executive.
(1) Reflects amounts paid in the year ended 30 June and is calculated on a total cost basis. Included may be salary sacrifice amounts (e.g. motor vehicles plus FBT) with the exception of salary
sacrifice superannuation which is included under ‘Superannuation’.
(2) Represents the cost of car parking (including FBT).
(3) Cash STI payment represents the amount of cash immediately payable to an Executive in recognition of performance for the year ended 30 June, with the exception of STI sacrificed to
superannuation which is included under ‘Superannuation’.
(4) STI Deferred in Cash represents the mandatory deferral of 50% of STI payments for Executives in recognition of performance to the year ended 30 June 2006. These amounts are deferred until
1 July 2007. Generally, the Executive will need to be an employee of the Bank at the end of the deferral period to receive this portion. Deferrals of STI payments prior to 2005 were made in
shares.
(5) Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives.
60 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
(6) STI Deferred in Shares represents the cost of shares acquired under the mandatory component of the Equity Participation Plan (EPP). Shares vest in two equal
tranches after one and two years respectively. For example, for STI payments for the year ended 30 June 2004, half the shares vested on 1 July 2005 and half
vested on 1 July 2006. The amount included in compensation each year has been amortised on a straight-line basis over the vesting period for each tranche of
shares. See Note 33 to the Financial Statements for further details on the operation of the EPP. The last share grant made under the mandatory component of the
EPP was in 2005. Mr McKinnon forfeited shares deferred under the mandatory component of the EPP (MEP) when he exited the Bank, resulting in a reversal of
disclosed amounts for STI Deferred in Shares, as required under AASB124.
(7) The ‘fair value’ of LTI reward shares has been calculated using a Monte-Carlo simulation method, incorporating the assumptions below :
The assessment has been made as at purchase date for each ERP grant based on the expected future TSR performance of the Bank and each member of its peer
group. The annualised equivalent of the ‘fair value’ in respect of the number of shares for each grant has been amortised on a straight line basis over the term of the
grant. Messrs Katz, McKinnon and Murray forfeited reward shares when they exited the Bank, resulting in a reversal of disclosed amounts for LTI Reward Shares,
as required under AASB124.
Reward Share Valuation Assumptions
Purchase Date
30 November 2002
29 October 2003
22 September 2004
5 November 2004
23 November 2005
Fair Value
$16.75
$16.36
$16.72
$19.72
$24.51
Exercise Price
$0.00
$0.00
$0.00
$0.00
$0.00
Risk Free Rate Assumption Term
57 mths
58 mths
59 mths
57 mths
56 mths
5.35%
5.70%
5.48%
5.61%
5.65%
Dividend Yield
Nil
Nil
Nil
Nil
Nil
Volatility
20.0%
20.0%
15.0%
15.0%
15.0%
(8) Represents any severance payments made on termination of employment (excluding any payment in lieu of notice). For Messrs Katz and McKinnon, termination
benefit includes a pro rata entitlement to Performance Units granted in place of the Reward Shares originally granted under the ERP arrangements that were
automatically forfeited when they resigned from the Bank. The Performance Units may vest at a future date, depending on the performance of the relevant grant.
They may receive all, some or none of these Performance Units, depending on the performance of the grant over the relevant periods. This arrangement is consistent
with termination arrangements for Executives who have unvested ERP Reward Shares when they exit the Bank.
(9) All Other Benefits payable that are not covered above, including any payment made in lieu of notice on termination of employment and other contractual payments.
(10) Differences in disclosure requirements of AASB1046 which applied for the 2005 Remuneration Report and requirements under AASB124 and AASB2 which apply
for 2006 disclosure have resulted in differences in compensation disclosures. In particular, options are no longer disclosed in the 2005 comparative figures as all
options were issued by the Bank prior to 7 November 2002, and AASB2 does not require these to be disclosed, and the calculation for determining LTI amounts to be
disclosed has also changed.
(11) As announced on 4 August 2006, Mr Cupper will retire from the Bank at the end of October 2006. As a result, 100% of his STI payment was immediately payable
and has been included under ‘Superannuation’.
(12) Negative values are shown where at risk compensation that was disclosed in previous Remuneration Reports has been forfeited. Messrs Katz and McKinnon both
forfeited LTI Reward Shares upon exiting the Bank that were included in their disclosed compensation details for the year ended 30 June 2005.
(13) Group totals in respect of the financial year ended 30 June 2005 do not necessarily equal the sum of amounts disclosed for individuals specified in 2006 as there are
differences to the individuals specified in 2005.
(14) These Executives, who are not Key Management Personnel, and Messrs Grimshaw and Katz are the five Executives who received the highest compensation for the
year ended 30 June 2006 as defined in the Section 300A of the Corporations Act 2001.
(15) 60% of Mr Touw’s STI payment is deferred as cash, with a 20% tranche vesting on 1 July each year until the final 20% vests at the end of three years. Each tranche
is indexed to mirror the Bank’s TSR performance over the relevant vesting period. Generally Mr Touw will need to be employed with the Bank at the vesting date to
receive the relevant tranche.
Termination Arrangements
unsatisfactory
The Bank’s Executive contracts generally provide for severance
payments of up to six months in cases where termination of
employment is initiated by the Bank, other than for misconduct
or
these
to Messrs Grimshaw, Cupper and
arrangements apply
O’Sullivan whose contracts allow for a twelve months severance
payment where termination is initiated by the Bank. There is also
a four week notice period for either party to terminate the
agreement.
performance. Exceptions
to
The contracts for Key Management Personnel and Other
Executives do not have a fixed term.
Upon exit from the Bank, Executives are entitled to receive their
statutory entitlements of accrued annual and long service leave,
as well as accrued superannuation benefits.
Executives who leave the Bank during a given performance year
(i.e. 1 July to 30 June) will generally not receive a STI payment
for that year except in the circumstances of retrenchment,
retirement or death. In those circumstances, a pro-rated
payment may be made based on the length of service during the
performance year.
Deferred cash or shares from previous STI awards are usually
forfeited where the Executive resigns or is dismissed. In
circumstances of retrenchment, retirement or death any cash will
generally be paid and unvested shares will generally vest
immediately. LTI grants are generally forfeited where the
Executive resigns or
In circumstances of
is dismissed.
retrenchment, retirement or death, the Executive or their estate
may, at Board discretion, retain a pro-rated grant of long term
incentives. Vesting of any long term incentives retained by the
Executive will still be subject to the performance hurdle relevant
to that grant.
Commonwealth Bank of Australia Annual Report 2006 61
Directors’ Report - Remuneration Report
STI Allocations for Executives for the Year Ended 30 June 2006
M A Cameron
L G Cupper (2)
S I Grimshaw
H D Harley
M R Harte (3)
M A Katz (4)
R V McKinnon (5)
G L Mackrell
R J Norris (6)
J K O’Sullivan
G A Petersen
J Beggs
W Negus
M Touw (7)
Percentage
Paid
%
50
100
50
50
50
-
-
50
50
50
50
50
50
40
Percentage
Forfeited
%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Percentage
(1)
Deferred
%
50
-
50
50
50
-
-
50
50
50
50
50
50
60
Minimum Total
Value
$
382,485
598,400
506,000
324,000
64,575
-
-
363,400
650,000
331,200
282,449
721,000
886,000
2,420,000
Maximum Total
Value
$
764,970
598,400
1,012,000
648,000
129,150
-
-
726,800
1,300,000
662,400
564,898
1,442,000
1,772,000
6,050,000
(1) Will generally vest on 1 July 2007 and be paid in July 2007, subject to not being forfeited due to resignation or misconduct including misrepresentation of
performance outcomes. Will generally vest and be immediately payable in circumstances of retrenchment, retirement or death. Mr Touw has slightly different
arrangements. Refer Footnote 7 below for details.
(2) Mr Cupper will retire from the Bank at the end of October 2006. As a result, 100% of his STI payment was immediately payable as cash.
(3) Mr Harte commenced on 10 April 2006.
(4) Mr Katz ceased employment on 24 March 2006
(5) Mr McKinnon ceased employment on 31 December 2005.
(6) Mr Norris commenced in the role on 22 September 2005.
(7) 60% of Mr Touw’s STI payment is deferred as cash, with a 20% tranche vesting on 1 July each year until the final 20% vests at the end of three years. Each tranche
is indexed to mirror the Bank’s TSR performance over the relevant vesting period. Generally Mr Touw will need to be employed with the Bank at the vesting date to
receive the relevant tranche.
LTI Allocations to Executives for the Year Ended 30 June 2006
M A Cameron
L G Cupper
S I Grimshaw
H D Harley
M R Harte (3)
M A Katz (4)
R V McKinnon (5)
G L Mackrell
R J Norris (6)
J K O’Sullivan
G A Petersen
J Beggs
W Negus
M Touw
Percentage
(1)
Paid
%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Percentage
Forfeited
%
-
-
-
-
-
74
100
-
-
-
-
-
-
-
Percentage
(1)
Deferred
%
100
100
100
100
100
26
-
100
100
100
100
100
100
100
Current
Allocation
(No. of Shares)
29,190
22,440
35,140
32,440
-
9,900
-
27,570
100,328
23,250
20,280
10,000
40,500
11,250
Minimum Total
Value
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Maximum Total
(2)
Value
$
1,132,572
870,672
1,363,432
1,258,672
-
384,120
-
1,069,716
3,892,726
902,100
786,864
388,000
1,571,400
436,500
(1) Will vest in 2008/2009, 2009/2010 or 2010/2011 subject to the service conditions and performance hurdle being met (see page 54). In circumstances of
retrenchment, retirement or death, the Executive or their Estate may, at Board discretion, retain a pro-rated grant of long term incentives.
(2) This equals the “Number of Reward Shares Allocated” multiplied by the Bank’s closing share price at the Commencement Date of the grant (15 July 2005), which
was $38.80.
(3) Mr Harte commenced on 10 April 2006.
(4) Mr Katz ceased employment on 24 March 2006 and retained a pro rata LTI allocation.
(5) Mr McKinnon ceased employment on 31 December 2005.
(6) Mr Norris commenced in the role on 22 September 2005.
62 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Equity Holdings of Key Management Personnel and Other Executives
Shareholdings
All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan.
Shares awarded under the Equity Reward Plan and the mandatory component of the Equity Participation Plan are registered in the
name of the Trustee. For further details of the Non-Executive Directors’ Share Plan, Equity Reward Plan, previous Executive Option
Plan and Equity Participation Plan refer to Note 33 to the Financial Statements.
Details of shareholdings of Key Management Personnel and Other Executives(or close family or entities controlled, jointly controlled, or
significantly influenced by them, or any entity over which any of the aforementioned hold significant voting power) are as follows:
Shares held by Directors
Name
Directors
R J Clairs
A B Daniels (3)
C R Galbraith
S C H Kay
W G Kent
D V Murray (4)
R J Norris (5)
F D Ryan
J M Schubert
F J Swan
B K Ward (6)
Total For Directors
Class
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Deferred STI
Reward Shares
Ordinary
Reward Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Deferred STI
Reward Shares
Balance
1 July 2005
13,357
17,669
8,824
3,669
15,286
323,638
21,866
325,000
10,000
-
7,430
18,508
5,954
5,766
430,101
21,866
325,000
Acquired/Granted
as
Compensation
(1)
776
721
740
721
740
-
-
-
-
100,328
812
2,165
704
739
8,118
-
100,328
On Exercise of
Options
-
-
-
-
-
250,000
-
-
-
-
-
-
-
-
250,000
-
-
Net Change
(2)
Other
-
301
466
-
87
(78,093)
(21,866)
(325,000)
-
-
-
515
316
124
(76,284)
(21,866)
(325,000)
Balance
30 June 2006
14,133
18,691
10,030
4,390
16,113
495,545
-
-
10,000
100,328
8,242
21,188
6,974
6,629
611,935
-
100,328
(1) For Non-Executive Directors, represents shares acquired under NEDSP on 2 September 2005 and 15 March 2006 by mandatory sacrifice of fees. All shares
acquired through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 33 to the Financial
Statements for further details on the NEDSP. For Mr Norris, this represents Reward Shares granted under the Equity Reward Plan (ERP) and subject to a
performance hurdle. The first possible date for meeting the performance hurdle is 15 July 2008 with the last possible date for vesting being 15 July 2010. See Note
33 to the Financial Statements for further details on the ERP.
(2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of deferred STI shares on
retirement (which became Ordinary shares).
(3) A related party of Mr Daniels beneficially holds an investment of $62,838 in Colonial First State Global Health and Biotech Fund, $403,860 in Colonial First State
Future Leaders Fund and $361,464 in Colonial First State Imputation Fund.
(4) Mr Murray retired on 22 September 2005. Mr Murray acquired 10,000 PERLS III securities during the year and continued to hold them at 30 June 2006.
(5) Mr Norris commenced on 22 September 2005.
(6) Ms Ward continued to hold 250 PERLS II securities at 30 June 2006.
Commonwealth Bank of Australia Annual Report 2006 63
Directors’ Report - Remuneration Report
Shares held by Executives
Name
Executives
M A Cameron
L G Cupper (3)
S I Grimshaw
H D Harley
M R Harte (4)
M A Katz (5)
Class
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
R V McKinnon (6) Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
G L Mackrell
J K O’Sullivan
G A Petersen
Other Executives
J Beggs
W Negus
M Touw
Total for
Executives
(1) Represents:
Balance
30 June 2005
-
8,094
60,430
44,540
9,385
84,000
16,365
14,133
113,800
25,852
10,241
85,700
-
-
-
303,748
14,061
139,130
43,991
7,083
58,750
27,319
10,134
83,230
5,565
6,702
59,440
8,572
5,177
35,500
105,891
31,734
29,000
3,680
-
-
-
49,703
33,200
585,523
166,447
782,180
Acquired/Granted
as
Compensation
(1)
-
-
29,190
-
-
22,440
-
-
35,140
-
-
32,440
-
-
-
-
-
38,380
-
-
17,030
-
-
27,570
-
-
23,250
-
-
20,280
-
-
10,000
-
-
40,500
-
-
11,250
-
-
307,470
On Exercise of
Options
-
-
-
-
-
-
100,000
-
-
87,500
-
-
-
-
-
250,000
-
-
37,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
475,000
-
-
Net Change
(2)
Other
-
(5,246)
-
6,815
(6,118)
-
(91,057)
(9,442)
-
(87,071)
(6,388)
-
-
-
-
(378,748)
(14,061)
(177,510)
(81,491)
(7,083)
(75,780)
7,611
(6,742)
-
3,351
(3,351)
-
1,335
(3,327)
-
20,845
(20,845)
-
-
-
-
-
(16,574)
-
(598,410)
(99,177)
(253,290)
Balance
30 June 2006
-
2,848
89,620
51,355
3,267
106,440
25,308
4,691
148,940
26,281
3,853
118,140
-
-
-
175,000
-
-
-
-
-
34,930
3,392
110,800
8,916
3,351
82,690
9,907
1,850
55,780
126,736
10,889
39,000
3,680
-
40,500
-
33,129
44,450
462,113
67,270
836,360
• Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal
tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 33 to the Financial Statements for further details on the EPP.
• Reward Shares - granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The first possible date for meeting the performance hurdle
is 16 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 to the Financial Statements for further details on the ERP.
(2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which
became Ordinary shares).
(3) Mr Cupper acquired 6,000 PERLS III securities during the year, and continued to hold them at 30 June 2006.
(4) Mr Harte commenced on 10 April 2006.
(5) Mr Katz ceased employment on 24 March 2006. Mr Katz acquired 2,250 PERLS III securities during the year, and continued to hold these and 250 PERLS II
securities as at 30 June 2006.
(6) Mr McKinnon ceased employment on 31 December 2005.
64 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Option Holdings
Name
Directors
D V Murray
(retired on 22 September 2005)
R J Norris
(commenced on 22 September 2005)
Executives
M A Cameron
L G Cupper
S I Grimshaw
H D Harley
M R Harte
M A Katz
(ceased employment on 24 March 2006)
R V McKinnon
(ceased employment on 31 December 2005)
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key Management Personnel
Other Executives
J Beggs
W Negus
M Touw (2)
Total
Vested and Exercisable at
30 June 2006
(1)
Balance
1 July 2005
Options
Exercised
Balance
30 June 2006
Number
Exercise Price
$
250,000
(250,000)
-
-
-
75,000
100,000
87,500
-
-
-
(100,000)
(87,500)
-
-
-
-
75,000
-
-
-
-
-
-
75,000
-
-
-
250,000
(250,000)
-
-
37,500
-
-
-
800,000
(37,500)
-
-
-
(725,000)
-
-
-
-
75,000
150,000
-
150,000
-
-
950,000
-
-
(725,000)
-
-
225,000
-
-
-
-
75,000
75,000
37,500
37,500
-
-
225,000
-
-
-
30. 12
-
-
-
-
-
-
-
-
n/a
23. 84
26. 97
30. 12
-
-
n/a
(1) ‘Vested and Exercisable’ options represents those granted on 3 September 2001 with an exercise price of $30.12. Mr Beggs also held vested but unexercised options
granted on 24 September 1999 with an exercise price of $23.84 and 13 September 2001 with an exercise price of $26.97 at 30 June 2006.
(2) As at 30 June 2005, Mr Touw privately held a short selling (negative) position in Commonwealth Bank Call Options of 40,000. During the year he reversed out of this
position and had a nil balance as at 30 June 2006. As at 30 June 2005 Mr Touw had a nil position in Commonwealth Bank Low Exercise Price Options (LEPOs).
During the year he short sold 10,000 LEPOs and that position remained as at 30 June 2006.
Commonwealth Bank of Australia Annual Report 2006 65
Directors’ Report - Remuneration Report
Shares Vested and Options Exercised During the Year
Shares Granted on Exercise of Options
Name
Directors
D V Murray (3)
R J Norris (4)
Executives
M A Cameron
L G Cupper
S I Grimshaw
H D Harley
M R Harte (5)
M A Katz (6)
R V McKinnon (7)
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key
Management
Personnel
Other Executives
J Beggs
W Negus
M Touw
Total
Deferred STI
Vested
Reward Shares
Vested
Number
Exercise Price
$
Value in Excess
of Exercise
(1)
Price
$
Total Value
of Options
(2)
Exercised
$
21,866
-
5,246
6,118
9,442
6,388
-
14,061
4,696
6,742
3,351
3,327
81,237
20,845
-
16,574
118,656
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
250,000
-
-
100,000
37,500
50,000
-
125,000
125,000
37,500
-
-
-
725,000
-
-
-
725,000
30. 12
-
-
-
30. 12
26. 97
30. 12
-
26. 97
30. 12
30. 12
-
-
-
n/a
-
-
-
n/a
10. 88
2,720,000
-
-
7. 15
16. 85
13. 70
-
18. 48
15. 33
13. 53
-
-
-
-
-
715,000
631,875
685,000
-
2,310,000
1,916,250
507,375
-
-
-
n/a
9,485,500
-
-
-
n/a
-
-
-
9,485,500
(1) “Value in Excess of Exercise Price” represents the difference between the exercise price and closing market value of CBA shares on date of exercise.
(2) “Total Value of Options Exercised” represents the number of options exercised multiplied by the “Value in Excess of Exercise Price”. No options were granted or
lapsed during the year. Accordingly, this value represents the total value of options that were granted, lapsed and exercised during the year.
(3) Mr Murray retired on 22 September 2005 and deferred STI vested at this time.
(4) Mr Norris commenced on 22 September 2005.
(5) Mr Harte commenced in the role on 10 April 2006
(6) Mr Katz ceased employment on 24 March 2006.
(7) Mr McKinnon ceased employment on 31 December 2005.
66 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report - Remuneration Report
Loans to Key Management Personnel and Other Executives
Total Loans to Key Management Personnel and Other Executives
Year Ended
30 June
Balance
1 July
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June
$000s
Number in
Group at
30 June
Directors
Executives
Total for Key
Management
Personnel
Other Executives
2006
2005
2006
2005
2006
2005
2006
2005
-
2
9,894
8,706
9,894
8,708
554
554
379
-
550
523
929
523
31
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,729
3
9,284
8,803
15,013
8,806
442
554
1
1
7
6
8
7
1
1
Details of Individuals with Loans above $100,000 in the reporting period are as follows:
Individual Loans above $100,000 to Key Management Personnel and Other Executives
Balance
1 July 2005
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June 2006
$000s
Highest
Balance
in Period
$000s
Directors
D V Murray
Executives
M A Cameron
S I Grimshaw
H D Harley
M A Katz
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key
Management
Personnel
Other Executives
W Negus
Total
-
379
-
-
1,485
-
332
243
347
175
175
500
100
1,080
1,500
392
696
258
647
200
201
400
800
9,531
442
112
10,085
5
3
73
16
19
11
7
11
11
31
-
43
97
26
42
17
42
12
7
11
52
915
30
1
946
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,729
5,729
358
300
857
391
304
-
-
175
175
500
100
1,017
1,500
582
614
274
647
200
-
155
800
546
302
1,485
394
334
243
427
175
175
500
100
1,080
1,500
587
696
277
647
200
203
400
800
14,678
16,800
442
-
15,120
442
112
17,354
Commonwealth Bank of Australia Annual Report 2006 67
Directors’ Report - Remuneration Report
Terms and Conditions of Loans
Transactions other than Financial Instrument Transactions
All loans to Key Management Personnel and Other Executives
(or related entities controlled or significantly influenced by them)
have been provided on an arms-length commercial basis
including the term of the loan, security required and the interest
rate (which may be fixed or variable).
Other Transactions of Key Management Personnel and
Other Executives and Related Parties
Financial Instrument Transactions
Financial instrument transactions (other than loans and shares
disclosed above) of Key Management Personnel and Other
Executives with the Bank and other banks that are controlled
entities occur in the ordinary course of business of the banks on
an arm’s length basis.
Disclosure of financial instrument transactions regularly made by
a bank is limited to disclosure of such transactions with Key
Management Personnel and Other Executives and entities
controlled or significantly influenced by them.
All such financial instrument transactions that have occurred
between the banks and their Key Management Personnel and
Other Executives have been trivial or domestic and were in the
nature of normal personal banking and deposit transactions.
of Banks
All other transactions with Key Management Personnel Other
Executives and their 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 entities not controlled by the Bank.
The interests of Mr Daniels in investment funds managed by
Colonial First State are detailed on page 63.
Mr Galbraith was a partner in the law firm Allens Arthur
Robinson to 31 January 2006. Mr Galbraith was a salaried
adviser to this law firm from 1 February to 30 June 2006. Allens
Arthur Robinson acted for the Bank in the provision of legal
services during the financial year. The fees for these services
amounted to $2,137,174.
Audit
Certain disclosures required by AASB124 have been made in
this Remuneration Report. Pages 51 to 68 of this report have
been audited as required.
68 Commonwealth Bank of Australia Annual Report 2006
Directors’ Report
The Audit Committee advised the Board accordingly and, after
considering the Committee’s advice, the Board of Directors
agreed that it was satisfied that the provision of the non-audit
services by Ernst & Young during the year, was compatible with
the general standard of
the
Corporations Act.
independence
imposed by
The reasons for the Directors being satisfied that the provision of
the non-audit services during the year did not compromise the
auditor independence requirements of the Corporations Act are:
• The operation of the Independent Auditor Services Policy
during the year to restrict the nature of non-audit services
engagements, to prohibit certain services and to require
Audit Committee pre-approval for all such engagements; and
• The relative quantum of fees paid for non-audit services
compared to the quantum of audit fees.
The above Directors’ statements are in accordance with the
advice received from the Audit Committee.
Auditor’s Declaration of Independence
We have obtained an independence declaration from our
auditor, Ernst and Young as presented on the following page.
Roundings
in
this report and
financial
The amounts contained
statements have been rounded to the nearest million dollars
unless otherwise stated, under the option available to the
Company under ASIC Class Order 98/100 (as amended by
ASIC Class Order 04/667).
the
Incorporation of Additional Material
This report incorporates the Chairman’s Statement, Highlights,
Analysis sections
for Banking, Funds Management and
Insurance, Corporate Governance and Shareholding Information
sections of this Annual Report.
Non-Audit Services
Amounts paid or payable to Ernst & Young for non-audit
services provided during the year, as set out in the Annual
Report in Note 39 to the Financial Statements are as follows:
Regulatory audits, reviews, attestations and assurances
for Group entities – Australia
Regulatory audits, reviews, attestations and assurances
for Group entities – Off-shore
APRA reporting (including the tripartite review)
Financial and other audits, reviews, attestations and
assurances for Group entities - Australia
Financial and other audits, reviews, attestations and
assurances for Group entities – Off-shore
Assurance services relating to Sarbanes-Oxley legislation
compliance
Agreed upon procedures and comfort letters in respect of
financing, debt raising and related activities
Total
$’000
1,495
631
996
52
132
2,782
457
6,545 (1)
(1) An additional amount of $4,056,000 was paid to Ernst & Young by way of
fees paid for Non-Audit Services provided to entities not consolidated into
the Financial Statements, being management investment schemes and
superannuation funds. $3,923,000 of this amount related to statutory
audits, with the residual relating to reviews, attestations and assurances.
Amounts paid or payable for audit services to Ernst & Young
totalled $9,481,000 and to other auditors totalled $176,000.
The Bank has in place an Independent Auditor Services Policy,
details of which are set out in the Corporate Governance section
of this Annual Report, to assist in ensuring the independence of
the Bank’s external auditor.
The Audit Committee has considered the provision, during the
year, of non-audit services by Ernst & Young and has concluded
that the provision of those services did not compromise the
auditor independence requirements of the Corporations Act.
Signed in accordance with a resolution of the Directors.
J M Schubert
Chairman
23 August 2006
R J Norris
Managing Director and Chief Executive Officer
Commonwealth Bank of Australia Annual Report 2006 69
Directors’ Report
Auditor’s Independence Declaration to the Directors of Commonwealth Bank of Australia
In relation to our audit of the financial report of Commonwealth Bank of Australia for the financial year
ended 30 June 2006, to the best of my knowledge and belief, there have been no contraventions of the
auditor independence requirements of the Corporations Act 2001 or any applicable code of professional
conduct, other than that two employees, of Ernst & Young, or their immediate families, held minor
investment balances in managed funds, that are associates of Commonwealth Bank of Australia, whilst
engaged in the audit or the provision of non-audit services, which constitute technical contraventions of
the auditor independence requirements of the Act.
In my opinion, due to the nature of these contraventions and the rectification steps which have been
undertaken, these issues have not impaired our audit independence for the year ended 30 June 2006.
Ernst & Young
S J Ferguson
Partner
23 August 2006
70 Commonwealth Bank of Australia Annual Report 2006
Liability limited by the Accountants Scheme, approved
under the Professional Standards Act 1994 (NSW).
Five Year Financial Summary
2006
$M
6,514
5,567
12,081
398
5,994
-
5,994
5,689
(1,605)
(31)
4,053
(25)
(100)
-
-
AIFRS
(1)
2005
$M
6,026
5,076
11,102
322
5,719
150
5,869
4,911
(1,409)
(10)
3,492
(53)
(39)
-
-
2004
$M
5,410
5,081
10,491
276
5,500
749
6,249
3,966
(1,262)
(9)
2,695
-
-
201
(324)
AGAAP
(1)
2002
$M
4,710
4,358
9,068
449
5,201
-
5,201
3,418
(916)
(1)
2,501
-
-
477
(323)
2003
$M
5,026
4,373
9,399
305
5,312
239
5,551
3,543
(958)
(6)
2,579
-
-
(245)
(322)
3,928
3,400
2,572
2,012
2,655
3,227
400
215
3,842
66
-
145
4,053
(25)
(100)
-
-
3,928
2,913
351
156
3,420
177
(105)
-
3,492
(53)
(39)
-
-
3,400
2,675
274
129
3,078
152
(535)
-
2,695
-
-
(324)
201
2,572
2,376
233
65
2,674
73
(168)
-
2,579
-
-
(322)
(245)
2,012
2,067
368
33
2,468
33
-
-
2,501
-
-
(323)
477
2,655
259,176
369,103
173,227
347,760
21,343
12,087
228,346
337,404
168,026
314,761
22,643
10,938
189,391
305,995
163,177
281,110
22,405
17,700
160,347
265,110
140,974
242,958
20,024
14,995
147,074
249,648
132,800
228,592
19,030
13,639
216,438
189,559
169,321
146,808
141,049
Income Statement
Net interest income
Other operating income
Total operating income
Bad debts expense
Operating expenses:
Comparable business
Initiatives including Which new Bank
Total operating expenses
Net profit before income tax
Corporate tax expense
Outside equity interests
Net profit after tax (“cash basis”)
Defined benefit superannuation plan expense
Treasury share valuation adjustment
Appraisal value uplift/(reduction)
Goodwill amortisation
Operating profit after income tax attributable to members
of the Bank
Contributions to profit (after tax)
Banking
Funds management
Insurance
Net profit after income tax (“underlying basis”)
Shareholder investment returns
Which new Bank
Profit on sale of the Hong Kong insurance business
Net profit after income tax (“cash basis”)
Defined benefit superannuation plan expense
Treasury share valuation adjustment
Goodwill amortisation
Appraisal value uplift/(reduction)
Net profit after income tax
Balance Sheet
Loans, advances and other receivables
Total assets
Deposits and other public borrowings
Total liabilities
Shareholders’ equity
Net tangible assets
Risk weighted assets
Average interest earning assets
Average interest bearing liabilities
274,798
255,100
244,708
225,597
214,187
197,532
188,270
174,737
170,634
157,105
Assets (on balance sheet)
Australia
New Zealand
Other
Total Assets
304,831
43,318
20,954
369,103
280,255
41,383
15,766
337,404
252,652
35,059
18,284
305,995
221,248
27,567
16,295
265,110
208,673
24,579
16,396
249,648
(1) The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2006 and 2005 results are presented on an AIFRS
basis, while the 2004, 2003 and 2002 results are presented on the previous AGAAP basis.
Commonwealth Bank of Australia Annual Report 2006 71
Five Year Financial Summary
Shareholder Summary
Dividends per share (cents) – fully franked
Dividends cover (times) – statutory
Dividends cover (times) – cash
Dividends cover (times) – underlying
Earnings per share (cents)
Basic
Statutory
Cash basis
Underlying basis
Fully diluted
Statutory
Cash basis
Underlying basis
Dividend payout ratio (%)
Statutory
Cash basis
Underlying basis
Net tangible assets per share ($)
Weighted average number of shares (statutory basic)
Weighted average number of shares (fully diluted)
Weighted average number of shares (cash basic)
Weighted average number of shares (cash fully diluted)
Number of shareholders
Share prices for the year ($)
Trading high
Trading low
End (closing price)
Performance Ratios (%)
Return on average Shareholders’ equity
Statutory
Cash basis
Underlying basis
Return on average total assets
Statutory
Cash basis
Underlying basis
Capital adequacy – Tier 1
Capital adequacy – Tier 2
Deductions
Capital adequacy – Total
Net interest margin
Other Information (numbers)
Full time staff equivalent
Branches/services centres (Australia)
Agencies (Australia)
ATMs (proprietary)
EFTPOS terminals
EzyBanking locations
AIFRS
(1)
AGAAP
(1)
2006
2005
2004
2003
2002
224
1. 4
1. 4
1. 3
308. 2
315. 9
299. 4
303. 1
310. 5
294. 7
73. 3
71. 0
74. 9
9. 4
1,275
1,329
1,283
1,338
698,552
47. 41
36. 62
44. 41
20. 4
21. 3
20. 2
1. 1
1. 1
1. 1
7. 56
3. 10
(1. 00)
9. 66
2. 34
197
1. 3
1. 3
1. 3
259. 6
264. 8
259. 2
255. 3
260. 5
255. 0
77. 0
74. 9
76. 5
8. 5
1,260
1,316
1,269
1,325
704,906
38. 52
28. 79
37. 95
18. 2
18. 8
18. 4
1. 1
1. 1
1. 1
7. 46
3. 21
(0. 92)
9. 75
2. 43
183
1. 1
1. 1
1. 3
196. 9
206. 6
237. 1
196. 8
206. 5
237. 0
93. 5
89. 1
77. 6
12. 2
1,256
1,257
1,256
1,257
714,901
33. 54
27. 0
32. 58
12. 5
12. 7
14. 6
0. 9
0. 9
1. 1
7. 43
3. 93
(1. 11)
10. 25
2. 53
154
0. 9
1. 3
1. 4
157. 4
202. 6
210. 2
157. 3
202. 5
210. 0
97. 7
75. 9
73. 3
11. 4
1,253
1,254
1,253
1,254
746,073
32. 75
23. 05
29. 55
10. 5
13. 1
13. 6
0. 8
1. 0
1. 0
6. 96
4. 21
(1. 44)
9. 73
2. 67
150
1. 4
1. 3
1. 3
209. 6
197. 3
194. 6
209 .3
197. 0
194. 3
71. 7
76. 2
77. 2
10. 3
1,250
1,252
1,250
1,252
722,612
34. 94
24. 75
32. 93
14. 7
12. 9
12. 8
1. 1
1. 0
1. 0
6. 78
4. 28
(1. 26)
9. 80
2. 76
36,664
1,005
3,836
3,191
148,220
862
35,313
1,006
3,864
3,154
137,240
841
36,296
1,012
3,866
3,109
126,049
815
35,845
1,014
3,893
3,116
129,259
760
37,245
1,020
3,936
3,049
126,613
730
Productivity
Total net operating income per full-time (equivalent)
employee ($)
Staff expense/Total operating income (%)
Total operating expenses/Total operating income (%)
329,506
23. 4
49. 6
314,388
24. 1
52. 9
289,040
24. 3
59. 6
262,212
26. 4
59. 1
243,469
26. 4
57. 4
(1) The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2006 and 2005 results are presented on an AIFRS
basis, while the 2004, 2003 and 2002 results are presented on the previous AGAAP basis.
72 Commonwealth Bank of Australia Annual Report 2006
Income Statements
Balance Sheets
Statements of Recognised Income and Expense
Statements of Cash Flows
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Note 32
Note 33
Note 34
Note 35
Note 36
Note 37
Note 38
Note 39
Note 40
Note 41
Note 42
Note 43
Note 44
Note 45
Note 46
Note 47
Note 48
Note 49
Note 50
Accounting Policies
Profit
Income
Average Balances and Related Interest
Income Tax Expense
Dividends
Earnings Per Share
Cash and Liquid Assets
Receivables from Other Financial Institutions
Assets at Fair Value through Income Statement
Derivative Assets and Liabilities
Available-for-Sale Investments
Investment Securities
Loans, Advances and Other Receivables
Provisions for Impairment
Credit Risk Management
Asset Quality
Shares in and Loans to Controlled Entities
Investment Property
Property, Plant and Equipment
Intangible Assets
Other Assets
Deposits and Other Public Borrowings
Payables to Other Financial Institutions
Liabilities at Fair Value through Income Statement
Income Tax Liabilities
Other Provisions
Debt Issues
Managed Fund Units on Issue
Bills Payable and Other Liabilities
Loan Capital
Detailed Statements of Changes in Equity
Share Capital
Minority Interests
Capital Adequacy
Maturity Analysis of Monetary Assets and Liabilities
Financial Reporting by Segments
Life Insurance Business
Remuneration of Auditors
Commitments for Capital Expenditures Not Provided for in the Accounts
Lease Commitments – Property, Plant and Equipment
Contingent Liabilities, Assets and Commitments
Market Risk
Retirement Benefit Obligations
Controlled Entities
Investments in Associated Entities and Joint Ventures
Director and Executive Disclosures
Related Party Disclosures
Notes to the Statements of Cash Flows
Disclosures about Fair Value of Financial Instruments
Financial Statements
74
75
76
77
79
115
117
118
123
126
127
128
128
129
131
138
140
142
144
148
155
159
159
160
162
163
164
165
165
165
166
167
169
170
170
173
176
182
183
188
190
193
199
199
200
201
204
215
218
220
221
221
228
230
Commonwealth Bank of Australia Annual Report 2006 73
Financial Statements
Income Statements
For the year ended 30 June 2006
Interest income
Interest expense
Net interest income
Other operating income
Net banking operating income
Funds management income
Investment revenue
Claims and policyholder liability expense
Net funds management operating income
Premiums from insurance contracts
Investment revenue
Claims and policyholder liability expense from insurance
contracts
Insurance margin on services operating income
Total net operating income
Bad debts expense
Operating expenses:
Comparable business
Which new Bank
Total operating expenses
Defined benefit superannuation plan expense
Profit before income tax
Corporate tax expense
Policyholder tax expense
Profit after income tax (1)
Minority interests
Net profit attributable to members of the Bank
Note
2
2
2
2
2
2,15
2
2
2,44
2
5
5
2006
$M
19,758
13,244
6,514
3,036
9,550
1,589
2,098
(2,064)
1,623
1,052
1,031
(970)
1,113
Group
2005
$M
16,781
10,755
6,026
2,845
8,871
1,247
1,956
(1,871)
1,332
1,132
1,186
(1,243)
1,075
2006
$M
16,027
11,305
4,722
5,540
10,262
-
-
-
-
-
-
-
-
Bank
2005
$M
13,681
8,858
4,823
3,991
8,814
-
-
-
-
-
-
-
-
12,286
11,278
10,262
8,814
398
322
380
292
5,994
-
5,994
(35)
5,859
1,569
331
3,959
(31)
3,928
5,719
150
5,869
(75)
5,012
1,374
228
3,410
(10)
3,400
4,604
-
4,604
(35)
5,243
976
-
4,267
-
4,267
4,388
150
4,538
(75)
3,909
897
-
3,012
-
3,012
(1) Net banking operating income, and profit after income tax of the Bank, is greater than the Group, due to the receipt of tax exempt intragroup dividends.
Earnings per share:
Basic
Fully diluted
Dividends per share attributable to shareholders of the Bank:
Ordinary shares
PERLS (1)
Trust preferred securities (TPS) – issued 6 August 2003 (1)
PERLS II – issued 6 January 2004 (1)
(1) Instruments reclassified to loan capital on adoption of AIFRS from 1 July 2005.
7
7
6
Net profit after income tax comprises:
Net profit after income tax (“underlying basis”)
Shareholder investment returns (after tax)
Which new Bank (after tax)
Profit on sale of the Hong Kong insurance business
Net profit after income tax (“cash basis”)
Defined benefit superannuation plan expense
Treasury share valuation adjustment
Net profit after income tax (“statutory basis”)
Cents per share
308. 2
303. 1
224
-
-
-
259. 6
255. 3
197
1,115
7,795
908
$M
$M
3,842
66
-
145
4,053
(25)
(100)
3,928
3,420
177
(105)
-
3,492
(53)
(39)
3,400
74 Commonwealth Bank of Australia Annual Report 2006
Balance Sheets
As at 30 June 2006
Assets
Cash and liquid assets
Receivables due from other financial institutions
Assets at fair value through Income Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Investment securities
Loans, advances and other receivables
Bank acceptances of customers
Shares in and loans to controlled entities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at fair value through Income Statement
Derivative liabilities
Bank acceptances
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders’ Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders’ Equity attributable to members of the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Minority Interests
Total Shareholders’ Equity
Financial Statements
2006
$M
5,131
7,107
15,758
24,437
2,944
9,675
11,203
-
259,176
18,310
-
258
1,314
190
7,809
650
5,141
369,103
173,227
11,184
13,811
10,820
18,310
-
378
1,336
821
22,225
78,591
1,109
6,053
337,865
9,895
347,760
21,343
13,505
-
939
1,904
4,487
20,835
508
-
508
21,343
Group
2005
$M
6,055
6,087
14,631
27,484
-
-
-
10,838
228,346
16,786
-
252
1,132
52
7,656
651
17,434
337,404
168,026
8,023
-
-
16,786
-
833
921
871
24,694
70,765
-
17,551
308,470
6,291
314,761
22,643
13,486
687
1,573
1,265
3,843
20,854
631
1,158
1,789
22,643
2006
$M
4,819
7,464
13,926
-
396
9,938
9,914
-
212,699
18,439
36,150
-
1,027
114
2,738
392
4,624
322,640
155,956
11,131
2,085
10,955
18,439
32,435
334
640
690
-
52,198
-
4,299
289,162
10,688
299,850
22,790
13,766
-
1,895
2,657
4,472
22,790
-
-
-
22,790
Bank
2005
$M
5,736
5,972
12,432
-
-
-
-
6,922
183,925
16,917
29,161
-
821
12
2,675
599
17,154
282,326
143,858
7,969
-
-
16,917
26,428
764
872
703
-
40,687
-
16,737
254,935
7,010
261,945
20,381
13,739
687
737
2,226
2,992
20,381
-
-
-
20,381
Note
8
9
10
11
12
13
14
18
19
20
46
21
5
22
23
24
25
11
26
26
27
38
28
29
30
31
33
33
33
32
32
34
Commonwealth Bank of Australia Annual Report 2006 75
Financial Statements
Statements of Recognised Income and Expense
For the year ended 30 June 2006
Actuarial gains/(losses) from defined benefit superannuation plan
Gains/(losses) on cash flow hedging instruments:
Recognised in equity
Transferred to Income Statement
Gains/(losses) on available-for-sale investments:
Recognised in equity
Transferred to Income Statement on sale
Transferred to Income Statement on impairment
Revaluation of properties
Transfer from FCTR to Income Statement on sale of entities
Exchange differences on translation of foreign operations
Income tax on items taken directly to or transferred directly from
equity:
FCTR
AFS investments revaluation reserve
Revaluation of properties
Cash flow hedge reserve
Net income recognised directly in equity
Profit for the period
Total net income recognised for the period
Attributable to:
Members of the parent
Minority interests
Total net income recognised for the period
Note
32,44
32
32
32
32
32
32
32
32
32
32
32
32
2006
$M
387
89
(58)
51
(33)
(3)
19
41
(232)
13
(6)
(4)
(11)
253
3,959
4,212
4,181
31
4,212
Group
2005
$M
110
-
-
-
-
-
-
29
-
(141)
-
-
-
-
(2)
3,410
3,408
3,398
10
3,408
2006
$M
387
58
(51)
52
(31)
(3)
14
-
(8)
-
7
(3)
(2)
420
4,267
4,687
4,687
-
4,687
Bank
2005
$M
110
-
-
-
-
-
-
29
-
-
-
-
-
-
139
3,012
3,151
3,151
-
3,151
76 Commonwealth Bank of Australia Annual Report 2006
Statements of Cash Flows (1) (2)
For the year ended 30 June 2006
Cash Flows From Operating Activities
Interest received
Interest paid
Other operating income received
Expenses paid
Income taxes paid
Net decrease/(increase) in trading securities
Net increase in assets at fair value through Income Statement
(excluding life insurance)
Life insurance:
Investment income
Premiums received (3)
Policy payments (3)
Net increase in liabilities at fair value through Income Statement
(excluding life insurance)
Cash flows from operating activities before changes in
operating assets and liabilities
Changes in operating assets and liabilities arising from cash
flow movements
Movement in investment securities:
Purchases
Proceeds from sale
Proceeds at or close to maturity
Movement in available-for-sale investments:
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 (increase)/decrease in receivables due from other financial
institutions not at call
Net decrease in securities purchased under agreement to resell
Life insurance business:
Purchase of insurance assets at fair value through Income
Statement
Proceeds from sale/maturity of insurance assets at fair value
through Income Statement
Net increase in deposits and other borrowings
Net proceeds from issuance of debt securities
Net increase in payables due to other financial institutions not at
call
Net increase/(decrease) in securities sold under agreements to
repurchase
Changes in operating assets and liabilities arising from cash
flow movements
Net cash provided by/(used in) Operating Activities
Cash flows from Investing Activities
Payment for acquisition of entities and management rights
Proceeds from disposal of controlled entities
Proceeds from disposal of entities and businesses (net of cash
disposed)
Dividends received
Net amounts paid to controlled entities
Proceeds from sale of property, plant and equipment
Purchases of property, plant and equipment
Payment for acquisitions of investments in associates
Purchases of intangible assets
Net decrease in other assets
Net cash (used in)/provided by Investing Activities
Note
49(a)
49(e)
49(c)
Financial Statements
2006
$M
19,712
(12,555)
4,319
(5,809)
(1,980)
-
(307)
2,399
2,338
(4,938)
1,445
4,624
-
-
-
(28,189)
646
24,831
(29)
(31,996)
(881)
537
Group
2005
$M
16,781
(10,720)
4,559
(5,678)
(985)
318
2006
$M
16,268
(11,348)
2,715
(4,318)
(1,117)
-
-
(1,926)
1,572
3,183
(4,664)
-
4,366
(22,608)
396
22,799
-
-
-
(7)
(31,721)
1,097
991
-
-
-
504
778
-
-
-
(25,310)
558
21,828
(1)
(28,936)
(793)
740
Bank
2005
$M
13,571
(8,960)
3,621
(4,459)
(619)
505
-
-
-
-
-
3,659
(20,254)
275
19,344
-
-
-
3
(24,777)
464
988
(8,078)
(14,165)
-
-
9,398
12,799
14,605
15,281
6,332
17,934
-
13,284
13,331
-
7,291
16,238
2,571
449
2,566
426
328
(1,480)
328
(1,418)
(3,458)
1,166
(4,702)
(336)
(2,405)
(1,627)
(418)
553
35
4
-
32
(385)
(152)
(90)
31
(390)
(40)
-
173
3
-
30
(286)
(42)
(92)
1,055
801
(26)
-
-
2,080
1,531
17
(329)
(102)
(95)
371
3,447
(1,420)
2,239
(24)
178
306
988
(3,325)
30
(164)
-
-
758
(1,253)
(1) It should be noted that the Bank does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions.
(2) Adjusted for AIFRS gross-up. Refer Note 1 (nn) (ii).
(3) Represents gross premiums and policy payments before splitting between policyholders and shareholders.
Commonwealth Bank of Australia Annual Report 2006 77
Financial Statements
Statements of Cash Flows (1) (2)
For the year ended 30 June 2006
Cash Flows from Financing Activities
Buyback of shares
Proceeds from issue of shares (net of costs)
Proceeds from issue of preference shares to minority interests
Proceeds from issue of other equity instruments (net of costs)
Dividends paid (excluding DRP buyback of shares)
Net movement in other liabilities
Net (purchase) of treasury shares
Issue of loan capital
Redemption of loan capital
Other
Net cash (used in) Financing Activities
Note
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
49(b)
2006
$M
(500)
49
-
939
(2,163)
139
(10)
2,446
(915)
1
(14)
762
1,276
2,038
Group
2005
$M
-
66
323
-
(2,083)
(330)
(60)
1,233
(1,392)
55
(2,188)
(1,723)
2,999
1,276
2006
$M
(500)
49
-
1,895
(2,163)
(3,313)
(2)
3,152
(918)
(93)
(1,893)
(73)
314
241
Bank
2005
$M
-
66
-
-
(2,024)
(292)
-
1,554
(1,621)
6
(2,311)
(1,325)
1,639
314
(1) It should be noted that the Bank does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions.
(2) Adjusted for AIFRS gross-up. Refer Note 1 (nn) (ii).
78 Commonwealth Bank of Australia Annual Report 2006
Note 1 Accounting Policies
General Information
to
This annual reporting period is the first under the Australian
equivalent
International Financial Reporting Standards
(“AIFRS”). For this reason, a full explanation of all AIFRS
accounting policies and differences from previous Australian
GAAP (“AGAAP”) is set out below. The financial impact of these
changes is summarised in Note 1 (nn).
The financial statements of the Commonwealth Bank of
Australia (the ‘Bank’) and the Bank and its subsidiaries (the
‘Group’) for the year ended 30 June 2006, were approved and
authorised for issue by the Board of Directors on 23 August
2006.
The Bank is incorporated and domiciled in Australia. It is a
company limited by shares that are publicly traded on the
Australian Stock Exchange. The address of its registered office
is Level 7, 48 Martin Place, Sydney NSW 1155, Australia.
The Group is one of Australia’s leading providers of integrated
financial services including retail, business and institutional
banking, superannuation, life insurance, general insurance,
funds management, broking services and finance company
activities. The principal activities of the Commonwealth Bank
Group during the financial period were:
(i) Banking
The Group provides retail banking services including housing
loans, credit cards, personal loans, savings and cheque
accounts, and demand and term deposits. The Group also offers
commercial products including business loans, equipment and
trade finance, and rural and agribusiness products. The Group
also has full service banking operations in New Zealand, Fiji,
and Indonesia. The Group has wholesale banking operations in
London, New York, Hong Kong, Singapore, Indonesia, China,
Tokyo and Malta.
(ii) Funds Management
The Group’s funds management business comprises wholesale
and retail investment, superannuation and retirement funds.
Investments are across all major asset classes including
Australian and international shares, property, fixed interest and
cash. The Group also has funds management businesses in
New Zealand, the United Kingdom and Asia.
(iii) Insurance
term
insurance, disability
The Group provides
insurance,
annuities, master trusts, investment products and household
general insurance. Life insurance operations are also conducted
in New Zealand, where the Group has the leading market share,
and throughout Asia and the Pacific.
There have been no significant changes in the nature of the
principal activities of the Group during the financial year.
(a) Bases of accounting
This general purpose financial report for the reporting period
ended 30 June 2006 has been prepared in accordance with the
requirements of the Corporations Act 2001.
Notes to the Financial Statements
For the financial year ended 30 June 2005 and all prior years the
Annual Financial Report was prepared under the Australian
accounting standards applicable to reporting periods beginning
prior to 1 January 2005 (AGAAP). This 30 June 2006 Annual
Financial Report, however, complies with current Australian
accounting standards which consist of Australian equivalents to
International Financial Reporting Standards (AIFRS). The basis
of the AIFRS standards are the International Financial Reporting
International Accounting
Standards (IFRS)
Standards Board. As a result of complying with AIFRS, the
Group accounts also comply with IFRS, and interpretations
adopted by the International Accounting Standards Board.
issued by
the
Accounting policies for the Bank have changed significantly due
to
the adoption of AIFRS. These changes have been
summarised by comparing prior years’ accounting policies to the
new AIFRS accounting policies. Differences in measurement,
recognition and disclosure have been noted in the change in
accounting policy section within each topic.
The preparation of the financial report in conformity with AIFRS
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
information and
accompanying notes. Use of available
application of judgement are inherent in the formation of
estimates. Actual results could differ from these estimates and
possible impacts are disclosed in Note 1 (mm).
(b) Basis of preparation
The financial statements are prepared on the basis of historical
cost except that the following assets and liabilities are stated at
their fair value: derivative financial instruments, assets and
liabilities at fair value through Income Statement, available-for-
sale investments, insurance policy liabilities, domestic bills
discounted which are included in loans, advances and other
receivables held by the Group, investment property and owner
occupied property, defined benefit plan assets and liabilities, and
employee share-based compensation liabilities. Recognised
assets and liabilities that are hedged and are attributable to the
hedged risk are stated at fair value.
The accounting policies which have changed as a result of the
adoption of AIFRS have been applied retrospectively and
consistently by the Group to all periods presented in these
financial statements and in preparing an opening AIFRS balance
sheet at 1 July 2004, except for the following standards which
were adopted and applied from 1 July 2005 onwards:-
i) AASB 132 Financial
Presentation;
ii) AASB 139 Financial
Measurement;
Instruments – Disclosure and
Instruments – Recognition and
iii) AASB 4 Insurance Contracts;
iv) AASB 1023 General Insurance Contracts; and
v) AASB 1038 Life Insurance Contracts.
Commonwealth Bank of Australia Annual Report 2006 79
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
On this basis, comparison with prior period results should be
read in conjunction with the following accounting policy notes.
AIFRS has been applied retrospectively subject to the following
elections under AASB 1 First-Time Adoption of AIFRS:
i) not to restate any past business combinations that occurred
prior to 1 July 2004 in preparing the Group’s opening AIFRS
Balance Sheet at 30 June 2005.
ii) to transfer the Foreign Currency Translation Reserve as at 1
July 2004 to Retained Profits.
The Group has applied its previous AGAAP in the comparative
information to financial instruments and insurance contracts
within the scope of the above standards.
The financial report is presented in Australian dollars. The Group
has elected to early adopt the following accounting standards
and amendments:
• AASB 119 Employee Benefits (July 2005).
• AASB 2004-3 Amendments
to Australian Accounting
Standards (December 2004) amending AASB 1 First-time
Adoption of Australian Equivalents to International Financial
Reporting Standards (July 2004), AASB 101 Presentation of
Financial Statements and AASB 124 Related Party
Disclosures.
• AASB 2005-1 Amendments
to Australian Accounting
Standards (May 2005) amending AASB 139 Financial
Instruments: Recognition and Measurement.
• AASB 2005-3 Amendments
to Australian Accounting
Standards (June 2005) amending AASB 119 Employee
Benefits (either July or December 2004).
• AASB 2005-4 Amendments
to Australian Accounting
Standards (June 2005) amending AASB 139 Financial
Instruments: Recognition and Measurement, AASB 1 First-
time Adoption of Australian Equivalents to International
Financial Reporting Standards (July 2004), AASB 1023
General Insurance Contracts and AASB 1038 Life Insurance
Contracts.
• AASB 2005-5 Amendments
to Australian Accounting
Standards (June 2005) amending AASB 1 First-time
Adoption of Australian Equivalents to International Financial
Reporting Standards (July 2004), and AASB 139 Financial
Instruments: Recognition and Measurement.
• AASB 2005-6 Amendments
to Australian Accounting
Standards (June 2005) amending AASB 3 Business
Combinations.
• AASB 2005-9 Amendments
to Australian Accounting
Standards (September 2005) requires that liabilities arising
from
financial guarantee contracts are
issue of
recognised in the Balance Sheet.
the
• AASB 2006-1 Amendments
to Australian Accounting
Standards (January 2006) amending AASB 121 The Effects
of Change in Foreign Exchange Rates (July 2004).
• UIG 8 Scope of AASB 2.
80 Commonwealth Bank of Australia Annual Report 2006
The following standards and amendments were available for
early adoption but have not been applied by the Group in these
financial statements:
• AASB 7 Financial Instruments: Disclosure (August 2005)
replacing
financial
instruments in AASB 132. AASB 7 is applicable for annual
reporting periods beginning on or after 1 January 2007.
the presentation
requirements of
• AASB 2005-10 Amendments
(September 2005) makes
to Australian Accounting
consequential
Standards
amendments
Instruments:
to AASB 132 Financial
Disclosures and Presentation, AASB 101 Presentation of
Financial Statements, AASB 114 Segment Reporting, AASB
117 Leases, AASB 133 Earnings per Share, AASB 139
Financial Instruments: Recognition and Measurement, AASB
1 First-time Adoption of Australian Equivalents
to
International Financial Reporting Standards, AASB 4
Insurance Contracts, AASB 1023 General
Insurance
Contracts and AASB 1038 Life Insurance Contracts, arising
from the release of AASB 7. AASB 2005-10 is applicable for
annual reporting periods beginning on or after 1 January
2007.
The Group plans to adopt AASB 7 and AASB 2005-10 from the
financial year commencing 1 July 2007.
The initial application of AASB 7 and AASB 2005-10 is not
expected to have an impact on the financial results of the Bank
and the Group as the standard and the amendment are
concerned only with disclosures.
(c) Consolidation
Additional entities have been consolidated within the Group due
to the adoption of AASB 127 Consolidated and Separate
Financial Statements and UIG 112 Consolidation – Special
Purpose Entities. These changes do not have a material impact
on net assets or net profit however they have resulted in material
gross ups of individual asset and liability line items of the Group.
For further details, refer to the change in accounting policy
below.
(i) Current accounting policy
The consolidated financial statements include the financial
statements of the Bank and all entities where it is determined
that there is a capacity to control as defined in AASB 127 and
UIG 112.
All balances and transactions between Group entities, including
losses, have been eliminated on
unrealised gains and
consolidation.
The consolidated financial statements also include the Group’s
share of the financial results of entities where the Group holds
an investment in, and has significant influence over, the financial
and operating policies as defined in AASB 128 Investments in
Associates. This is normally evidenced when the group owns
20% or more of the voting rights.
Note 1 Accounting Policies (continued)
Associated companies are defined as those entities over which
the Group has significant influence but there is no capacity to
control. Investments in associates are carried at cost plus the
Group’s share of post-acquisition profit or loss and other
reserves. The Group’s share of profit or loss of associates is
included in the profit from ordinary activities.
(ii) Change in accounting policy
With the adoption of AASB 127 and UIG 112, a number of
additional entities have been included in the Group. This is due
to a change in what constitutes control and the inclusion of
potential voting rights when considering control. Some of these
entities were formed by the Group for the purpose of asset
securitisation transactions and structured debt issuance, and to
accomplish certain narrow and well-defined objectives. Such
entities may acquire assets directly or indirectly from the Bank or
its affiliates. Additionally, some of these entities are bankruptcy-
remote (i.e. their assets are not available to satisfy the claims of
creditors of the Group or any other of its subsidiaries). However,
these entities have been consolidated in the Group’s financial
statements as the exposure to risks and benefits from the entity
resides with the Group.
The adoption of AASB 127 and UIG 112 has been applied
retrospectively from 1 July 2004.
(d) Revenue recognition
The adoption of AASB 118 Revenue and AASB 139 has had an
impact on the recognition and measurement of revenue. For
further details, refer to the change in accounting policy below.
(i) Current accounting policy
Revenue is recognised to the extent that it is probable that the
economic benefits will flow to the Group and the revenue can be
reliably measured. The principal sources of revenue are interest
income and fees and commissions.
Interest income
Interest income is recognised on an accrual basis using the
effective interest method. Further information is included in Note
1(g) Receivables from other financial institutions, Note 1(j)
Available-for-sale investments, Note 1(l) Loans, advances and
other receivables, and Note 1(m) Leasing.
Lending fees
Fee income and direct costs relating to loan origination,
financing or restructuring and to loan commitments are deferred
and amortised to interest income over the life of the loan using
the effective interest method. Fees received for commitments
which are not expected to result in a loan are recognised in the
profit and loss over the commitment period. Loan syndication
fees where the Group does not retain a portion of the syndicated
loan are recognised in income once the syndication has been
completed. 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 profit and
loss on an accrual basis.
Fees and commission
fees
When commission charges and
to specific
transactions or events, they are recognised in income in the
period in which they are earned. However, when they are
charged for services provided over a period, they are recognised
in income on an accrual basis.
relate
Notes to the Financial Statements
Other income
Trading income is brought to account when earned based on
changes in fair value of financial instruments and recorded from
trade date. Further information is included in Notes 1(e) Foreign
Currency Translations, 1(i) Assets at Fair Value Through Income
Statement, and Note 1(ff) Derivative financial instruments. Life
insurance business income recognition is explained in Note
1(hh) below.
(iii) Change in accounting policy
Under AASB 118 and AASB 139, interest income now includes
fees integral to the establishment of financial instruments for
which interest income is recognised using the effective interest
method. Fee income and direct costs relating to loan origination
are deferred and amortised to interest earned on loans,
advances and other receivables over the life of the loan using
the effective interest method.
is no material change
There
measurement of fees and commission and other income.
the
in
recognition and
The changes have been applied from 1 July 2005.
(e) Foreign currency translations
The adoption of AASB 121, The Effects of Changes in Foreign
Exchange Rates, has not had a substantial impact on the
reporting currency of the Group’s entities or the translation of
foreign currency assets and liabilities. However, on transition
under AASB 1 First-time Adoption of Australian Equivalents to
IFRS, an option exists to transfer any amounts recorded within
the Foreign Currency Translation Reserve (FCTR) as at 1 July
2004 to Retained Profits. For further details, refer to the change
in accounting policy below.
(i) Current accounting policy
The functional and presentation currency of the domestic
operations of the Bank has been determined to be Australian
Dollars (AUD) as this currency best reflects the economic
substance of the underlying events and circumstances relevant
to the Bank. Each entity and overseas branch within the Group
has also determined their functional currency based on their own
primary economic indicators.
All foreign currency monetary items are revalued at spot rates of
exchange prevailing at balance sheet date and changes in the
spot rate are recorded in the profit and loss. Foreign currency
forward, futures, swaps and option positions are revalued at the
appropriate market rates applying at balance sheet date.
Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rate at the date of transaction. Non-monetary assets
and liabilities denominated in foreign currencies that are stated
at fair value are translated into AUD at foreign exchange rates
ruling at the dates the fair value was determined. With the
exception of the revaluations classified in equity, unrealised
foreign currency gains and
these
revaluations and gains and losses arising from foreign exchange
dealings are included in the profit and loss.
losses arising
from
The foreign currency assets and liabilities of overseas branches
and controlled entities with an overseas functional currency are
converted to AUD at balance sheet date in accordance with the
foreign exchange rates ruling at that date. Profit and loss items
for overseas branches and controlled entities are converted to
AUD progressively throughout the year at the spot exchange
rate at the date of the transaction. All resulting exchange
the FCTR as a separate
in
differences are recognised
component of equity.
Commonwealth Bank of Australia Annual Report 2006 81
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Translation differences arising from conversion of opening
balances of shareholders’ funds of overseas branches and
controlled entities at year end exchange rates are reflected in
the FCTR. The Group 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
impact on its financial condition.
(ii) Change in accounting policy
Under the option available within AASB 1 the Bank transferred
the balance of the FCTR as at 30 June 2004 to Retained Profits.
The translation on non-monetary Available-for-sale investments,
the cash flow hedge reserve and net investments in foreign
entities are all recorded in the FCTR.
These changes have been applied retrospectively from 1 July
2004.
(f) Cash and liquid assets
The adoption of AIFRS, AASB 127 Consolidated and Separate
Financial Statements and UIG 112 Consolidation – Special
Purpose Entities has not impacted the definition of cash and
liquid assets, however additional entities have been
consolidated into the Group, refer to Note 1(c) Consolidation.
These changes have resulted in recognition of additional cash
and liquid assets. For further details, refer to the change in
accounting policy below.
(i) Current accounting policy
Cash and liquid assets includes cash at branches, cash at
bankers, nostro balances, money at short call with an original
maturity of three months or less and securities held under
reverse repurchase agreements. They are brought to account at
the face value or the gross value of the outstanding balance.
Interest is taken to profit and loss using the effective interest
method when earned.
(ii) Change in accounting policy
Under AASB 127 and UIG 112 special purpose vehicles used
for the securitisation of loans and receivables by the Group will
be consolidated under AIFRS. This has resulted in an increase
in cash and liquid assets.
Under AASB 107 Cash Flow Statements, the definition of cash
and liquid assets includes nostro balances. This balance was
previously
financial
institutions.
from other
receivables
recorded
in
The change has been applied retrospectively from 1 July 2004.
(g) Receivables from other financial institutions
The adoption of AIFRS has not had a substantial impact on
receivables from other financial institutions. For further details,
refer to the change in accounting policy below.
(i) Current accounting policy
Receivables from other financial institutions include loans,
deposits with regulatory authorities 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 using the effective interest method.
82 Commonwealth Bank of Australia Annual Report 2006
(ii) Change in accounting policy
Under AASB 107 Cash Flow Statements, nostro balances,
previously recorded separately
from other
financial institutions, have been reclassified to cash and liquid
assets.
in receivables
regulatory authorities, previously
Deposits with
recorded
separately on the face of the balance sheet, have been
reclassified to receivables from other financial institutions.
The change has been applied retrospectively from 1 July 2004
(h) Financial instruments
The adoption of AASB 132 Financial Instruments: Disclosure
and Presentation, AASB 139 Financial Instruments: Recognition
and Measurement and AASB 130 Disclosures in the Financial
Statements of Banks and Similar Financial Institutions from 1
July 2005 has had a significant impact on the recognition,
measurement and disclosure of financial instruments. Under
these standards,
to
recognise all derivatives in the balance sheet and to record all
derivatives and some financial assets and liabilities at fair market
value. Those financial assets and financial liabilities which are
not at fair value will be carried at cost or amortised cost.
the accounting policy has changed
For each class of financial instrument listed below, except for
restructured facilities referred to in Note 1(l) Loans, advances
and other receivables, 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.
Under AASB 132 and AASB 139, financial instruments are
required to be classified into one of the following measurement
categories which determines the accounting treatment of the
item:
• Assets at fair value through Income Statement (Note 1 (i))
• Available-for-sale investments (Note 1 (j))
• Loans, advances and other receivables (Note 1 (l))
• Liabilities at fair value through Income Statement (Note 1 (x))
• Liabilities at amortised cost
• Equity (Note 1 (ee))
The change in accounting policy on transition to AIFRS for each
class of financial instrument is detailed below.
to
the
recognition and
The application of AASB 139
measurement of
liabilities,
financial assets and
including derivatives, has given rise to a transition adjustment
and will increase volatility in reported profits. For a summary of
the change in accounting policy for hedge accounting see Note
1(ff), Derivative financial instruments.
financial
The Group has no held to maturity investments.
In line with the exemption provided by AASB 1, comparative
information has not been restated under AASB 132 and AASB
139.
Offsetting financial instruments
The Group offsets financial assets and liabilities where there is a
legally enforceable right to set off, and there is an intention to
settle on a net basis or to realise the asset and settle the liability
simultaneously.
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Derecognition of financial instruments
(ii) Change in accounting policy
The derecognition of a financial instrument takes place when the
Group no longer controls the contractual rights that comprise the
financial instrument, which is normally the case when the
instrument is sold, or all the cash flows attributable to the
instrument are passed through to an independent third party and
the risks and rewards have substantially been transferred.
(i) Assets at fair value through Income Statement
“Assets at fair value through Income Statement”, is a new class
of financial asset under AASB 139. For further details, refer to
the change in accounting policy below.
(i) Current accounting policy
Assets at fair value through Income Statement include assets
held for trading and assets that upon initial recognition are
designated by the Group as at fair value through Income
Statement. The assets designated as at fair value through
Income Statement are those assets where the designation either
reduces significant accounting mismatches between assets and
related liabilities, the group of financial assets are managed and
their performance is evaluated on a fair value basis, or where
the asset is a contract which contains an embedded derivative.
The assets are recognised initially at fair value and transaction
costs including brokerage commissions and fees are taken
directly to profit and loss. Subsequent changes in fair value are
reported in other operating income. Dividends and interest are
reflected in other operating income. Interest earned is recorded
within Net Interest Earnings.
Assets at fair value through Income Statement are classified into
three subcategories: Trading, Insurance and Other investments.
Trading
Trading assets are short and long term public, bank and other
debt securities and equities that are acquired and held for
trading purposes. Subsequent to initial recognition fair value is
measured using quoted bid prices where available. In a trading
portfolio with offsetting risk positions, quoted mid prices, where
available, are used to measure the fair value. Non-market
quoted assets are valued using valuation techniques based on
market conditions and risks existing at balance sheet date.
Insurance
Insurance investment assets are investment securities that back
life insurance contracts and life investment contracts. Refer to
Note 1(hh), Life insurance business for further details.
Other investments
Other investments include financial assets which the Group has
designated as at fair value through the Income Statement.
Subsequent to initial recognition fair value is measured using
quoted bid prices. Quoted mid prices are used to measure
assets with offsetting risk positions in a portfolio at fair value.
Non-market quoted instruments are valued using valuation
techniques that are market conditions and risks existing at
balance sheet date. Changes in fair value, and the reporting of
interest and dividends earned are accounted for as outlined
above. Other investments are recorded on a trade date basis.
Under AASB 132 and AASB 139, there is a substantial change
in the disclosure, recognition, measurement and presentation of
those financial assets now classified as Assets at fair value
through Income Statement. The standards have been applied
from 1 July 2005. The changes are summarised below:
Assets at fair value through Income Statement is a new category
of financial asset.
Trading securities have been reclassified into assets at fair value
through Income Statement.
Insurance investment assets have been reclassified into Assets
at fair value through Income Statement.
Other Investments is a new category of financial asset within
Assets at fair value through Income Statement. They were
previously carried at cost, or amortised cost, predominantly as
investment securities.
Quoted bid prices, where available, are used to measure fair
value. Quoted mid prices, where available, are used to measure
fair value where there is an offsetting risk position in a portfolio.
There is no material change in the measurement of assets at fair
value.
Unrealised changes in fair value and realised gains and losses
on disposal are reflected in other operating income. Interest on
other investments is reported in net interest earnings using the
effective interest method. Dividends are reflected in other
operating income when earned.
Other investments are recorded on a trade date basis.
(j) Available-for-sale investments
The adoption of AASB 132 and AASB 139 has had a substantial
impact on the measurement and disclosure of those financial
instruments now classified as available-for-sale investments.
Additional entities have been consolidated into the Group, refer
to Note 1(c) Consolidation, which has resulted in recognition of
additional available-for-sale investments. For further details,
refer to the change in accounting policy below.
(i) Current accounting policy
Available-for-sale investments are short and long term public,
bank and other securities and include bonds, notes, bills of
exchange, commercial paper, certificates of deposit, equities
and rolling loan originations and syndications.
Available-for-sale investments are initially recognised at fair
value including transaction costs and thereafter at fair value.
Unquoted equities and investments whose fair value cannot be
reliably measured are valued at cost. Gains and losses arising
from changes in fair value are reported in the available-for-sale
revaluation reserve net of applicable income taxes until such
investments are sold, collected, otherwise disposed of, or
become
Interest, premiums and dividends are
reflected in other operating income when earned.
impaired.
Available-for-sale investments are tested for lasting impairment
in line with Note 1(n) Provisions for impairment.
Upon disposal or impairment, the accumulated change in fair
value within
is
transferred to profit and loss and reported under other operating
income.
the available-for-sale revaluation reserve
Commonwealth Bank of Australia Annual Report 2006 83
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(ii) Change in accounting policy
Restructured Facilities
There is no change in accounting policy.
When the original contractual terms of facilities (primarily loans)
are modified, the accounts become classified as restructured.
Such accounts continue to accrue interest as long as the facility
is performing 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 performing classification. Facilities are generally kept as
non performing until they are returned to a performing basis.
Assets Acquired Through Securities Enforcement (AATSE)
There is no change in accounting policy.
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 an individually assessed provision or written off.
AATSE are further classified as Other Real Estate Owned
(“OREO”) or Other Assets Acquired Through Security
Enforcement (“OAATSE”) and classified in the appropriate asset
classifications in the balance sheet.
Impairment of loans, advances and other receivables
There has been a change in the recognition and measurement
of impairment of loans, advances and other receivables as
explained in Note 1(n) Provisions for impairment.
(ii) Change in accounting policy
Under AASB 139, loans are measured at amortised cost using
the effective interest rate method.
As explained in Note 1(n), the Group has individually assessed
provisions and collective provisions for impairment. In addition,
the measurement and recognition of those provisions has
changed, which is also explained in Note 1(n).
The change in measurement has been applied from 1 July 2005.
Under AASB 127 and UIG 112 certain special purpose vehicles
used for the securitisation of loans and receivables by the Group
are consolidated under AIFRS, which has resulted in an
increase in loans, advances and other receivables.
The change in recognition associated with AASB 127 and UIG
112 has been applied retrospectively from 1 July 2004.
(m) Leasing
The adoption of AASB 117 Leases has not had a significant
impact on the recognition, measurement or disclosure of leases.
The changes are minimal except and so far as leveraged leases
that were ‘grandfathered leveraged leases’ are now measured
and disclosed as finance leases. For further details, refer to the
change in accounting policy below.
(i) Current accounting policy
Leases where the Group transfers substantially all the risks and
rewards incident to ownership of an asset to the lessee or a third
party are classified as finance leases. A receivable at an amount
equal to the present value of the lease payments, including any
guaranteed residual value, is recognised.
Under AASB 139, financial assets previously classified as
investment securities have predominantly been reclassified to
Available-for-sale investments and Loans, advances and other
receivables.
Investment securities which were previously recognised at cost
or amortised cost have been restated to fair value. Changes in
fair value have been included as a separate component of equity
(available-for-sale revaluation reserve) until sale or impairment
when the cumulative gain or loss is transferred to profit and loss.
The change in measurement has been applied from 1 July 2005.
(k) Repurchase agreements
There is no material change in accounting policy.
Securities sold under agreements to repurchase are retained
within the Available-for-sale investments or Assets at fair value
for
through
accordingly in line with Note 1 (j) and (i) respectively.
Income Statement categories and accounted
Liability accounts are used to record the obligation to repurchase
and disclosed as Deposits. Securities held under reverse
repurchase agreements are recorded within Cash and liquid
assets.
(l) Loans, advances and other receivables
The adoption of AASB 127, AASB 132, AASB 139 and UIG 112
has had a substantial impact on the recognition, measurement
and disclosure of those financial instruments classified as loans,
advances and other receivables. Additional entities have been
consolidated into the Group, refer to Note 1(c) Consolidation,
which has resulted in recognition of additional loans, advances
and other receivables. For further details, refer to the change in
accounting policy below.
(i) Current accounting policy
Loans, advances and other receivables are financial assets with
fixed and determinable payments that are not quoted in an
active market.
term
finance
lending,
They include overdrafts, home loans, credit card and other
personal
financing, redeemable
loans, bill
leases. Loans,
preference shares, securities and
advances and other receivables are initially recognised at fair
value including direct and incremental transaction costs. They
are subsequently measured at amortised cost using the effective
interest method. Where loans, advances and other receivables
are originated with the intent to be sold immediately or in the
short term, they are recorded in Assets at fair value through
Income Statement.
Note 1(d) and Note 1(n) provide additional information with
respect to revenue recognition and impairment respectively.
Non Performing Facilities
Individual provisions for impairment are recognised to reduce
the carrying amount of loans and advances to their estimated
recoverable amounts. Individually significant provisions are
calculated based on discounted cash flows.
The unwinding of the discount from initial recognition of
impairment through to recovery of the written down amount is
recognised as interest income. In subsequent periods, interest in
arrears/due on non performing facilities is taken to profit and loss
when a cash payment is received/realised and the amount is not
designated as a principal payment.
84 Commonwealth Bank of Australia Annual Report 2006
Note 1 Accounting Policies (continued)
AASB 117 requires income on finance lease transactions to be
recognised on a basis reflecting a constant periodic return based
on the lessor’s net investment outstanding in respect of the
finance lease.
The difference between the gross receivable and the present
value of the receivable is unearned finance income and is
recognised over the term of the lease using the effective interest
method. Finance lease receivables are included in loans,
advances and other receivables.
Leases where the Group retains substantially all the risk and
rewards incident to ownership of an asset are classified as
operating leases.
Operating lease rental revenue and expense is recognised in
profit and loss on a straight-line basis over the lease term. The
Group classifies assets leased out under operating leases as
property, plant and equipment. These assets are depreciated
over their expected useful lives on a basis consistent with similar
fixed assets.
(ii) Change in accounting policy
Previously, only leveraged leases with a lease term beginning
from 1 July 1999 were accounted for as finance leases with
income brought to account progressively over the lease term.
With the adoption of AASB 117 Leases, all leveraged leases,
including those written prior to 1 July 1999 are now measured
and disclosed as finance leases.
(n) Provisions for impairment
The adoption of AASB 139 Financial Instruments: Recognition
and Measurement and AASB 136 Impairment of Assets has had
a substantial impact on the measurement and recognition of
impairment of financial and non-financial assets. For further
details, refer to the change in accounting policy below.
(i) Current accounting policy
Financial assets
Financial assets, excluding derivative assets and assets at fair
value through Income Statement, are reviewed at each balance
sheet date to determine whether there is objective evidence of
impairment. A financial asset or portfolio of financial assets is
impaired and impairment losses are incurred if, and only if, there
is objective evidence of impairment as a result of one or more
loss events that occurred after the initial recognition of the asset
and prior to the balance sheet date (“a loss event”) and that loss
event or events has had an impact on the estimated future cash
flows of the financial asset or the portfolio that can be reliably
estimated. If any such indication exists, the asset’s carrying
amount is written down to the asset’s estimated recoverable
amount.
Loans, advances and other receivables
The Group assesses at each balance date whether there is any
objective evidence of impairment.
If there is objective evidence that an impairment loss on loans,
advances and other receivables has been incurred, the amount
of the loss is measured as the difference between the asset’s
carrying amount and the present value of the expected future
cash flows (excluding future credit losses that have not been
incurred), discounted at the financial asset’s original effective
interest rate. Short-term balances are not discounted.
Notes to the Financial Statements
Loans and advances are presented net of provisions for loan
impairment. The Group has Individually assessed provisions
and Collectively assessed provisions. Individually assessed
provisions are made against individually significant financial
assets and those that are not individually significant, including
groups of financial assets with similar credit risk characteristics.
All other loans and advances that do not have an individually
assessed provision are assessed collectively for impairment.
Collective provisions are maintained to reduce the carrying
amount of portfolios of similar loans and advances to their
estimated recoverable amounts at the balance sheet date.
The expected future cash flows for portfolios of assets with
similar risk characteristics are estimated on the basis of historical
loss experience. Loss experience is adjusted on the basis of
current observable data to reflect
the effects of current
conditions that did not affect the period on which the loss
experience is based and to remove the effects of conditions in
the period that do not currently exist. Increases or decreases in
the provision amount are recognised in the profit and loss.
Available-for-sale investments
When a decline in the fair value of an available-for-sale
investment has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative loss
that had been recognised directly in equity (refer Note 1(j)) is
removed from equity and recognised in the profit and loss.
If in a subsequent period the amount of an impairment loss for
an available-for-sale debt security decreases and the decrease
can be linked objectively to an event occurring after the
impairment event, the impairment is reversed through profit and
loss. However, impairment losses on available-for-sale equity
securities are not reversed while the asset is still recognised.
Goodwill and other non-financial assets
Goodwill balances and intangible assets with an indefinite useful
life are assessed for impairment at each reporting date or more
regularly where an indication of impairment exists. Please refer
to Note 1(t) Intangibles for more details on goodwill and
intangibles impairment testing. If any such indication exists, the
asset’s carrying amount is written down to the asset’s estimated
recoverable amount and the loss is recognised in the profit and
loss in the period in which it occurs.
The carrying amounts of the Group’s other non-financial assets
are reviewed at each balance sheet date to determine whether
there is any indication of impairment. If any such indication
exists, the asset’s recoverable amount is estimated.
The recoverable amount of an asset or cash generating unit can
be the greater of the fair value less cost to sell, or value in use.
The Group’s policy is to use the fair value less costs to sell in
assessing
is
recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds
recoverable amount.
Impairment losses are recognised in the profit and loss.
recoverable amount. An
impairment
loss
its
A previously recognised impairment loss (except for goodwill) is
reversed if there has been a change in the estimates used to
determine the recoverable amount. However, the reversal is not
to an amount higher than the carrying amount that would have
been determined, net of amortisation or depreciation, if no
impairment loss had been recognised in prior years.
Commonwealth Bank of Australia Annual Report 2006 85
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Off-balance sheet items
Under AASB 137 Provisions, Contingent Liabilities and
Contingent Assets, provisions for impairment on off-balance
sheet items such as a commitment are reported in other
provisions. Measurement of provisions is discussed further in
Note 1(aa) Provisions.
The amounts required to bring the provisions for impairment to
their assessed levels are charged to profit and loss.
(ii) Change in accounting policy
Under previous AGAAP and in line with market practice, the
Group’s general provision for bad debts was maintained to cover
non identified probable losses and latent risks inherent in the
overall portfolio of advances and other credit transactions.
These assets are brought to account at fair value when impaired
and a provision is raised as per Note 1(n) Provisions for
impairment.
(q) Investment property
The adoption of AASB 116 Property, Plant and Equipment, and
AASB 140, Investment Property, have not had a material impact
on the recognition and measurement of these assets. There
have, however, been some disclosure changes in relation to
investment property. For further details, refer to the change in
accounting policy below.
(i) Current accounting policy
Investment properties are classified as properties held to earn
rental income and/or for capital appreciation.
Under AIFRS, the Group recognises impairment provisions in
respect of only those advances and credit transactions for which
there is objective evidence of impairment as at each balance
sheet date.
The Group carries investment properties at fair value based on a
valuation performed by professional valuers. Valuations are
carried out annually. Fair value movements are taken to the
profit and loss in the year in which they arise.
As a result of this change, there has been a reduction in the
amount of the Bank’s collective provisioning for impaired loans.
Investment properties are separately disclosed on the face of
the balance sheet and in the notes to the financial statements.
Specific provisions are now known as individually assessed
provisions and are established where objective evidence of
impairment has been identified via an individual assessment of a
financial asset or group of financial assets.
Individually significant provisions are assessed as the difference
between an asset’s carrying amount and the present value of
estimated future cash flows discounted at the asset’s original
effective interest rate.
Loans and advances that do not have an individually assessed
provision are assessed collectively for impairment.
The transitional provisions for loan impairment resulted in
adjustments to existing provisions being taken to Retained
Profits.
The difference between the post-tax equivalents of the previous
general provision and the new collective provision has been
appropriated from Retained Profits to a separate component of
equity - General Reserve for Credit Loss.
(o) Bank acceptances of customers
There is no change in accounting policy.
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 that is taken to profit and loss when earned.
(p) Shares in and loans to controlled entities
There has been no substantial change in accounting policy.
Shares in controlled entities are carried in the Bank’s financial
statements at the lower of cost of acquisition or recoverable
amount, and loans to controlled entities are measured at
amortised cost using the effective interest method.
(ii) Change in accounting policy
Investment properties were previously included within Property,
Plant and Equipment and are now separately disclosed on the
face of the balance sheet and in the notes to the financial
statements.
The changes in disclosure have been applied from 1 July 2005.
(r) Assets classified as held for sale
The adoption of AASB 5, Non-Current Assets Held for Sale and
Discontinued Operations, and AASB 116, Property, Plant and
Equipment, have not had a material impact on the recognition
and measurement of these assets. There have been some
disclosure changes in relation to assets classified as held for
sale. For further details, refer to the change in accounting policy
below.
(i) Current accounting policy
Assets are classified as held for sale when their carrying
amounts will be recovered principally through sale within 12
months. They are measured at the lower of carrying amount and
fair value less costs to sell and if material are disclosed
separately on the face of the balance sheet.
Assets classified as held for sale are neither amortised nor
depreciated.
(ii) Change in accounting policy
Assets classified as held for sale were previously included within
Property, Plant and Equipment and if material are now
separately disclosed on the face of the balance sheet and in the
notes to the financial statements.
The changes in disclosure have been applied from 1 July 2005.
86 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(s) Property, Plant and Equipment
The adoption of AASB 5, Non-Current Assets Held for Sale and
Discontinued Operations, AASB 116, Property, Plant and
Equipment, and AASB 140, Investment Property have not had a
material impact on the recognition and measurement of these
assets. There have been some disclosure changes in relation to
investment property and assets classified as held for sale. For
further details, refer to the change in accounting policy below.
(i) Current accounting policy
The Group measures its property assets (land and buildings) on
a
is based upon
independent market valuations.
fair value measurement basis which
Adjustments arising from revaluation are generally reflected in
the Asset Revaluation Reserve, except to the extent they
reverse a revaluation decrease of the same asset previously
recognised in profit and loss. Gains or losses on disposals are
the net disposal
determined as
proceeds, if any, and the carrying amount of the item. Realised
amounts in the Asset Revaluation Reserve are transferred to the
Capital Reserve.
the difference between
Equipment is measured at cost less accumulated depreciation
and provision for impairment, if any. Depreciation is calculated
principally on a category basis at rates applicable to each
category’s useful life using the straight-line method and treated
as an operating expense charged to profit and loss. The
amounts charged for the year are shown in Note 2 Profit.
Computer software is capitalised at cost and classified as
Property, Plant and Equipment where it is deemed integral to the
operation of associated hardware.
The useful lives of major depreciable asset categories are as
follows:
Buildings
Shell
Integral plant and equipment:
Carpets
All other (air-conditioning, lifts)
Non integral plant and equipment:
Maximum 30 years
10 years
20 years
Fixtures and fittings
10 years
Leasehold improvements
Leasehold improvements
Equipment
Security surveillance systems
Furniture
Office machinery
EFTPOS machines
Lesser of unexpired
lease term or lives as
above
7 years
8 years
5 years
3 years
Depreciation rates and methods underlying the calculation of
depreciation of items of property, plant and equipment are kept
under review to take account of any change in circumstances.
No depreciation is charged on freehold land, although, in
common with all long-lived assets, it is subject to impairment
testing, if deemed appropriate.
Property, plant and equipment are periodically reviewed for
impairment. Where the carrying amount of an asset is greater
than its estimated recoverable amount, it is written down
immediately through profit and loss to its recoverable amount.
Where the Group expects the carrying amount of assets held
within property, plant and equipment to be recovered principally
through a sale transaction in the short-term rather than through
continuing use, these assets are classified as held for sale.
(ii) Change in accounting policy
Under AASB 116 Property, Plant and Equipment, property
revaluations were previously recognised on a class of asset
basis where increments and decrements are offset against each
other when they relate to the same class of assets. Under
increments or decrements are
AIFRS, net cumulative
determined at the level of each individual asset. This has led to
revaluation amounts that were previously offset being allocated
back to assets.
Investment properties and assets classified as held for sale
previously included within property, plant and equipment have
been split out and if material, are separately disclosed on the
face of the balance sheet and in the notes to the financial
statements. For further details refer to Note 1(q) and Note 1(r)
on Investment property and assets classified as held for sale
respectively.
Previously, realised amounts in the Asset Revaluation Reserve
were transferred to the Capital Reserve, but are now transferred
to Retained Profits.
The changes in disclosure have been applied from 1 July 2004.
(t) Intangibles
The adoption of AASB 138 Intangible Assets has had a
substantial
the recognition, measurement and
disclosure of intangibles. For further details, refer to the change
in accounting policy below.
impact on
(i) Current accounting policy
Goodwill
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.
Goodwill is reviewed annually for impairment at each reporting
date, or more frequently if events or changes in circumstances
indicate that it might be impaired. For the purposes of
impairment testing, goodwill is allocated to cash-generating units
or groups of units. A cash-generating unit is the smallest
identifiable group of assets that generate independent cash
flows. Goodwill is allocated by the Group to cash generating
units or groups of units based on how goodwill is monitored by
management.
An impairment loss is recognised for a cash-generating unit if
the recoverable amount of the unit/group of units is less than the
carrying amount of the unit/group of units. The recoverable
amount of the cash-generating units is calculated as the fair
value less costs to sell, measured using readily available market
data and assumptions. Impairment losses on goodwill are not
subsequently reversed.
Commonwealth Bank of Australia Annual Report 2006 87
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Gains and losses on the disposal of an entity are net of the
carrying amount of the goodwill relating to the entity.
Under AASB 138, the acquired component of any excess of the
net market value over net assets of the Group’s life insurance
controlled entities is classified as goodwill.
Computer software costs
Where computer software costs are not integrally related to
associated hardware, the Group recognises them as an
intangible asset where they are clearly identifiable, can be
reliably measured and it is probable they will lead to future
economic benefits that the Group controls.
The Group carries capitalised software assets at cost less
amortisation and any impairment losses.
These assets are amortised over their estimated useful lives on
a straight-line basis which is usually 2½ years. Software
maintenance costs continue to be expensed as incurred.
Any impairment loss is recognised in the profit and loss when
incurred.
Other Intangibles
Other intangibles comprise acquired management fee rights and
customer lists where they are clearly identifiable, can be reliably
measured and where it is probable they will lead to future
economic benefits that the Group controls.
The Group carries capitalised management fee rights and
customer lists at cost less amortisation and any impairment
losses. These assets are either deemed to have indefinite lives
and assessed annually for impairment, or are amortised over
their estimated useful lives on a straight-line basis over ten
years.
Any impairment loss is recognised in the profit and loss when
incurred.
(ii) Change in accounting policy
Under AASB 138, goodwill is no longer required to be amortised,
but is subject to an annual impairment test, or more frequent
tests if events or changes in circumstances indicate that it might
be impaired. On transition, goodwill is included on the basis of its
deemed cost as at 1 July 2004 which represents the carrying
amount recorded under previous AGAAP.
The AIFRS standards have not been applied retrospectively to
business combinations that occurred prior to 1 July 2004 in
preparing the Group’s opening AIFRS balance sheet at 1 July
2005. The only adjustment made to goodwill has been the
recognition of other separately identifiable intangible assets for
capitalised management fee rights and customer lists.
Computer software costs were previously included in Other
assets, but have either been reclassified to intangible assets or
property, plant and equipment.
Under AASB 138 the asset representing the excess of the net
market value over net assets of the Group’s life insurance
controlled entities can no longer be recognised in full. The
acquired component has been reclassified to goodwill and the
write off of the internally generated component has been
reflected on transition at 1 July 2004 against the General
Reserve. For further details, refer to Note 1(hh) Life Insurance
Business.
88 Commonwealth Bank of Australia Annual Report 2006
(u) Other Assets
The adoption of AASB 132, AASB 138 and AASB 1038 Life
Insurance Contracts, has resulted in the reclassification of
derivative assets, computer software costs and the asset
representing the excess of the net market value of net assets of
the Group’s life insurance controlled entities. For further details,
refer to the change in accounting policy below.
(i) Current accounting policy
Other assets include all other financial assets and include
interest, fees and other unrealised income receivable, and
securities sold not delivered. These assets are recorded at the
cash value to be realised when settled.
The net surpluses or deficits that arise within defined benefit
superannuation plans are recognised and disclosed separately
in other assets and bills payable and other liabilities. As the bank
carries a net surplus, no funding of the Australian defined benefit
superannuation plan is required, therefore the related expense
has been treated as a non cash item.
(ii) Change in accounting policy
Capitalised computer software costs have been reclassified to
Intangible assets. Trading derivatives have been reclassified to
Derivative assets.
Under AASB 138 the asset representing the excess of the net
market value over net assets of the Group’s life insurance
controlled entities can no longer be recognised in full.
The acquired component has been reclassified to goodwill and
the write off of the internally generated component has been
reflected on transition at 1 July 2004 against the General
Reserve. For further details, refer to Note 1(hh) Life Insurance
Business.
Under AASB 119, the surplus within the defined benefit
superannuation plan has been recognised and disclosed within
other assets. The change in measurement has been applied
retrospectively from 1 July 2004.
(v) Deposits from Customers
The adoption of AASB 132 and AASB 139 has not had a
substantial impact on deposits and other public borrowings. The
changes relate to measurement and recognition. For further
details, refer to the change in accounting policy below.
(i) Current accounting policy
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 fair
value including directly attributable transaction costs at inception.
Deposits and other public borrowings are subsequently stated at
amortised cost. Interest and yield related fees are taken to profit
and loss based on the effective interest method when incurred.
Where the Group has hedged the deposits with derivative
instruments, hedge accounting rules are applied (refer to Note
1(ff) Derivative financial instruments).
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(ii) Change in accounting policy
(ii) Change in accounting policy
Interest and yield related fees are taken to profit and loss based
on the effective interest method when incurred, whereas
previously interest was taken to profit and loss on an accrual
basis when incurred. There has been no substantial change in
the carrying value of deposits and other public borrowings as a
result of this change.
The change has been applied from 1 July 2005.
(w) Payables to other financial institutions
The adoption of AASB 132 and AASB 139 has not had a
substantial impact on payables to other financial institutions. The
changes relate to measurement and recognition. For further
details, refer to the change in accounting policy below.
(i) Current accounting policy
Payables to other financial institutions include deposits, vostro
balances and settlement account balances due to other banks.
They are brought to account at fair value including directly
attributable transaction costs at inception.
financial
to other
Payables
institutions are subsequently
recognised at amortised cost. Interest and yield related fees are
taken to profit and loss using the effective interest method when
incurred.
Where the Group has stated the payables to other financial
institutions at fair value through the Income Statement, the
changes in fair value are reported in profit and loss (refer Note 1
(x) Liabilities at Fair Value through Income Statement).
(ii) Change in accounting policy
Interest and yield related fees are taken to profit and loss based
on the effective interest method, whereas previously interest
was taken to profit and loss on an accrual basis. There has been
no substantial change in the carrying value of Payables to other
financial institutions as a result of this change.
The liabilities are measured at fair value plus directly attributable
transaction costs at inception. They are subsequently measured
at amortised cost. They were previously carried at the gross
value of the outstanding balance. The change has been applied
from 1 July 2005.
(x) Liabilities at fair value through Income Statement
“Liabilities at fair value through Income Statement” is a new
class of financial liabilities under AASB 139. There is a
the recognition, measurement and
substantial change
disclosure of these liabilities. For further details, refer to the
change in accounting policy below.
in
(i) Current accounting policy
The Group designates certain liabilities as at fair value through
Income Statement on origination where those liabilities are
managed on a fair value basis. Changes in the fair value of
liabilities through the Income Statement are reported in profit
and loss. For quoted liabilities, quoted offer prices are used to
measure fair value. Quoted mid prices are used to measure
liabilities at fair value through Income Statement with offsetting
risk positions in a portfolio at fair value. For non-market quoted
liabilities, fair values have been determined using valuation
techniques.
financial
Under AASB 139, certain
that were
predominantly disclosed as deposits from customers and debt
issues at amortised cost under previous AGAAP, are now
reclassified to liabilities at fair value through Income Statement.
The change in measurement has been applied from 1 July 2005.
liabilities
(y) Income taxes
The adoption of AASB 112 Income Taxes and UIG 1052 Tax
Consolidation Accounting has had an
the
measurement and disclosure of income taxes of the tax-
consolidated Group, and thus, of various members of the Group.
For further details, refer to the change in accounting policy
below.
impact on
(i) Current accounting policy
Income tax on the profit and loss for the period comprises
current and deferred tax.
Income tax is recognised in profit and loss, except to the extent
that it relates to items recognised directly to equity, in which case
it is recognised in equity.
Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantially enacted at
the balance sheet date, and any adjustment to tax payable in
respect of previous years.
Deferred tax is provided using the balance sheet liability method,
providing
the carrying
temporary differences between
amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes.
for
The amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of
assets and liabilities, using tax rates enacted or substantially
enacted at the balance sheet date and are expected to apply
when the deferred tax asset is realised or the deferred tax
liability is settled.
A deferred tax asset is recognised only to the extent it is
probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are reduced
to the extent that it is no longer probable that the related tax
benefit will be realised.
The Commonwealth Bank of Australia elected to be taxed as a
single entity under the tax consolidation system with effect from
1 July 2002.
The Bank has formally notified the Australian Taxation Office of
its adoption of the tax consolidation regime. In addition to the
Bank electing to be taxed as a single entity under the tax
consolidation regime, the measurement and disclosure of
deferred tax assets and liabilities has been performed in
accordance with the principles in AASB 112, and on a modified
stand alone basis under UIG 1052.
Any current tax liabilities/assets (after the elimination of intra-
group transactions) and deferred tax assets arising from unused
tax losses assumed by the Bank from the subsidiaries in the tax
consolidated group are recognised in conjunction with any tax
funding arrangement amounts (refer below). Any difference
between these amounts is recognised by the Bank as an equity
contribution to or distribution from the subsidiary.
Commonwealth Bank of Australia Annual Report 2006 89
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
The Bank recognises deferred tax assets arising from unused
tax losses of the tax-consolidated group to the extent that it is
probable that future taxable profits of the tax-consolidated group
will be available against which the asset can be utilised.
Any subsequent period adjustments to deferred tax assets
arising from unused tax losses assumed from subsidiaries are
recognised by the Bank only.
The members of the tax-consolidated group have entered into a
tax funding arrangement which sets out the funding obligations
of members of the tax-consolidated group in respect of tax
amounts.
(ii) Change in accounting policy
A “balance sheet” approach to tax-effect accounting is followed
under AIFRS, replacing the previous “liability method”. This
approach recognises deferred tax balances when there is a
difference between the carrying value of an asset or liability and
its tax base. Also, unused tax losses are now recognised as
deferred tax assets to the extent that it is probable that future
taxable profits will be available, whereas previously the tax
losses had to be virtually certain of being utilised. As at 1 July
2004 these changes in approach did not result in any material
adjustment to Shareholders’ Equity other than as a result of
other AIFRS transition adjustments.
In addition, deferred tax assets and liabilities are now separately
the Balance Sheet. Additional
disclosed on
disclosures have been provided in the notes to the financial
statements.
face of
the
(z) Employee benefits
The adoption of AASB 119 Employee Benefits and AASB 2
Share-based Payments, have had a substantial impact on the
recognition, measurement, and disclosure of net surpluses
and/or deficits of defined benefit superannuation plans. For
further details, refer to the change in accounting policy below.
(i) Current accounting policy
Annual leave
The provision
outstanding liability to employees at balance sheet date.
for annual
represents
leave
the current
Long service leave
The provision for long service leave is discounted to the present
value, is subject to actuarial review and is maintained at a level
that accords with actuarial advice.
Other employee benefits
The provision for other employee entitlements represents
liabilities for staff housing loan benefits, a subsidy to a registered
health fund with respect to retired employees and current
employees, and employee incentives under employee share
plans and bonus schemes.
level of
The
accordance with the requirements of AASB 119.
these provisions has been determined
in
Under AASB 2 Share-based Payments, the Group engages in
equity settled share-based compensation in respect of services
received from certain of its employees. The fair value of the
share-based compensation is calculated at grant date and
amortised to profit and loss against the Equity Compensation
Reserve over the vesting period, subject to service and
performance conditions being met.
90 Commonwealth Bank of Australia Annual Report 2006
When allocating share-based payments, the Bank purchases
shares on market and recognises them at cost as a deduction
from Share Capital (Treasury Shares). On settlement the shares
are issued and recognised against the Equity Compensation
Reserve.
Defined benefit superannuation plan
currently
The Group
two defined benefit
sponsors
superannuation plans for its employees. The assets and
liabilities of these plans are legally held in separate trustee-
administered funds. They are calculated separately for each
plan by assessing the fair value of plan assets and deducting the
amount of future benefit that employees have earned in return
for their service in current and prior periods discounted to
present value. The discount rate is the yield at balance sheet
date on government securities which have terms to maturity
approximating to the terms of the related liability. The defined
benefit superannuation plan surpluses and/or deficits are
calculated by fund actuaries. Contributions to all superannuation
plans are made in accordance with the rules of the plans. As the
Australian plan is in surplus, no funding is currently necessary.
losses
related
Actuarial gains and
to defined benefit
superannuation plans are directly recorded in Retained Profits.
The net surpluses or deficits that arise within defined benefit
superannuation plans are recognised and disclosed separately
in Other assets and Bills payable and other liabilities.
Defined contribution superannuation plan
The Group sponsors a number of defined contribution
superannuation plans. Certain plans permit employees to make
contributions and earn matching or other contributions from the
Group. The Group recognises contributions due in respect of the
accounting period in the profit and loss. Any contributions unpaid
at the balance sheet date are included as a liability.
Superannuation plan expense
Under AIFRS, an additional non-cash expense is recognised
reflecting the accrual accounting charge to profit and loss
associated with defined benefit superannuation plans.
(ii) Change in accounting policy
The Group sponsors two defined benefit superannuation plans
on behalf of its employees. Previously, the net surpluses and/or
deficits of these plans were not included in the financial
statements.
Under AASB 119, the surpluses or deficits that arise within
defined benefit superannuation plans are recognised and
disclosed separately in Other assets and Bills payable and other
liabilities. From 1 July 2004, the actuarial gains and losses
relating to defined benefit superannuation plans are recorded in
Retained profits. On transition to AIFRS, the comparative period
beginning 1 July 2004 recorded an opening Retained profits
adjustment where an additional non-cash expense is recognised
reflecting the accrual accounting charge to profit and loss
associated with defined benefit superannuation plans.
Under previous AGAAP, the Bank accrued all share-based
compensation on a cost basis and amortised it to expense over
the vesting period where there were performance hurdles to be
met. Shares in the Bank were purchased by a Trust when the
shares were granted and held until they vested to the employee.
Under AASB 2, AASB 119 and AASB 132 the fair value of the
share-based compensation is calculated at grant date and
amortised to the profit and loss over the vesting period, subject
to service and performance conditions being met.
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Shares in the Bank held by the Trust are consolidated,
reclassified as ‘Treasury Shares’ and accounted for as a
deduction from Share Capital.
(aa) Provisions
The adoption of AASB 137 Provisions, Contingent Liabilities and
Contingent Assets has not had any material impact on
provisions.
(i) Current accounting policy
A provision is recognised in the balance sheet when the Group
has a legal or constructive obligation as a result of a past event,
and where it is probable that an outflow of economic benefits will
be required to settle the obligation and a reliable estimate of the
amount of the obligation can be made.
Provision for dividend
For further details, refer to the change in accounting policy
below.
(i) Current accounting policy
Debt issues are short and long term debt issues of the Group
including commercial paper, notes, term loans and medium term
notes. Commercial paper, floating, fixed and structured debt
issues are recorded at cost or amortised cost using the effective
interest method. Premiums, discounts and associated issue
expenses are recognised using the effective interest method
through profit and loss from the date of issue to ensure that
securities attain their redemption values by maturity date.
Interest is charged against profit and loss using the effective
interest method when 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.
A provision for dividend payable is recognised when dividends
are declared by the Directors.
Hedging
Provisions for restructuring
Provisions for restructuring are brought to account where there
is a detailed formal plan for restructure and a demonstrated
commitment to that plan.
Provision for ‘Which new Bank’ costs
On 19 September 2003, the Group launched its “Which new
Bank” customer service vision. This was a three year program
and involved the Bank in additional expenditure in the key areas
of staff training and skilling, systems and process simplification,
and
for principally
technology. Such expenses provided
comprised redundancies and process improvements.
Provision for self-insurance
The provision for self-insurance covers certain non-lending
losses and non-transferred insurance risks. Actuarial reviews
are carried out at regular intervals with provisioning effected in
accordance with actuarial advice.
(bb) Debt issues
The adoption of AASB 127, AASB 139 and UIG 112 has had a
substantial impact on the recognition and measurement of debt
issues.
Additional entities have been consolidated into the Group, refer
to Note 1(c) Consolidation, which has resulted in recognition of
additional debt issues.
Where the Group has designated debt instruments at fair value
through Income Statement, the changes in fair value are
reported in profit and loss (refer to Note 1(x)) Liabilities at fair
value through Income Statement.
Certain debt issues are designated within fair value hedging
relationships and as a result the debt has been measured at fair
value for the risk that has been hedged.
The Group hedges interest rate and foreign currency risk on
certain debt issues. When hedge accounting is applied to fixed
rate debt issues, the carrying values are adjusted for changes in
fair value related to the hedged risks rather than carried at
financial
amortised cost. Refer
instruments.
to Note 1(ff) Derivative
(ii) Change in accounting policy
Premiums, discounts and associated issue expenses are
recognised using the effective interest method through profit and
loss from the date of issue to ensure securities attain their
redemption values by maturity date.
Under previous AGAAP, these items were recognised on an
accrual basis through the profit and loss.
The requirement to separate embedded derivatives from debt
issues is new under AASB 139. The change has been applied
from 1 July 2005.
Debt issued by entities used to securitise assets of the Group,
and certain asset-backed conduit entities, are consolidated
under AIFRS. This results in material gross-ups of debt issues
and the related interest expense (assets and related income are
similarly grossed up). This change has been applied
retrospectively from 1 July 2004.
(cc) Bills payable and other liabilities
The adoption of AASB 119, AASB 127, AASB 139 and UIG 112
has not had a substantial impact on Bills payable and other
liabilities. For further details, refer to the change in accounting
policy below.
(i) Current accounting policy
Bills payable and other liabilities includes interest, fees, defined
benefit superannuation plan deficit, other unrealised expenses
payable and securities purchased not delivered.
The superannuation plan deficit is recorded in line with Note 1(z)
Employee benefits while the remaining liabilities are recorded at
amortised cost using the effective interest method.
Commonwealth Bank of Australia Annual Report 2006 91
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
Where the group has stated bills payable and other liabilities at
fair value through Income Statement, the changes in fair value
are reported in profit and loss (refer to Note 1(x) Liabilities at fair
value through Income Statement).
(ee) Shareholders’ equity
The adoption of AASB 132 has had a substantial impact on the
recognition and disclosure of shareholders’ equity. For further
details, refer to the change in accounting policy below.
(ii) Change in accounting policy
(i) Current accounting policy
Additional entities have been consolidated into the Group, refer
to Note 1(c) Consolidation. These changes have resulted in a
reduction of bills payable and other liabilities due to inter-
company eliminations.
Market revaluation of trading derivatives previously recorded in
bills payable and other liabilities have been reclassified to
derivative financial instruments from 1 July 2005.
Under AASB 119, the deficit within one defined benefit
superannuation plan has been recognised and disclosed in Bills
payable and other liabilities. The change in measurement has
been applied retrospectively from 1 July 2004.
(dd) Loan capital
The adoption of AASB 132 and AASB 139 has had a substantial
impact on the disclosure and measurement of loan capital.
Certain hybrid financial instruments of the Group previously
classified as equity instruments have now been classified as
loan capital. For further details, refer to the change in accounting
policy below.
(i) Current accounting policy
Loan capital is debt issued by the Group with terms and
conditions, such as being undated or subordinated, which qualify
the debt issue for inclusion as capital under APRA Prudential
Standards. Loan capital debt issues are initially recorded at fair
value plus transaction costs that are directly attributable to the
loan capital debt issue. After initial recognition the loan capital
debt issue is measured at amortised cost using the effective
interest method.
Interest inclusive of premiums, discounts and associated issue
expenses are recognised using the effective interest method
over the expected life of the instrument through the profit and
loss each year from the date of issue so that they attain their
redemption values by maturity date. Any profits or losses arising
from redemption prior to expected maturity are taken to the profit
and loss in the period in which they are realised.
(ii) Change in accounting policy
From 1 July 2005, under AASB 132, certain hybrid financial
instruments of the Group which were previously classified as
equity with the associated distributions reported as dividends
paid, are now classified as loan capital and the associated
distributions reported as interest expense.
Interest, inclusive of premiums, discounts and associated issue
expenses are amortised through profit and loss each year using
the effective interest method.
Previously, they were taken to profit and loss on a straight line
basis when incurred.
Ordinary share capital is the amount of paid up capital from the
issue of ordinary shares.
Under AASB 132, Treasury Shares are deducted from Ordinary
share capital. Gains or losses on the reissue of Treasury Shares
are recognised in Shareholders’ Equity within Retained Profits.
Other contributed capital represents the movement between the
acquisition and reissue price of Treasury Shares.
The General Reserve is derived from revenue profits and is
available for dividend payments except for undistributable profits
in respect of the Group’s life insurance businesses.
The Capital Reserve was derived from capital profits and is
available for dividend payments.
A General Reserve for Credit Loss has been appropriated from
Retained Profits to comply with APRA’s proposed prudential
requirements.
(ii) Change in accounting policy
From 1 July 2004, under AASB 132 Treasury Shares are
deducted from ordinary share capital. The gain or loss on
reissue of Treasury Shares is recognised in Retained Profits.
The minority interests in controlled unit trusts of the life
insurance companies no longer qualify as equity. As a result, the
Group has, on adoption of AIFRS, reclassified outside equity
interests in life insurance statutory funds and other funds as
liabilities.
From 1 July 2005 certain hybrid financial instruments previously
recorded in Shareholders’ Equity have been reclassified as Loan
capital.
(ff) Derivative financial instruments
The adoption of AASB 132 and 139 has had a substantial
impact on the recognition, measurement and disclosure of
derivative financial instruments. For further details, refer to the
change in accounting policy below.
(i) Current accounting policy
The Group has a significant volume of derivative financial
instruments that 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 Group’s
trading activities and to hedge certain assets and liabilities. All
derivatives that do not meet the hedging criteria under AASB
139 are classified as derivatives held for trading, or as other
derivatives.
92 Commonwealth Bank of Australia Annual Report 2006
Note 1 Accounting Policies (continued)
The Group initially recognises derivative financial instruments in
the balance sheet at the fair value of consideration given or
received. They are subsequently remeasured to fair value based
on quoted market prices, or broker or dealer price quotations.
Non market quoted instruments are valued using valuation
techniques based on market conditions and risks existing at
balance sheet date. 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 fair value of derivatives are reflected in the profit and
loss immediately as they occur unless designated within a cash
flow hedging relationship.
Derivative financial instruments utilised for hedging
relationships
The Group uses derivative instruments as part of its asset and
liability management activities to manage exposures to interest
rate, foreign currency and credit risks, including exposures
arising from forecast transactions. Hedge accounting can be
applied subject to certain rules for fair value hedges, cash flow
hedges and hedges of foreign operations. Cash flow and fair
value hedges are the predominant hedges applied by the Group.
Swaps are the major financial instruments used in the Bank’s
hedging arrangements.
Swaps
Interest rate swap receipts and payments are accrued to profit
and loss using the effective interest method 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.
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
revalued to market at the current market exchange rate with
revaluation gains and losses taken to profit and loss against
revaluation losses and gains of the underlying hedged item or
class of items.
Fair value hedges
For fair value hedges, the change in fair value of the hedging
derivative, and the hedged risk of the hedged item, is recognised
immediately in the Income Statement within other operating
income. If the fair value hedge relationship is terminated for
reasons other than the derecognition of the hedged item, fair
value hedge accounting ceases and, in the case of an interest
bearing item, the fair value adjustment of the hedged item is
amortised to profit and loss over the remaining term of the
original hedge.
the
unamortised fair value adjustment is recognised immediately in
profit and loss.
is derecognised
the hedged
item
If
Cash flow hedges
A fair valuation gain or loss associated with the effective portion
of a derivative designated as a cash flow hedge is recognised
initially in Shareholders’ Equity within the cash flow hedge
reserve. Amounts in the cash flow hedge reserve are transferred
to profit and loss when the cash flows on the hedged item are
recognised in profit and loss. Gains and losses resulting from
cash flow hedge ineffectiveness are recorded immediately in
profit and loss.
Notes to the Financial Statements
A fair valuation gain or loss represents the amount by which
changes in the fair value of the expected cash flow of the
hedging derivative differ from the fair value of the changes (or
expected changes) in the cash flow of the hedged item.
Where the hedged item is derecognised, the cumulative gain or
loss is recognised immediately in profit and loss. If for reasons
other than the derecognition of the hedged item, cash flow
hedge accounting ceases, the cumulative gains or losses are
amortised over the remaining term of the original hedge.
Embedded derivatives
A derivative may be embedded within a host contract. If the host
contract is not already carried at fair value with changes in fair
value reported in profit and loss, and where the economic
characteristics and risks of the embedded derivative are not
closely related to the economic characteristics and risks of the
host contract, the embedded derivative is separated from the
host contract and accounted for as a stand-alone derivative
instrument at fair value.
(ii) Change in accounting policy
The adoption of AASB 132 and AASB 139 has had a substantial
impact on the recognition, measurement and disclosure of
derivative financial instruments. The changes are summarised
below:
Derivative assets and derivative liabilities are recognised at fair
value and disclosed separately on the face of the balance sheet.
The Group complies with new hedge accounting rules which
include the use of predominantly fair value or cash flow hedges,
the designation of hedging relationships and the documentation
of these relationships.
Embedded derivatives are now required to be identified,
separated and fair valued provided they are not closely related
to their host contract.
(gg) Commitments to extend credit, letters of credit,
guarantees, warranties and indemnities issued
in
The adoption of AASB 132 and AASB 139 has had a substantial
change
the disclosure, recognition, measurement and
presentation of certain financial liabilities which were previously
treated as contingent liabilities. For further details, refer to the
change in accounting policy below.
(i) Current accounting policy
Contingent liabilities are possible obligations whose existence
will be confirmed only by uncertain future events, or present
obligations where the transfer of economic benefit is uncertain or
cannot be reliably measured. Contingent liabilities are not
recognised, but are disclosed unless they are remote.
Financial guarantees are given to banks, financial institutions
and other bodies on behalf of customers to secure loans,
overdrafts and other banking facilities, and to other parties in
connection with the performance of customers under obligations
related to contracts, advance payments made by other parties,
tenders, retentions and the payment of import duties.
Financial guarantee contracts are initially recognised in the
financial statements at fair value on the date that the guarantee
was given.
Commonwealth Bank of Australia Annual Report 2006 93
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
the higher of
Subsequent to initial recognition, the Bank's liabilities under such
guarantees are measured at
initial
measurement amount, less amortisation calculated to recognise
in the profit and loss the fee income earned over the period, and
the best estimate of the expenditure required to settle any
financial obligation arising as a result of the guarantees at the
balance sheet date.
the
Any increase in the liability relating to guarantees is taken to
profit and loss. Any liability remaining is recognised in profit and
loss when the guarantee is discharged, cancelled or expires.
(ii) Change in accounting policy
Under AGAAP, credit related instruments (other than credit
derivatives) were treated as contingent liabilities and these were
not shown on the balance sheet unless, and until, the Group
was called upon to make a payment under the instrument.
Fees received for providing these instruments were taken to
profit over the life of the instrument and reflected in fees and
commissions receivable.
the Group recognises
loss and subsequently at
Under AIFRS,
financial guarantee
contracts as financial liabilities, initially at fair value through profit
initial
and
measurement amount, less amortisation calculated to recognise
in the profit and loss the fee income earned over the period, and
the best estimate of the expenditure required to settle any
financial obligation arising as a result of the guarantees at the
balance sheet date.
the higher of
the
(hh) Life Insurance Business
The adoption of AASB 4 Insurance Contracts and AASB 1038
Life Insurance Contracts has impacted on the measurement,
recognition and disclosure of the life insurance business.
Under AASB 4, life insurance contracts are accounted for in
accordance with AASB 1038 (which is largely consistent with
previous AGAAP except there is a change in determination of
discount rates) while investment contracts are accounted for as
financial instruments with a separate management services
element in accordance with AASB 139 and AASB 118. For
further details, refer to the change in accounting policy below.
Life insurance contract liabilities are measured at the net present
value of future receipts from and payments to policyholders
using a risk free discount rate (or expected fund earning rate
where benefits are contractually
the asset
performance), and are calculated in accordance with the
principles of Margin on Services (MoS) profit reporting as set out
in Actuarial Standard AS 1.04: Valuation of Policy Liabilities
issued by the Life Insurance Actuarial Standards Board.
linked
to
Life investment contract liabilities are measured at fair value in
accordance with AASB 139 as liabilities with changes in fair
value taken to the Income Statement.
Returns on all investments controlled by life insurance entities
within the Group are recognised as revenues. Investments in the
Group’s own equity instruments held within the life insurance
statutory funds and other funds are treated as Treasury Shares
in accordance with Note 1(ee) Shareholders’ Equity.
Initial entry fee income on investment contracts issued by life
insurance entities is recognised up front where the Group
provides financial advice. Other entry fees are deferred and
recognised over the life of the underlying investment contract.
Participating benefits vested in relation to the financial year,
other
from unvested policyholder benefits
transfers
liabilities, are recognised as expenses.
than
Reinsurance contracts entered into are recognised on a gross
basis.
Premiums and Claims
Premiums and claims are separated on a product basis into their
revenue, expense and change in liability components unless the
separation is not practicable or the components cannot be
reliably measured.
(i) Life insurance contracts
Premiums received for providing services and bearing risks are
recognised as revenue. Premiums with a regular due date are
recognised as revenue on a due and receivables basis.
Premiums with no due date are recognised on a cash received
basis. Insurance contract claims are recognised as an expense
when a liability has been established.
(i) Current accounting policy
(ii) Investment contracts
The Group’s life insurance business is comprised of insurance
contracts and investment contracts as defined by AASB 4.
Insurance contracts are accounted for in accordance with the
requirements of AASB 1038.
Investment contracts are
accounted for in accordance with AASB 118, 139 and 1038.
Details are set out below.
All assets, liabilities, revenues, expenses and equity are
included in the financial report irrespective of whether they are
designated as relating to policyholders or to shareholders.
All assets backing insurance liabilities are classified as assets at
fair value through Income Statement. They are brought to
account at fair value based on quoted bid prices or using
appropriate valuation techniques.
Premiums received include the fee portion of the premium
recognised as revenue over the period the underlying service is
provided and the deposit portion recognised as an increase in
investment contract liabilities. Premiums with no due date are
recognised on a cash received basis. Fees earned for managing
the funds invested are recognised as revenue. Claims under
investment contracts represent withdrawals of
investment
deposits and are recognised as a reduction in investment
contract liabilities.
94 Commonwealth Bank of Australia Annual Report 2006
Note 1 Accounting Policies (continued)
Life Insurance Liabilities and Profit
Life insurance contract policy liabilities are calculated in a way
that allows for the systematic release of planned profit margins
as services are provided to policyowners and the revenues
relating to those services are received. Selected profit carriers
including premiums and anticipated policy payments are used to
determine profit recognition.
insurance contract and
Investment assets are held in excess of those required to meet
life
liabilities.
Investment earnings are directly influenced by market conditions
and as such this component of profit will vary from year to year.
investment contract
Participating Policies
insurance contract policy
Life
participating policies include
shareholder profit margins and an allowance
supportable bonuses.
to
liabilities attributable
the value of future planned
future
for
The value of supportable bonuses and planned shareholder
profit margins account for all profit on participating policies based
on best estimate assumptions.
Under the Margin on Services profit recognition methodology,
the value of supportable bonuses and the shareholder profit
margin relating to a reporting year will emerge as planned profits
in that year.
Life Insurance Contract Acquisition Costs
Acquisition costs for life insurance contracts include the fixed
and variable costs of acquiring new business. These costs are
effectively deferred through the determination of life insurance
contract liabilities at the balance date to the extent that they are
deemed recoverable from the expected future profits of an
amount equivalent to the deferred cost.
Notes to the Financial Statements
When a controlled unit trust is consolidated, the share of the unit
holder liability attributable to the Bank is eliminated but amounts
due to external unit holders remain as liabilities in the
consolidated balance sheet. The share of the net assets of
controlled companies attributable to minority unit holders is
disclosed separately on the balance sheet. In the Income
Statement, the net profit or loss of the controlled entities relating
to minority interests is removed before arriving at the net profit or
loss attributable to members of the Bank.
(ii) Change in accounting policy
The changes in the accounting policy for the life insurance
business, apply retrospectively from 1 July 2004 and the
remainder on 1 July 2005.
following are changes which have been applied
The
retrospectively from 1 July 2004:
(a) Under AASB 1038, the asset representing the excess of the
net market value over net assets of the Bank’s life insurance
controlled entities is no longer recognised in full. As a result, the
Group has ceased to recognise any movement in this asset. The
internally generated component has been written off against the
General Reserve; and the acquired component has been
reclassified as goodwill within the balance sheet and subjected
to an annual impairment test. For further details on goodwill,
refer to Note 1(t) Intangibles.
(b) Under previous AGAAP, direct investments in the Group’s
own equity securities by the Group’s life insurance statutory
funds were recognised in the balance sheet at market value.
Under AASB 127 these assets have been reclassified as
Treasury Shares, and accounted for as a deduction from
ordinary share capital. For further details, refer to Note 1(ee)
Shareholders’ Equity.
Deferred acquisition costs are amortised over the expected life
of the life insurance contract.
The following are changes which have been applied from 1 July
2005:
Life Investment Contract Acquisition Costs
Acquisition costs for investment contracts include the variable
costs of acquiring new business. However, the deferral of
investment contract acquisition costs is limited by the application
of AASB 118 to the extent that only incremental transaction
costs (for example commissions and volume bonuses) are
deferred. The
in
accordance with AASB 139 is no less than the contract
surrender value.
investment contract
liability calculated
Managed Fund Units on Issue – held by minority
unitholders
The life insurance statutory funds and other funds include
controlling interests in trusts and companies, and the total
amounts of each underlying asset, liability, revenue and
expense of the controlled entities are recognised in the
consolidated financial statements.
(a) AASB 1038 requires income from investment contracts sold
by life insurance businesses to be shown separately from
income from insurance contracts sold by insurance companies.
Insurance contracts are accounted for in accordance with the
requirements of AASB 1038, and investment contracts are
accounted for in accordance with AASB 118, 139 and 1038.
(b) Under AIFRS, the actuarial calculation of insurance contract
liabilities is affected by a change in the determination of the
discount rate applied for some contracts.
(c) Certain acquisition costs related to investment contracts
which were deferred under previous AGAAP can no longer be
deferred under AIFRS.
(d) On transition to AIFRS, the minority interests in controlled
unit trusts of the life insurance companies no longer qualify as
equity. As a result, the Group has, on adoption of AIFRS,
reclassified outside equity interests in life insurance statutory
funds and other funds as liabilities.
Commonwealth Bank of Australia Annual Report 2006 95
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(e) Initial entry fee income on investment contracts issued by life
insurance entities is recognised up front where the Group
provides financial advice. Other entry fees are deferred over the
life of the underlying investment contract.
(f) AASB 1038 requires separate disclosure of investment
contract and insurance contract liabilities.
(ii) Asset Securitisation
The adoption of AASB 127, 132, 139 and UIG 112 has had a
substantial impact on the recognition of asset securitisation.
However, there is no material change in disclosure and
measurement of asset securitisations. For further details, refer to
the change in accounting policy below.
(i) Current accounting policy
The Group conducts an asset securitisation program through
which it packages and sells assets as securities to investors.
The Group is entitled to any residual income of the program after
all payments due to investors and costs of the program have
been met. Therefore the Group is considered to hold the
majority of the residual risks and benefits within the entities
through which asset securitisation is conducted and therefore
consolidates these entities.
Additional entities have been consolidated into the Group, refer
to Note 1(c) Consolidation. These changes have resulted in
recognition of material additional individual asset, liability and
profit and loss line items of the Group.
The liabilities associated with the asset securitisation entities and
related issue costs are accounted for on an amortised cost basis
using the effective interest method. Interest rate swaps and
liquidity facilities are provided at arm’s length to the program by
the Group in accordance with APRA Prudential Guidelines.
Derivatives return the risks and rewards of ownership of the
securitised assets to the Bank and consequently the Bank
is
these assets. An
cannot derecognise
recognised inclusive of the derivative and any related fees.
imputed
liability
For further details on the treatment of the securitisation entities,
refer to Note 1(c) Consolidation.
(ii) Change in accounting policy
AIFRS requires the consolidation of certain asset securitisation
entities that were not consolidated under previous AGAAP.
AIFRS also requires the recognition by the Bank of assets and
liabilities that were not recognised under the previous AGAAP.
This has resulted in the gross up of the entities’ assets and
liabilities recorded within the Balance Sheet. The changes have
been applied from 1 July 2004.
(jj) Fiduciary activities
(i) Current accounting policy
There is no change in accounting policy.
The Bank and designated controlled entities act as Responsible
Entity, Trustee and/or Manager for a number of Wholesale,
Superannuation and Investment Funds, Trusts and Approved
Deposit Funds.
96 Commonwealth Bank of Australia Annual Report 2006
The assets and liabilities of these Trusts and Funds are not
included in the consolidated financial statements as the Group
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 Income Statement of
the Group.
(kk) Comparative figures
Where necessary, comparative figures have been adjusted to
conform with changes
financial
statements.
in presentation
these
in
139
Financial
Comparative figures have been prepared in accordance with
AIFRS as outlined in Note 1(a) and (b) except for the adoption of
AASB 132 Financial Instruments: Disclosure and Presentation,
AASB
and
Measurement, AASB 4 Insurance Contracts, AASB 1023
General Insurance Contracts and AASB 1038 Life Insurance
Contracts. These standards have not been applied against
comparative information in line with the exemption provided by
AASB 1 First-time adoption of Australian Equivalents
to
International Financial Reporting Standards.
Instruments: Recognition
The Group has continued to apply its previous AGAAP in
preparing the comparative information within the scope of the
above standards.
(ll) Roundings
in
this report and
financial
The amounts contained
statements are presented in Australian Dollars and have been
rounded to the nearest million dollars unless otherwise stated,
under the option available to the Company under ASIC Class
Order 98/100 (as amended by ASIC Class Order 04/667).
the
(mm) Critical Accounting Policies and Estimates
to be more
These Notes to the Financial Statements contain a summary of
the Group’s significant accounting policies. Certain of these
the
policies are considered
determination of the Group’s financial position, since they
require management to make difficult, complex or subjective
judgements, some of which may relate to matters that are
inherently uncertain. These decisions are reviewed by a
Committee of the Board.
important
in
for
loan balances, actuarial assumptions
These policies include judgements as to levels of provisions for
impairment
in
determining life insurance policy liabilities and market valuations
of life insurance controlled entities and determining whether
certain entities should be consolidated. An explanation of these
policies and the related judgements and estimates involved is
set out below.
Provisions for Impairment
Provisions for impairment are raised where there is objective
evidence of impairment and at an amount adequate to cover
assessed 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.
Note 1 Accounting Policies (continued)
Individually Assessed Provisions
Individually assessed provisions are raised where there is
objective evidence of impairment and full recovery of principal is
considered doubtful.
Individually assessed 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. The provisions are established
based primarily on estimates of the realisable (fair) value of
collateral taken and are measured as the difference between the
asset’s carrying amount and the present value of the expected
future cash flows (excluding future credit losses that have not
been incurred), discounted at the financial asset’s original
effective interest rate. Short term balances are not discounted.
Individually Assessed provisions (in bulk) are also made against
statistically managed segments to cover facilities which are not
well secured and past due 180 days or more, against the credit
risk rated segment for exposures aggregating to less than
$250,000 and 90 days or more past due, and against credit risks
identified in specific segments in the credit risk rated portfolio.
These provisions are derived primarily by reference to historical
ratios of write-offs to balances in default.
Individually assessed provisions are provided for from the
collective provision.
Collective Provision
All other loans and advances that do not have an individually
assessed provision are assessed collectively for impairment.
The collective provision is maintained to reduce the carrying
amount of portfolios of similar loans and advances to their
estimated recoverable amounts at the balance sheet date.
The evaluation process is subject to a series of estimates and
judgements.
In the credit risk rated segment, the risk rating system, including
the frequency of default and loss given default rates, loss
history, and the size, structure and diversity of individual credits
are considered. Current developments in portfolios (industry,
geographic and term) are reviewed.
In the statistically managed segment the history of defaults and
losses, and the size, structure and diversity of portfolios are
considered.
In addition management considers overall indicators of portfolio
performance, quality and economic conditions.
Changes in these estimates could have a direct impact on the
level of provision determined.
The amount required to bring the collective provision to the level
assessed is taken to profit and loss as set out in Note 15.
Life Insurance Policyholder Liabilities
Life insurance policyholder liabilities are accounted for under
AASB 1038: Life Insurance Business. A significant area of
judgement is in the determination of policyholder liabilities, which
involve actuarial assumptions. (1)
Notes to the Financial Statements
The areas of judgement where key actuarial assumptions are
made in the determination of policyholder liabilities are:
• Business assumptions including:
• Amount, timing and duration of claims/policy payments;
• Policy lapse rates; and
• Acquisition and long term maintenance expense levels;
• Long term economic assumptions for discount and interest
rates, inflation rates and market earnings rates; and
• Selection of methodology, either projection or accumulation
method. The selection of the method is generally governed
by the product type.
The determination of assumptions relies on making judgements
on variances from long-term assumptions. Where experience
differs from long term assumptions:
• Recent results may be a statistical aberration; or
• There may be a commencement of a new paradigm
requiring a change in long term assumptions.
The Group’s actuaries arrive at conclusions regarding the
statistical analysis using their experience and judgement.
Additional information on the accounting policy is set out in Note
1(hh) Life Insurance Business, and Note 38 Life Insurance
Business details the key actuarial assumptions.
Consolidation of Special Purpose Entities
The Group assesses whether a special purpose entity should be
consolidated based on the risks and rewards of each entity and
whether the majority pass to the Group. Such assessments are
predominately
the Group’s
securitisation program and structured transactions.
the context of
required
in
International Financial Reporting Standards
On 1 July 2005 the Bank commenced application of the
Australian equivalent of
International Financial Reporting
Standards (“AIFRS”). This is in line with the conversion deadline
set out by the Financial Reporting Council of Australia.
Descriptions of the key AIFRS issues are set out in Note 1 (nn)
of the Financial Statements.
(nn) Explanation of transition to Australian equivalents
to IFRS
As stated in Note 1(a), these financial statements are prepared
in accordance with Australian equivalents to IFRS (AIFRS).
As required by AASB 1, the accounting policies set out in Note 1
have been applied in preparing the financial statements for the
year ended 30 June 2006,
information
presented in these financial statements for the year ended 30
June 2005 and in the preparation of an opening Australian
equivalents to IFRS Balance Sheet at 1 July 2004 (the Group’s
date of transition).
the comparative
As noted in Note 1(b) and 1(kk) comparative figures and the
opening Australian equivalents to IFRS Balance Sheet at 1 July
2004 have been prepared in accordance with AIFRS as outlined
in Note 1(a) and 1(b) except for the adoption of AASB 132
Financial Instruments: Disclosure and Presentation, AASB 139
Financial Instruments: Recognition and Measurement, AASB 4
Insurance Contracts, AASB 1023 General Insurance Contracts
and AASB 1038 Life Insurance Contracts.
(1) The measurement basis is outlined in Note 1 (hh)
Commonwealth Bank of Australia Annual Report 2006 97
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
These standards have not been applied against comparative
information in line with the exemption provided by AASB 1 First-
time adoption of Australian Equivalents to International Financial
Reporting Standards.
Additional items reclassified with effect from 1 July 2005 include:
• Derivative assets and liabilities reclassified from Other assets
and Other liabilities to separate lines on the face of the
Balance Sheet (refer note 1 (ff));
In preparing its opening AIFRS balance sheet, the Group has
adjusted amounts reported previously in financial statements
prepared in accordance with the previous AGAAP basis of
accounting.
•
•
Insurance and trading assets reclassified to Assets at fair
value through Income Statement (refer note 1 (i));
Investment securities predominately reclassified to Available-
for-sale investments (refer note 1 (j));
An explanation of how the transition from previous GAAP to
AIFRS has affected the Group and the Bank’s financial position
and financial performance is set out in the following tables and
the notes that accompany the tables.
Explanation of AIFRS Transition Adjustments
In the following reconciliations, AIFRS impacts have been shown
as Reclassifications, Gross-ups and Re-measurements. The
major impacts are as follows:
(i) Reclassifications
Relates to the reclassification of various assets and liabilities in
line with AIFRS disclosure requirements.
Significant items reclassified for periods prior to 1 July 2005
included:
•
Investment properties reclassified from Property, Plant and
Equipment to a separate line on the face of the Balance
Sheet (refer note 1 (q));
• Capitalised computer software reclassified from Other assets
to Intangible assets – computer software costs (refer note 1
(t));
• The acquired portion of excess market value over net assets
is reclassified from Other assets to Intangible assets –
goodwill (refer note 1 (t)); and
• Separation and reclassification of deferred tax assets and tax
liabilities (refer note 1 (y)).
• Some Deposits from customers and Debt issues reclassified
to Liabilities at fair value through Income Statement (refer
note 1 (x));
• Reclassification of minority interests in Insurance Statutory
funds and other funds to liabilities (refer note 1 (hh)); and
• Reclassification of preference share capital and other equity
instruments from shareholders’ equity to loan capital (refer
note 1 (dd)).
There is no net impact on net assets, shareholders’ equity nor
net profit.
(ii) Gross-up
Impact of the consolidation of certain special purpose vehicles
related to the securitisation of Bank assets, and certain other
customer asset securitisations. On
to AIFRS,
consolidation of these vehicles has the effect of grossing up
individual asset, liability and profit and loss line items. This has
no net impact on net assets, shareholders’ equity nor net profit.
transition
(iii) Re-measurements
Relates to AIFRS transition adjustments which involve a change
in the measurement basis relative to previous AGAAP. Affected
line items are explained by reference to the relevant accounting
policy note. Material impacts are further explained in the tables
on page 103 to 106 and 111 to 114, and referenced to the re-
measure column of the following AIFRS transition tables.
98 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Policy
(1)
Note
(f)
(g)
AGAAP
Group $M
6,453
8,369
Reclass
$M
168
(130)
Gross-up
$M
153
-
Re-Measure
$M
-
-
(2)
Total
$M
321
(130)
AIFRS
Group $M
6,774
8,239
Group
1 July 2004
Transition Adjustments
Trading
Insurance
Investment securities
Loans, advances and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Bank acceptances
Income tax liability
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
(i)
(i),(hh)
(l),(m),(n)
(o)
(g)
(q)
(s)
(c)
(t)
(y)
(u)
(v)
(w)
(o)
(y)
(y)
(y)
(z),(aa)
(hh)
(bb)
(cc)
(dd)
(ee)
(ee)
(hh)
14,896
28,942
11,447
189,391
15,019
38
-
1,204
239
4,705
-
25,292
305,995
163,177
6,641
15,019
811
-
-
1,011
24,638
44,042
19,140
6,631
281,110
24,885
13,359
687
1,573
3,946
2,840
22,405
304
2,176
24,885
-
(16)
-
-
-
(38)
252
(228)
-
2,836
564
(3,408)
-
-
-
-
(811)
426
385
-
-
-
-
-
-
-
-
-
-
492
(492)
-
-
-
-
3
-
531
7,605
-
-
-
-
-
-
-
(17)
8,275
24
-
-
-
-
-
-
-
8,732
(481)
-
8,275
-
-
-
-
-
-
-
-
-
-
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.
-
(301) A
-
24
-
-
-
31
-
-
23 H
I
(2,512)
(2,735)
-
-
-
-
-
188 L
(85) M
-
-
77 P
-
180
(2,915)
(371) R
-
-
(3,045) S
501 T
3
(317)
531
7,629
-
(38)
252
(197)
-
2,836
587
(5,937)
5,540
24
-
-
(811)
426
573
(85)
-
8,732
(404)
-
8,455
(2,915)
(371)
-
-
(2,553)
9
14,899
28,625
11,978
197,020
15,019
-
252
1,007
239
7,541
587
19,355
311,535
163,201
6,641
15,019
-
426
573
926
24,638
52,774
18,736
6,631
289,565
21,970
12,988
687
1,573
1,393
2,849
(2,915)
(2,915)
19,490
-
-
(2,915)
-
-
(2,915)
304
2,176
21,970
Commonwealth Bank of Australia Annual Report 2006 99
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Trading
Insurance
Investment securities
Loans, advances and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Bank acceptances
Income tax liability
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
Group
30 June 2005
Transition Adjustments
Policy
(1)
Note
(f)
(g)
AGAAP
Group $M
5,715
6,205
Reclass
$M
163
(118)
Gross-up
$M
177
-
Re-Measure
$M
-
-
(2)
Total
$M
340
(118)
AIFRS
Group $M
6,055
6,087
(i)
(i),(hh)
(l),(m),(n)
(o)
(g)
(q)
(s)
(c)
(t)
(y)
(u)
(v)
(w)
(o)
(y)
(y)
(y)
(z),(aa)
(hh)
(bb)
(cc)
(dd)
(ee)
(ee)
(hh)
14,628
27,837
10,272
217,516
16,786
45
-
1,344
52
4,394
-
24,241
329,035
168,029
8,023
16,786
1,550
-
-
895
24,694
58,621
18,086
6,291
302,975
26,060
13,871
687
1,573
4,624
3,516
24,271
631
1,158
26,060
-
(16)
-
-
-
(45)
252
(237)
-
2,941
627
(3,567)
-
-
-
-
(1,550)
833
717
-
-
-
-
-
-
-
-
-
-
492
(492)
-
-
-
-
3
-
566
10,818
-
-
-
-
-
-
-
(37)
11,527
(3)
-
-
-
-
-
-
-
12,144
(614)
-
11,527
-
-
(337) A
-
12
-
-
-
25
-
321 G
24 H
I
(3,203)
(3,158)
-
-
-
-
-
204 L
(24) M
-
-
79 P
-
259
(3,417)
3
(353)
566
10,830
-
(45)
252
(212)
-
3,262
651
(6,807)
8,369
(3)
-
-
(1,550)
833
921
(24)
-
12,144
(535)
-
11,786
(3,417)
14,631
27,484
10,838
228,346
16,786
-
252
1,132
52
7,656
651
17,434
337,404
168,026
8,023
16,786
-
833
921
871
24,694
70,765
17,551
6,291
314,761
22,643
-
-
-
-
-
-
-
-
-
(385) R
-
-
(3,851) S
819 T
(385)
-
-
(3,359)
327
13,486
687
1,573
1,265
3,843
(3,417)
(3,417)
20,854
-
-
(3,417)
-
-
(3,417)
631
1,158
22,643
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.
100 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Policy
(1)
Note
(f)
(g)
AGAAP
Group $M
5,715
6,205
Reclass
$M
163
(627)
Gross-up
$M
177
-
Re-Measure
$M
-
-
Group
1 July 2005
Transition Adjustments
Trading
Insurance
Other
Derivative assets
Investment securities
Available-for-sale investments
Loans, advances and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at fair value through Income
Statement
Derivative liabilities
Bank acceptances
Income tax liability
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed fund units on issue
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
(i)
(i),(hh)
(i)
(ff)
(j)
(l),(m),(n)
(o)
(g)
(q)
(s)
(c)
(t)
(y)
(u)
14,628
27,837
-
-
10,272
-
217,516
16,786
45
-
1,344
52
4,394
-
24,241
329,035
(436)
(16)
3,402
12,096
(10,838)
9,706
(1,146)
-
(45)
252
(238)
-
2,941
627
(16,165)
(324)
(v)
(w)
168,029
8,023
(8,272)
(16)
(x)
(ff)
(o)
(y)
(y)
(y)
(z),(aa)
(hh)
(bb)
(hh)
(cc)
(dd)
-
-
16,786
1,550
-
-
895
24,694
58,621
-
18,086
6,291
302,975
26,060
12,437
11,913
-
(1,550)
833
717
16
-
(4,240)
1,158
(12,162)
2,260
3,094
(3,418)
3
-
-
-
566
-
10,818
-
-
-
-
-
-
-
(37)
11,527
(3)
-
-
-
-
-
-
-
-
-
12,144
-
(614)
-
11,527
-
(2)
A
B
-
(352)
-
(2,292)
-
85
C
574 D-F
-
-
-
25
-
321
241
(3,670)
(5,068)
66
-
G
H
I
J
K
-
(609)
-
-
-
444
L
(24) M
N
342
(1,046) O
-
(282)
P
(194) Q
(1,303)
(3,765)
Total
$M
340
(627)
AIFRS
Group $M
6,055
5,578
(433)
(368)
3,402
9,804
(10,272)
9,791
10,246
-
(45)
252
(213)
-
3,262
868
(19,872)
6,135
14,195
27,469
3,402
9,804
-
9,791
227,762
16,786
-
252
1,131
52
7,656
868
4,369
335,170
(8,209)
(16)
159,820
8,007
12,437
11,304
-
(1,550)
833
1,161
(8)
342
6,858
1,158
(13,058)
2,066
13,318
(7,183)
12,437
11,304
16,786
-
833
1,161
887
25,036
65,479
1,158
5,028
8,357
316,293
18,877
(ee)
(ee)
(hh)
13,871
687
1,573
4,624
3,516
-
(687)
(1,573)
802 (3)
(802) (3)
24,271
(2,260)
631
1,158
26,060
-
(1,158)
(3,418)
-
-
-
-
-
-
-
-
-
(385)
-
-
(3,729)
349
R
S
T
(385)
(687)
(1,573)
(2,927)
(453)
13,486
-
-
1,697
3,063
(3,765)
(6,025)
18,246
-
-
(3,765)
-
(1,158)
(7,183)
631
-
18,877
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.
(3) These estimates of AIFRS transition adjustments have been revised due to a change in functional currency. The details are discussed further in Note 32.
Commonwealth Bank of Australia Annual Report 2006 101
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Income Statement Reconciliation
Interest income
Interest expense
Net interest income
Other operating income
Net banking operating income
Funds management income
Investment revenue
Claims and policyholder liability expense from insurance
contracts
Net funds management and investment contract
operating income
Premiums from insurance contracts
Investment revenue
Claims and policyholder liability expense from insurance
contracts
Insurance margin on services operating income
Total net operating income
Bad debts expense
Operating expenses:
Comparable business
Which new Bank
Total operating expenses
Defined benefit superannuation plan expense
Appraisal value uplift
Goodwill amortisation
Profit before income tax
Income tax expense
Profit after income tax
Minority interests
Net profit attributable to members of the Bank
Net profit after income tax comprises:
Net profit after income tax ("underlying basis")
Shareholder investment returns
Which new Bank
Net profit after income tax ("cash basis")
Defined benefit superannuation plan expense
Treasury share valuation adjustment
Net profit after income tax (“statutory basis”) (1)
Policy
(1)
Note
(m)
(hh)
(z)
(hh)
(t)
(y)
(z)
(hh)
Group
Year Ended 30 June 2005
Transition Adjustments
AGAAP
Group $M
16,194
10,228
5,966
2,915
8,881
Gross-up
$M
598
527
71
(70)
1
(2)
Re-Measure
$M
(11)
-
(11)
-
(11)
AIFRS
Transition
$M
587
527
60
(70)
(10)
AIFRS
Group $M
16,781
10,755
6,026
2,845
8,871
1,261
2,008
(1,871)
1,398
1,132
1,186
(1,243)
1,075
11,354
322
5,697
150
5,847
-
778
(325)
5,638
1,637
4,001
(10)
3,991
3,466
177
(105)
3,538
-
-
3,538
-
-
-
-
-
-
-
-
1
-
1
-
1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(14)
(52) U
-
(14)
(52)
-
1,247
1,956
(1,871)
(66)
(66)
1,332
-
-
-
-
(77)
-
21
-
21
(75) V
(778) W
325 X
(626)
(35)
(591)
-
(591)
(46)
-
-
(46)
(53)
(39)
(138)
-
-
-
-
1,132
1,186
(1,243)
1,075
(76)
11,278
-
322
22
-
22
(75)
(778)
325
(626)
(35)
(591)
-
(591)
(46)
-
-
(46)
(53)
(39)
(138)
5,719
150
5,869
(75)
-
-
5,012
1,602
3,410
(10)
3,400
3,420
177
(105)
3,492
(53)
(39)
3,400
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.
102 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Group
AIFRS Balance Sheet Impacts
Insurance assets at fair value through Income Statement (refer note 1 (i) and (hh))
1 July 2004
(301)
30 June 2005
1 July 2005
(337)
(352)
Derivative assets (refer note 1 (ff))
1 July 2004
30 June 2005
1 July 2005
-
-
(2,292)
Available-for-sale investments (refer note 1 (j))
1 July 2004
30 June 2005
1 July 2005
-
-
85
The recognition of direct investments in Commonwealth Bank shares by the
Bank's life insurance statutory funds as 'Treasury Shares' results in the reversal
of the fair value of these shares from consolidated insurance assets while the
cost of these shares is reversed from ordinary share capital (refer adjustment R).
The associated insurance policyholder liability is not reversed, resulting in an
accounting mismatch (see adjustment U).
As above.
As above, also includes impact of valuing assets held by life insurance using bid
prices rather than mid prices (-$15m).
Principally relates to the elimination of internal swaps; and an adjustment to re-
measure derivatives that were previously accrual accounted.
Revaluation of available-for-sale ('AFS') investments from cost to fair value. AFS
assets are principally comprised of those assets classified as investment
securities under previous Australian GAAP, which were measured on a cost
basis.
Loans, advances and other receivables – gross (refer note 1 (l))
1 July 2004
30 June 2005
1 July 2005
-
-
295
Principally relates to two adjustments: (1) re-measurement to fair value of loan
assets designated within fair value hedging relationships. Such loan assets are
initially measured on an amortised cost basis, and then adjusted to fair value to
offset the mark-to-market movement on the associated fair value hedge
derivative (+$399m); and (2) capitalisation of the net fee income integral to the
yield of an originated loan results in the recognition of an unamortised deferred
income balance (-$122m).
Loans, advances and other receivables - collective provision for impairment (refer note 1 (n))
1 July 2004
30 June 2005
1 July 2005
-
-
294
Reflects the difference between the previous Australian GAAP general provision
for impairment and the AIFRS collective provision for impairment, net of
reclassifications. Under AIFRS, collective provisions are recognised where there
is objective evidence of impairment, and includes an estimate of losses which
have been incurred but not reported as at balance sheet date.
Loans, advances and other receivables – individually assessed provisions for impairment (refer note 1 (n))
1 July 2004
30 June 2005
1 July 2005
-
-
(15)
Reflects the difference between the previous Australian GAAP specific provision
for impairment and the AIFRS individually assessed provisions. This difference
relates to the impact of discounting of expected cash flows on recovery.
Intangible assets (refer note 1 (t))
1 July 2004
30 June 2005
-
321
1 July 2005
321
Goodwill no longer amortised under AIFRS. Reflects the reversal of amortisation
of goodwill for the year ended 30 June 2005.
As above.
Commonwealth Bank of Australia Annual Report 2006 103
A
B
C
D
E
F
G
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Group
AIFRS Balance Sheet Impacts
H
I
J
K
L
M
N
Deferred tax assets (refer note 1 (y))
1 July 2004
23
30 June 2005
1 July 2005
24
241
Other assets (refer note 1 (u))
1 July 2004
(2,512)
30 June 2005
1 July 2005
(3,203)
(3,670)
Deposits from customers (refer note 1 (v))
1 July 2004
30 June 2005
1 July 2005
-
-
66
Derivative liabilities (refer note 1 (ff))
1 July 2004
30 June 2005
1 July 2005
-
-
(609)
Deferred tax liabilities (refer note 1 (y))
1 July 2004
188
30 June 2005
1 July 2005
204
444
Other provisions (refer note 1 (z) and (aa))
1 July 2004
(85)
30 June 2005
1 July 2005
(24)
(24)
Principally relates to the deferred tax asset recognised on the defined benefit
superannuation plan deficit liability, under the AIFRS "balance sheet" approach to
tax-effect accounting.
As above.
As above, and also includes deferred tax assets related to various AIFRS
adjustments such as hedge accounting, loan impairment provisioning and
revenue and expense recognition.
Principally relates to two adjustments: (1) the reversal of internally generated
appraisal value excess (-$3,123m); and (2) the recognition of the defined benefit
superannuation plan surplus asset (+$633m). Refer to adjustments R and S.
As above, though adjustments become (1) (-$3,901m); and (2) (+$717m).
As above, also includes hedging impact of (-$473 m), which relates to the
elimination of interest receivable on hedged derivatives.
Represents the revaluation of deposits designated within fair value hedge
relationships.
Principally relates to the elimination of internal swaps; initial recognition of
embedded derivatives at fair value; and an adjustment to re-measure derivatives
that were previously accrual accounted.
Principally relates to the deferred tax liability recognised on the defined benefit
superannuation plan surplus asset, under the AIFRS "balance sheet" approach
to tax-effect accounting. Refer adjustment I above.
As above.
As above, and also includes deferred tax liabilities related to various AIFRS
adjustments such as hedge accounting, re-measurement of available-for-sale
assets, and revenue and expense recognition.
Principally relates to the reversal of accrued liabilities in respect of employee
share-based compensation. This is a one-off adjustment in the comparative
period due to the discontinuance of the mandatory component of the Equity
Participation Plan.
As above.
As above.
Insurance policyholder liabilities (refer note 1 (hh))
1 July 2004
30 June 2005
1 July 2005
-
-
342
Relates to measurement differences in the actuarial calculation of policyholder
liabilities under AIFRS. Impact primarily driven by a change in the discount rates
applied to some contracts, and the write off of deferred acquisition costs related
to investment-style products of the Wealth Management business.
104 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Group
AIFRS Balance Sheet Impacts
Debt issues (refer note 1 (bb))
1 July 2004
30 June 2005
1 July 2005
-
-
(1,046)
Represents the revaluation of debt issues designated within fair value hedge
relationships.
Bills payable and other liabilities (refer note 1 (cc))
1 July 2004
77
Relates to the recognition of the defined benefit superannuation plan deficit
liability.
As above.
As above, also includes impact of the elimination of interest payable on hedge
derivatives.
O
P
Q
R
S
T
30 June 2005
1 July 2005
79
(282)
Loan capital (refer note 1 (dd))
1 July 2004
30 June 2005
1 July 2005
-
-
(194)
Ordinary share capital (refer note 1 (ee))
1 July 2004
(371)
30 June 2005
1 July 2005
(385)
(385)
Reserves (refer note 1 (ee))
1 July 2004
(3,045)
30 June 2005
1 July 2005
(3,851)
(3,729)
Retained profits
1 July 2004
30 June 2005
1 July 2005
501
819
349
Relates to the impact of fair value hedging and foreign currency re-translation of
hybrid instrument reclassified from equity.
Relates to two adjustments: (1) recognition of direct investments in
Commonwealth Bank shares by the Bank's life insurance statutory funds as
'Treasury Shares' results in the reversal of the cost of these shares from ordinary
share capital (-$245m), being fair value of $301m less market value appreciation
$46m (less $10m tax effect)); and (2) the consolidation of the Employee Share
Scheme Trust, which holds shares in the Bank on behalf of employees, results in
the reversal of the cost of these shares from ordinary share capital (-$126m).
As above, though adjustments become (1) (-$253m); and (2) (-$132m).
As above.
Principally relates to the reversal from general reserve of the internally generated
appraisal value excess (-$3,123m).
As above (-$3,901m).
As above, also includes the impact of the recognition of available-for-sale
revaluation reserve; cash flow hedge reserve; and the retranslation of certain
hybrid financial instruments on reclassification from equity to loan capital.
Principally relates to three adjustments: (1) Recognition of the net after tax
surplus on the Bank's defined benefit superannuation plans (+$389m) comprising
an opening surplus of (+$443m) less an opening deficit of (-$54m); (2)
adjustment related to employee share-based compensation accounting under
AIFRS (+$141m); and (3) the reversal of the cumulative market value
appreciation on life insurance treasury shares (-$46m).
As above, though adjustments become (1) (+$447m); (2) (+$112m); and (3)
(-$66m), together with (4) the reversal of goodwill amortisation for the full year
(+$321m)
As above, also includes the impact of (1) the initial recognition of derivative
financial instruments on initial application of hedge accounting and recognition of
embedded derivatives (-$282m); (2) change in calculation of life insurance policy
holder liabilities and DAC (-$260m); (3) revenue and expense recognition
adjustments (-$167m); and (4) recalculation of loan impairment provisions
(+$195m).
Commonwealth Bank of Australia Annual Report 2006 105
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Group
AIFRS Income Statement Impacts
U
V
W
X
Funds management investment revenue (refer note 1 (hh))
30 June 2005
(52)
Relates to reversal of net gains on treasury shares held in the life insurance
statutory funds.
Defined benefit superannuation plan expense (refer note 1 (hh))
30 June 2005
(75)
Relates to the additional, non-cash expense item reflecting the accrual
accounting charge to profit and loss associated with accounting for defined
benefit superannuation plans.
Appraisal value uplift (refer note 1 (t))
30 June 2005
(778)
Relates to the reversal of the appraisal value uplift on cessation of appraisal
value accounting under AIFRS.
Goodwill amortisation (refer note 1 (t))
30 June 2005
325
Relates to the reversal of goodwill amortisation under AIFRS.
106 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Policy
(1)
Note
AGAAP
Bank $M
6,485
7,068
Reclass
$M
168
(164)
Trading
Investment securities
Loans, advances, and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Shares in and loans to controlled entities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Bank acceptances
Income tax liability
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Other provisions
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
12,877
6,626
154,139
15,160
4
23,677
-
722
220
2,522
-
18,849
248,349
142,469
6,611
15,160
690
14,176
-
-
832
24,449
17,888
7,338
229,613
18,736
13,359
687
737
2,148
1,805
18,736
-
-
18,736
-
-
-
-
(4)
-
-
-
-
78
423
(501)
-
-
-
-
(690)
-
358
332
-
-
-
-
-
-
-
-
-
(5)
5
-
-
-
-
Bank
1 July 2004
Transition Adjustments
Gross-up
$M
-
-
-
5,473
-
-
-
-
-
-
-
-
96
5,569
-
-
-
-
5,468
-
-
-
-
101
-
5,569
-
-
-
-
-
-
-
-
-
-
(2)
Re-Measure
$M
-
-
-
-
13
-
-
-
-
30
-
-
23 G
611 H
677
-
-
-
-
-
-
197 K
(83) L
-
80 N
-
194
483
(126) P
-
-
80 Q
529 R
483
-
-
483
Total
$M
168
(164)
-
-
5,486
-
(4)
-
-
30
-
78
446
206
6,246
-
-
-
(690)
5,468
358
529
(83)
-
181
-
5,763
483
AIFRS
Bank $M
6,653
6,904
12,877
6,626
159,625
15,160
-
23,677
-
752
220
2,600
446
19,055
254,595
142,469
6,611
15,160
-
19,644
358
529
749
24,449
18,069
7,338
235,376
19,219
(126)
-
-
75
534
13,233
687
737
2,223
2,339
483
19,219
-
-
483
-
-
19,219
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.
Commonwealth Bank of Australia Annual Report 2006 107
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Policy
(1)
Note
AGAAP
Bank $M
5,574
6,133
Reclass
$M
162
(161)
Gross-up
$M
-
-
Re-Measure
$M
-
-
(2)
Total
$M
162
(161)
AIFRS
Bank $M
5,736
5,972
Bank
30 June 2005
Transition Adjustments
Trading
Investment securities
Loans, advances, and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Shares in and loans to controlled entities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Bank acceptances
Income tax liability
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Other provisions
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
12,432
6,922
174,140
16,917
1
29,161
-
796
12
2,336
-
17,200
271,624
143,858
7,969
16,917
1,421
16,652
-
-
723
40,687
16,658
7,010
251,895
19,729
13,871
687
737
2,179
2,255
19,729
-
-
19,729
-
-
-
-
(1)
-
-
-
-
153
577
(727)
3
-
-
-
(1,421)
-
764
657
-
-
-
-
-
3
-
-
-
(2)
5
3
-
-
3
-
-
9,783
-
-
-
-
-
-
-
-
(7)
9,776
-
-
-
-
9,776
-
-
-
-
-
-
9,776
-
-
-
-
-
-
-
-
-
-
-
-
2
-
-
-
-
25
-
186 F
22 G
688 H
923
-
-
-
-
-
-
215 K
(20) L
-
79 N
-
274
649
(132) P
-
-
49 Q
732 R
649
-
-
649
-
-
9,785
-
(1)
-
-
25
-
339
599
(46)
10,702
-
-
-
(1,421)
9,776
764
872
(20)
-
79
-
10,050
652
12,432
6,922
183,925
16,917
-
29,161
-
821
12
2,675
599
17,154
282,326
143,858
7,969
16,917
-
26,428
764
872
703
40,687
16,737
7,010
261,945
20,381
(132)
-
-
47
737
13,739
687
737
2,226
2,992
652
20,381
-
-
652
-
-
20,381
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.
108 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at fair value through Income Statement:
Policy
(1)
Note
AGAAP
Bank $M
5,574
6,133
Reclass
$M
162
(161)
Gross-up
$M
-
-
Re-Measure
$M
-
-
(2)
Total
$M
162
(161)
AIFRS
Bank $M
5,736
5,972
Bank
1 July 2005
Transition Adjustments
Trading
Other
Derivative assets
Investment securities
Available-for-sale investments
Loans, advances, and other receivables
Bank acceptances of customers
Deposits with regulatory authorities
Shares in and loans to controlled entities
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at fair value through Income
Statement
Derivative liabilities
Bank acceptances
Income tax liability
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Other provisions
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total Liabilities
Net Assets
Shareholders' Equity
Share capital:
Ordinary share capital
Preference share capital
Other equity instruments
Reserves
Retained profits
Shareholders' equity attributable to members of
the Bank
Minority interests:
Controlled entities
Insurance statutory funds and other funds
Total Shareholders’ Equity
12,432
-
-
6,922
-
174,140
16,917
1
29,161
-
796
12
2,336
-
17,200
271,624
143,858
7,969
-
-
16,917
1,421
16,652
-
-
723
40,687
-
16,658
7,010
251,895
19,729
(101)
324
12,249
(6,922)
6,860
50
-
(1)
-
-
-
-
153
577
(13,025)
165
(1,580)
-
1,580
11,854
-
(1,421)
-
764
657
-
-
-
(11,842)
1,435
1,447
(1,282)
13,871
687
737
2,179
2,255
-
(687)
(737)
252
(110)
19,729
(1,282)
-
-
19,729
-
-
(1,282)
-
-
-
-
-
9,783
-
-
-
-
-
-
-
-
(7)
9,776
-
-
-
-
-
-
9,776
-
-
-
-
-
-
-
9,776
-
-
-
-
-
-
-
-
-
-
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.
A
B
169 C-E
-
-
(2,691)
-
93
-
-
68
-
25
-
186
154
956
(1,040)
67
-
-
(937)
-
-
-
-
366
16
F
G
H
I
J
K
L
(996) M
-
269
N
(186) O
1,401
361
(101)
324
9,558
(6,922)
6,953
10,002
-
(1)
68
-
25
-
339
731
(12,076)
8,901
12,331
324
9,558
-
6,953
184,142
16,917
-
29,229
-
821
12
2,675
731
5,124
280,525
(1,513)
-
142,345
7,969
1,580
10,917
-
(1,421)
9,776
764
1,023
16
(996)
-
(11,573)
1,249
9,822
(921)
1,580
10,917
16,917
-
26,428
764
1,023
739
39,691
-
5,085
8,259
261,717
18,808
(132)
-
-
88
405
361
-
-
361
P
Q
R
(132)
(687)
(737)
340
295
13,739
-
-
2,519
2,550
(921)
18,808
-
-
(921)
-
-
18,808
Commonwealth Bank of Australia Annual Report 2006 109
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Income Statement Reconciliation
Interest income
Interest expense
Net interest income
Other operating income
Net banking operating income
Funds management income
Investment revenue
Claims and policyholder liability expense
Net funds management and investment contract
operating income
Premiums from insurance contracts
Investment revenue
Claims and policyholder liability expense from
insurance contracts
Insurance margin on services operating income
Total net operating income
Bad debts expense
Operating expenses:
Comparable business
Which new Bank
Total operating expenses
Defined benefit superannuation plan expense
Appraisal value uplift
Goodwill amortisation
Profit before income tax
Corporate tax expense
Profit after income tax
Minority interests
Net profit attributable to members of the Bank
Bank
Year Ended 30 June 2005
Transition Adjustments
Policy
(1)
Note
AGAAP
Group $M
13,404
(8,601)
4,803
4,023
8,826
Gross-up
$M
289
(257)
32
(32)
-
Re-Measure
$M
(12)
-
(12)
-
(12)
AIFRS
Transition $M
277
(257)
20
(32)
(12)
AIFRS
Bank $M
13,681
(8,858)
4,823
3,991
8,814
-
-
-
-
-
-
-
-
8,826
(292)
-
(4,357)
(150)
(4,507)
-
-
(186)
3,841
(920)
2,921
-
2,921
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(12)
-
-
(31)
-
(31)
(75) S
-
186 T
68
23
91
-
91
-
-
-
-
-
-
-
-
(12)
-
-
(31)
-
(31)
(75)
-
186
68
23
91
-
91
-
-
-
-
-
-
-
-
8,814
(292)
-
(4,388)
(150)
(4,538)
(75)
-
-
3,909
(897)
3,012
-
3,012
(1) References relate to key Accounting Policies as set out on pages 79 to 98.
(2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.
110 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Bank
AIFRS Balance Sheet Impacts
A
B
C
D
E
F
Derivative assets (refer note 1 (ff))
1 July 2004
30 June 2005
1 July 2005
-
-
(2,691)
Available-for-sale investments (refer note 1 (j))
1 July 2004
30 June 2005
1 July 2005
-
-
93
Principally relates to the recognition of internal swaps; and an adjustment to re-
measure derivatives that were previously accrual accounted.
Principally relates to the revaluation of available-for-sale ('AFS') investments from
cost to fair value. AFS assets are principally comprised of those assets classified
as investment securities under previous Australian GAAP, which were measured
on a cost basis.
Loans, advances and other receivables – gross (refer note 1 (l))
1 July 2004
30 June 2005
1 July 2005
-
-
(112)
Principally relates to two adjustments: (1) capitalisation of the net fee income
integral to the yield of an originated loan results in the recognition of an
unamortised deferred income balance (-$155m); and (2) re-measurement to fair
value of loan assets designated within fair value hedging relationships. Such loan
assets are initially measured on an amortised cost basis, and then adjusted to fair
value to offset the mark-to-market movement on the associated fair value hedge
derivative (+$37m).
Loans, advances and other receivables - collective provision for impairment (refer note 1 (n))
1 July 2004
30 June 2005
1 July 2005
-
-
302
Reflects the difference between the previous Australian GAAP general provision
for impairment and the AIFRS collective provision for impairment, net of
reclassifications. Under AIFRS, collective provisions are recognised where there
is objective evidence of impairment, and includes an estimate of losses which
have been incurred but not reported as at balance date.
Loans, advances and other receivables – individually assessed provisions for impairment (refer note 1 (n))
1 July 2004
30 June 2005
1 July 2005
-
-
(21)
Reflects the difference between the previous Australian GAAP specific provision
for impairment and the AIFRS individually assessed provisions. This difference
relates to the impact of discounting of expected cash flows on recovery.
Intangible assets (refer note 1 (t))
1 July 2004
30 June 2005
-
186
1 July 2005
186
Goodwill no longer amortised under AIFRS. Reflects the reversal of amortisation
of goodwill for the full year ended 30 June 2005.
As above.
Commonwealth Bank of Australia Annual Report 2006 111
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Bank
AIFRS Balance Sheet Impacts
G
H
I
J
K
L
Deferred tax assets (refer note 1 (y))
1 July 2004
23
30 June 2005
1 July 2005
22
154
Other assets (refer note 1 (u))
611
1 July 2004
30 June 2005
1 July 2005
688
956
Deposits from customers (refer note 1 (v))
1 July 2004
30 June 2005
1 July 2005
-
-
67
Derivative liabilities (refer note 1 (ff))
1 July 2004
30 June 2005
1 July 2005
-
-
(937)
Deferred tax liabilities (refer note 1 (y))
1 July 2004
197
30 June 2005
1 July 2005
215
366
Other provisions (refer note 1 (z) and (aa))
1 July 2004
(83)
30 June 2005
1 July 2005
(20)
16
Principally relates to the deferred tax asset recognised on the defined benefit
superannuation plan deficit liability, under the AIFRS "balance sheet" approach to
tax-effect accounting.
As above.
As above, and also includes deferred tax assets related to various AIFRS
adjustments such as hedge accounting, loan impairment provisioning and
revenue and expense recognition.
Principally relates to the recognition of the defined benefit superannuation plan
surplus asset (+$633m). Refer to adjustment S.
As above, though adjustment becomes +$717m.
As above, also includes hedging impact of +$261m, which relates to the
elimination of interest receivable on hedged derivatives.
Represents the revaluation of deposits designated within fair value hedge
relationships.
Principally relates to the elimination of internal swaps; initial recognition of
embedded derivatives at fair value; and an adjustment to re-measure derivatives
that were previously accrual accounted.
Principally relates to the deferred tax liability recognised on the defined benefit
superannuation plan surplus asset, under the AIFRS "balance sheet" approach
to tax-effect accounting. Refer adjustment H above.
As above.
As above, and also includes deferred tax liabilities related to various AIFRS
adjustments such as hedge accounting, re-measurement of available-for-sale
investments, and revenue and expense recognition.
Principally relates to the reversal of accrued liabilities in respect of employee
share-based compensation. This is a one-off adjustment in the comparative
period due to the discontinuance of the mandatory component of the Equity
Participation Plan.
As above.
As above.
112 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Bank
AIFRS Bank Balance Sheet Impacts
Debt issues (refer note 1 (bb))
1 July 2004
30 June 2005
1 July 2005
-
-
(996)
Represents the revaluation of debt issues designated within fair value hedge
relationships.
M
N
O
P
Q
Bills payable and other liabilities (refer note 1 (cc))
1 July 2004
80
30 June 2005
1 July 2005
79
269
Loan capital (refer note 1 (dd))
1 July 2004
30 June 2005
1 July 2005
-
-
(186)
Ordinary share capital (refer note 1 (ee))
1 July 2004
(126)
30 June 2005
1 July 2005
(132)
(132)
Reserves (refer note 1 (ee))
1 July 2004
80
30 June 2005
1 July 2005
R
Retained profits
1 July 2004
30 June 2005
1 July 2005
49
88
529
732
405
Principally relates to the recognition of the defined benefit superannuation plan
deficit liability.
As above.
As above, also includes impact of the elimination of interest payable on hedge
derivatives.
Relates to the impact of fair value hedging and foreign currency re-translation of
hybrid instruments reclassified from equity.
Relates to the consolidation of the Employee Share Scheme Trust, which holds
shares in the Bank on behalf of employees, results in the reversal of the cost of
these shares from ordinary share capital (-$126m).
As above, though adjustment becomes (-$132m).
As above.
Principally relates to two adjustments: (1) recognition of a new employee
compensation reserve for the accrual of employee expenses incurred by the Bank
to be compensated through share based payments (+$47m); and (2) the
recognition of the directors discount on property in the asset revaluation reserve
(+$30m).
As above, though adjustment becomes (1) (+$23m); and (2) (+$25m).
As above, also includes the impact of the recognition of available-for-sale
revaluation reserve; cash flow hedge reserve; and the retranslation of certain
hybrid financial instruments on reclassification from equity to loan capital.
Principally relates to two adjustments: (1) Recognition of the net after tax surplus
on the Bank's defined benefit superannuation plans (+$389m) comprising an
opening surplus of (+$443m) less an opening deficit of (-$54m); and (2)
adjustment related to employee share-based compensation accounting under
AIFRS (+$141m).
As above, though adjustments become (1) (+$447m); and (2) (+$112m), together
with (3) the reversal of goodwill amortisation for the full year (+$186m)
As above, also includes the impact of (1) the initial recognition of derivative
financial instruments on initial application of hedge accounting (-$105m); (2)
revenue and expense recognition adjustments (-$108m); and (3) recalculation of
loan impairment provisions (+$114m).
Commonwealth Bank of Australia Annual Report 2006 113
Notes to the Financial Statements
Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments
Re-measure
Adjustment
Reference Transition Date
Adjustment $M
Explanation of material AIFRS re-measurements
Bank
AIFRS Bank Income Statement Impacts
S
T
Defined benefit superannuation plan expense (refer note 1 (hh))
30 June 2005
(75)
Relates to the additional, non-cash expense item reflecting the accrual accounting
charge to profit and loss associated with accounting for the defined benefit
superannuation plans.
Goodwill amortisation (refer note 1 (t))
30 June 2005
186
Relates to the reversal of goodwill amortisation under AIFRS.
Statements of Cash Flows
There are no material differences between the Statements of Cash Flows presented under AIFRS and the Statements of Cash Flows
presented under former Australian GAAP.
114 Commonwealth Bank of Australia Annual Report 2006
Note 2 Profit
Profit before income tax has been determined as follows:
Interest Income
Loans
Other financial institutions
Cash and liquid assets
Assets at fair value through Income Statement
Available-for-sale investments
Investment securities
Controlled entities
Total Interest Income
Interest Expense
Deposits
Other financial institutions
Liabilities at fair value through Income Statement
Debt issues
Controlled entities
Loan capital
Total Interest Expense
Net Interest Income
Other Operating Income
Lending fees
Commission and other fees
Trading income
Net gain/(loss) on disposal of non-trading instruments
Net hedging ineffectiveness
Dividends – Controlled entities
Dividends – Other
Net profit on sale of property, plant and equipment
Funds management and investment contract income
Insurance contracts income
Other
Total Other Operating Income
Total Net Operating Income
Bad Debts Expense
Collectively assessed impairment loss/(recovery)
Bad Debts Expense (Note 15)
Notes to the Financial Statements
2006
$M
17,304
333
250
1,186
685
-
-
19,758
7,388
475
971
3,795
-
615
13,244
6,514
800
1,635
505
45
(79)
-
4
4
1,623
1,113
122
5,772
12,286
Group
2005
$M
14,846
229
198
785
-
723
-
16,781
7,063
257
-
3,084
-
351
10,755
6,026
733
1,545
440
(13)
-
-
3
4
1,332
1,075
133
5,252
11,278
2006
$M
13,739
319
271
796
241
-
661
16,027
6,663
433
371
2,398
854
586
11,305
4,722
714
1,330
498
31
333
2,078
2
(1)
-
-
555
5,540
10,262
398
398
322
322
380
380
Bank
2005
$M
11,708
136
221
647
-
242
727
13,681
5,543
255
-
2,201
496
363
8,858
4,823
722
1,286
381
(39)
-
988
-
4
-
-
649
3,991
8,814
292
292
Commonwealth Bank of Australia Annual Report 2006 115
Notes to the Financial Statements
Note 2 Profit (continued)
Staff Expenses
Salaries and wages
Share based compensation
Superannuation contributions
Provisions for employee entitlements
Payroll tax
Fringe benefits tax
Other staff expenses
Comparable business
Which new Bank
Total Staff Expenses
Occupancy and Equipment Expenses
Operating lease rentals
Depreciation:
Buildings
Leasehold improvements
Equipment
Operating lease assets
Repairs and maintenance
Other
Comparable business
Which new Bank
Total Occupancy and Equipment Expenses
Information Technology Services
Projects and development
Data processing
Desktop
Communications
Amortisation of software assets
IT equipment depreciation
Comparable business
Which new Bank
Total Information Technology Services
Other Expenses
Postage
Stationery
Fees and commissions
Advertising, marketing and loyalty
Amortisation of other intangible assets (excluding software)
Non lending losses
Other
Comparable business
Which new Bank
Total Other Expenses
Comparable business
Which new Bank
Total Operating Expenses
Defined benefit superannuation plan expense
Profit before income tax
116 Commonwealth Bank of Australia Annual Report 2006
2006
$M
2,419
39
8
66
123
34
134
2,823
-
2,823
338
22
56
64
9
73
59
621
-
621
364
227
137
201
43
13
985
-
985
118
98
636
307
6
116
284
1,565
-
1,565
5,994
-
5,994
(35)
5,859
Group
2005
$M
2,274
74
7
67
115
32
104
2,673
50
2,723
331
21
58
63
8
71
61
613
13
626
331
248
150
204
17
6
956
52
1,008
112
108
614
288
3
103
249
1,477
35
1,512
5,719
150
5,869
(75)
5,012
2006
$M
1,872
39
(14)
59
111
30
31
2,128
-
2,128
284
21
46
38
-
67
32
488
-
488
332
200
134
173
36
13
888
-
888
104
74
406
249
-
110
157
1,100
-
1,100
4,604
-
4,604
(35)
5,243
Bank
2005
$M
1,758
74
(18)
59
101
28
29
2,031
50
2,081
266
20
46
29
-
64
40
465
13
478
298
221
148
174
18
6
865
52
917
98
79
402
234
-
103
111
1,027
35
1,062
4,388
150
4,538
(75)
3,909
Notes to the Financial Statements
Note 3 Income
Banking
Interest income
Fees and commissions
Trading income
Gain/(loss) on disposal of non-trading instruments
Net hedging ineffectiveness
Dividends
Net gain/(loss) on sale of property, plant and equipment
Other income
Funds Management, Investment and Insurance contracts
Funds management and investment contract income including premiums
Insurance contract premiums and related income
Investment income (1)
Total income
2006
$M
19,758
2,435
505
45
(79)
4
4
122
22,794
1,589
1,052
3,129
5,770
28,564
Group
2005
$M
16,781
2,278
440
(13)
-
3
4
132
19,625
1,247
1,132
3,142
5,521
25,146
2006
$M
16,027
2,044
498
31
333
2,080
(1)
555
21,567
-
-
-
-
21,567
Bank
2005
$M
13,681
2,008
380
-
-
988
4
615
17,676
-
-
-
-
17,676
(1) Includes profit on sale of the Hong Kong insurance business of $145 million and goodwill impairment on Symetry investment of $21 million.
Commonwealth Bank of Australia Annual Report 2006 117
Notes to the Financial Statements
Note 4 Average Balances and Related Interest
The following table lists the major categories of interest earning
assets and interest bearing liabilities of the Bank together with
the respective interest earned or paid and the average interest
rate for each of the years ended 30 June 2006 and 30 June
2005. Averages used were predominately daily averages.
Interest is accounted for based on product yield, while all trading
gains and losses are disclosed as trading income within other
banking income.
Where assets or liabilities are hedged, the amounts are shown
net of the hedge, however individual items not separately
hedged may be affected by movements in exchange rates.
The overseas component comprises overseas branches of the
Bank and overseas domiciled controlled entities.
Non-accrual loans were included in interest earning assets
under loans, advances and other receivables.
The official cash rate in Australia increased by 25 basis points
during the year ended 30 June 2006, while rates in New
Zealand increased by a total of 50 basis points during the year.
Average Interest Earning Assets and Income
Cash and liquid assets
Australia
Overseas
Receivables due from other financial institutions
Australia
Overseas
Assets at fair value through Income Statement – Trading
Australia
Overseas
Assets at fair value through Income Statement – Other
Australia
Overseas
Investment securities
Australia
Overseas
Available-for-sale investments
Australia
Overseas
Loans, advances and other receivables
Australia
Overseas
Intragroup loans
Australia
Overseas
Average interest earning assets and interest income including
intragroup
Intragroup eliminations
Total average interest earning assets and interest income
Securitisation Home Loan Assets
Average Non-Interest Earning Assets
Bank acceptances
Australia
Overseas
Assets at fair value through Income Statement - Insurance
Australia
Overseas
Property, plant and equipment
Australia
Overseas
Other assets
Australia
Overseas
Provisions for impairment
Australia
Overseas
Total average non-interest earning assets
Total average assets
Percentage of total average assets applicable to overseas
operations (%)
118 Commonwealth Bank of Australia Annual Report 2006
Average
Balance
$M
3,581
908
3,016
4,007
12,161
3,388
355
3,241
-
-
5,010
6,508
Interest
$M
221
29
145
188
725
185
22
254
-
-
349
336
192,086
40,537
13,527
3,012
-
9,623
284,421
(9,623)
274,798
10,887
-
338
19,331
(338)
18,993
765
18,014
-
20,529
3,468
978
158
20,699
5,113
(1,144)
(86)
67,729
353,414
19. 0
2005
Average
Rate
%
4. 8
1. 9
2. 5
4. 4
5. 2
4. 7
-
-
6. 8
5. 0
-
-
6. 9
7. 1
-
1. 6
6. 5
1. 6
6. 6
7. 0
2006
Average
Rate
%
Average
Balance
$M
6. 2
3. 2
4. 8
4. 7
6. 0
5. 5
6. 2
7. 8
-
-
7. 0
5. 2
7. 0
7. 4
-
3. 5
6. 8
3. 5
6. 9
7. 0
Interest
$M
178
20
61
168
603
182
-
-
296
427
-
-
3,716
1,077
2,394
3,791
11,535
3,850
-
-
4,375
8,538
-
-
171,249
34,183
11,822
2,427
-
5,793
250,501
(5,793)
244,708
8,568
-
92
16,276
(92)
16,184
597
16,263
-
22,929
4,542
893
144
23,822
3,303
(1,430)
(142)
70,324
323,600
18. 3
Notes to the Financial Statements
2005
Average
Rate
%
5. 1
7. 7
1. 9
4. 1
4. 0
3. 4
2. 9
3. 3
-
-
6. 0
2. 8
5. 8
3. 9
1. 6
-
4. 5
1. 6
4. 5
5. 3
Note 4 Average Balances and Related Interest (continued)
Average Interest Bearing Liabilities and Loan
Capital and Interest Expense
Average
Balance
$M
Time deposits
Australia
Overseas
Savings deposits
Australia
Overseas
Other demand deposits (1)
Australia
Overseas
Payables due to other financial institutions
Australia
Overseas
Liabilities at fair value through Income Statement
Australia
Overseas
Debt issues (1)
Australia
Overseas
Loan capital (1)
Australia
Overseas
Intragroup borrowings
Australia
Overseas
60,725
15,732
31,832
2,597
44,544
4,637
1,982
7,649
2,038
13,266
46,315
14,603
7,936
1,244
9,623
-
Interest
$M
3,533
935
603
119
1,905
293
119
356
192
779
2,547
577
450
165
338
-
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
Securitisation Debt Issues
264,723
(9,623)
255,100
11,541
12,911
(338)
12,573
671
Non-Interest Bearing Liabilities
Deposits not bearing interest
Australia
Overseas
Liabilities on bank acceptances
Australia
Overseas
Insurance policy liabilities
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 and Loan Capital
applicable to overseas operations (%)
(1) Comparison between reporting periods are impacted by hedge accounting.
5,797
1,170
18,014
-
20,731
3,040
11,476
4,552
64,780
331,421
21,993
353,414
20. 7
2006
Average
Rate
%
Average
Balance
$M
5. 8
5. 9
1. 9
4. 6
4. 3
6. 3
6. 0
4. 7
9. 4
5. 9
5. 5
4. 0
5. 7
13. 3
3. 5
-
4. 9
3. 5
4. 9
5. 8
Interest
$M
3,183
1,356
586
119
1,653
166
50
207
-
-
61,826
17,716
31,304
2,927
41,235
4,859
1,707
6,292
-
-
34,853
16,540
2,095
462
5,566
772
5,793
-
321
30
92
-
231,390
(5,793)
225,597
9,911
10,320
(92)
10,228
527
5,512
1,121
16,263
-
20,732
3,900
14,607
3,927
66,062
301,570
22,030
323,600
19. 3
Commonwealth Bank of Australia Annual Report 2006 119
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Net Interest Margin
Total interest earning assets excluding
securitisation
Total interest bearing liabilities excluding
securitisation
Net interest income & interest spread
(excluding securitisation)
Benefit of free funds
Net interest margin
Reconciliation of Net Interest Margin
Net margin as reported (1)
AIFRS volatility (2)
Underlying net interest margin pro-forma basis
Avg Bal
$M
Income
$M
2006
Yield
%
Avg Bal
$M
Income
$M
274,798
18,993
6. 91
244,708
16,184
255,100
12,573
4. 93
225,597
10,228
6,420
1. 98
0. 36
2. 34
5,956
2005
Yield
%
6. 61
4. 53
2. 08
0. 35
2. 43
2006
%
2. 34
0. 02
2. 36
2005
%
2. 43
-
2. 43
Jun 06 vs
Jun 05 %
(9)bpts
2bpts
(7)bpts
(1) Refer page 102 for a reconciliation of Net Interest Income (AIFRS to AGAAP equivalent).
(2) Represents AIFRS impact (mainly hybrid distributions and hedge accounting).
Geographical analysis of key categories
Full Year Ended
Loans, Advances and Other Receivables
Australia
Overseas
Total
Non Lending Interest Earning Assets
Australia
Overseas
Total
Interest Bearing Deposits
Australia
Overseas
Total
Other Interest Bearing Liabilities
Australia
Overseas
Total
Avg Bal
$M
Income
$M
192,086
40,537
232,623
13,527
3,012
16,539
24,123
18,052
42,175
137,101
22,966
160,067
58,271
36,762
95,033
1,462
992
2,454
6,041
1,347
7,388
3,308
1,877
5,185
2006
Yield
%
7. 04
7. 43
7. 11
6. 06
5. 50
5. 82
4. 41
5. 87
4. 62
5. 68
5. 11
5. 46
Avg Bal
$M
Income
$M
171,249
34,183
205,432
11,822
2,427
14,249
22,020
17,256
39,276
134,365
25,502
159,867
42,126
23,604
65,730
1,138
797
1,935
5,422
1,641
7,063
2,466
699
3,165
2005
Yield
%
6. 90
7. 10
6. 94
5. 17
4. 62
4. 93
4. 04
6. 43
4. 42
5. 85
2. 96
4. 82
The overseas component comprises overseas branches of the
Bank and overseas domiciled controlled entities. Overseas
intragroup borrowings have been adjusted into the interest
spread and margin calculations to more appropriately reflect the
overseas cost of funds. Non–accrual loans were included in
interest earning assets under loans, advances and other
receivables.
In calculating net interest margin, assets, liabilities, interest
income and interest expense related to securitisation vehicles
have been excluded. This has been done to more accurately
reflect the Bank’s underlying net margin.
Change in Net Interest
Due to changes in average volume of interest earning assets and interest bearing liabilities
Due to changes in interest margin
Change in net interest income
Year Ended
2006 vs 2005
Increase/(Decrease)
$M
718
(254)
464
120 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Changes in Net Interest Income:
Volume and Rate Analysis
Interest Earning Assets
Cash and liquid assets
Australia
Overseas
Receivables due from other financial institutions
Australia
Overseas
Assets at fair value through Income Statement - Trading
Australia
Overseas
Assets at fair value through Income Statement - Other
Australia
Overseas
Investment securities
Australia
Overseas
Available-for-sale investments
Australia
Overseas
Loans, advances and other receivables
Australia
Overseas
Intragroup loans
Australia
Overseas
Changes in interest income including intragroup
Intragroup eliminations
Changes in interest income
Securitisation home loan assets
Interest Bearing Liabilities and Loan Capital
Time deposits
Australia
Overseas
Savings deposits
Australia
Overseas
Other demand deposits
Australia
Overseas
Payables due to other financial institutions
Australia
Overseas
Liabilities at fair value through income Statement
Australia
Overseas
Debt issues
Australia
Overseas
Loan capital
Australia
Overseas
Intragroup borrowings
Australia
Overseas
Changes in interest expense including intragroup
Intragroup eliminations
Changes in interest expense
Changes in net interest income
Securitisation debt issues
June 2006 vs June 2005
Volume
$M
Rate
$M
Total
$M
(7)
(4)
23
10
35
(24)
11
127
(148)
(214)
174
168
1,453
462
-
98
2,255
(98)
2,035
162
50
13
61
10
87
27
11
127
(148)
(213)
175
168
252
123
-
148
800
(148)
774
6
43
9
84
20
122
3
22
254
(296)
(427)
349
336
1,705
585
-
246
3,055
(246)
2,809
168
(60)
(135)
410
(286)
350
(421)
10
(14)
137
(11)
12
54
96
390
660
(65)
136
40
98
-
1,556
(98)
1,396
718
91
7
14
115
138
57
95
96
389
(208)
180
(7)
95
148
-
1,035
(148)
949
(254)
53
17
-
252
127
69
149
192
779
452
115
129
135
246
-
2,591
(246)
2,345
464
144
Commonwealth Bank of Australia Annual Report 2006 121
Notes to the Financial Statements
Note 4 Average Balances and Related Interest (continued)
Changes in Net Interest Income: Volume and Rate Analysis
The preceding table shows the movement in interest income and
expense due to changes in volume and changes in interest rates.
Volume variances reflect the change in interest from the prior
period due to movement in the average balance. Rate variance
reflects the change in interest from the prior year due to changes
in interest rates.
Volume and rate variance for total interest earning assets and
liabilities have been calculated separately (rather than being the
sum of the individual categories).
Geographical analysis of key categories
Australia
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Australia interest margin (3)
Overseas
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Overseas interest margin (3)
Group
Interest spread (1)
Benefit of net free liabilities, provisions and equity (2)
Group interest margin (3)
2006
%
2. 21
0. 24
2. 45
0. 97
0. 67
1. 64
1. 98
0. 36
2. 34
2005
%
2. 33
0. 25
2. 58
1. 03
0. 68
1. 71
2. 08
0. 35
2. 43
(1) Difference between the average interest rate earned and the average interest rate paid on funds.
(2) A portion of the Group’s interest earning assets is funded by net interest free liabilities and shareholders’ equity. The benefit to the Group of these interest free funds is the
amount it would cost to replace them at the average cost of funds.
(3) Net interest income divided by average interest earning assets for the year.
122 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 5 Income Tax Expense
Profit from ordinary activities before Income Tax
Banking
Funds management
Insurance
Defined benefit superannuation plan expense
Prima Facie Income Tax at 30%
Banking
Funds management
Insurance
Defined benefit superannuation plan expense
Tax effect of expenses that are non-deductible/income non-assessable in
determining taxable profit:
Current period
Taxation offsets and other dividend adjustments
Tax adjustment referable to policyholder income
Non assessable income – life insurance transitional fee relief
Non–assessable gains
Tax losses recognised
Other
Prior periods
Other
Total income tax expense
Income Tax Attributable to Profit from ordinary activites
Banking
Funds management
Insurance
Corporate tax expense
Policyholder tax expense
Total income tax expense
Effective Tax Rate
Total – corporate
Banking – corporate
Funds management – corporate
Insurance – corporate
Recognised in the Income Statement
Australia
Current tax expense
Deferred tax expense
Total Australia
Overseas
Current tax expenses
Deferred tax expense
Total Overseas
Total income tax expense
2006
$M
4,594
643
657
(35)
5,859
1,378
193
197
(11)
1,757
(29)
232
-
(43)
(35)
3
128
15
1,900
1,328
139
102
1,569
331
1,900
Group
2005
$M
4,057
508
522
(75)
5,012
1,217
153
157
(23)
1,504
(48)
160
(30)
-
(9)
25
98
-
1,602
1,197
88
89
1,374
228
1,602
%
%
28. 4
29. 1
30. 8
19. 7
28. 7
30. 1
21. 8
22. 4
2006
$M
5,278
-
-
(35)
5,243
1,584
-
-
(11)
1,573
(615)
-
-
-
(14)
32
(597)
-
976
976
-
-
976
-
976
%
18. 6
18. 6
-
-
Bank
2005
$M
3,984
-
-
(75)
3,909
1,195
-
-
(23)
1,172
(309)
-
-
-
(2)
36
(275)
-
897
897
-
-
897
-
897
%
22. 9
22. 9
-
-
$M
$M
$M
$M
1,366
382
1,748
114
38
152
1,900
1,403
(5)
1,398
175
29
204
1,602
655
318
973
3
-
3
976
1,036
(148)
888
9
-
9
897
The share of associates’ income tax expense included in total income tax expense in Income Statement is $1 million for 2006 (2005: $2
million)
Commonwealth Bank of Australia Annual Report 2006 123
Notes to the Financial Statements
Note 5 Income Tax Expense (continued)
The significant temporary differences are as follows (1) :
Deferred tax assets arising from:
Provision for employee benefits
Provisions for Which new Bank
Provisions for impairment on loans, advances and other receivables
Other provisions not tax deductible until expense incurred
Recognised value of tax losses carried forward
Financial instruments
Other
Set off of tax
Total deferred tax assets
Intergroup deferred tax receivable (Note 22)
Deferred tax liabilities arising from:
Property asset revaluations
Lease financing
Defined benefit superannuation plan surplus
Intangible assets
Financial instruments
Other
Set off of tax
Total deferred tax liabilities (Note 26)
Intergroup deferred tax payable (Note 30)
Deferred tax assets opening balance:
1 July 2004 AIFRS Transitional Adjustment
Restated opening balance
Movement in temporary differences during the year:
Provisions for employee benefits
Provisions for Which new Bank
Provisions for impairment on loans, advances and other receivables
Other provisions not tax deductible until expense incurred
Tax value of loss carry-forwards utilised
Financial instruments
Other
Set off of tax
Deferred tax assets closing balance (1)
Deferred tax liabilities opening balance:
1 July 2004 AIFRS Transitional Adjustment
Restated opening balance
Movements in temporary differences during the year:
Property asset revaluations
Lease financing
Defined benefit superannuation plan surplus
Intangible assets
Financial instruments
Other
Set off of tax
Deferred tax liabilities closing balance (1) (Note 26)
2006
$M
Group
2005
$M
2006
$M
Bank
2005
$M
261
11
350
135
9
195
297
(608)
650
-
29
312
368
10
626
599
(608)
1,336
-
651
-
651
-
(30)
(81)
64
9
42
164
(169)
650
921
-
921
-
16
153
(1)
217
199
(169)
1,336
261
41
431
71
-
153
133
(439)
651
-
29
296
215
11
409
400
(439)
921
-
564
23
587
29
(11)
8
42
-
(50)
(180)
226
651
384
188
572
29
(43)
25
11
(234)
335
226
921
245
11
341
74
9
62
209
(559)
392
-
29
144
368
-
586
72
(559)
640
-
599
-
599
5
(30)
(84)
15
9
(11)
27
(138)
392
872
-
872
-
(148)
153
-
275
(374)
(138)
640
240
41
425
59
-
73
182
(421)
599
549
29
292
215
-
311
446
(421)
872
60
423
23
446
28
(11)
12
95
-
(58)
(52)
139
599
332
197
529
29
(47)
25
-
(156)
353
139
872
(1) Exchange differences on deferred foreign tax balances are taken to income to match the treatment of exchange differences on the underlying assets and liabilities.
Deferred tax assets not taken to account (1)
Valuation allowance
Opening balance
Prior year adjustments
Benefits now taken to account
Benefits arising during the year not recognised
Closing balance
2006
$M
159
(40)
(35)
47
131
Group
2005
$M
170
(33)
(9)
31
159
2006
$M
79
7
(14)
-
72
Bank
2005
$M
94
(33)
(2)
20
79
(1) The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been taken to account in respect of the above items
because it is not probable that future taxable profits will be available against which the Group can utilise the benefits therefrom.
124 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 5 Income Tax Expense (continued)
Expiration of carry-forward losses
At 30 June 2006 carry-forward losses expire as follows:
From one to two years
From two to four years
After four years
Losses that do not expire under current tax law
Total
2006
$M
2
14
30
85
131
Group
2005
$M
3
3
36
117
159
2006
$M
-
10
29
33
72
Bank
2005
$M
1
-
34
44
79
Potential future income tax benefits of the company arising
from:
• Capital losses arising under the tax consolidations systems;
and
• Tax losses and timing differences in offshore centres have
not been recognised as assets because recovery is not
probable.
Tax Consolidation
Tax consolidation legislation has been enacted to allow
Australian resident entities to elect to consolidate and be
treated as single entities for Australian tax purposes. The
Commonwealth Bank of Australia has elected to be taxed as a
single entity with effect from 1 July 2002.
These benefits could amount to:
• $72 million (2005: $44 million) in capital losses; and
• $59 million (2005: $115 million) in offshore centres.
These potential tax benefits will only be obtained if:
• The company derives future capital gains and assessable
income of a nature and of an amount sufficient to enable the
benefit from the losses to be realised;
• The company continues to comply with the conditions for
claiming capital losses and deductions imposed by tax
legislation; and
• No changes in tax legislation adversely affect the Company
in realising the benefit from deductions for the losses.
New Zealand Subsidiaries
Certain subsidiaries of the Bank in New Zealand are being
audited by the Inland Revenue Department (IRD) as part of an
industry-wide review of structured finance transactions.
An assessment has been received from the IRD in respect of
one structured finance investment in relation to the year ended
30 June 2001. Notices of proposed adjustment have been
received for other similar investments for other years.
The Bank is confident that the tax treatment it has adopted for
these investments is correct, and any assessments received
will be disputed.
Commonwealth Bank of Australia Annual Report 2006 125
Notes to the Financial Statements
Note 6 Dividends
Ordinary Shares
Interim ordinary dividend (fully franked) (2006: 94 cents, 2005: 85 cents)
Interim ordinary dividend paid – cash component only
Interim ordinary dividend paid – dividend reinvestment plan
Total dividends paid
Preference Shares (1)
Preference dividends paid (fully franked) (2005: 1,115 cents)
Provision for preference dividend
Other Equity Instruments (1)
Dividends paid
2006
$M
992
219
1,211
-
-
-
Group
2005
$M
883
200
1,083
29
10
92
2006
$M
992
219
1,211
-
-
-
Bank
2005
$M
883
200
1,083
29
10
34
Total dividends provided for, reserved or paid
Other provision carried
1,211
6
1,214
4
1,211
6
1,156
4
Dividends proposed and not recognised as a liability (fully franked) (2006: 130
cents, 2005: 112 cents) (2)
1,668
1,434
1,668
1,434
Provision for dividends
Balance as at 1 July 2005
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Balance at 30 June 2006 (Note 27)
14
2,646
(2,645)
(9)
6
14
2,437
(2,437)
-
14
14
2,646
(2,645)
(9)
6
14
2,437
(2,437)
-
14
(1) Reclassified to loan capital on adoption of AIFRS from 1 July 2005.
(2) The 2005 final dividend was satisfied by cash disbursements of $1,173 million and the issue of $261 million of ordinary shares through the dividend reinvestment
plan. The 2006 final dividend is expected to be satisfied by cash disbursements of $1,365 million and the estimated issue of $303 million of ordinary shares through
the dividend reinvestment plan.
Dividend Franking Account
After fully franking the final dividend to be paid for the year
ended 30 June 2006 the amount of credits available, at the 30%
tax rate as at 30 June 2006 to frank dividends for subsequent
financial years is $nil (2005: $194 million). This figure is based
on the combined franking accounts of the Bank at 30 June
2006, which have been adjusted for franking credits that will
arise from the payment of income tax payable on profits for the
year ended 30 June 2006, franking debits that will arise from the
payment of dividends proposed for the year and franking credits
that the Bank may be prevented from distributing in subsequent
financial periods.
The Bank expects that future tax payments will generate
sufficient franking credits for the Bank to be able to continue to
fully frank future dividend payments. These calculations have
been based on the taxation law as at 30 June 2006.
Dividend History
Half Year Ended
31 December 2003
30 June 2004
31 December 2004
30 June 2005
31 December 2005
30 June 2006
Cents Per
Share
79
104
85
112
94
130
Half-year
(1)
Full Year
(1)
Payout Ratio
Payout Ratio
Date Paid
30/03/04
24/09/04
31/03/05
23/09/05
05/04/06
(4)
%
82. 7
103. 8
65. 6
88. 6
60. 6
86. 5
%
-
93.5
-
77.0
-
73. 3
Full Year
Payout Ratio
(2)
Cash Basis
DRP
Participation
(3)
Rate
DRP
Price
%
-
73. 9
-
74. 9
-
71. 0
31. 61
30. 14
35. 90
37. 19
43. 89
-
%
18. 8
18. 7
18. 6
18. 2
18. 1
-
(1) Dividend Payout Ratio: dividends divided by statutory earnings.
(2) Payout ratio based on net profit after tax before defined benefit superannuation plan expense and treasury shares mismatch. Includes Which new Bank expenses for
the year ended 30 June 2005 and the profit on sale of CMG Asia for the year ended 30 June 2006.
(3) DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan.
(4) Dividend expected to be paid on 5 October 2006.
126 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 7 Earnings Per Share
Earnings per Ordinary Share
Basic
Fully diluted
Reconciliation of earnings used in the calculation of earnings per share
Profit after income tax
Less: Preference share dividends
Less: Other equity instrument dividends
Less: Other dividends – ASB preference shares
Less: Minority interests
Earnings used in calculation of basic earnings per share
Add: Profit impact of assumed conversions
Preference shares
Other equity instruments
Loan capital
Earnings used in calculation of fully diluted earnings per share
Weighted average number of ordinary shares (net of treasury shares) used in the calculation
of basic earnings per share
Effect of dilutive securities – share options and convertible loan capital instruments
Weighted average number of ordinary shares (net of treasury shares) used in the calculation
of fully diluted earnings per share
Cash Basis Earnings Per Ordinary Share
Basic
Fully diluted
Reconciliation of earnings used in the calculation of basic cash basis earnings per share
Earnings used in calculation of earnings per share (as above)
Add: Defined benefit superannuation plan expense after income tax
Add: Treasury shares mismatch after income tax
Earnings used in calculation of basic cash basis earnings per share
Add: Profit impact of assumed conversions
Preference shares
Other equity instruments
Loan capital
Earnings used in calculation of fully diluted cash basis earnings per share
Weighted average number of ordinary shares (net of treasury shares) used in calculation
of basic cash basis earnings per share
Effect of dilutive securities – share options and convertible loan capital instruments
Weighted average number of ordinary shares (net of treasury shares) used in calculation
of fully diluted cash basis earnings per share
2006
C
308. 2
303. 1
Group
2005
C
259. 6
255. 3
$M
$M
3,959
-
-
-
(31)
3,928
-
-
100
4,028
3,410
(39)
(76)
(16)
(10)
3,269
23
67
-
3,359
Number of Shares
2006
M
1,275
54
2005
M
1,260
56
1,329
1,316
C
C
315. 9
310. 5
264. 8
260. 5
$M
$M
3,928
25
100
4,053
-
-
100
4,153
3,269
53
39
3,361
23
67
-
3,451
Number of Shares
2006
M
1,283
55
2006
M
1,269
56
1,338
1,325
Basic earnings per share amounts are calculated by dividing net
profit for the year attributed to ordinary equity holders of the
parent by the weighted average number of ordinary shares
outstanding during the year.
Diluted earnings per share amount are calculated by dividing
net profit attributable to ordinary shareholders (after deducting
interest on the convertible redeemable loan capital instruments)
by
the weighted average number of ordinary shares
outstanding during the year (adjusted for the effects of diluted
options and diluted convertible non-cumulative redeemable
loan capital instruments).
Commonwealth Bank of Australia Annual Report 2006 127
Notes to the Financial Statements
Note 8 Cash and Liquid Assets
Australia
Notes, coins and cash at bankers
Money at short call
Securities purchased under agreements to resell
Bills received and remittances in transit
Total Australia
Overseas
Notes, coins and cash at bankers
Money at short call
Securities purchased under agreements to resell
Total Overseas
Total Cash and Liquid Assets
Note 9 Receivables from Other Financial Institutions
Australia
Placements with and loans to other banks and financial institutions
Total Australia
Overseas
Deposits with regulatory authorities (1)
Other placements with and loans to other banks and financial institutions
Total Overseas
Total Receivables from Other Financial Institutions
(1) These at call deposits are required by law for the Bank to operate in these regions.
2006
$M
1,629
4
2,629
131
4,393
74
356
308
738
5,131
2006
$M
3,191
3,191
74
3,842
3,916
7,107
Group
2005
$M
1,831
3
2,598
372
4,804
68
307
876
1,251
6,055
Group
2005
$M
3,573
3,573
45
2,469
2,514
6,087
2006
$M
1,210
-
2,629
133
3,972
4
210
633
847
4,819
2006
$M
3,700
3,700
3
3,761
3,764
7,464
Bank
2005
$M
1,474
-
2,598
371
4,443
5
45
1,243
1,293
5,736
Bank
2005
$M
4,000
4,000
1
1,971
1,972
5,972
128 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 10 Assets at Fair Value through Income Statement
Trading
Insurance
Other
Total Assets at Fair Value through Income Statement
Trading
Australia
Market Quoted:
Australian Public Securities
Commonwealth and States
Local and semi-government
Bills of exchange
Certificates of deposit
Medium term notes
Other securities
Non-Market Quoted:
Commercial paper
Total Australia
Overseas
Market Quoted:
Government securities
Eurobonds
Certificates of deposit
Medium term notes
Floating rate notes
Commercial paper
Non-Market Quoted:
Commercial paper
Bills of exchange
Other securities
Total Overseas
Total Trading Assets
2006
$M
15,758
24,437
2,944
43,139
2006
$M
422
860
2,982
5,031
2,846
43
Group
2005
$M
14,631
27,484
-
42,115
Group
2005
$M
283
505
1,346
5,980
1,949
196
2006
$M
13,926
-
396
14,322
2006
$M
422
860
2,982
5,031
2,846
24
Bank
2005
$M
12,432
-
-
12,432
Bank
2005
$M
283
505
1,346
5,977
1,949
181
648
12,832
767
11,026
800
12,965
878
11,119
361
349
1,408
60
392
82
138
135
1
2,926
15,758
358
502
1,559
-
563
367
6
240
10
3,605
14,631
220
349
-
-
392
-
-
-
-
961
13,926
248
502
-
-
563
-
-
-
-
1,313
12,432
Thereof can be repledged or resold by counter party
1,192
n/a (1)
1,192
n/a (1)
(1) No comparative balances are provided due to the exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
Commonwealth Bank of Australia Annual Report 2006 129
Notes to the Financial Statements
Note 10 Assets at Fair Value through Income Statement (continued)
Insurance
Equity Security Investments:
Direct
Indirect
Total Equity Security Investments
Debt Security Investments:
Direct
Indirect
Total Debt Security Investments
Property Investments:
Direct
Indirect
Total Property Investments
Other Assets
Total Life Insurance Investment Assets
Investments
Backing Life
Risk
Contracts
Investments
Backing Life
Investment
Contracts
2006
$M
685
1,156
1,841
579
2,598
3,177
182
463
645
87
5,750
2006
$M
2,013
5,725
7,738
1,924
5,497
7,421
313
854
1,167
2,361
18,687
2006
$M
2,698
6,881
9,579
2,503
8,095
10,598
495
1,317
1,812
2,448
24,437
Group
2005
$M
2,791
6,467
9,258
3,918
8,116
12,034
3
2,442
2,445
3,747
27,484
Direct investments refer to positions held directly in the issuer of
the investment. Indirect investments refer to investments that are
held through unit trusts or similar investment vehicles.
All financial assets within the life statutory funds have been
determined to back either life insurance or life investment
contracts.
Disclosure on Asset Restriction
Investments held in the Australian statutory funds may only be
used within the restrictions imposed under the Life Insurance Act
1995.
The main restrictions are that assets in a fund may only be used
to meet the liabilities and expenses of the fund, to acquire
investments to further the business of the fund, or as distributions
when solvency and capital adequacy requirements are met.
Participating policyholders can receive a distribution when
solvency requirements are met, whilst shareholders can only
receive a distribution when the higher levels of capital adequacy
requirements are met.
These investment assets held in the statutory funds are not
available for use by the Commonwealth Bank’s operating
businesses.
The Group also holds investments in the Colonial First State
Property Trust Group and Colonial Mastertrust Wholesale funds
(including Fixed Interest, Australian Shares, International Shares,
Property Securities, Capital Stable, Balanced and Diversified
Growth funds) through controlled life insurance entities, which
have been designated as Assets at Fair Value through Income
Statement instead of being accounted for under the equity
accounting method.
Instead, these investments are brought to account at fair value at
Balance Sheet date in compliance with the requirements of AASB
1038: Life Insurance Business.
Other (1)
Fair value structured transactions
Receivables due from financial institutions
Term loans
Other lending
Total Other Financial Instruments
Group
2006
$M
1,005
1,144
616
179
2,944
Bank
2006
$M
369
-
-
27
396
(1) Under AIFRS, certain assets have been designated at fair value through Income Statement from 1 July 2005 as they are managed by the Group on a fair value basis.
130 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities
Derivative contracts
Cash flow hedges
Each derivative is classified as either held for “Trading” purposes
or for “Hedging” purposes. Derivatives classified as “Hedging”
are transactions entered into in order to manage the risks arising
from non traded assets, liabilities and commitments in Australia
and offshore centres. Other derivatives are those held in relation
to a portfolio designated at fair value through Income Statement.
The Group uses interest rate swaps and cross currency swaps
to minimise the variability in cash flows of interest-earning
assets, interest-bearing liabilities or forecasted transactions
caused by interest rate or foreign exchange fluctuations. For the
year ended 30 June 2006 there has been no material gain or
loss associated with ineffective portions of cash flow hedges.
Gains and losses on derivative contracts designated as cash
flow hedges are initially recorded in Shareholders’ equity but are
reclassified to current period earnings when the hedged cash
flows occur, as explained in Note 1 (ff) Derivative financial
instruments. As at 30 June 2006, deferred net gains on
flow hedges
derivative
accumulated in Shareholders’ equity were $88 million. The
amount recognised in Shareholders’ equity at 30 June 2006,
related to cash flows expected to occur within one month to
approximately 30 years of the balance sheet date, with the main
portion expected to occur within 3 years.
instruments designated as cash
As at 30 June 2006, the fair value of outstanding derivatives
designated as cash flow hedges was $537 million of assets and
$193 million of
from
liabilities. Amounts
gains/(losses) on cash flow hedging instruments recognised in
equity to current period earnings due to discontinuation of hedge
accounting were immaterial.
reclassified
Derivatives transacted for hedging purposes
The Group enters into other derivative transactions, which are
designated and qualify as either fair value or cash flow hedges
for recognised assets or liabilities or forecast transactions. It also
enters into derivative transactions which provide economic
hedges for risk exposures but do not meet the accounting
requirements for hedge accounting treatment. As stated in Note
1 (ff) Derivative financial instruments, the Group uses Credit
Default Swaps (CDSs) and equity swaps as economic hedges
to manage credit risk in the asset portfolio and risks associated
with both the capital investment in equities and the related yield
respectively, but cannot apply hedge accounting to such
positions. Gains or losses on these CDSs and equity swaps
have therefore been recorded in trading income.
Derivatives designated and accounted for as hedging
instruments
The Group’s accounting policies for derivatives designated and
accounted for as hedging instruments are explained in Note 1
(ff) where terms used in the following sections are explained.
Fair value hedges
The Group’s fair value hedges principally consist of interest rate
swaps, cross currency swaps and futures. Fair value hedges are
used to limit the Group’s exposure to changes in the fair value of
its fixed-rate interest bearing assets or liabilities that are due to
interest rate or foreign exchange volatility.
For the year ended 30 June 2006, the Group recognised a net
loss of $20 million (reported within other operating income in the
Financial Statements), which represents the ineffective portion of
fair value hedges.
As at 30 June 2006, the fair value of outstanding derivatives
designated as fair value hedges was $594 million of assets and
$2,741 million of liabilities.
Commonwealth Bank of Australia Annual Report 2006 131
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivative Assets and Liabilities
Held for trading
Held for hedging
Other derivatives
Total recognised derivative assets and liabilities
Derivatives held for trading
Exchange rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Equity related contracts:
Options purchased and sold
Total equity related contracts
Commodity related contracts:
Forward contracts
Swaps
Options purchased and sold
Total commodity related contracts
Face Value
$M
972,789
114,612
31,646
1,119,047
245,943
104,942
8,063
17,051
375,999
64,865
404,493
83,075
34,899
587,332
3,073
3,073
-
-
1,919
2,944
1,522
6,385
Fair Value
Asset
$M
8,257
1,131
287
9,675
2,179
2,735
15
190
5,119
1
2,443
3
94
2,541
6
6
-
-
244
299
48
591
2006
Fair Value Face Value
Liability
$M
(7,779)
(2,934)
(107)
(10,820)
(2,067)
(2,095)
-
(193)
(4,355)
(2)
(2,824)
(29)
(119)
(2,974)
(8)
(8)
-
-
(190)
(200)
(52)
(442)
$M
645,203
n/a
n/a
n/a
164,491
85,978
25
21,523
272,017
25,312
273,456
44,362
26,659
369,789
3,002
3,002
395
395
-
-
-
-
Group
2005
Fair Value
Liability
$M
Fair Value
Asset
$M
12,145 (1)
n/a
n/a
n/a
(11,916) (1)
n/a
n/a
n/a
1,532
6,602
1
146
8,281
2
3,727
10
108
3,847
4
4
13
13
-
-
-
-
(1,686)
(6,177)
-
(191)
(8,054)
(2)
(3,761)
(28)
(50)
(3,841)
(8)
(8)
(13)
(13)
-
-
-
-
Total derivative assets/liabilities held for trading
972,789
8,257
(7,779)
645,203
12,145 (1)
(11,916) (1)
(1) The fair value of derivative assets and liabilities for 2005 has been included in Note 11 for comparative purposes only. For the 2005 financial year these fair values are
disclosed as other assets and other liabilities respectively.
132 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Fair Value
Asset
$M
2006
Fair Value Face Value
Liability
$M
$M
2005
Fair Value Fair Value
Liability
$M
Asset
$M
Group
Derivatives designated as fair value hedges
Exchange rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Futures
Total interest rate related contracts
Equity related contracts:
Swaps
Total equity related contracts
Commodity related contracts:
Swaps
Total commodity related contracts
Face Value
$M
16
15,251
-
101
15,368
44,171
1,500
45,671
159
159
47
47
-
375
-
-
375
215
3
218
-
-
1
1
-
(543)
-
-
(543)
(2,187)
-
(2,187)
(10)
(10)
(1)
(1)
Total fair value hedges
61,245
594
(2,741)
Derivatives designated as cash flow hedges
Exchange rate related contracts:
Forward contracts
Swaps
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Total interest rate related contracts
Total cash flow hedges
1,237
980
2,217
51,150
51,150
53,367
3
281
284
253
253
537
-
-
-
(193)
(193)
(193)
Total derivative assets/liabilities held for hedging
114,612
1,131
(2,934)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
Commonwealth Bank of Australia Annual Report 2006 133
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Fair Value
Asset
$M
2006
Fair Value Face Value
Liability
$M
$M
Fair Value
Asset
$M
Group
2005
Fair Value
Liability
$M
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
Face Value
$M
6,802
5,838
252
12,892
7,691
8,069
1,916
627
18,303
275
275
171
171
5
5
171
88
1
260
1
17
-
-
18
-
-
8
8
1
1
(28)
(20)
(6)
(54)
(2)
(27)
-
(1)
(30)
-
-
(1)
(1)
(1)
(1)
Other Derivatives
Exchange rate related contracts:
Forward contracts
Swaps
Options purchased and sold
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Equity related contracts:
Options purchased and sold
Total equity related contracts
Commodity related contracts:
Forward contracts
Total commodity related contracts
Identified embedded derivatives
Total other derivatives
-
31,646
-
287
(21)
(107)
Total recognised derivative assets/liabilities
1,119,047
9,675
(10,820)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
134 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
2006
Fair Value Face Value
Bank
2005
Fair Value
Liability
$M
Fair Value
Asset
$M
$M
Derivative Assets and Liabilities
Held for trading
Held for hedging
Other derivatives
Total derivative assets and liabilities
Derivatives held for trading
Exchange rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Forward contracts
Swaps
Futures
Options purchased and sold
Derivatives held with controlled entities
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Commodity related contracts:
Forward contracts
Swaps
Options purchased and sold
Total commodity related contracts
Face Value
$M
1,004,062
94,052
2,788
1,100,902
245,943
104,435
8,063
17,051
18,877
394,369
64,865
404,470
83,075
34,899
12,926
600,235
3,073
3,073
1,919
2,944
1,522
6,385
Fair Value
Asset
$M
8,944
991
3
9,938
2,179
2,733
15
190
327
5,444
1
2,443
3
94
362
2,903
6
6
244
299
48
591
Liability
$M
(8,179)
(2,755)
(21)
(10,955)
(2,067)
(1,962)
-
(193)
(406)
(4,628)
(2)
(2,824)
(29)
(119)
(127)
(3,101)
(8)
(8)
(190)
(200)
(52)
(442)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
Total derivative assets/liabilities held for trading
1,004,062
8,944
(8,179)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
Commonwealth Bank of Australia Annual Report 2006 135
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Derivatives designated as fair value hedges
Exchange rate related contracts:
Swaps
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Futures
Derivatives held with controlled entities
Total interest rate related contracts
Equity related contracts:
Swaps
Total equity related contracts
Commodity related contracts:
Swaps
Total commodity related contracts
Face Value
$M
13,544
229
13,773
24,896
1,500
803
27,199
159
159
47
47
Fair Value
Asset
$M
2006
Fair Value Face Value
Liability
$M
$M
2005
Fair Value Fair Value
Liability
$M
Asset
$M
Bank
341
-
341
110
3
2
115
-
-
1
1
(534)
(4)
(538)
(1,962)
-
(45)
(2,007)
(10)
(10)
(1)
(1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
Total fair value hedges
41,178
457
(2,556)
Derivatives designated as cash flow hedges
Exchange rate related contracts:
Swaps
Derivatives held with controlled entities
Total exchange rate related contracts
Interest rate related contracts:
Swaps
Total interest rate related contracts
Total cash flow hedges
980
744
1,724
51,150
51,150
52,874
Total derivative assets/liabilities held for hedging
94,052
281
-
281
253
253
534
991
-
(6)
(6)
(193)
(193)
(199)
(2,755)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
136 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 11 Derivative Assets and Liabilities (continued)
Other Derivatives
Interest rate related contracts:
Swaps
Total interest rate related contracts
Credit related contracts:
Swaps
Total credit related contracts
Equity related contracts:
Options purchased and sold
Total equity related contracts
Identified embedded derivatives
Total other derivatives
Face Value
$M
2,383
2,383
275
275
130
130
-
2,788
Fair Value
Asset
$M
2006
Fair Value Face Value
Liability
$M
$M
Fair Value
Asset
$M
Bank
2005
Fair Value
Liability
$M
-
-
-
-
3
3
-
3
-
-
-
-
-
-
(21)
(21)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
Total recognised derivative assets/liabilities
1,100,902
9,938
(10,955)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
Commonwealth Bank of Australia Annual Report 2006 137
Notes to the Financial Statements
Note 12 Available-for-Sale Investments
Australia
Market Quoted:
Australian Public Securities:
Local and semi-government
Shares and equity investments
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities
Non-Market Quoted:
Australian Public Securities:
Local and semi-government
Medium term notes
Shares and equity investments
Other securities
Total Australia
Overseas
Market Quoted:
Government securities
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities
Non-Market Quoted:
Government securities
Certificates of deposit
Eurobonds
Floating rate notes
Other securities
Total Overseas
Less specific allowances for impairment
Total Available-for-Sale investments
Group
2006
$M
1,892
511
415
465
1,576
800
84
70
217
2
6,032
265
244
2,390
391
456
571
509
9
17
31
118
192
5,193
(22)
11,203
Bank
2006
$M
1,894
502
407
-
1,576
510
-
61
158
941
6,049
63
244
2,366
354
243
430
84
-
17
31
45
-
3,877
(12)
9,914
Available-for-sale assets revalued to fair value resulted in a gain of $51 million recognised directly in equity. As a result of sale,
derecognition or impairment of available-for-sale assets, losses of $36 million were removed from equity and reported in profit and loss
for the year.
138 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 12 Available-for-Sale Investments (continued)
Australia
Australian Public Securities:
Local and semi-government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities and equity investments
Provisions
Total Australia
Overseas
Government securities
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity investments
Provisions
Total Overseas
Total Available-for-sale Investments
Group
At 30 June 2006
Amortised
Cost
$M
Gross
Unrealised
Gains
$M
Gross
Unrealised
Losses
$M
1,892
486
465
1,576
1,481
(22)
5,878
275
244
2,408
421
457
688
703
-
5,196
11,074
84
-
-
-
77
16
177
-
1
-
2
-
1
1
-
5
182
-
(1)
-
-
(28)
(15)
(44)
(1)
(1)
(1)
(1)
(1)
-
(3)
(1)
(9)
(53)
Fair
Value
$M
1,976
485
465
1,576
1,530
(21)
6,011
274
244
2,407
422
456
689
701
(1)
5,192
11,203
Available-for-sale investments are carried at fair value with changes in fair value recognised in equity after hedging adjustments.
Maturity Distribution and Average Yield
The following table analyses the maturities and weighted average yields of the Group’s holdings of available-for-sale investments.
0 to 3 months 3 to 12 months
1 to 5 years
5 to 10 years 10 years or more
Non-
Maturing
Total
$M
%
$M
%
$M
%
$M
%
$M
%
$M
$M
Group
Maturity Period at 30 June 2006
Australia
Australian Public Securities:
Local and semi-
government
Medium term notes
Floating rate notes
Mortgage backed securities
Other securities, commercial
paper and equity
investments
Provisions
Total Australia
Overseas
Government securities
Bills of exchange
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities and equity
investments
Provisions
Total Overseas
Total Available-for-Sale
Investments
Additional Disclosure
-
17
75
-
64
(2)
154
125
160
1,660
123
20
36
-
-
2,124
2,278
-
5. 69
6. 08
-
4. 59
-
-
8. 95
2. 94
4. 62
6. 75
6. 88
4. 20
-
-
-
-
100
-
88
-
-
(11)
177
5. 60
-
6. 08
-
1,702
309
242
-
-
-
-
331
(6)
2,578
61 11. 29
3. 24
84
3. 90
706
5. 09
81
5. 75
24
3. 86
102
80
-
41
218
412
522
20
-
1,078
5. 50
-
-
681
-
1,954
6. 22
6. 09
6. 08
-
6. 68
-
-
2. 55
-
4. 48
5. 20
5. 66
4. 06
5. 79
-
-
108
110
-
-
19
(2)
235
8
-
-
-
-
28
-
(1)
35
1,255
-
4,532
-
270
7. 17
5. 93
-
-
7. 11
-
-
3. 04
-
-
-
-
5. 12
-
-
-
-
66
49
60
1,576
-
-
1,751
-
-
-
-
-
1
-
-
1
1,752
Proceeds at or close to maturity of available-for-sale investments in 2006 were: $24,831 million.
Proceeds from sale of Available-for-sale investments in 2006 were: $646 million.
6. 14
6. 05
6. 08
6. 04
-
-
-
-
1,976
485
465
1,576
-
-
-
1,116
-
1,116
1,530
(21)
6,011
274
244
2,407
422
456
689
701
(1)
5,192
-
-
-
-
-
-
-
-
-
1,116 11,203
-
-
-
-
-
7. 12
-
-
-
-
Commonwealth Bank of Australia Annual Report 2006 139
Notes to the Financial Statements
Note 13 Investment Securities
Investment Securities (comparatives only)
Australia
Listed:
Australian Public Securities:
Commonwealth and States
Other Securities and equity investments
Unlisted:
Australian Public Securities:
Local and semi-government
Medium term notes
Mortgage backed securities
Other securities and equity investments
Total Australia
Overseas
Listed:
Government securities
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Other securities
Unlisted:
Government securities
Eurobonds
Medium term notes
Floating rate notes
Preference shares
Other securities and equity investments
Total Overseas
Total Investment Securities
Group
2005
$M
2,201
343
80
783
1,055
675
5,137
79
1,376
636
378
619
165
224
477
254
452
744
297
5,701
10,838
Bank
2005
$M
2,201
336
-
220
1055
71
3,883
63
1,341
600
122
177
76
-
76
221
286
-
77
3,039
6,922
140 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 13 Investment Securities (continued)
The following table sets out the gross unrealised gains and losses of the Group’s investment securities.
Gross Unrealised Gains and Losses of Group (comparatives only)
Australia
Australian Public Securities:
Commonwealth and States
Medium term notes
Mortgage backed securities
Other securities and equity investments (1)
Total Australia
Overseas
Government securities
Certificates of deposit
Eurobonds
Medium term notes
Floating rate notes
Preference shares
Other securities and equity investments
Total Overseas
Total Investment Securities
Group
At 30 June 2005
Amortised
Cost
$M
Gross
Unrealised
Gains
$M
Gross
Unrealised
Losses
$M
2,281
783
1,055
1,018
5,137
303
1,376
1,113
632
1,071
744
462
5,701
10,838
54
4
-
64
122
3
-
21
6
4
-
8
42
164
1
-
-
-
1
-
-
1
1
-
-
-
2
3
Fair
Value
$M
2,334
787
1,055
1,082
5,258
306
1,376
1,133
637
1,075
744
470
5,741
10,999
(1) Equity derivatives were in place to hedge equity market risk in respect of structured equity products for customers. There were $42 million of net deferred losses on
these contracts which offset the above unrealised gains and these are disclosed within Note 43. At the end of the financial year there were no net deferred gains or
losses included in the amortised cost value.
Investment securities were carried at cost or amortised cost and were purchased with the intent of being held to maturity. The
investment portfolio was managed in the context of the full balance sheet of the Group.
Additional Disclosure
Proceeds at or close to maturity of investments in 2005 were: $22,799 million.
Proceeds from sale of investments in 2005 were: $392 million.
2005: realised capital gain $9 million and realised capital losses $1 million.
Commonwealth Bank of Australia Annual Report 2006 141
Notes to the Financial Statements
Note 14 Loans, Advances and Other Receivables
Australia
Overdrafts
Housing loans (1)
Credit card outstandings
Lease financing
Bills discounted
Term loans
Redeemable preference share financing
Other lending
Total Australia
Overseas
Overdrafts
Housing loans
Credit card outstandings
Lease financing
Bills discounted
Term loans
Redeemable preference share financing
Other lending
Other securities
Total overseas
Gross loans, advances and other receivables
Less
Provisions for impairment (Note 15):
Collective provisions (2)
Individually assessed provisions against loans and advances (2)
Unearned income:
Term loans
Lease financing
Interest reserved (3)
Net loans, advances and other receivables
2006
$M
2,672
144,834
6,997
4,924
2,779
56,950
1
597
219,754
2,435
22,287
428
139
7
15,282
1,194
8
438
42,218
261,972
(1,046)
(171)
(934)
(645)
-
(2,796)
259,176
Group
2005
$M
2,564
129,913
6,682
5,055
3,399
46,451
9
389
194,462
2,660
20,765
406
195
-
12,804
-
192
-
37,022
231,484
(1,390)
(157)
(889)
(683)
(19)
(3,138)
228,346
2006
$M
2,672
141,121
6,997
1,352
2,779
52,579
1
949
208,450
-
87
-
137
7
5,730
-
-
24
5,985
214,435
Bank
2005
$M
2,564
125,452
6,682
1,724
3,399
41,447
9
750
182,027
-
54
-
127
-
3,686
-
-
-
3,867
185,894
(938)
(157)
(1,218)
(134)
(510)
(131)
-
(1,736)
212,699
(426)
(172)
(19)
(1,969)
183,925
(1) Includes securitised loan balances for 2006 of $12,007 million (2005: $10,818 million) in the Group and $9,977 million (2005: $7,290 million) in the Bank. Liabilities of
similar values are included in debt issues (Group) and due to controlled entities (Bank).
(2) Collective provisions and individually assessed provisions recalculated under AIFRS for 2006.
(3) Interest reserved is not recognised under AIFRS from 1 July 2005
Finance Leases
Minimum lease payments receivable:
No later than one year
Later than one year but not later than five years
Later than five years
Lease financing
2006
$M
1,271
2,792
1,000
5,063
Group
2005
$M
1,602
2,884
764
5,250
2006
$M
501
838
150
1,489
Bank
2005
$M
822
969
60
1,851
142 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 14 Loans, Advances and Other Receivables (continued)
Australia
Government and other public authorities
Agricultural, forestry and fishing
Financial, investments and insurance
Real estate:
Mortgage (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Australia
Overseas
Government and other public authorities
Agricultural, forestry and fishing
Financial, investments and insurance
Real estate:
Mortgage (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Gross Loans, Advances and Other Receivables
Interest Rate Sensitivity of Lending
Australia
Overseas
Total Variable Interest Rates
Australia
Overseas
Total Fixed Interest Rates
Gross Loans, Advances and Other Receivables
Group
Maturity Period at 30 June 2006
Maturing
One Year
or Less
$M
Maturing
Between
One & Five
Years
$M
Maturing
After Five
Years
$M
234
1,053
3,758
14,570
1,107
6,522
1,222
16,351
44,817
291
517
1,808
3,142
125
386
50
4,399
10,718
55,535
14,724
4,252
18,976
30,092
6,467
36,559
55,535
1,287
1,495
4,617
12,724
768
8,932
2,707
16,855
49,385
67
780
3,175
2,769
87
127
84
2,547
9,636
59,021
26,215
4,492
30,707
23,170
5,144
28,314
59,021
7
759
1,308
117,540
210
547
995
4,186
125,552
22
1,797
3,020
16,376
56
8
5
580
21,864
147,416
46,999
4,526
51,525
78,553
17,338
95,891
147,416
Total
$M
1,528
3,307
9,683
144,834
2,085
16,001
4,924
37,392
219,754
380
3,094
8,003
22,287
268
521
139
7,526
42,218
261,972
87,938
13,270
101,208
131,815
28,949
160,764
261,972
(1) Principally Owner occupied housing. While most of these loans would have a contractual term of 20 years or more, the actual average term of the portfolio is less
than five years.
(2) Financing real estate and land development projects.
Commonwealth Bank of Australia Annual Report 2006 143
Notes to the Financial Statements
Note 15 Provisions for Impairment
Provisions for impairment
Collective provisions
Opening balance (1)
Charge against profit and loss
Transfer to individually assessed provisions
Impairment losses recovered
Adjustments for exchange rate fluctuations and other items
Impairment losses written off
Closing balance
Individually assessed provisions
Opening balance (1)
Transfer from collective provisions for:
New and increased provisioning
Less write-back of provisions no longer required
Net transfer
Adjustment for exchange rate fluctuations and other items
Impairment losses
Closing balance
Total provisions for impairment
General Reserve for Credit Losses (pre-tax equivalent) (2)
Total provisions including General Reserve for Credit Losses
2006
$M
1,021
398
(440)
127
(7)
1,099
(53)
1,046
191
468
(28)
440
(16)
(444)
171
1,217
500
1,717
Group
2005
$M
1,393
322
(352)
81
2
1,446
(56)
1,390
143
408
(56)
352
(3)
(335)
157
1,547
-
1,547
2006
$M
915
380
(404)
90
(1)
980
(42)
938
174
427
(23)
404
(15)
(406)
157
1,095
500
1,595
Bank
2005
$M
1,242
292
(326)
60
(1)
1,267
(49)
1,218
121
378
(52)
326
-
(313)
134
1,352
-
1,352
(1) The opening balance at 1 July 2005 includes the impact of adopting AIFRS 132, AIFRS 137 and AIFRS 139 which have not been applied to the 2005 comparatives
in accordance with AASB 1.
(2) The General Reserve for Credit Loss has been established to satisfy the current APRA prudential requirement for banks to maintain a general reserve for credit loss,
and allowable collective provisions, at a minimum level of 0.5% of risk weighted assets.
Coverage Ratios
Collective provisions as a % of risk weighted
assets
General provisions as a % of risk weighted assets
Collective provisions plus general reserve for
credit losses (pre-tax equivalent) as a % of risk
weighted assets
Individually assessed provisions for impairment as
a % of gross impaired assets
Specific provisions for impairment as a % of gross
impaired assets net of interest reserved (1)
Total provisions for impairment as % of gross
impaired assets net of interest reserved (1)
Total provisions for impairment plus general
reserve for credit losses (pre-tax equivalent) as a
% of gross impaired assets
(1) Interest reserved not recognised under AIFRS.
%
%
%
%
0. 48
-
0. 71
52. 5
-
0. 73
-
-
0. 44
-
0. 68
51. 3
-
0. 68
-
-
-
41. 76
-
37. 81
373. 3
411. 44
357. 5
381. 49
526. 7
-
520. 9
-
Coverage Ratios under AIFRS
The re-measurement of impairment provisions under AIFRS
has resulted in a lower level of total provisions than previously
assessed using Australian GAAP. However the Australian
prudential regulator, APRA, has proposed for the 2005/2006
financial year, that banks maintain a provisioning benchmark of
0.5% of risk weighted assets to adequately cover potential
losses.
The Group has consequently established a General Reserve
for Credit Losses within equity, which together with the
Collective Provisions (net of deferred tax) will satisfy this
requirement.
144 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 15 Provisions for Impairment (continued)
Total bad debts expense
The charge is required for:
Individually assessed provisioning
New and increased provisioning
Less provisions no longer required
Net individually assessed provisions
Provided from collective provisioning
Charge to profit and loss
Collective Provisioning
Direct write-offs
Recoveries of amounts previously written off
Movement in collective provision
Funding of individually assessed provisions
Charge to profit and loss
Total charge to profit and loss for bad debts expense
2006
$M
398
468
(28)
440
(440)
-
53
(127)
32
440
398
398
Group
2005
$M
322
408
(56)
352
(352)
-
56
(81)
(5)
352
322
322
2006
$M
380
427
(23)
404
(404)
-
42
(90)
24
404
380
380
Bank
2005
$M
292
378
(52)
326
(326)
-
49
(60)
(23)
326
292
292
Individually Assessed Provisions for Impairment by Industry Category
The following table sets out the Group’s specified provisions for impairment by industry category as at 30 June 2005 and 2006.
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Total individually assessed provisions
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
2006
$M
Group
2005
$M
-
4
1
19
2
97
1
42
166
-
-
1
2
-
2
-
-
5
171
-
16
1
3
7
63
5
49
144
-
-
1
11
-
1
-
-
13
157
Commonwealth Bank of Australia Annual Report 2006 145
2006
$M
Group
2005
$M
1
8
1
9
5
388
6
68
486
-
-
-
-
-
7
-
4
11
497
122
5
127
370
-
1
4
8
4
280
4
83
384
-
-
-
6
-
-
-
1
7
391
76
5
81
310
Notes to the Financial Statements
Note 15 Provisions for Impairment (continued)
Bad Debts Written Off by Industry Category
The following table sets out the Group’s bad debts written off for financial years ended 30 June 2005 and 2006.
Bad Debts Written Off
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Gross Bad Debts written off
Bad Debts Recovered
Australia
Overseas
Total Bad Debts Recovered
Net Bad Debts written off
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
146 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 15 Provisions for Impairment (continued)
Bad Debts Recovered by Industry Category
The following table sets out the Group’s bad debts recovered for financial years ended 30 June 2005 and 2006.
Bad Debts Recovered
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Total Bad Debts Recovered
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
2006
$M
Group
2005
$M
-
1
2
1
-
100
1
17
122
-
-
-
-
-
5
-
-
5
127
-
2
3
1
1
60
1
8
76
-
-
-
-
-
4
-
1
5
81
Commonwealth Bank of Australia Annual Report 2006 147
Notes to the Financial Statements
Note 16 Credit Risk Management
The Bank 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 major lending
areas.
The Bank 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
is generally
term revolving consumer credit
while short
unsecured.
A centralised exposure management system records all
significant credit risks borne by the Bank. The Risk Committee of
the Board operates under a charter of the Board in terms of
which the Committee oversees the Bank’s credit management
policies and practices. The Committee usually meets every two
months, and more often if required.
The credit risk portfolio is divided into two segments, retail and
credit risk rated.
The retail segment generally comprises facilities of less than
$1m for housing loan, credit card, personal loan and some
leasing products. Secured commercial lending within this limit is
currently being trialled. These exposures are generally not
individually reviewed unless arrears occur. The portfolios are
reviewed by the Business Credit Support and Monitoring unit
with an overview by the Portfolio Quality Assurance unit.
Facilities in the retail segment become classified for remedial
management by centralised units based on arrears status.
Credit risk rated exposures generally comprise business and
corporate exposures,
including bank and government
exposures. Each exposure is assigned an internal risk rating that
is based on an assessment of the risk of default and the risk of
loss in the event of default. Credit risk rated exposures are
generally required to be reviewed annually, unless they are
small transactions that are managed on a behavioural basis
after their initial rating at origination. The risk rated segment is
subject to inspection by the Portfolio Quality Assurance unit,
which is independent of the business units and which reports
quarterly on its findings to the Board Risk Committee.
including compliance with policy and
Credit processes,
underwriting standards, and application of risk ratings, are
examined, and reported where cases of non-compliance are
observed.
Impairment of Financial Assets
Under AASB 139 impairment losses are recognised to reduce
the carrying amount of loans and advances to their estimated
recoverable amounts. Individually assessed provisions are
made against individually significant financial assets and those
that are not individually significant including groups of financial
assets with similar credit risk characteristics. The Bank creates
an individually assessed provision for impairment when there is
objective evidence that it will not be able to collect all amounts
due. The amount of the impairment is the difference between the
carrying amount and the recoverable amount, calculated as the
present value of expected cash flows, including amounts
recoverable from guarantees and collateral, discounted at the
original effective interest rate.
148 Commonwealth Bank of Australia Annual Report 2006
Therefore, interest will continue to be accrued on impaired loans
based on the revised carrying amounts and using appropriate
effective interest rates.
Risk rated portfolios are assessed at each balance sheet date
for objective evidence that the financial asset or portfolio of
assets is impaired. Impaired assets in the credit risk rated
segment are those facilities where an individually assessed
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.
Loans are generally classified as non-accrual when receivership,
insolvency or bankruptcy occurs. Impaired assets in the retail
segment are those “classified” facilities that are not well secured
and past due 180 days or more. Most of these facilities are
written off immediately on becoming past due 180 days or more.
The Bank creates a further “portfolio impairment” where there is
objective evidence that components of the loan portfolio contain
probable losses at the balance sheet date, will be identified in
the future, or where insufficient data exists to reliably determine
whether such losses exist. The estimated probable losses are
based upon historical patterns of losses. The calculation is
based on statistical methods of credit risk measurement and
takes into account current cyclical developments as well as
economic conditions in which the borrowers operate.
The occurrence of actual credit losses is erratic in both timing
and amount and those that arise usually relate to transactions
entered into in previous accounting periods. In order to make the
business ultimately accountable for any credit losses they suffer
but also to give them the incentive to align their credit risk
decisions and risk adjusted pricing with the medium term risk
profile of their credit transactions, the Bank uses the concept of
“expected loss” for management purposes. Expected loss is a
statistically based measure intended to reflect the annual cost
that will arise, on average, over time, from transactions that
become impaired, and is a function of the probability of default
(given by the rating), current and likely future exposure to the
counterparty and the likely severity of the loss should default
actually occur.
The Bank uses a portfolio approach to the management of its
credit risk. A key element is a well diversified portfolio. The Bank
uses various portfolio management tools, including a centralised
portfolio model that assesses risk and return on an overall
portfolio and segmented basis, to assist in diversifying the credit
portfolio. The Bank is involved in credit derivative transactions,
has purchased various assets in the market, and has carried out
various asset securitisations and a Collateralised Loan
Obligation issue.
For further information about accounting policy for allowance
and provision for credit losses see Note 1 (n).
Master Netting Arrangements
The Bank further restricts its exposure to credit losses by
entering into master netting arrangements with counterparties
with which it undertakes a significant volume of transactions.
Master netting arrangements do not generally result in an offset
of balance sheet assets and liabilities as transactions are usually
settled on a gross basis. However, the credit risk associated with
favourable contacts is reduced by a master netting arrangement
to the extent that if an event of default occurs, all amounts with
the counterparty are terminated and settled on a net basis. As at
30 June 2006, master netting arrangements reduced the credit
risk by approximately $3.7 billion (2005: $4.7 billion).
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
Total Gross Credit Risk by Industry
The following table sets out the Group’s total gross credit risk by industry as at 30 June 2005 and 2006.
Industry
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Total Gross Credit Risk
Less unearned income
Total Credit Risk
Charge for Bad debts
Loss Rate (%) (3)
2006
$M
6,765
5,227
30,114
149,958
3,501
16,566
4,924
68,253
285,308
904
3,097
21,469
23,267
294
524
139
14,686
64,380
349,688
(1,579)
348,109
398
0. 11
Group
2005
$M
7,125
5,029
38,588
134,913
2,211
14,970
5,055
54,837
262,728
1,385
3,392
18,250
21,747
346
581
195
10,667
56,563
319,291
(1,572)
317,719
322
0. 10
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
(3) The loss rate is the charge as a percentage of the credit risk.
The Group has a good quality and well diversified credit
portfolio, with 49.8% of the exposure in mortgage loans and a
further 14.8% in finance, investment and insurance (primarily
banks). 18.6% of exposure is overseas, of which 35.9% is in
mortgage loans.
Overall over 68% of individually rated exposures in the
commercial portfolio (including government and finance) are of
investment grade or equivalent quality.
Commonwealth Bank of Australia Annual Report 2006 149
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2006.
Assets at
Fair Value
through
Income
Statement
$M
Available
For Sale
Investments
$M
Loans
Advances
and Other
Receivables
$M
Bank
Acceptances
of
customers
$M
Derivatives
$M
Contingent
Liabilities
$M
3,551
-
1,528
3,307
8
1,814
52
38
344
68
122
9,683
1,103
6,518
1,484
26,923
Total
$M
6,765
5,227
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and
insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Gross Balances
1,282
-
8,013
-
-
-
-
3,537
12,832
361
-
-
-
-
-
2,338
6,011
-
-
144,834
2,085
16,001
4,924
37,392
219,754
380
3,094
1,543
518
8,003
-
-
-
-
1,022
2,926
15,758
-
-
-
-
4,674
5,192
11,203
22,287
268
521
139
7,526
42,218
261,972
Other Risk Concentrations
Receivables due from other financial institutions
Deposits with regulatory authorities
Total Gross Credit Risk
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
-
411
429
-
14,545
18,310
-
-
-
-
-
-
-
-
-
18,310
-
143
3
-
2,486
9,240
69
2
5,124
862
133
-
7,955
15,970
94
1
149,958
3,501
16,566
4,924
68,253
282,117
904
3,097
4,352
3,137
17,553
-
3
-
-
195
4,621
13,861
980
23
3
-
1,269
5,507
21,477
23,267
294
524
139
14,686
60,464
342,581
7,033
74
349,688
Risk concentrations for contingent liabilities are based on the credit equivalent balance in Note 42. Contingent liabilities, assets and
commitments. Risk concentrations for derivatives are based on the credit equivalent balance in Note 43, Market Risk.
150 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
Total Gross Credit Risk by Industry
The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2005.
Assets at
Fair Value
through
Income
Statement
$M
Loans
Advances
and Other
Receivables
$M
Bank
Acceptances
of customers
$M
Investment
Securities
$M
Derivatives
$M
Contingent
Liabilities
$M
788
-
2,281
-
3,000
3,213
10
1,741
227
35
819
40
Total
$M
7,125
5,029
7,326
837
5,882
1,167
15,240
4,563
35,015
-
-
-
-
2,912
11,026
558
-
-
-
-
-
2,019
5,137
303
-
129,913
1,694
14,504
5,055
31,201
194,462
216
3,372
1,798
2,122
7,027
-
-
-
-
1,249
3,605
14,631
-
-
-
-
3,276
5,701
10,838
20,765
271
552
195
4,624
37,022
231,484
-
274
380
-
13,214
16,786
-
-
-
-
-
-
-
-
-
-
16,786
-
27
2
-
2,150
17,681
49
7
5,000
216
84
-
3,341
14,063
259
13
134,913
2,211
14,970
5,055
54,837
259,155
1,385
3,392
3,277
1,512
15,736
-
6
2
-
461
3,802
21,483
982
69
27
-
1,057
3,919
17,982
21,747
346
581
195
10,667
54,049
313,204
6,042
45
319,291
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and
insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
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
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
Commonwealth Bank of Australia Annual Report 2006 151
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
Impaired Assets by Industry and Status
The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2006.
Industry
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
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
Impaired
Assets
$M
Provisions
for
Impairment
$M
Total Risk
$M
Write-offs
$M
Recoveries
$M
Net
Write-offs
$M
-
12
2
40
7
56
12
183
312
-
1
-
6
4
2
-
1
14
326
-
4
1
19
2
97
1
42
166
-
-
1
2
-
2
-
-
5
171
1
8
1
9
5
388
6
68
486
-
-
-
-
-
7
-
4
11
497
-
(1)
(2)
(1)
-
(100)
(1)
(17)
(122)
-
-
-
-
-
(5)
-
-
(5)
(127)
1
7
(1)
8
5
288
5
50
364
-
-
-
-
-
2
-
4
6
370
6,765
5,227
26,923
149,958
3,501
16,566
4,924
68,253
282,117
904
3,097
17,553
23,267
294
524
139
14,686
60,464
342,581
7,033
74
349,688
(1) Principally owner occupied housing .
(2) Primarily financing real estate and land development projects.
152 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2005.
Industry
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1) (3)
Construction (2)
Personal
Lease financing
Other commercial and industrial (3)
Total Australia
Overseas
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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
Impaired
Assets
$M
Provisions
for
Impairment
$M
Total Risk
$M
Write-offs
$M
Recoveries
$M
Net
Write-offs
$M
-
76
6
32
2
46
8
211
381
-
1
-
7
-
4
-
2
14
395
-
16
1
3
7
63
5
49
144
-
-
1
11
-
1
-
-
13
157
-
1
4
8
4
280
4
83
384
-
-
-
6
-
-
-
1
7
391
-
(2)
(3)
(1)
(1)
(60)
(1)
(8)
(76)
-
-
-
-
-
(4)
-
(1)
(5)
(81)
-
(1)
1
7
3
220
3
75
308
-
-
-
6
-
(4)
-
-
2
310
7,125
5,029
35,015
134,913
2,211
14,970
5,055
54,837
259,155
1,385
3,392
15,736
21,747
346
581
195
10,667
54,049
313,204
6,042
45
319,291
(1) Principally owner occupied housing .
(2) Primarily financing real estate and land development projects.
(3) Certain of these loans have been reclassified for consistency.
Large Exposures
Concentrations of exposure to any debtor or counterparty group
are controlled by a large credit exposure policy. All exposures
outside the policy are approved by the Board Risk Committee.
5% to less than 10% of Group’s capital resources
10% to less than 15% of Group’s capital resources
The following table shows the aggregated number of the Bank’s
counterparty Corporate and Industrial exposures (including
direct and contingent exposures) which individually were
greater then 5% of the Group’s capital resources (Tier One and
Tier Two capital):
2006
Number
-
-
2005
Number
1
-
Commonwealth Bank of Australia Annual Report 2006 153
Notes to the Financial Statements
Note 16 Credit Risk Management (continued)
Credit Portfolio Receivables by Industry
The following table sets out the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) by
industry at 30 June 2005 and 2006.
Industry
Australia
Government and public authorities
Agriculture, forestry and fishing
Financial, investment and insurance
Real estate:
Mortgage (1)
Construction (2)
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 (1)
Construction (2)
Personal
Lease financing
Other commercial and industrial
Total Overseas
Gross loans, Advances and Other Receivables
Provisions for bad debts, unearned income, interest reserved
and unearned tax remissions on leveraged leases (3)
Net Loans, Advances and Other Receivables
(1) Principally owner occupied housing.
(2) Primarily financing real estate and land development projects.
(3) Interest reserved not recognised under AIFRS from 1 July 2005.
2006
$M
1,528
3,307
9,683
144,834
2,085
16,001
4,924
37,392
219,754
380
3,094
8,003
22,287
268
521
139
7,526
42,218
261,972
2005
$M
3,000
3,213
5,882
129,913
1,694
14,504
5,055
31,201
194,462
216
3,372
7,027
20,765
271
552
195
4,624
37,022
231,484
(2,796)
259,176
(3,138)
228,346
154 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 17 Asset Quality
Impaired Assets
The Group follows the Australian disclosure requirements for
impaired assets contained in AASB 130: Disclosures in the
Financial Statements of Banks and similar Financial Institutions.
There are three classifications of impaired assets:
(a) Non Performing comprising:
(b) Restructured Facilities, comprising:
• 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-performing.
• Any credit risk facility against which an individually assessed
(c) Assets Acquired through Security Enforcement (AATSE),
provision for impairment has been raised;
comprising:
• 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 relevant financial period that has not
been received in cash is reversed from profit and loss when
facilities become classified as non-performing. Interest on these
facilities is then only taken to profit if received in cash.
• Other Real Estate Owned (OREO), comprising real estate
where the Group assumed ownership or foreclosed in
settlement of a debt; and
• Other Assets Acquired through Securities Enforcement
(OAATSE), comprising assets other than real estate where
the Group has assumed ownership or
in
settlement of a debt.
foreclosed
Impaired Asset Ratios
Gross impaired asset ratios net of interest reserved as a % of risk weighted assets
Net impaired assets as % of:
Risk weighted assets
Total shareholders’ equity
Colonial State Bank
Indemnified Loan Book
Pursuant to the Sale Agreement between Colonial and the New
South Wales Government, Colonial State Bank’s loan book as at
31 December 1994 and any further loan losses (including
interest) arising are indemnified by the NSW Government. This
indemnity is to the extent of 90% of the losses after an initial $60
million (which was provided for by the Colonial State Bank as at
31 December 1994).
All loans (other than impaired loans) were covered for a period
of three years from 31 December 1994 and for the duration of
the loan in the case of impaired loans so classified as at 31
December 1997. The sale agreement also allows for loans to be
withdrawn from the indemnity provided the withdrawal is
approved by Colonial Sate Bank and the NSW Government and
the due processes followed.
2006
%
0. 15
0. 07
0. 73
2005
%
0. 20
0. 12
0. 97
Pursuant to the agreement, the costs of funding and managing
non-performing loans that are covered by the loan indemnities
are reimbursed by the NSW Government on a quarterly basis.
Commonwealth Bank of Australia Annual Report 2006 155
2006
$M
312
-
312
(166)
146
-
-
-
-
-
-
-
-
146
14
-
14
(5)
9
-
-
-
-
-
-
-
-
9
Group
2005
$M
381
(19)
362
(144)
218
-
-
-
-
-
-
-
-
218
14
-
14
(13)
1
-
-
-
-
-
-
-
-
1
155
219
Notes to the Financial Statements
Note 17 Asset Quality (continued)
Impaired Assets
The following table sets out the Group’s impaired assets as at 30 June 2005 and 2006.
Australia
Non-Performing loans:
Gross balances
Less interest reserved (1)
Gross balances (net of interest reserved)
Less provisions for impairment
Net Non-Performing Loans
Restructured loans:
Gross balances
Less interest reserved (1)
Gross balances (net of interest reserved)
Less specific provisions
Net Restructured Loans
Assets Acquired Through Security Enforcement (AATSE):
Gross balances
Less provisions for impairment
Net AATSE
Net Australian Impaired assets
Overseas
Non-Performing loans
Gross balances
Less interest reserved (1)
Gross balances (net of interest reserved)
Less provisions for impairment
Net Non-Performing Loans
Restructured loans:
Gross balances
Less interest reserved (1)
Gross balances (net of interest reserved)
Less specific provisions
Net Restructured Loans
Asset Acquired Through Security Enforcement (AATSE)
Gross Balance
Less provisions for impairment
Net AATSE
Net overseas impaired assets
Total Net Impaired Assets
(1) Interest reserved not recognised under AIFRS from 1 July 2005.
156 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 17 Asset Quality (continued)
Movement in Impaired Asset Balances
The following table provides an analysis of the movement in the gross impaired asset balances for financial years 2005 and 2006.
Gross Impaired Assets
Gross impaired assets at beginning of period
New and increased
Balances written off
Returned to performing or repaid
Gross Impaired Assets at Period End
2006
$M
395
745
(450)
(364)
326
Group
2005
$M
363
769
(350)
(387)
395
The following amounts comprising loans less than $250,000 are reported in accordance with regulatory returns to APRA. They are not
classified as impaired assets and therefore not included within the above impaired assets summary.
Loans Performing Past Due 90 Days or More
Housing loans
Other loans
Total Loans Performing Past Due
Net Interest Forgone on Impaired Assets
Australia non-performing facilities
Overseas non-performing facilities
Total Interest Forgone
Interest Taken to Profit on Impaired Assets
Australia
Non-performing facilities
Restructured facilities
Overseas
Non-performing facilities
Other real estate owned
Total Interest Taken to Profit
2006
$M
155
137
292
2006
$M
11
-
11
2006
$M
11
-
-
-
11
Group
2005
$M
183
119
302
Group
2005
$M
13
-
13
Group
2005
$M
9
-
-
-
9
Commonwealth Bank of Australia Annual Report 2006 157
Notes to the Financial Statements
Note 17 Asset Quality (continued)
Impaired Assets
Non-Performing Loans
With provisions
Without provisions
Gross balances
Less interest reserved (1)
Net balances
Less provisions for impairment
Net Non-Performing Loans
Restructured Loans
Gross balances
Less interest reserved (1)
Net balances
Less provisions for impairment
Net Restructured Loans
Other Real Estate Owned (OREO) (2)
Gross balances
Less provisions for impairment
Net OREO
Other Assets Acquired Through Security
Enforcement (OAATSE) (2)
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-Performing Loans by Size of Loan
Less than $1 million
$1 million to $10 million
Greater than $10 million
Total
Performing Loans 90 days past due or more (3)
(1) Interest reserved not recognised under AIFRS from 1 July 2005.
Australia
2006
$M
Overseas
2006
$M
Total
2006
$M
Australia
2005
$M
Overseas
2005
$M
172
140
312
-
312
(166)
146
-
-
-
-
-
-
-
-
-
-
-
312
-
312
(166)
146
140
125
47
312
250
10
4
14
-
14
(5)
9
-
-
-
-
-
-
-
-
-
-
-
14
-
14
(5)
9
11
3
-
14
42
182
144
326
-
326
(171)
155
235
146
381
(19)
362
(144)
218
-
-
-
-
-
-
-
-
-
-
-
326
-
326
(171)
155
151
128
47
326
292
-
-
-
-
-
-
-
-
-
-
-
381
(19)
362
(144)
218
119
116
146
381
267
14
-
14
-
14
(13)
1
-
-
-
-
-
-
-
-
-
-
-
14
-
14
(13)
1
13
1
-
14
35
Group
Total
2005
$M
249
146
395
(19)
376
(157)
219
-
-
-
-
-
-
-
-
-
-
-
395
(19)
376
(157)
219
132
117
146
395
302
(2) Other real estate owned and other assets acquired through security enforcement are sold through the Bank’s existing disposal processes. These processes are
expected to take no longer than 6 months.
(3) Comprising loans less than $250,000 in accordance with regulatory returns to APRA. They are not classified as Impaired Assets and therefore are not included
within Impaired Assets.
158 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 18 Shares in and Loans to Controlled Entities
Shares in controlled entities
Loans to controlled entities
Total Shares in and Loans to Controlled Entities
2006
$M
21,619
14,531
36,150
Bank
2005
$M
17,634
11,527
29,161
Note 19 Investment Property
Investment Property
Investment properties are carried at fair value with changes in
fair value recognised in profit and loss. The fair value of
investment properties is based on valuations performed by an
independent valuer who holds a recognised and relevant
professional qualification and has recent experience in the
location and category of investment property being valued.
2006
$M
258
Group
2005
$M
252
2006
$M
-
Bank
2005
$M
-
This investment represents a 50% interest in a long-term
freehold lease over property.
Amounts recognised in profit and loss relating to the investment property
Rental income (1)
Net gains or losses from fair value adjustments (1)
Direct operating expenses (2)
Total
(1) This income is disclosed as part of Other Operating Income – Other in Note 2
(2) This expense is disclosed as part of Other Operating Income – Other in Note 2
Investment Property (reconciliation)
Opening balance
Net gains or losses from fair value adjustments
Closing balance
2006
$M
17
6
(2)
21
2006
$M
252
6
258
Group
2005
$M
15
-
(2)
13
Group
2005
$M
252
-
252
Commonwealth Bank of Australia Annual Report 2006 159
Notes to the Financial Statements
Note 20 Property, Plant and Equipment
Land and Buildings
Land
At 30 June 2006 valuation
At 30 June 2005 valuation
Closing balance
Buildings
At 30 June 2006 valuation
At 30 June 2005 valuation
Closing balance
Total Land and Buildings
Leasehold Improvements
At cost
Provision for depreciation
Closing balance
Equipment
At cost
Provision for depreciation
Closing balance
Assets under Lease
At cost
Provision for depreciation
Closing balance
Assets held for sale
At 30 June 2006 valuation
At 30 June 2005 valuation
Closing balance
2006
$M
Group
2005
$M
2006
$M
199
-
199
288
-
288
487
732
(416)
316
794
(505)
289
238
(17)
221
1
-
1
-
174
174
-
293
293
467
702
(409)
293
735
(486)
249
124
(8)
116
-
7
7
182
-
182
263
-
263
445
633
(362)
271
511
(301)
210
100
-
100
1
-
1
Bank
2005
$M
-
159
159
-
257
257
416
582
(337)
245
406
(253)
153
-
-
-
-
7
7
Total Property, Plant and Equipment
1,314
1,132
1,027
821
Assets held for sale comprise:
Land
Buildings
Total Assets Held For Sale
-
1
1
5
2
7
-
1
1
5
2
7
Land and buildings are carried at fair value based on independent valuations performed in 2006, refer Note 1 (s). Under the cost model
these assets would have been recognised at the carrying amount outlined in the table below.
Carrying Amount of Land and Buildings under the Cost Model:
Land
Buildings
Total Land and Buildings
2006
$M
125
225
350
Group
2005
$M
119
229
348
2006
$M
122
210
332
Bank
2005
$M
115
201
316
160 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 20 Property, Plant and Equipment (continued)
Reconciliation of the carrying amount of Property, Plant and Equipment at the beginning and end of the 2006 and 2005 financial years.
Reconciliation
Land
Opening balance
Acquisitions
Disposals/transfers to “Assets held-for-sale”
Disposals
Net revaluations
FX translation adjustment
Closing balance
Buildings
Opening balance
Acquisitions
Acquisitions attributed to business combinations
Disposals/transfers to “Assets held-for-sale”
Disposals
Net revaluations
Depreciation
FX translation adjustment
Closing balance
Leasehold Improvements
Opening balance
Acquisitions
Acquisitions attributed to business combinations
Disposals
Transfers
Depreciation
FX translation adjustment
Closing balance
Equipment
Opening balance
Adjustment to opening balance
Acquisitions
Disposals/transfers
Depreciation
FX translation adjustment
Closing balance
Assets Under Lease
Opening balance
Acquisitions
Disposals/transfers
Depreciation
Closing balance
2006
$M
Group
2005
$M
2006
$M
Bank
2005
$M
174
9
5
(6)
19
(2)
199
293
38
2
(13)
(7)
(1)
(22)
(2)
288
293
87
9
(6)
(7)
(56)
(4)
316
249
(1)
136
(13)
(80)
(2)
289
116
114
-
(9)
221
172
-
(11)
-
13
-
174
288
22
-
(11)
-
15
(21)
-
293
281
78
-
(8)
-
(58)
-
293
191
-
115
12
(69)
-
249
75
71
(22)
(8)
116
159
8
5
(6)
16
-
182
257
35
-
1
(6)
(3)
(21)
-
263
245
77
-
(5)
-
(46)
-
271
153
(1)
109
-
(51)
-
210
-
100
-
-
100
159
-
(11)
-
11
-
159
250
22
-
(12)
-
17
(20)
-
257
235
62
-
(6)
-
(46)
-
245
108
-
80
-
(35)
-
153
-
-
-
-
-
Commonwealth Bank of Australia Annual Report 2006 161
Notes to the Financial Statements
Note 21 Intangible Assets
Intangible Assets
Goodwill
Computer software costs
Other
Total Intangible Assets
Goodwill
Purchased goodwill – Colonial
Purchased goodwill – other
Total goodwill
Computer Software Costs
Cost
Accumulated amortisation
Total computer software costs
Other (1)
Cost
Accumulated amortisation
Total other
Goodwill (reconciliation)
Opening balance
Additions
Impairment
Closing balance
Computer Software Costs (reconciliation)
Opening balance
Additions:
From internal development
Amortisation
Closing balance
Other (reconciliation)
Opening balance
Additions:
From acquisitions
Amortisation
Closing balance
2006
$M
7,200
229
380
7,809
6,705
495
7,200
290
(61)
229
393
(13)
380
7,214
7
(21)
7,200
182
90
(43)
229
260
126
(6)
380
Group
2005
$M
7,214
182
260
7,656
6,705
509
7,214
206
(24)
182
267
(7)
260
7,184
30
-
7,214
107
92
(17)
182
250
13
(3)
260
2006
$M
2,522
212
4
2,738
2,229
293
2,522
268
(56)
212
4
-
4
2,522
-
-
2,522
153
95
(36)
212
-
4
-
4
Bank
2005
$M
2,522
153
-
2,675
2,229
293
2,522
172
(19)
153
-
-
-
2,522
-
-
2,522
78
87
(12)
153
-
-
-
-
(1) Other principally comprises customer lists and $311 million of management fee rights. Management fee rights have an indefinite useful life under the contractual terms
of the management agreements and are subject to an independent valuation for impairment testing purposes. No impairment was required as a result of this
valuation.
162 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 21 Intangible Assets (continued)
Segment Allocation of Goodwill
The Group’s carrying amount of goodwill for each segment of business is shown below.
Segment
Banking (1)
Funds Management (2)
Insurance (2)
Total
2006
$M
4,360
2,267
573
7,200
Group
2005
$M
4,353
2,288
573
7,214
(1) The allocation to banking includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank.
(2) The allocation to funds management and insurance principally related to the goodwill on acquisition of Colonial.
Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives
Goodwill has been allocated for impairment testing purposes to
cash-generating units in the following business segments:
Banking, Funds Management and Insurance. Under AASB 136
a cash-generating unit to which goodwill has been allocated
shall be tested for impairment annually.
Whenever the cash-generating unit is impaired, the carrying
amounts containing goodwill are written down
the
recoverable amount that has been determined based on net
selling price less costs to sell, using an applicable earnings
multiple.
to
Australian
Retail Banking
$M
4,149
Funds
Management
(Excluding
Property)
$M
2,189
Funds
Management
(Property)
$M
78
Australian
Life
Insurance
$M
131
New Zealand
Banking
$M
211
New Zealand
Life Insurance
$M
442
Carrying amount of goodwill
Group
At 30 June 2006
Key Assumptions Used in Selling Price less Cost to Sell Calculations
Earnings multiples relating to the Group’s Banking cash-
generating units are sourced from publicly available data
associated with valuations performed on recent businesses
displaying similar characteristics to the Group’s Banking cash-
generating units, and are applied to current earnings.
Life Insurance (Australian and New Zealand) and Funds
Management cash-generating units are valued via an actuarial
assessment.
The key assumptions used when completing the actuarial
assessment included new business multiples, discount rates,
valuation allowances for franking credits, investment market
returns, mortality, morbidity, persistency and expense inflation.
These have been determined by reference
to historical
company and industry experience and publicly available data.
Note 22 Other Assets
Accrued interest receivable
Shares in other companies
Defined benefit superannuation plan surplus
Accrued fees/reimbursements receivable
Securities sold not delivered
Unrealised gains on trading derivatives
Intergroup current tax receivable
Intergroup deferred tax receivable
Other
Total Other Assets
Note
44
43
2006
$M
1,346
n/a
1,228
669
1,088
n/a (1)
-
-
810
5,141
Group
2005
$M
1,197
267
717
641
907
12,144
-
-
1,561
17,434
2006
$M
1,329
n/a
1,228
385
659
n/a (1)
217
- (2)
806
4,624
Bank
2005
$M
1,503
133
717
507
625
12,043
55
549
1,022
17,154
(1) Under AIFRS, a gain or loss on trading derivatives, including unrealised amounts, is recognised immediately in profit or loss.
(2) For 2005, UIG Abstract 52 required current and deferred taxes under tax funding arrangements for tax consolidated subsidiaries to be recognised as inter-company
balances. For 2006, UIG Interpretation 1052 requires subsidiaries in a tax consolidated group to recognise deferred taxes relating to temporary differences.
Commonwealth Bank of Australia Annual Report 2006 163
Notes to the Financial Statements
Note 23 Deposits and Other Public Borrowings
Australia
Certificates of deposit
Term deposits
On demand and short term deposit
Deposits not bearing interest
Securities sold under agreements to repurchase and short sales
Total Australia
Overseas
Certificates of deposit
Term deposits
On demand and short term deposits
Deposits not bearing interest
Securities sold under agreements to repurchase and short sales
Total Overseas
Total Deposits and Other Public Borrowings
2006
$M
18,185
43,210
81,547
5,872
1,380
150,194
959
13,790
7,088
1,166
30
23,033
173,227
Group
2005
$M
16,041
41,582
75,407
5,823
2,258
141,111
3,105
13,617
8,633
1,155
405
26,915
168,026
2006
$M
18,185
41,611
83,913
5,876
1,380
150,965
959
3,922
71
9
30
4,991
155,956
Bank
2005
$M
16,041
39,993
75,806
5,853
2,258
139,951
386
2,998
113
5
405
3,907
143,858
Maturity Distribution of Certificates of Deposit and Time Deposits
The following table sets forth the maturity distribution of the Group’s certificates of deposit and time deposits as at 30 June 2006.
Australia
Certificates of deposit (1)
Time deposits
Total Australia
Overseas
Certificates of deposit (1)
Time deposits
Total Overseas
Total Certificates of Deposit and Time Deposits
Maturing
Three Months
or Less
$M
Maturing
Between Three
& Six Months
$M
Maturing
Between Six &
Twelve Months
$M
Maturing
After
Twelve Months
$M
12,605
26,137
38,742
551
9,479
10,030
48,772
1,769
7,401
9,170
17
2,482
2,499
11,669
2,388
8,447
10,835
390
1,273
1,663
12,498
1,423
1,225
2,648
1
377
378
3,026
Group
At 30 June 2006
Total
$M
18,185
43,210
61,395
959
13,611
14,570
75,965
(1) All certificates of deposit issued by the Bank are for amounts greater than $100,000.
164 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 24 Payables to Other Financial Institutions
Australia
Overseas
Total Payables to Other Financial Institutions
2006
$M
3,354
7,830
11,184
Group
2005
$M
2,708
5,315
8,023
2006
$M
3,353
7,778
11,131
Bank
2005
$M
2,712
5,257
7,969
Note 25 Liabilities at Fair Value through Income Statement
Deposits and other borrowings
Debt instruments
Total Liabilities at Fair Value through Income Statement (1)
2006
$M
8,238
5,573
13,811
Group
2005
$M
n/a
2006
$M
2,085
-
2,085
Bank
2005
$M
n/a
(1) Liabilities at fair value through Income Statement have been designated to this category at inception as they are managed on a fair value basis by the Group.
Designating these liabilities at fair value through Income Statement has also eliminated an accounting mismatch created by measuring assets and liabilities on a
different basis.
Due to the Bank’s constant credit rating over the period there was no change in the fair value of liabilities that is not attributable to
changes in benchmark interest rates. The increment on top of the carrying amount that the Group would be contractually required to
pay at maturity to the holder of these financial liabilities is $99 million.
Note 26 Income Tax Liability
Australia
Current tax liability
Deferred tax liability (Note 5)
Total Australia
Overseas
Current tax liability
Deferred tax liability (Note 5)
Total Overseas
Total Income Tax Liability
2006
$M
368
1,234
1,602
10
102
112
1,714
Group
2005
$M
808
861
1,669
25
60
85
1,754
2006
$M
329
640
969
5
-
5
974
Bank
2005
$M
757
872
1,629
7
-
7
1,636
Commonwealth Bank of Australia Annual Report 2006 165
Notes to the Financial Statements
Note
2006
$M
280
186
66
-
37
85
90
6
71
821
6
Group
2005
$M
296
146
58
91
18
100
66
14
82
871
2006
$M
Group
2005
$M
91
(46)
(45)
-
18
37
(18)
37
100
32
(47)
85
66
26
(2)
90
82
59
(66)
(4)
71
208
(20)
(97)
91
-
22
(4)
18
79
61
(40)
100
60
34
(28)
66
122
29
(69)
-
82
2006
$M
267
167
66
-
37
-
87
6
60
690
2006
$M
91
(46)
(45)
-
18
37
(18)
37
-
-
-
-
66
23
(2)
87
41
54
(35)
-
60
Bank
2005
$M
285
126
62
91
18
-
66
14
41
703
Bank
2005
$M
208
(20)
(97)
91
-
22
(4)
18
-
-
-
-
59
34
(27)
66
49
24
(32)
-
41
General Insurance Claims
This provision is to cover future claims on general insurance
contracts that have been incurred but not reported.
Self Insurance and Non-Lending Losses
This provision covers certain non-lending losses and non-
transferred insurance risk. The provision is reassessed annually
in consultation with actuarial advice.
Note 27 Other Provisions
Provision for:
Long service leave
Annual leave
Other employee entitlements
Which new Bank costs
Restructuring costs
General insurance contract outstanding claims
Self insurance/non-lending losses
Dividends
Other
Total Other Provisions
Reconciliation
Which new Bank costs:
Opening balance
Transfers
Amounts utilised during the year
Closing balance
Restructuring costs:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
General insurance claims:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
Self insurance/non-lending losses:
Opening balance
Additional provisions
Amounts utilised during the year
Closing balance
Other:
Opening balance
Additional provisions
Amounts utilised during the year
FX translation adjustment
Closing balance
Provision Commentary
Which new Bank Provision
This provision was raised to provide for the implementation of
the Which new Bank initiative (refer Note 1 (aa)) which was
completed in 2006.
Restructuring costs
This provision was raised to provide for Bank restructures as
outlined in Note 1 (aa). This is expected to be utilised by the end
of 2008.
166 Commonwealth Bank of Australia Annual Report 2006
Note 28 Debt Issues
Short Term Debt Issues
Long Term Debt Issues
Total Debt Issues
Short Term Debt Issues
AUD Promissory Notes
AUD Bank Bills
US Commercial Paper
Euro Commercial Paper
Other
Long Term Debt Issues with less than one year to maturity
Total Short Term Debt Issues
Long Term Debt Issues
USD Medium Term Notes
AUD Medium Term Notes
JPY Medium Term Notes
GBP Medium Term Notes
Other Currencies Medium Term Notes
Offshore Loans (all JPY)
Develop Australia bonds (all AUD)
Eurobonds
Total Long Term Debt Issues
Maturity Distribution of Debt Issues
Less than 3 months
Between 3 months to 12 months
Between 1 year and 5 years
Greater than 5 years
Total Debt Issues
Notes to the Financial Statements
2006
$M
22,838
55,753
78,591
1,081
505
6,861
4,248
6
10,137
22,838
29,475
12,479
1,785
4,088
5,102
147
217
2,460
55,753
8,138
14,700
40,874
14,879
78,591
Group
2005
$M
26,864
43,901
70,765
1,214
624
10,661
4,976
-
9,389
26,864
22,967
7,122
868
4,401
6,596
-
-
1,947
43,901
12,443
17,681
30,656
9,985
70,765
2006
$M
11,034
41,164
52,198
-
-
-
4,248
6
6,780
11,034
27,172
4,232
1,785
2,084
4,897
147
-
847
41,164
5,640
5,394
30,428
10,736
52,198
Bank
2005
$M
9,500
31,187
40,687
-
-
-
3,065
-
6,435
9,500
15,680
6,272
692
2,736
5,807
-
-
-
31,187
6,006
3,493
21,320
9,868
40,687
The Bank has a Euro Medium Term Note program under which
it may issue notes up to an aggregate amount outstanding of
USD35 billion. The Bank also has a US Medium Term Note
program under which it may issue notes up to an aggregate
amount outstanding of USD15 billion. Notes issued under these
programs 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 2006, the Bank has issued:
• USD medium term notes: between 1 and 5 years – USD 60
million (AUD 81 million); greater than 5 years – USD 258
million (AUD 347 million);
• CHF medium term notes: between 1 and 5 years – CHF 200
million (AUD 218 million);
• EUR medium term notes: greater than 5 years – EUR 5
million (AUD 8 million);
• JPY medium term notes: between 1 and 5 years – JPY 25
billion (AUD 297 million); greater than 5 years – JPY 1.5
billion (AUD 18 million);
• NZD medium term notes: between 1 and 5 years – NZD 10
million (AUD 8 million);
• AUD medium term notes: between 1 and 5 years – AUD 6
million;
• GBP medium term notes: greater than 5 years – GBP 3
million (AUD 7 million); and
• HKD medium term notes: between 1 and 5 years – HKD
380 million (AUD 66 million).
Where any debt issue is booked in an offshore branch or
subsidiary, the amounts have first been converted into the
functional currency of the branch at a branch defined exchange
rate, before being converted into the AUD equivalent.
Where proceeds have been employed in currencies other than
that of the ultimate repayment liability, swap or other hedge
arrangements have been entered into.
Commonwealth Bank of Australia Annual Report 2006 167
Notes to the Financial Statements
Note 28 Debt Issues (continued)
Short Term Borrowings
The following table analyses the Group’s short term borrowings for the financial years ended 30 June 2005 and 2006.
US Commercial Paper
Outstanding at period end (1)
Maximum amount outstanding at any month end (2)
Approximate average amount outstanding
Approximate weighted average rate on:
Average amount outstanding
Outstanding at period end
Euro Commercial Paper
Outstanding at period end (1)
Maximum amount outstanding at any month end (2)
Approximate average amount outstanding (2)
Approximate weighted average rate on:
Average amount outstanding
Outstanding at period end
Other Commercial Paper
Outstanding period end (1)
Maximum amount outstanding at any month end (2)
Approximate average amount outstanding (2)
Approximate weighted average rate on:
Average amount outstanding
Outstanding at period end
Group
2006
2005
(AUD Millions, except where
indicated)
6,861
13,717
9,754
4. 4%
5. 2%
4,248
4,441
3,177
4. 4%
5. 2%
1,592
2,665
1,880
6. 3%
6. 4%
10,661
10,698
10,341
1. 2%
1. 5%
4,976
6,146
3,800
2. 2%
2. 8%
1,838
2,110
1,790
5. 8%
5. 7%
(1) The amount outstanding at period end is reported on a book value basis (amortised cost).
(2) The maximum and average amounts over the period are reported on a face value basis because the book values of these amounts are not available. Any differences
between face value and book value would not be material given the short term nature of the borrowings.
Exchange Rates Utilised
AUD 1.00 =
Currency
USD
EUR
GBP
JPY
NZD
HKD
CAD
CHF
IDR
THB
FJD
As at
30 June
2006
0. 7428
0. 5848
0. 4053
85. 276
1. 214
5. 770
0. 8247
0. 917
6,880
28. 355
1. 304
As at
30 June
2005
0. 7643
0. 6313
0. 4223
84. 165
1. 090
5. 940
0. 9399
0. 978
7,425
31. 531
1. 301
168 Commonwealth Bank of Australia Annual Report 2006
Note 28 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 Banks Act 1959 (as amended) at 30
June 1996. This guarantee has been progressively phased out
following
the Commonwealth of Australia’s
shareholding in the Bank on 19 July 1996.
the sale of
transitional arrangements
The
the
Commonwealth of Australia’s guarantee are contained in the
Commonwealth Bank Sale Act 1995.
for phasing out
In relation to the Commonwealth of Australia’s guarantee of the
Bank’s liabilities, transitional arrangements provided that:
• All demand deposits and term deposits were guaranteed for
a period of three years from 19 July 1996, with term deposits
outstanding at the end of that three year period 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 at 19 July 1996 will be guaranteed
until their maturity.
Accordingly, demand deposits are no longer guaranteed. Term
deposits outstanding at 19 July 1999 remain guaranteed until
maturity. The run-off of the Government guarantee has no effect
on the Bank’s access to deposit markets.
Commonwealth Development Bank
On 24 July 1996, the Commonwealth of Australia sold its 8.1%
shareholding in the Commonwealth Development Bank of
Australia Limited (CDBL) to the Bank for $12.5 million.
Under the arrangements relating to the purchase by the Bank of
the Commonwealth of Australia’s shareholding in the CDBL:
• All
lending assets as at 30 June 1996 have been
quarantined in CDBL, consistent with the charter terms on
which they were written;
Note 29 Managed Funds Units on Issue
Managed funds units on issue
(1) Reclassified from Minority Interests under AIFRS, refer Note 34.
Notes to the Financial Statements
• The CDBL’s liabilities continue to remain guaranteed by the
Commonwealth of Australia; and
• CDBL 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 CDBL is being
written by the rural arm of the Bank.
The due payment of all monies payable by CDBL to a person
other than the Commonwealth of Australia 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 of Australia
whilst quarantined assets are held. The value of the liabilities
under the guarantee will diminish as quarantined assets reach
maturity and are repaid.
State Bank of NSW (also known as Colonial State Bank)
The enabling legislation for the sale of the State Bank of New
South Wales Limited (SBNSW), the State Bank (Privatisation)
Act 1994 – Section 12 and the State Bank (Corporatisation) Act
1989 – Section 12 (as amended), provides in general terms for
a guarantee by the NSW Government in respect of all funding
liabilities and off balance sheet products (other than demand
deposits) incurred or issued prior to 31 December 1997 by
SBNSW until maturity and a guarantee for demand deposits
accepted by SBNSW up to 31 December 1997. Other
obligations incurred before 31 December 1994 are also
guaranteed to their maturity. On 4 June 2001 Commonwealth
Bank of Australia became the successor in law to SBNSW
pursuant to the Financial Sector Transfer of Business Act 1999.
The NSW Government guarantee of the liabilities and products
as described above continues unchanged by the succession.
2006
$M
1,109
Group
2005
$M
- (1)
2006
$M
-
Bank
2005
$M
-
Managed funds units on issue represent the liability to minority interest unit holders in funds which have been consolidated by the
Group.
Commonwealth Bank of Australia Annual Report 2006 169
Notes to the Financial Statements
Note 30 Bills Payable and Other Liabilities
Bills payable
Accrued interest payable
Accrued fees and other items payable
Defined benefit superannuation plan deficit
Securities purchased not delivered
Unrealised losses on trading derivatives
Intergroup deferred tax payable
Other liabilities
Total Bills Payable and Other Liabilities
Note 31 Loan Capital
Note
44
43
Currency
Amount (M)
Footnotes
FRN
FRN
FRN
TPS
PERLS II
PERLS III
TPS
Tier 1 Loan Capital
Exchangeable
Exchangeable
Undated
Undated
Undated
Undated
Undated
Total Tier 1 Loan Capital
Tier 2 Loan Capital
Extendible
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Subordinated
Total Tier 2 Loan Capital
Fair value hedge and
effective yield adjustments
Total Loan Capital
FRN
FRN
Notes
EMTN
EMTN
EMTN
EMTN
Notes
Notes
EMTN
MTN
FRN
EMTN
EMTN
FRN
EMTN
EMTN
Notes
EMTN
FRN
EMTN
Loan
EMTN
Notes
USD38
USD71
USD100
USD550
AUD750
AUD1,166
USD700
AUD275
AUD25
USD300
JPY20,000
USD400
GBP200
JPY30,000
AUD130
USD350
GBP150
AUD300
AUD200
JPY10,000
USD500
AUD300
EUR300
USD61
NZD350
JPY10,000
AUD300
CAD300
JPY5,000
USD200
NZD183
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
2006
$M
830
1,587
1,408
65
1,097
n/a
-
1,066
6,053
2006
$M
50
96
135
740
750
1,166
-
2,937
275
25
404
235
539
493
352
-
471
370
300
200
117
673
300
513
81
288
117
300
364
59
269
151
6,896
62
9,895
Group
2005
$M
928
1,435
1,256
79
1,065
11,914
-
874
17,551
Group
2005
$M
49
124
131
-
-
-
-
304
275
25
549
216
501
408
387
130
536
373
300
200
127
711
300
501
126
322
-
-
-
-
-
-
5,987
-
6,291
2006
$M
773
1,408
1,057
65
655
n/a
-
341
4,299
2006
$M
50
96
135
740
750
1,166
942
3,879
275
25
404
235
539
493
352
-
471
370
300
200
117
673
300
513
81
288
117
300
364
59
269
-
6,745
64
10,688
Bank
2005
$M
863
1,226
860
79
796
11,854
60
999
16,737
Bank
2005
$M
49
124
131
719
-
-
-
1,023
275
25
549
216
501
408
387
130
536
373
300
200
127
711
300
501
126
322
-
-
-
-
-
-
5,987
-
7,010
170 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 31 Loan Capital (continued)
(1) USD 300 million undated Floating Rate Notes (FRNs) issued
11 July 1988 exchangeable into dated FRNs.
to subscribe for fully paid ordinary shares up to an amount equal
to the principal value of the maturing FRNs.
Outstanding notes at 30 June 2006 were:
Due July 2006
Undated
:
:
USD32.5 million
USD5 million
Subsequent to 30 June 2006, the notes due July 2006 have
been switched into undated notes.
(2) USD 400 million undated FRNs issued 22 February 1989
exchangeable into dated FRNs. USD24 million matured in
February 2006.
Outstanding notes at 30 June 2006 were:
Due February 2008 :
Due February 2011 :
USD7 million
USD64 million
(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 One 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 of Australia or (with the consent of
the Commonwealth of Australia) 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 of Australia 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 of Australia and
subject to the agreement of the APRA, 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 of Australia pursuant
to its guarantee in respect of the relevant notes will trigger the
issue of shares to the Commonwealth of Australia 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 of
Australia ceasing to guarantee the relevant notes. In relation to
Dated FRNs which have matured to date, the Bank and the
Commonwealth agreed to amend the relevant Agreement to
reflect that the Commonwealth of Australia was not called upon
(4) On 6 August 2003 a wholly owned entity of the Bank issued
USD550 million (AUD832 million) of perpetual non-call 12 year
trust preferred securities into the US capital markets. These
securities offer a non-cumulative fixed rate distribution of 5.805%
per annum payable semi-annually. These instruments were
previously classified as Other Equity Instruments.
(5) On 6 January 2004, a wholly owned entity of the Bank
(Commonwealth Managed Investments Limited as Responsible
Entity of the PERLS II Trust) issued $750 million of Perpetual
Exchangeable Resettable Listed Securities (PERLS II). These
securities are units in a registered managed investments
scheme, perpetual in nature, offering a non-cumulative floating
rate distribution payable quarterly. These instruments were
previously classified as Other Equity Instruments.
(6) On 7 April 2006, a wholly owned entity of the Bank (Preferred
Capital Limited)
issued $1,166,456,200 of Perpetual
Exchangeable Repurchaseable Listed Shares (PERLS III).
(7) On 15 March 2006, the Bank issued USD700 million (AUD947
million) of perpetual non-call 10 year trust preferred securities
into the US capital markets. These securities offer a non-
cumulative fixed rate distribution of 6.024% per annum payable
semi-annually.
(8) AUD275 million extendible floating rate note issued December
1989, due December 2014;
The Bank has entered into a separate agreement with the
Commonwealth of Australia relating to the above issue (the
“Agreement”) which qualifies the issue as Tier Two capital. The
Agreement provides for the Bank to issue either fully paid
ordinary shares to the Commonwealth of Australia or (with the
consent of the Commonwealth of Australia) rights to all
shareholders to subscribe for fully paid ordinary shares up to an
amount equal to the outstanding principal value of the note issue
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 of Australia or a rights issue:
• A relevant event of default occurs in respect of the note issue
and, where applicable, the Trustee of the notes gives notice
of such to the Bank;
• The Bank, if required by the Commonwealth of Australia and
subject to the agreement of the APRA, exercises its option to
redeem such issue; or
• Any payment made by the Commonwealth of Australia
pursuant to its guarantee in respect of the issue will trigger
the issue of shares to the Commonwealth of Australia to the
value of such payment.
Original issue size was $300 million. $25 million matured in
December 2004.
(9) AUD25 million subordinated FRN, issued April 1999, due April
2029.
(10) USD750 million subordinated notes, issued June 2000, due
June 2010; split into USD300 million fixed rate notes and
USD450 million floating rate notes. The floating rate notes were
called and redeemed in June 2005.
Commonwealth Bank of Australia Annual Report 2006 171
Notes to the Financial Statements
Note 31 Loan Capital (continued)
(11) JPY20 billion perpetual subordinated EMTN, issued February
1999.
(21) AUD300 million subordinated floating rate notes, issued
February 2005, due February 2015.
(12) USD400 million subordinated EMTN, issued June 1996 due
July 2006.
(22) EUR300 million subordinated EMTN, issued March 2005,
due March 2015.
(13) GBP200 million subordinated EMTN, issued March 1996 due
December 2006.
(14) JPY30 billion subordinated EMTN, issued October 1995 due
October 2015.
(15) AUD130 million subordinated notes comprised as follows:
AUD10 million fixed rate notes issued 12 December 1995,
matured 12 December 2005. AUD110 million floating rate notes
issued 12 December 1995, matured 12 December 2005. AUD5
million fixed rate notes issued 17 December 1996, matured 12
December 2005. AUD5 million floating rate notes issued 17
December 1996, matured 12 December 2005.
(16) USD350 million subordinated fixed rate note, issued June
2003, due June 2018.
(17) GBP150 million subordinated EMTN, issued June 2003, due
December 2023.
(18) AUD500 million subordinated notes, issued February 2004,
due February 2014; split into AUD300 million fixed rate notes
and AUD200 million floating rate notes.
(19) JPY10 billion subordinated EMTN, issued May 2004, due
May 2034.
(20) USD500 million subordinated EMTN issued June 2004
(USD250 million) and August 2004 (USD250 million), due
August 2014.
(23) USD100 million subordinated EMTN, issued March 2005,
due March 2025. Partial redemption of USD39.5 million in
September 2005.
(24) NZD350 million subordinated notes, issued May 2005, due
April 2015.
(25) JPY10 billion subordinated notes, issued November 2005,
due November 2015.
(26) AUD300 million subordinated floating rate notes, issued
November 2005, due November 2015.
(27) CAD300 million subordinated notes, issued November 2005,
due November 2015.
(28) JPY5 billion subordinated loan, issued March 2006, due
March 2018.
(29) USD200 million subordinated notes, issued June 2006, due
July 2016. Treatment as Lower Tier Two Capital commences
October 2006.
(30) NZD183 million subordinated notes issued June 2006, due
June 2016.
172 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity
Equity Reconciliations
Ordinary Share Capital
Opening balance
AIFRS transition adjustment (1)
Restated opening balance
Buyback
Dividend reinvestment plan
Employee share ownership schemes
(Purchase)/sale and vesting of treasury shares (2)
Issue costs
Closing balance
Preference Share Capital
Opening balance
AIFRS transition adjustment (3)
Restated opening balance
Closing balance
Other Equity Instruments
Opening balance
AIFRS transition adjustment (3)
Restated opening balance
Issue of instruments
Issue costs
Closing balance
Retained Profits
Opening balance
AIFRS transition adjustment (4) (5)
Restated opening balance
Actuarial gains and losses from defined benefit superannuation plan
Realised gains and dividend income on treasury shares held within the Bank’s
life insurance statutory funds recognised directly in retained profits
Operating profit attributable to members of the Bank
Total available for appropriation
Transfers to general reserve
Transfers to general reserve for credit loss
Interim dividend – cash component
Interim dividend – dividend reinvestment plan
Payment of final dividend prior year – cash component
Payment of final dividend prior year – dividend reinvestment plan
Other dividends
Closing balance
2006
$M
13,486
-
13,486
(500)
481
50
(10)
(2)
13,505
687
(687)
-
-
1,573
(1,573)
-
947
(8)
939
3,843
(780)
3,063
387
85
3,928
7,463
(239)
(92)
(992)
(219)
(1,172)
(262)
-
4,487
Group
2005
$M
13,359
(371)
12,988
-
446
67
(14)
(1)
13,486
687
-
687
687
1,573
-
1,573
-
-
1,573
2,840
9
2,849
110
21
3,400
6,380
(8)
-
(883)
(200)
(1,069)
(246)
(131)
3,843
2006
$M
13,739
-
13,739
(500)
481
50
(2)
(2)
13,766
687
(687)
-
-
737
(737)
-
1,895
-
1,895
2,992
(437)
2,555
387
-
4,267
7,209
-
(92)
(992)
(219)
(1,172)
(262)
-
4,472
Bank
2005
$M
13,359
(126)
13,233
-
446
67
(6)
(1)
13,739
687
-
687
687
737
-
737
-
-
737
1,805
534
2,339
112
-
3,012
5,463
-
-
(883)
(200)
(1,069)
(246)
(73)
2,992
(1) Relates to the initial recognition of treasury shares held within the employee share scheme trust and the life insurance statutory funds.
(2) Relates to movements in treasury shares held within the employee share scheme trust and the life insurance statutory funds.
(3) Reclassification of hybrid financial instruments from equity to liabilities.
(4) Comprises the following items detailed in Note 1 (nn):
• Actuarial and other movements within the defined benefit superannuation plan surplus;
• Net movement in the calculation of life insurance policyholder liabilities;
• Adjustment in respect of realised gains and dividend income on treasury shares;
• Deferral of initial entry fee income earned by life insurance entities;
• Adjustment to the fair value calculation for assets held by the life insurance business;
• Adjustment in respect of derivative financial instruments;
• Deferral of previously recognised net income and expenses within the banking business;
• Transfer of foreign currency translation reserve to retained profits on 1 July 2004;
• Foreign exchange adjustment on the reclassification of hybrid financial instruments;
• Transfer to establish the general reserve for credit loss; and
• Adjustment to fair value calculation for trading assets within the banking portfolios and for other financial instruments designated as fair value through profit and loss.
(5) Due to a change in functional currency the estimates of AIFRS transition adjustments were revised. The net impact of this was $51 million increase in FCTR, $51
million decrease in retained profits.
Commonwealth Bank of Australia Annual Report 2006 173
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity (continued)
Reserves
General Reserve
Opening balance
AIFRS transition adjustment (1)
Restated opening balance
Appropriation from retained profits
Closing balance
Capital Reserve
Opening balance
Reversal of revaluation surplus on sale of property
Closing balance
Asset Revaluation Reserve
Opening balance
AIFRS transition adjustment (2)
Restated opening balance
Revaluation of properties
Transfers on sale of properties
Tax on revaluation of properties
Closing balance
Foreign Currency Translation Reserve
Opening balance
AIFRS transition adjustments (3) (4)
Restated opening balance
Currency translation adjustments
Transfer to the Income Statement
Tax on translation adjustments
Closing balance
Cash Flow Hedge Reserve
Opening balance
AIFRS transition adjustment (5)
Restated opening balance
Gains/(losses) on cash flow hedging instruments:
Recognised in equity
Transferred to Income Statement
Tax on cash flow hedging instruments
Closing balance
Employee Compensation Reserve
Opening balance
AIFRS transition adjustments (6)
Restated opening balance
Current period movement
Closing balance
General Reserve for Credit Loss (7)
Opening balance
AIFRS transition adjustment
Restated opening balance
Appropriation from retained profits
Closing balance
2006
$M
982
-
982
239
1,221
282
3
285
119
-
119
19
(3)
(4)
131
(141)
78
(63)
(232)
41
13
(241)
-
39
39
89
(58)
(11)
59
23
-
23
11
34
-
258
258
92
350
Group
2005
$M
3,810
(2,836)
974
8
982
280
2
282
61
31
92
29
(2)
-
119
(205)
205
-
(141)
-
-
(141)
-
-
-
-
-
-
-
-
47
47
(24)
23
-
-
-
-
-
2006
$M
570
-
570
-
570
1,533
3
1,536
99
-
99
14
(3)
(3)
107
1
1
2
(8)
-
-
(6)
-
1
1
58
(51)
(2)
6
23
-
23
11
34
-
258
258
92
350
Bank
2005
$M
570
-
570
-
570
1,531
2
1,533
43
29
72
29
(2)
-
99
4
(1)
3
(2)
-
-
1
-
-
-
-
-
-
-
-
47
47
(24)
23
-
-
-
-
-
(1) Net write down of the internally generated appraisal value of the life insurance and funds management business.
(2) Change in valuation methodology for owner-occupied property.
(3) Transfer to retained profits on 1 July 2004; and re-translation on 1 July 2005 due to change in recognition and measurement of financial instruments.
(4) Due to change in functional currency, the estimates of the AIFRS transition adjustments were revised. The net impact of this was $51million increase in FCTR, $51million
decrease in retained profits.
(5) Initial recognition of the cash flow hedge reserve on 1 July 2005.
(6) Initial recognition of employee equity compensation reserve on 1 July 2004.
(7)The opening balance of the general reserve for credit loss has been appropriated from retained profits. The amount is the tax effected difference between the former general
provision at 30 June 2005, $1,390 million, and the opening transition balance of the collective provision, $1,021 million. The general reserve for credit loss has been
established to satisfy the current APRA prudential requirement for banks to maintain a general reserve for credit loss, and allowable collective provisions, at a minimum level
of 0.5% of risk weighted assets.
174 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 32 Detailed Statements of Changes in Equity (continued)
Available-for-Sale Investments Reserve
Opening balance
AIFRS transition adjustment (1)
Restated opening balance
Net gains/(losses) on available-for-sale investments
Net (gains)/losses on available-for-sale investments transferred to Income
Statement on sale
Impairment of available-for-sale investments transferred to Income Statement
Tax on available-for-sale investments
Closing balance
Total Reserves
Shareholders’ Equity attributable to members of the Bank
Shareholders’ Equity attributable to Minority Interests
Total Shareholders’ Equity
(1) Initial recognition of the available-for-sale investment reserve on 1 July 2005.
2006
$M
-
56
56
51
(33)
(3)
(6)
65
1,904
20,835
508
21,343
Group
2005
$M
-
-
-
-
-
-
-
-
1,265
20,854
1,789
22,643
2006
$M
-
35
35
52
(31)
(3)
7
60
2,657
22,790
-
22,790
Bank
2005
$M
-
-
-
-
-
-
-
-
2,226
20,381
-
20,381
Commonwealth Bank of Australia Annual Report 2006 175
Notes to the Financial Statements
Note 33 Share Capital
Issued and Paid Up Ordinary Capital
Ordinary Share Capital
Opening balance (excluding Treasury Shares deduction)
Dividend Reinvestment Plan: Final Dividend prior year
Dividend Reinvestment Plan: Interim Dividend
Share Buyback
Exercise of executive options
Issue costs
Closing balance (excluding Treasury Shares deduction)
Less Treasury Shares
Closing balance
Shares on Issue
Opening balance (excluding Treasury Shares deduction)
Dividend reinvestment plan issues:
2004/2005 Final Dividend fully paid ordinary shares at $37.19
2005/2006 Interim Dividend fully paid ordinary shares at $43.89
2003/2004 Final Dividend fully paid ordinary shares at $30.14
2004/2005 Interim Dividend fully paid ordinary shares at $35.90
Share buyback
Exercise under executive option plan
Closing balance (excluding Treasury Shares deduction)
Less Treasury Shares
Closing balance
Terms and Conditions of Ordinary Share Capital
2006
$M
13,871
262
219
(500)
50
(2)
13,900
(395)
13,505
Group
2005
$M
13,359
246
200
-
67
(1)
13,871
(385)
13,486
2006
$M
13,871
262
219
(500)
50
(2)
13,900
(134)
13,766
Bank
2005
$M
13,359
246
200
-
67
(1)
13,871
(132)
13,739
Number
Number
Number
Number
1,280,276,172 1,264,006,062 1,280,276,172 1,264,006,062
7,032,857
4,979,668
-
-
(11,139,988)
1,756,200
-
-
8,172,546
5,581,364
7,032,857
4,979,668
-
-
(11,139,988)
1,756,200
-
-
8,172,546
5,581,364
2,516,200
2,516,200
1,282,904,909 1,280,276,172 1,282,904,909 1,280,276,172
(4,613,116)
1,271,819,651 1,266,764,403 1,280,551,395 1,275,663,056
(11,085,258)
(13,511,769)
(2,353,514)
Ordinary shares have the right to receive dividends as declared and in the event of winding up the company, to participate in the proceeds
from sale of surplus assets in proportion to the number of and amounts paid up on shares held.
A shareholder has one vote on a show of hands and one vote for each fully paid share on a poll. A shareholder may be present at a
general meeting in person or by proxy or attorney, and if a body corporate, it may also authorise a representative.
Preference Share Capital
PERLS
PERLS Capital issued and paid up
PERLS Redemption
2006
$M
-
Number
-
Group
2005
$M
687
Number
3,500,000
2006
$M
-
Number
-
Bank
2005
$M
687
Number
3,500,000
On 6 April 2006, the Bank redeemed the $700 million PERLS. PERLS, which qualified as Tier One capital of the Bank, were replaced with
PERLS III, refer Note 31.
Other Equity Instruments
Other equity instruments issued and paid up
(1) Reclassified to Loan Capital under AIFRS, refer Note 31.
(2) Net of issue costs.
Trust Preferred Securities 2006
2006
$M
939 (2)
Number
700,000
Group
2005
$M
1,573 (1)
Number
4,300,000
2006
$M
1,895
Number
1,400,000
Bank
2005
$M
737 (1)
Number
550,000
On 15 March 2006 the Bank issued USD 700 million (AUD 947 million) of trust preferred securities into the US capital markets. These
securities offer a non-cumulative fixed rate of distribution of 6.024% per annum payable semi-annually. These securities qualify as Tier
One capital of the Bank. A related instrument was issued by the Bank to a subsidiary for AUD 956 million and eliminates on consolidation.
176 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 33 Share Capital (continued)
Ex Dividend Date
Dividends
The ex dividend date was 14 August 2006.
The Directors have declared a fully franked (at 30%) final
Employee Share Plans
dividend of 130 cents per share amounting to $1,668 million.
The Bank has in place the following employee share plans:
The dividend will be payable on 5 October 2006 to shareholders
on the register at 5pm on 18 August 2006. Dividends paid in the
year to 30 June 2006:
• As declared in the 30 June 2005 profit announcement, a fully
franked final dividend of 112 cents per share amounting to
$1,434 million was paid on 23 September 2005. The
payment comprised cash disbursements of $1,172 million
with $262 million being reinvested by participants through the
Dividend Reinvestment Plan; and
•
In respect of the year to 30 June 2006, a fully franked interim
dividend of 94 cents per share amounting to $1,211 million
was paid on 5 April 2006. The payment comprised cash
disbursements of $992 million with $219 million being
the Dividend
reinvested
Reinvestment Plan.
participants
through
by
Share Buyback
the Bank announced
the successful
On 16 June 2006
total of
completion of an on-market share buyback. A
11,139,988 shares were bought back at a total cost of $500
million. Shares were purchased for between $41.08 and $46.79.
Dividend Reinvestment Plan
The Bank expects to issue around $303 million of shares in
respect of the Dividend Reinvestment Plan for the final dividend
for 2005/06.
The Dividend Reinvestment Plan continues to be capped at
10,000 shares per shareholder.
Record Date
The register closed for determination of dividend entitlement and
for participation in the dividend reinvestment plan at 5pm on 18
August 2006 at Link Market Services Limited, Locked Bag A14,
Sydney South, 1235.
• Commonwealth Bank Employee Share Acquisition Plan
(“ESAP”);
• Commonwealth Bank Equity Participation Plan (“EPP”);
• Commonwealth Bank Equity Reward Plan (“ERP”); and
• Commonwealth Bank Non-Executive Directors Share Plan
(“NEDSP”).
The current ESAP and ERP arrangements were each approved
by Shareholders at the Annual General Meeting (“AGM”) on 26
October 2000. Shareholders’ consent was not required for either
the EPP or NEDSP but details were included in the Explanatory
Memorandum to the 2000 meeting to ensure Shareholders were
fully informed.
Employee Share Acquisition Plan (“ESAP”)
The ESAP was introduced in 1996 and provides employees with
up to $1,000 worth of free shares per annum subject to a
performance target being met. The performance target is growth
in annual profit of the greater of 5% or the consumer price index
(CPI change) plus 2%. Whenever annual profit growth exceeds
CPI change, the Board may use its discretion in determining
whether any grant of shares will be made.
Under ESAP, shares granted are restricted for sale for three
years or until such time as the participating employee ceases
employment with the Group, whichever is earlier. Shares
granted under the ESAP receive full dividend entitlements,
voting rights and there are no forfeiture or vesting conditions
attached to the shares granted.
Effective from 1 July 2002, shares granted under ESAP offers
have been expensed through the profit and loss. In the current
year, 646,412 shares were granted to eligible employees in
respect of the 2005 grant.
The Bank has determined to allocate each eligible employee
shares up to a value of $1,000 in respect of the 2006 grant. As a
result, a total expense of $27 million will be accrued by the grant
date in respect of the 2006 grant, $23 million of which has been
accrued as at 30 June 2006. The shares will be purchased on-
market at the then market price.
Commonwealth Bank of Australia Annual Report 2006 177
Notes to the Financial Statements
Note 33 Share Capital (continued)
From 1 July 2000 to 30 June 2002, details of issues under ESAP were:
Issue Date
13 October 2000
20 December 2000
31 October 2001
3 December 2001
31 January 2002
Bonus Ordinary
(1)
Shares Issued
872,620
805
893,554
3,876
1,938
No. of Participants
24,932
23
26,281
114
57
Shares issued
(2)
to Each Participant
Issue Price
(2)
35
35
34
34
34
$27. 78
$27. 78
$28. 95
$28. 95
$28. 95
From 1 July 2002, details of shares purchased under ESAP were:
Issue Date
31 October 2002
22 January 2003
31 October 2003
29 October 2004
9 September 2005
Ordinary
Shares Purchased
830,874
1,584
683,617
699,918
646,412
No. of Participants
25,178
48
23,573
22,578
24,862
Shares allocated
(3)
to Each Participant
Allocation Price
(3)
33
33
29
31
26
$29. 71
$29. 71
$27. 53
$31. 52
$37. 68
(1) For Offers in 2000 and 2001 both new and existing shareholders were granted Bonus Ordinary Shares issued from the Share Capital Account.
(2) The Issue Price x Shares issued to each Participant effectively represents about $1,000 of free shares.
(3) The Allocation Price for the offer is equal to the market value which is determined by calculating the weighted average of the prices at which the shares were traded
on the ASX during the 5 trading day period up to and including the grant date. The Allocation Price x Shares allocated to each participant effectively represents about
$1,000 of free shares for the 2002, 2004 and 2005 Offers and $800 of free shares for the 2003 Offer.
Equity Participation Plan (“EPP”)
The EPP facilitates the voluntary sacrifice of both fixed
remuneration and annual short term incentives (STI) to be
applied in the acquisition of shares. The plan also previously
facilitated the mandatory sacrifice of 50% of STI payments for
some employees. However, the mandatory component of EPP
ceased for the year ended 30 June 2005 and was replaced with
a separate cash STI deferral arrangement
for eligible
employees.
Each participant of the mandatory component of the EPP for
whom shares are held by the Trustee on their behalf has a right
to receive dividends. Once the shares vest, dividends which
have accrued during the vesting period are paid to participants.
The participant may also direct the Trustee on how the voting
rights attached to the shares are to be exercised during the
vesting period. Where participating employees do not satisfy the
vesting conditions, shares and dividend rights are forfeited.
Under the voluntary component of the EPP, shares purchased
are restricted for sale for two years or when a participating
employee ceases employment with the Bank, whichever is
earlier. Shares purchased under the voluntary component of the
EPP carry full dividend entitlements, voting rights and there are
no forfeiture or vesting conditions attached to the shares.
Under the mandatory component of the EPP, fully paid ordinary
shares are purchased and held in Trust until such time as the
vesting conditions have been met. The vesting condition
attached to the shares specifies that participants must generally
remain employees of the Bank until the vesting date. Shares
previously granted under the mandatory component of the EPP
remain subject to their vesting conditions.
Shares acquired under both the voluntary and mandatory
components of the EPP have been expensed against the profit
and loss account. In the current year, $5 million was expensed
against the profit and loss account to reflect the cost of
allocations under the Plan.
All shares acquired by employees under the EPP are purchased
on-market at the current market price. A total number of
8,090,094 shares have been acquired under the EPP since the
plan commenced in 2001.
Details of purchases under the EPP from 1 July 2005 to 30 June 2006 were as follows:
Allotment Date
1 September 2005
9 November 2005
15 March 2006
Participants
131
2
56
Shares Purchased
93,437
35,911
8,469
Average Purchase Price
$37. 58
$40. 46
$44. 19
The movement in shares purchased under the mandatory component of the EPP has been as follows:
Details of Movements
Shares held under the Plan at the beginning of year
Shares allocated during year
Shares vested during year
Shares forfeited during year
Shares held under the Plan at end of year
2005
2,790,353
2,067,281
(2,016,790)
(224,073)
2,616,771
2006
2,616,771
56
(1,736,939)
(56,804)
823,084
178 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 33 Share Capital (continued)
Equity Reward Plan (“ERP”)
The Board has envisaged that up to a maximum of 500
employees would participate each year in the ERP.
Previous grants under the ERP were in two parts, comprising
grants of options and grants of shares. Since 2001/02, no
options have been issued under the ERP. From 2002/03,
Reward Shares have only been issued under this plan.
The exercise of previously granted options and the vesting of
employee legal title to the shares is conditional on the Bank
achieving a prescribed performance hurdle. The ERP
performance hurdle is based on relative Total Shareholder
Return (“TSR”) with
the Bank’s TSR performance being
measured against a comparator group of companies.
The prescribed performance hurdle for options and Reward
Shares issued prior to 2002/03 was:
• The Bank’s TSR (broadly, growth in share price plus
dividends reinvested) over a minimum three year period,
must equal or exceed the index of TSR achieved by the
comparator group of companies. The comparator group
(previously companies represented in the ASX’s “Banks and
Finance Accumulation Index” excluding the Bank) was
widened in 2001/02 to better reflect the Bank’s business mix;
and
•
If the performance hurdle is not reached within that three
years the options may nevertheless be exercisable or the
shares vest, only where the hurdle is subsequently reached
within five years from the grant date.
Details of options issued and shares acquired under 2000 and 2001 grants of the ERP as well as movements in the options and shares
are as follows:
Options
Year of Grant
2000
Commencement
Date
13 Sep 2000
Issue Date Options Issued
577,500
7 Feb 01
Options
(1)
Outstanding
187,500
13 Sep 2000
31 Oct 01
12,500
-
2001
3 Sep 2001
31 Oct 01
2,882,000
741,000
3 Sep 2001
31 Jan 02
12,500
12,500
3 Sep 2001
15 Apr 02
100,000
-
1
16
Participants Exercise Price Exercise Period
$26. 97 (2) 14 Sep 2003 to
13 Sep 2010 (3)
$26. 97 (2) 14 Sep 2003 to
13 Sep 2010 (3)
4 Sep 2004 to
3 Sep 2011 (4)
4 Sep 2004 to
3 Sep 2011 (4)
4 Sep 2004 to
3 Sep 2011 (4)
$30. 12 (2)
$30. 12 (2)
$30. 12 (2)
61
1
1
(1) Options outstanding as at the date of the report.
(2) The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
(3) Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
(4) Performance hurdle was satisfied on 3 October 2004 and options may be exercised up to 3 September 2011.
Options – Details of Movements
Year of Grant
Held by participants at the start of year
Granted during year
Exercised during year
Lapsed during year
Outstanding at the end of year
Granted from 30 June to the date of report
Exercised from 30 June to date of report
Lapsed from 30 June to the date of report
Outstanding as at the date of report
July 2004 – June 2005
2001
2,235,200
-
(403,900)
(29,700)
1,801,600
-
(50,000)
-
1,751,600
2000
402,500
-
(155,000)
-
247,500
-
-
-
247,500
July 2005 – June 2006
2001
1,801,600
-
(1,008,300)
(39,800)
753,500
-
-
-
753,500
2000
247,500
-
(60,000)
-
187,500
-
-
-
187,500
For Reward Shares granted from 2002/03 to 2005/06 inclusive, a
tiered vesting scale was applied so that 50% of the allocated
shares vest if the Bank’s TSR return is equal to the 50th
percentile, 75% vest at the 67th percentile and 100% when the
Bank’s return is in the top quartile.
Where the rating is at least at the 50th percentile on the third
anniversary of the grant, the shares will vest at a time nominated
by the executive, within the trading windows, over the next two
years. The vesting percentage will be at least that achieved on
the third anniversary of the grant and the executive will be able to
delay vesting until a subsequent half yearly window prior to the
fifth anniversary of the grant. The vesting percentage will be
calculated by reference to the rating at that time.
Where the rating is below the 50th percentile on the third
anniversary of grant, the shares can still vest if the rating reaches
the 50th percentile prior to the fifth anniversary, but the maximum
vesting will be 50%.
In 2006 the Bank reviewed these arrangements and will
implement a change to retesting and the vesting scale for future
ERP grants. A straight line vesting scale will be introduced, with
50% vesting at the 51st percentile, through to 100% vesting at
the 75th percentile for future ERP grants. Retesting will be
restricted from four occasions to one, 12 months after initial
testing.
Reward Shares acquired under the share component of the
ERP are purchased on-market at the current market price. The
cost of shares acquired is expensed through the profit and loss
over a five year period, reflecting the maximum vesting period. In
the current year, $3 million has been expensed through the profit
and loss. The expense for the current year is lower than
previous years due to the new accounting treatment required
under AIFRS.
Executive options issued up to September 2001 have not been
recorded as an expense by the Group.
Commonwealth Bank of Australia Annual Report 2006 179
Notes to the Financial Statements
Note 33 Share Capital (continued)
Reward Shares
Year of Grant
2000
2001
2002
2003
2004
2005
Purchase Date
20 Feb 2001
31 Oct 2001
31 Oct 2001
22 Nov 2002
12 Nov 2003
11 Nov 2004
11 Nov 2005
Shares
Purchased
361,100
2,000
652,100
357,500
285,531
225,934
18,306
Shares
Allocated
361,100
2,000
661,500 (1)
545,500 (2)
595,600 (3)
522,290 (4)
557,253 (5)
Vesting Period
Participants
14 Sep 2003 to Sep 2005 (6)
61
14 Sep 2003 to 3 Sep 2005 (6)
1
4 Sep 2004 to 3 Sep 2006 (7)
241
3 Sep 2005 to 2 Sep 2007 (8)
195
2 Sep 2006 to 1 Sep 2008 (8)
255
259 23 Aug 2007 to 23 Aug 2009 (8)
15 Jul 2005 to 15 Jul 2010 (8)
260
Average
Purchase
(9)
Price
$29. 72
$29. 25
$29. 25
$28. 26
$28. 33
$29. 87
$29. 30
(1) In October 2001, 11,400 Reward Shares were re-allocated to participants receiving the 2001 grant as a result of Reward Shares forfeited from previous ERP grant.
(2) In November 2002, 188,000 shares were re-allocated to participants receiving the 2002 grant as a result of shares forfeited from previous grants. The total number of
Reward Shares allocated in 2002 represents 50% of the maximum entitlement that participants may receive. The 2002 grant did not meet the performance hurdle at the
first measurement point and therefore did not vest. If it reaches the required performance hurdle at a subsequent measurement date, a maximum of 50% only of the
original grant will vest. Further details of ERP arrangements are provided in the Bank’s Remuneration Report.
(3) In November 2003, 310,069 shares were re-allocated to participants receiving the 2003 grant as a result of shares forfeited from previous grants. The total number of
Reward Shares allocated in 2003 represents 50% of the maximum entitlement that participants may receive. It is intended that Reward Shares required to meet
obligations under ERP will be acquired by the Trust on-market during the three years prior to the first measurement point of the performance hurdle.
(4) In November 2004, 296,356 shares were re-allocated to participants receiving the 2004 Grant as a result of shares forfeited from previous grants. The total number of
Reward Shares allocated in 2004 represents 50% of the maximum entitlement that participants may receive – refer to footnote 3 above for further information.
(5) In November 2005, 538,947 shares were re-allocated to participants receiving the 2005 grant as a result of shares forfeited from previous grants. The total number of
Reward Shares allocated in 2005 represents 50% of the maximum entitlement that participants may receive – refer to footnote 3 above for further information.
(6) Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant.
(7) Performance hurdle was satisfied on 3 October 2004 and as a result 423,500 shares vested to participants of the 2001 grant.
(8) Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited.
(9) Average Purchase Price refers to the average price of all shares allocated for that grant, including the original purchase price of any reallocated shares.
Reward Shares – Details of Movements
Year of Grant
Total Reward Shares
Held by participants at the start of year
Granted during year (1)
Vested during year
Lapsed during year
Outstanding at the end of year
Granted from 30 June to date of report
Vested from 30 June to date of report
Lapsed from 30 June to date of report
Outstanding as at the date of report
July 2004 – June 2005
July 2005 – June 2006
2001
437,000
-
(423,500)
(13,500)
-
-
-
-
-
2002
445,825
-
-
(68,975)
376,850
-
-
(11,400)
365,450
2003
557,500
-
-
(94,650)
462,850
-
-
(8,950)
453,900
2004
-
597,975
-
(53,075)
544,900
-
-
(8,750)
536,150
2002
376,850
-
-
(135,000)
241,850
-
-
(7,750)
234,100
2003
462,850
-
-
(114,200)
348,650
-
-
(11,250)
337,400
2004
544,900
-
-
(121,215)
423,685
-
-
(15,125)
408,560
2005
-
557,253
-
(34,505)
522,748
-
-
(18,175)
504,573
(1) The total number of shares granted during the year represents 50% of the maximum entitlement that participants may receive.
During the vesting period, Reward Shares are held in Trust.
Each participant on behalf of whom Reward Shares are held by
the Trustee, has a right to receive dividends. Once the shares
vest dividends are paid in relation to those accrued during the
vesting period. The participant may also direct the Trustee on
how the voting rights attached to the shares are to be exercised
during the vesting period.
For a limited number of executives including overseas based
staff a cash-based “share replicator” ERP scheme is operated
by way of grants of performance units. A performance unit is a
monetary unit with a value linked to the share price of
Commonwealth Bank shares. Performance Unit grants are
subject to the same vesting conditions as the Reward Share
component of the ERP. On meeting the vesting condition, a
cash payment is made to executives whereby the value is
determined based on the current share price on vesting plus an
accrued dividend value. An amount of $4 million has been
expensed to the profit and loss account in respect of the year
ended 30 June 2006 to reflect future payments which may be
required under the “share replicator” plan.
180 Commonwealth Bank of Australia Annual Report 2006
Executive Option Plan (“EOP”)
As previously notified
discontinued in 2000/01.
to shareholders,
this plan was
Under the EOP, the Bank granted options to purchase ordinary
shares to those key executives who, being able by virtue of their
responsibility, experience and skill to influence the generation of
shareholder wealth, were declared by the Board of Directors to
be eligible to participate in the Plan. Non-executive Directors
were not eligible to participate in the Plan.
Options cannot be exercised before each respective exercise
period and the ability to exercise is conditional on the Bank
achieving a prescribed performance hurdle. The option plan did
not grant rights to the option holders to participate in a share
issue of any other body corporate.
The performance hurdle is the same TSR comparator hurdle as
outlined above for the Equity Reward Plan (“ERP”) grants prior
to 2002/03.
The EOP was discontinued in 2000/2001 and no options have
been granted under the plan during the last five reporting
periods. The last grant under EOP was made in September
2000. The performance hurdles for the August 1999 grant and
the September 2000 grant were met in 2004.
Notes to the Financial Statements
Note 33 Share Capital (continued)
Details of issues made under EOP as well as movements for 2004/2005 and 2005/2006 are as follows:
Executive Option Plan (“EOP”)
Commencement
Date
3 Nov 1997
25 Aug 1998
24 Aug 1999
13 Sep 2000
Issue Date Options Issued
2,875,000
3,275,000
3,855,000
2,002,500
11 Dec 1997
30 Sep 1998
24 Sep 1999
13 Oct 2000
Options
Outstanding
-
-
190,600
175,800
Participants Exercise Price
(1)
27
32
38
50
$15. 53 (2)
$19. 58 (2)
$23. 84 (2)
$26. 97 (2)
Exercise Period
4 Nov 00 to 3 Nov 02
26 Aug 01 to 25 Aug 03
25 Aug 02 to 24 Aug 09 (3)
14 Sep 03 to 13 Sep 10 (4)
(1) The Exercise Price is the market value at the commencement date. 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 commencement date.
(2) Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
(3) Performance hurdle for the 1999 grant was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009.
(4) Performance hurdle for the 2000 grant was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
Details of Movements
Year of Grant
Total options:
Held by participants at start of year
Exercised during year
Lapsed during year
Outstanding at the end of year
Granted from 30 June to date of report
Exercised from 30 June to date of report
Lapsed from 30 June to date of report
Outstanding as at the date of report
July 2004 – June 2005
2000
1999
July 2005 – June 2006
2000
1999
1,875,000
(1,425,000)
-
450,000
-
-
-
450,000
1,144,600
(507,300)
-
637,300
-
(75,400)
-
561,900
450,000
(250,000)
(9,400)
190,600
-
-
-
190,600
637,300
(437,900)
(23,600)
175,800
-
-
-
175,800
Summary of shares issued during the period 1 July 2005 to the date of the report as a result of options being exercised are:
Option Issue Date
24 September 1999
13 October 2000
7 February 2001
30 October 2001
15 April 2002
Shares Issued
250,000
437,900
60,000
908,300
100,000
Price Paid per Share
$23. 84
$26. 97
$26. 97
$30. 12
$30. 12
Total Consideration Paid
$5,960,000
$11,810,163
$1,618,200
$27,357,996
$3,012,000
No amount is unpaid in respect of the shares issued upon exercise of the options during the above period.
Under the Bank’s EOP and ERP an option holder generally has
no right to participate in any new issue of securities of the Bank
or of a related body corporate as a result of holding the option.
The only exception is when there is a pro rata issue of shares to
the Bank’s shareholders by way of a bonus issue involving
capitalisation (other than in place of dividends or by way of
dividend reinvestment).
In this case an option holder is entitled to receive additional
shares upon exercise of the options being the number of bonus
shares that the option holder would have received if the options
had been exercised and shares issued prior to the bonus issue.
Commonwealth Bank of Australia Annual Report 2006 181
Notes to the Financial Statements
Note 33 Share Capital (continued)
Non-Executive Directors Share Plan (“NEDSP”)
The NEDSP provides for the acquisition of shares by Non-
Executive Directors through the mandatory sacrifice of 20% of
their annual fees (paid on a quarterly basis). Shares purchased
are restricted for sale for 10 years or when the Director leaves
the Board, whichever is earlier. In addition, Non-Executive
Directors can voluntarily elect to sacrifice up to a further 50% of
their fees for the acquisition of shares.
Shares are purchased on-market at the current market price and
a total of 50,061 shares have been purchased under the NEDSP
since the plan commenced in 2001. Since March 2005, shares
are now acquired under the plan on a six monthly basis.
Shares acquired under
full dividend
entitlements and voting rights. There are no forfeiture or vesting
conditions attached to shares granted under the NEDSP.
the plan
receive
Details of grants under the NEDSP from 1 July 2005 to 30 June 2006 were as follows:
Period
1 April to 30 June 2005
1 July to 31 December 2005
Total Fees Sacrificed
$112,127
$226,849
Participants
9
9
Shares Purchased Average Purchase Price
$37. 58
$44. 19
2,984
5,134
For the current year, $348,000 was expensed through the profit and loss reflecting shares purchased and allocated under the NEDSP.
Note 34 Minority Interests
Controlled entities:
Share capital (1)
Retained profits and reserves
Life insurance statutory funds (2)
Total Minority Interests
2006
$M
508
-
-
508
Group
2005
$M
623
8
1,158
1,789
(1) ASB Perpetual Preference Shares - $505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 million) of
perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative. On 22
December 2004, ASB Capital No.2 Ltd, a New Zealand subsidiary, issued NZD350 million (AUD323 million) of perpetual preference shares. Such shares are non-
redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative.
(2) Reclassified to Managed Funds Units on Issue under AIFRS, refer Note 29.
182 Commonwealth Bank of Australia Annual Report 2006
Note 35 Capital Adequacy
Commonwealth Bank of Australia (“the Bank”) is subject to
regulation by the Australian Prudential Regulation Authority
(“APRA”) under the authority of the Banking Act 1959. APRA
has set minimum regulatory capital requirements for banks that
are consistent with the Basel Accord. These requirements define
what is acceptable as capital and provide for standard methods
of measuring the risks incurred by the Bank. APRA has set
minimum ratios that compare the regulatory capital with risk-
weighted on and off balance sheet assets. Regulatory capital
requirements are measured for the Bank (known as “Level 1”)
and for the Bank and its banking subsidiaries (known as “Level
2”). The life insurance and funds management businesses are
not consolidated for capital adequacy purposes.
Regulatory capital is divided into Tier One and Tier Two Capital.
Certain deductions are made from the sum of Tier One and Tier
Two Capital to arrive at the Capital Base. Tier One Capital
primarily consists of shareholders’ equity plus other capital
instruments acceptable to APRA, less goodwill and less the
intangible element of the investment in life insurance and funds
management businesses. Tier Two Capital primarily consists of
the collective provision for impairment losses, the General
Reserve for Credit Loss and other hybrid and debt instruments
acceptable to APRA. The tangible element of the investment in
life insurance and funds management businesses is deducted
from the sum of Tier One and Tier Two Capital to arrive at the
Capital Base.
In accordance with APRA’s methodology, measuring risk
requires one of a number of risk weights to be applied to each
asset on the balance sheet and to off-balance sheet obligations.
The risk weights are 100%, 50%, 20% and 0%. It should be
noted that the risk weights are not consistent with the loss
experience of the Bank and its subsidiaries. In addition, there is
an agreed method for measuring market risk for traded assets.
its capital
the
The Bank actively manages
rating
requirements of various stakeholders
agencies and shareholders). This is achieved by optimising the
mix of capital while maintaining adequate capital ratios
throughout the financial year.
to balance
(regulators,
The regulatory capital ratios of the Bank are shown on page
185. Details of the principal movements in the capital ratios are
shown on pages 185 and 186.
Dividends
Banks may not pay dividends if immediately after payment, they
are unable to meet the minimum capital requirements. Banks
cannot pay dividends from Retained Profits without APRA’s prior
approval. Under APRA guidelines, the expected dividend must
be deducted from Tier One Capital.
Regulatory Capital Requirements for Other ADIs in the
Group
ASB Bank Limited is subject to regulation by the Reserve Bank
of New Zealand (“RBNZ”). RBNZ applies a similar methodology
to APRA in calculating regulatory capital requirements. At 30
June 2006 ASB Bank Limited had a Tier One ratio of 9.8% and
a Total Capital ratio of 10.6%.
(1) The shareholders fund is subject to a separate capital requirement.
Notes to the Financial Statements
Regulatory Capital Requirements for Life Insurance and
Funds Management Business
The Group’s life insurance businesses in Australia are regulated
by APRA. The Life Insurance Act 1995 includes a framework for
the calculation of the regulatory capital requirements for life
insurance companies. There are two tiers to the regulatory
capital requirements – ‘solvency’ and ‘capital adequacy’. The
capital adequacy test for statutory funds is always equal to or
greater than the solvency test (1). At 30 June 2006, for Australian
life insurance companies, the estimated excess over capital
adequacy within life insurance statutory funds amounted to $191
million in aggregate.
The Group owns two life insurance companies in Australia:
Commonwealth Insurance Holdings Limited (“CIHL”), and the
Colonial Mutual Life Assurance Society Limited (“CMLA”).
There are no regulatory capital requirements for life insurance
companies in New Zealand, though the directors of any
company must certify its solvency under the Companies Act
1993. The Group determines the minimum capital requirements
for its New Zealand life insurance business according to the
Prudential Reserving Guidance Note of the New Zealand
Society of Actuaries.
the Australian Securities and
Fund managers in Australia are subject to responsible entity
regulation by
Investment
Commission (“ASIC”). The regulatory capital requirements vary
for responsible entities depending on the type of Australian
Financial Services or Authorised Representatives’ Licence held,
but a requirement of up to $5 million of net tangible assets
applies.
APRA supervises approved trustees of superannuation funds
and requires them to also maintain net tangible assets of at least
$5 million. These requirements are not cumulative where an
entity is both an approved trustee for superannuation purposes
and a responsible entity.
The total Group’s life and funds management companies held
an estimated $642 million excess over regulatory capital
requirements at 30 June 2006 in aggregate.
Regulatory Changes
Basel II
In June 2004, the Basel Committee on Banking Supervision
(“the Basel Committee”) issued the Revised Framework for the
calculation of capital adequacy for banks, commonly known as
Basel II. The objective of the Basel II Framework is to develop
capital adequacy guidelines that are more accurately aligned
with the individual risk profile of banks.
The Basel II Framework is based on three “pillars”. Pillar 1
covers the capital requirements for banks, Pillar 2 covers the
supervisory review process and Pillar 3 relates to market
disclosure. The Basel II Framework introduces a capital
requirement for operational risk and, for both credit and
operational risk, allows a choice between three approaches. The
Bank is intending to implement the Advanced Internal Ratings
Based Approach (“AIRB”) for credit risk and the Advanced
Measurement Approach (“AMA”) for operational risk. Under both
these approaches the Bank will be allowed to use its internal
models and data for calculating regulatory capital. The Basel II
Framework has also introduced a requirement to calculate a
capital charge for Interest Rate Risk in the Banking Book. Other
than this change, the current capital requirements for market risk
are not expected to be significantly affected.
Commonwealth Bank of Australia Annual Report 2006 183
Notes to the Financial Statements
Note 35 Capital Adequacy (continued)
Active Capital Management
The Bank maintains a strong capital position. The Tier One
Capital Ratio increased from 7.46% to 7.56% during the year
reflecting the issue of hybrid securities during the second half of
the year. The Total Capital Ratio decreased from 9.75% at 30
June 2005 to 9.66% at 30 June 2006 impacted by the growth in
Risk Weighted Assets. Risk Weighted Assets increased from
$190 billion at 30 June 2005 to $216 billion at 30 June 2006 due
to strong growth
the
business/corporate sector. The Bank’s credit ratings remained
unchanged.
lending assets particularly
in
in
The following significant initiatives were undertaken to actively
manage the Bank’s capital:
Tier One Capital
•
•
Issue of $262 million and $219 million shares in October
2005 and April 2006 respectively to satisfy the Dividend
Reinvestment Plan (“DRP”) in respect of the final dividend for
2004/05 and interim dividend for 2005/06;
In accordance with APRA guidelines, the estimated issue of
$303 million shares to satisfy the DRP in respect of the final
dividend for 2005/06;
Issue of US$700 million Tier One hybrid in March 2006;
•
• Redemption of $700 million PERLS in April 2006;
•
Issue of $1,166 million PERLS III in April 2006; and
• Completion of a $500 million on-market share buyback.
Tier Two Capital
•
•
Issue of the equivalent of $840 million Lower Tier Two
Capital;
In accordance with APRA guidelines, the reduction in Tier
Two note and bond
to
amortisation;
issues of $278 million due
• The call and maturity of the equivalent of $78 million of Tier
Two note and bond issues; and
•
Increase in the value of Tier Two note and bond issues of
$66 million resulting from changes in foreign exchange
movements (whilst these notes are hedged, the unhedged
value is included in the calculation of regulatory capital in
accordance with APRA regulations).
Deductions from Total Capital
The following movements in deductions have occurred during
the period:
• An increase in deductions due to the Bank’s acquisition of a
19.9% interest in Hangzhou City Commercial Bank for $102
million;
• An increase in deductions due to a $291 million increase in
net tangible assets arising from the retention of profits in the
Colonial Group; and
• A decrease in deductions due to the $145 million profit
realised on the sale of CMG Asia in October 2005 being
repatriated to the Bank. The balance of the proceeds of sale
of $463 million was used to repay part of the non-recourse
debt funding in the Bank’s life and funds management
business.
The Bank lodged its Accreditation application for the AIRB and
AMA Approaches with APRA on 30 September 2005 and is well
advanced in finalising solutions to the remaining requirements.
the
is working closely with APRA
The Bank
Accreditation process. The implementation of Basel II in
Australia is expected to take place on 1 January 2008.
through
International Financial Reporting Standards
The Bank adopted the Australian equivalent of International
Financial Reporting Standards (“AIFRS”) on 1 July 2005.
However, APRA required reporting under AGAAP accounting
principles to continue for regulatory capital purposes until the
introduction of revised prudential standards, which take effect on
1 July 2006.
The revised prudential standards will impact Tier One Capital
and the Capital Base. However, APRA has granted transition
relief in relation to changes to their prudential regulations from 1
July 2006 until 31 December 2007.
Total transition relief is $1,715 million comprised of $1,641
million relief for Tier One Capital and $74 million relief for Upper
Tier Two Capital.
Transition relief principally relates to:
• Excess of Market Value Over Net Assets (“EMVONA”)
$1,339 million;
• Software capitalised expenses $229 million; and
• Defined benefit deficit $45 million.
The Adjusted Common Equity (“ACE”) ratio at 30 June 2006
was 4.50%. At 1 July 2006, ACE was 4.39% as Standard &
Poor’s has not granted transition relief for the impact of software
capitalised expenses and defined benefit deficit. EMVONA is
already excluded from ACE.
Conglomerate Groups
APRA has advised that a third level of capital adequacy (“Level
3”) will be implemented to coincide with the introduction of Basel
II. APRA defines a conglomerate group as a group of companies
containing one or more Australian incorporated Authorised
Deposit-taking Institutions (“ADIs”). The Bank is an ADI and the
Commonwealth Bank Group falls within APRA’s definition of a
conglomerate group. Each conglomerate group will be required
to hold capital that corresponds to the corporate structure of that
conglomerate. The calculation will have regard to all group
members and the capacity to move surplus capital from one
group entity to another.
The regulatory capital requirements for each conglomerate
group will be specific to that group.
The proposals indicate that the use of internal capital estimation
and allocation models may be permitted. However, APRA has
not yet specified their requirements for internal models, nor
when they will complete their review of the Bank’s models.
Whilst the Bank considers that it is strongly capitalised (as
evidenced by its credit ratings), no assurance can be given that
our models will meet APRA’s requirements or that the Bank
meets the Level 3 capital requirements.
184 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 35 Capital Adequacy (continued)
Risk-Weighted Capital Ratios
Tier One
Tier Two
Less deductions
Total
Adjusted Common Equity (1)
Regulatory Capital
Tier One Capital
Shareholders’ equity
Reverse effect to shareholders’ equity of AIFRS transition (2)
Reverse effect of AIFRS during the period to 30 June 2006: (2)
Purchase/(sale) and vesting of treasury shares
Actuarial (gains)/losses from defined benefit superannuation plan
Realised gains and dividend income on treasury shares held within the Bank’s life insurance statutory funds
Cash flow hedge reserve
Employee compensation reserve
General reserve for credit loss
Available-for-sale investments
Defined benefit superannuation plan expense
Treasury share valuation adjustment
Preference share capital
Issue of hybrid instruments
Other
Adjusted shareholders’ equity per APRA’s transitional arrangements
Eligible loan capital
Estimated reinvestment under Dividend Reinvestment Plan (3)
Foreign currency translation reserve related to non-consolidated subsidiaries
Deduct:
Asset revaluation reserve (4)
Expected dividend
Goodwill (5)
Intangible component of investment in non–consolidated subsidiaries (6)
Minority interests in entities controlled by non–consolidated subsidiaries
Minority interests in insurance statutory funds and other funds
Capitalised expenses
Other
Total Tier One Capital
Tier Two Capital
Collective provision for impairment losses (7)
General reserve for credit loss (pre-tax equivalent) (7)
General provision for bad debts
FITB related to general provision for bad debts
Asset revaluation reserve (4)
Upper Tier Two note and bond issues
Lower Tier Two note and bond issues (8) (9)
Other
Total Tier Two Capital
Total Capital
2006
Actual
%
7. 56
3. 10
(1. 00)
9. 66
4. 50
2006
$M
21,343
7,183
10
(387)
(85)
(20)
(11)
(92)
(9)
25
100
(687)
1,147
(6)
28,511
281
303
160
(131)
(1,668)
(4,416)
(5,397)
-
(1,158)
(122)
(9)
16,354
1,046
500
1,546
(464)
131
235
5,335
(58)
6,725
23,079
Group
2005
Actual
%
7. 46
3. 21
(0. 92)
9. 75
4. 91
2005
$M
26,060
-
-
-
-
-
-
-
-
-
-
-
26,060
304
272
211
(92)
(1,434)
(4,394)
(5,397)
(111)
(1,158)
(107)
(13)
14,141
-
-
1,389
(414)
92
237
4,783
-
6,087
20,228
(1) Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in
accordance with Standard & Poor’s methodology at 30 June 2006.
(2) APRA requires regulatory capital to continue to be calculated in accordance with AGAAP accounting principles until 1 July 2006. As such, all material changes to
capital resulting from the Bank adopting AIFRS accounting standards on 1 July 2005 have been reversed from regulatory capital.
(3) Based on reinvestment experience related to the Bank’s Dividend Reinvestment Plan.
(4) The Bank agreed with APRA to adopt AIFRS on 1 July 2005 for the reporting of the Asset Revaluation Reserve.
(5) Consistent with APRA requirements goodwill is reported on an AGAAP basis.
(6) Per APRA’s transitional arrangements, it was agreed to deduct the value as at 30 June 2005 of the intangible component of the carrying value of the life insurance
and funds management business from Tier One Capital until 1 July 2006.
(7) In line with current APRA requirements the Bank has established a General Reserve for Credit Loss.
(8) APRA requires these Lower Tier Two note and bond issues to be included as if they were un–hedged.
(9) For regulatory capital purposes, Lower Tier Two note and bond issues are amortised by 20% of the original amount during each of the last five years to maturity.
Commonwealth Bank of Australia Annual Report 2006 185
Notes to the Financial Statements
Note 35 Capital Adequacy (continued)
Regulatory Capital
Total Capital
Deduct:
Investment in non–consolidated subsidiaries (net of intangible component deducted from Tier One Capital):
Shareholders’ net tangible assets in life and funds management businesses
Reverse effect of transition to AIFRS (1)
Capital in other non-consolidated subsidiaries
Value of acquired inforce business (2)
Less: non-recourse debt
Other deductions
Capital Base
2006
$M
23,079
(1,902)
(592)
(256)
(1,339)
2,077
(2,012)
(151)
20,916
Group
2005
$M
20,228
(2,513)
-
(348)
(1,152)
2,292
(1,721)
(28)
18,479
(1) APRA requires regulatory capital to continue to be calculated in accordance with AGAAP accounting principles until 1 July 2006. As such, all material changes to
capital resulting from the Bank adopting AIFRS accounting standards on 1 July 2005 have been reversed from regulatory capital.
(2) Per APRA’s transitional arrangements, it was agreed to deduct the value as at 30 June 2005 of acquired inforce business from Total Capital, until 1 July 2006.
However, values as at 30 June 2005 have been adjusted to reflect the acquisition of the Gandel Group interests in Colonial First State Property Retail Trust and
Gandel Retail Management Trust.
Adjusted Common Equity (1)
Tier One Capital
Deduct:
Eligible loan capital
Preference share capital
Other equity instruments
Minority interests (net of minority interests component deducted from Tier One Capital)
Investment in non–consolidated subsidiaries (net of intangible component deducted from Tier One Capital)
Other deductions
Total Adjusted Common Equity
2006
$M
16,354
(281)
-
(3,659)
(508)
(2,012)
(151)
9,743
Group
2005
$M
14,141
(304)
(687)
(1,573)
(520)
(1,721)
(28)
9,308
(1) Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in
accordance with the pre AIFRS Standard & Poor’s methodology at 30 June 2006.
186 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 35 Capital Adequacy (continued)
Risk-Weighted Assets
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
Claims on OECD banks and local governments
Advances secured by residential property (1)
All other assets (1)
Total On Balance Sheet Assets – Credit Risk (2) (3)
Face Value
2005
$M
2006
$M
23,301
16,742
157,962
110,971
308,976
27,447
14,754
143,746
92,510
278,457
Risk
Weights
%
-
20
50
100
Face Value
Credit Equivalent
2006
$M
3,598
2,365
82,634
2005
$M
3,308
1,280
76,581
1,027,846
1,116,443
885,700
966,869
2006
$M
3,598
999
16,604
14,342
35,543
2005
$M
3,308
584
13,839
20,814
38,545
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 (4)
Total Risk-Weighted Assets – Credit Risk
Risk-Weighted Assets – Market Risk
Total Risk-Weighted Assets
Group
Risk–Weighted
Balance
2006
$M
2005
$M
-
3,348
78,981
110,971
193,300
-
2,951
71,873
92,510
167,334
Group
Risk-Weighted
Balance
2006
$M
2,786
964
12,049
3,892
19,691
2005
$M
2,622
540
10,328
5,881
19,371
212,991
3,447
216,438
186,705
2,854
189,559
(1) For loans secured by residential property approved after 5 September 1994, a risk weight of 100% applied where the loan to valuation ratio is in excess of 80%.
Effective from 28 August 1998, a risk weight of 50% applies to these loans if they are totally insured by an acceptable lender’s mortgage insurer. Loans that are risk-
weighted at 100% are reported under “All other assets”.
(2) The difference between total on balance sheet assets and the Group’s balance sheet reflects the alternative treatment of some assets and provisions as prescribed
in APRA’s capital adequacy guidelines; principally goodwill, collective provision for impairment losses, General Reserve for Credit Loss, and investments in life
insurance and funds management business.
(3) Total on balance sheet assets exclude debt and equity securities in the trading book and all on balance sheet positions in commodities, as they are included in the
calculation of notional market risk-weighted assets.
(4) Off balance sheet exposures secured by the residential property account for $8.9 billion of off balance sheet credit equivalent assets ($4.2 billion of off balance sheet
risk-weighted assets).
Commonwealth Bank of Australia Annual Report 2006 187
Notes to the Financial Statements
Note 36 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, with actual
maturities shorter than the contractual terms.
Therefore this information is not relied upon by the Bank in the
management of its interest rate risk in Note 43.
Group
Maturity Period At 30 June 2006
At Call
$M
Overdrafts
$M
0 to 3
months
$M
3 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Specified
$M
Assets
Cash and liquid assets
Receivables due from other financial
institutions
Assets at fair value through Income
Statement:
Trading (1)
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables (2)
Bank acceptances of customers
Other monetary assets
Total monetary assets
Liabilities
Deposits and other public
borrowings(3)
Payables to other financial institutions
Liabilities at fair value through Income
Statement
Derivative liabilities
Bank acceptances
Insurance policy liabilities
Debt issues and loan capital
Managed funds units on issue
Other monetary liabilities
Total monetary liabilities
2,016
-
-
153
182
-
-
15,182
-
29
17,562
97,262
1,380
1,987
-
-
-
-
-
10
100,639
-
-
-
-
-
-
-
5,107
-
-
5,107
-
-
-
-
-
-
-
-
-
-
3,115
-
5,923
1,156
-
-
15,758
995
2,124
7,484
2,278
16,643
17,531
3,803
75,654
48,772
8,999
5,426
6,471
17,531
-
9,478
-
5,056
101,733
-
1,900
62
986
1,255
18,115
779
81
24,334
24,167
805
2,677
877
779
-
14,700
-
209
44,214
-
2,653
576
833
4,532
58,373
-
6
66,973
2,938
-
2,880
1,047
-
-
42,838
-
469
50,172
-
28
-
1,945
-
372
2,022
146,802
-
2
151,171
88
-
841
2,425
-
-
21,470
-
420
25,244
Total
$M
5,131
7,107
15,758
24,437
2,944
9,675
11,203
259,176
18,310
4,176
357,917
-
-
-
16,791
-
-
1,116
(1,046)
-
255
17,116
-
-
173,227
11,184
-
-
-
22,225
-
1,109
205
23,539
13,811
10,820
18,310
22,225
88,486
1,109
6,369
345,541
(1) Trading assets are purchased without the intention to hold until maturity and are categorised as maturing within 3 months.
(2) $141 billion of this figure represents 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 has historically been less than 5 years.
(3) Includes substantial “core” deposits that 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 43.
188 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 36 Maturity Analysis of Monetary Assets and Liabilities (continued)
Group
Maturity Period At 30 June 2005
At Call
$M
Overdrafts
$M
0 to 3
months
$M
3 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Specified
$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
Life assets
Other monetary assets
Total monetary assets
Liabilities
Deposits and other public
borrowings (3)
Payables to other financial
institutions
Bank acceptances
Life liabilities
Debt issues and loan capital
Other monetary liabilities
Total monetary liabilities
970
371
-
-
4,837
-
179
1
6,358
93,682
809
-
-
-
8
94,499
-
-
-
-
5,225
-
-
-
5,225
-
-
-
-
-
-
-
5,085
-
-
-
4,943
14,631
1,467
21,766
16,387
4,128
15,479
83,886
408
-
1,325
30,518
399
477
20
33,147
50
-
5,279
57,143
-
3,471
1
65,944
315
-
2,767
110,247
-
3,130
17
116,476
-
-
-
-
(1,390)
-
16,099
115
14,824
Total
$M
6,055
6,087
14,631
10,838
228,346
16,786
27,484
15,633
325,860
39,974
29,957
4,274
139
-
168,026
6,054
16,387
-
11,978
16,807
91,200
1,160
399
-
18,164
30
49,710
-
-
-
33,467
9
37,750
-
-
-
13,447
7
13,593
-
-
24,694
-
174
24,868
8,023
16,786
24,694
77,056
17,035
311,620
(1) Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months.
(2) $125 billion of this figure represents 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 has historically been less than 5 years.
(3) Includes substantial “core” deposits that 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 43.
Commonwealth Bank of Australia Annual Report 2006 189
Notes to the Financial Statements
Note 37 Financial Reporting by Segments
Primary Segment
Business Segments
Income Statement
Interest income
Premium and related revenue
Other income
Total revenue
Interest expense
Segment result before income tax
Income tax expense
Segment result after income tax
Minority interests
Segment result after income tax and minority interests
Net profit attributable to shareholders of the Bank
Non–Cash Expenses
Intangible asset amortisation
Bad debts expense
Depreciation
Defined benefit superannuation plan expense
Other
Group
Year Ended 30 June 2006
Funds
Management
$M
-
-
3,687
3,687
Insurance
$M
-
1,052
1,031
2,083
Total
$M
19,758
1,052
7,754
28,564
-
643
(331)
312
(3)
309
309
-
-
2
-
1
-
13,244
657
(241)
416
-
416
416
-
-
5
-
-
5,859
(1,900)
3,959
(31)
3,928
3,928
49
398
164
35
66
Banking
$M
19,758
-
3,036
22,794
13,244
4,559
(1,328)
3,231
(28)
3,203
3,203
49
398
157
35
65
Balance Sheet
Total assets
Acquisition of property, plant & equipment, intangibles and other non–
current assets
Associate investments
Total liabilities
340,254
19,201
9,648
369,103
510
106
324,185
94
52
16,423
8
32
7,152
612
190
347,760
190 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 37 Financial Reporting by Segments (continued)
Primary Segment
Business Segments
Income Statement
Interest income
Premium and related revenue
Other income
Total revenue
Interest expense
Segment result before income tax
Income tax expense
Segment result after income tax
Minority interests
Segment result after income tax and minority interests
Net profit attributable to shareholders of the Bank
Non–Cash Expenses
Intangible asset amortisation
Bad debts expense
Depreciation
Defined benefit superannuation plan expense
Other
Banking
$M
Funds
Management
$M
16,781
-
2,845
19,626
10,755
3,982
(1,197)
2,785
(3)
2,782
2,782
20
322
135
75
84
-
-
3,203
3,203
-
508
(192)
316
(7)
309
309
-
-
8
-
27
Group
Year Ended 30 June 2005
Insurance
$M
-
1,132
1,186
2,318
Total
$M
16,781
1,132
7,234
25,147
-
10,755
522
(213)
309
-
309
309
-
-
13
-
-
5,012
(1,602)
3,410
(10)
3,400
3,400
20
322
156
75
111
Balance Sheet
Total assets
Acquisition of property, plant & equipment, intangibles and other non–
current assets
Associate investments
Total liabilities
304,620
16,191
16,593
337,404
303
19
287,549
8
1
16,832
39
32
10,380
350
52
314,761
Commonwealth Bank of Australia Annual Report 2006 191
Notes to the Financial Statements
Note 37 Financial Reporting by Segments (continued)
Secondary Segment
Geographical Segments
Income Statement
Revenue
Australia
New Zealand
Other countries (1)
Total Revenue
Net Profit Attributable to Shareholders of the Bank
Australia
New Zealand
Other countries (1)
Total Net Profit Attributable to Shareholders of the Bank
Assets
Australia
New Zealand
Other countries (1)
Total Assets
Acquisition of Property, Plant & Equipment, Intangibles and Other Non–
Current Assets
Australia
New Zealand
Other countries (1)
Total
Group
Year Ended 30 June
2006
%
79. 8
14. 1
6. 1
100. 0
81. 5
9. 8
8. 7
100. 0
82. 6
11. 7
5. 7
100. 0
92. 2
5. 5
2. 3
100. 0
2005
$M
20,003
3,361
1,783
25,147
2,778
363
259
3,400
280,255
41,383
15,766
337,404
303
37
10
350
2005
%
79. 5
13. 4
7. 1
100. 0
81. 7
10. 7
7. 6
100. 0
83. 0
12. 3
4. 7
100. 0
86. 6
10. 6
2. 8
100. 0
2006
$M
22,802
4,021
1,741
28,564
3,200
387
341
3,928
304,831
43,318
20,954
369,103
564
34
14
612
(1) Other countries were: United Kingdom, United States of America, Japan, Singapore, Malta, Hong Kong, Grand Cayman, Fiji, Indonesia, China and Vietnam.
The geographical segment represents the location in which the transaction was booked.
192 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 38 Life Insurance Business
The following information is provided to disclose the statutory
life insurance business transactions contained in the Group
financial statements and
the underlying methods and
assumptions used in their calculations.
All financial assets within the life statutory funds have been
determined to back either life insurance or life investment
contracts. Also refer to Note 1 (hh). The insurance segment
result is prepared on a business segment basis, refer to Note
37.
Summarised Income Statement
Premium and related revenue
Outward reinsurance premiums expense
Claims expense
Reinsurance recoveries
Investment revenue (excluding investments in
subsidiaries)
Equity securities
Debt securities
Property
Other
Increase/(decrease) in insurance policy
liabilities
Operating income
Acquisition expenses
Maintenance expenses
Management expenses
Other expense
Operating profit before income tax
Income tax attributable to operating profit
Operating profit after income tax
Minority interests in operating profit after income
tax
Net profit after income tax
Sources of life insurance operating profit
The operating profit after income tax is
represented by:
Emergence of planned profit margins
Difference between actual and planned
experience
Effects of changes to underlying assumptions
Reversal of previously recognised losses or loss
recognition on groups of related products
Investment earnings on assets in excess of
policyholder liabilities
Other movements (2)
Operating profit after income tax
Life insurance premiums received and
receivable
Life insurance claims paid and payable
Life Insurance
Contracts
Life Investment
Contracts
2006
$M
949
(176)
(526)
128
205
230
174
(48)
(192)
744
163
173
18
14
376
148
228
-
228
104
20
2
1
70
31
228
2005
$M
n/a (1)
n/a (1)
2006
$M
414
(3)
(127)
-
1,686
372
169
413
(2,165)
759
21
191
7
29
511
255
256
-
256
200
(41)
-
-
7
90
256
2005
$M
n/a (1)
n/a (1)
2006
$M
1,363
(179)
(653)
128
1,891
602
343
365
(2,357)
1,503
184
364
25
43
887
403
484
-
484
304
(21)
2
1
77
121
484
Group
2005
$M
1,500
(231)
(422)
122
1,635
795
353
411
(2,686)
1,477
295
413
43
36
690
314
376
(5)
371
206
(2)
-
-
167
-
371
2,649
4,803
3,112
4,632
(1) No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.
(2) Includes profit on sale of the Hong Kong insurance business.
The disclosure of the components of operating profit after
income tax expense are required to be separated between
policyholders’ and shareholders’ interests. As policyholder
profits are an expense of the Group and not attributable to
shareholders, no such disclosure is required.
Commonwealth Bank of Australia Annual Report 2006 193
Notes to the Financial Statements
Note 38 Life Insurance Business (continued)
Life Insurance
Contracts
Life Investment
Contracts
Reconciliation of movements in policy
liabilities
Contract policy liabilities
Gross policy liabilities opening balance
AIFRS transition adjustment
Net increase/(decrease) in contract liabilities
reflected in the summarised Income Statement
Contract contributions recognised in policy
liabilities
Contract withdrawals recognised in policy
liabilities
Non cash movements
FX translation adjustment
Gross policy liabilities closing balance
Liabilities ceded under reinsurance
Opening balance
Decrease/(increase) in reinsurance assets
reflected in the summarised Income Statement
Closing balance
Net policy liabilities at 30 June
Expected to be realised within 12 months
Expected to be realised in more than 12
months
Total Insurance Policy Liabilities
2006
$M
25,241
(19,108)
135
60
(281)
(1,361)
(97)
4,589
(205)
57
(148)
545
3,896
4,441
2005
$M
n/a (1)
n/a (1)
n/a (1)
2006
$M
-
19,108
2,165
1,329
(4,133)
(559)
(126)
17,784
-
-
-
3,625
14,159
17,784
2005
$M
n/a (1)
n/a (1)
n/a (1)
2006
$M
25,241
-
2,300
1,389
(4,414)
(1,920)
(223)
22,373
(205)
57
(148)
4,170
18,055
22,225
(1) No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.
Group
2005
$M
n/a (1)
n/a (1)
n/a (1)
194 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
The movement in any key variable will impact the performance
and net assets of the Group and as such represents a risk.
Note 38 Life Insurance Business (continued)
Sensitivity Analysis
The Group conducts sensitivity analyse’s to quantify the
exposure to risk of changes in the key underlying variables such
as interest rate, equity prices, mortality, morbidity and inflation.
The valuations included in the reported results and the Group’s
best estimate of future performance are calculated using certain
assumptions about these variables.
Variable
Expense risk
Interest rate risk
Mortality rates
Morbidity rates
Discontinuance
Market Risk
Impact of movement in underlying variable
An increase in the level or inflationary growth of expenses over assumed levels will decrease
profit and shareholder equity.
Depending on the profile of the investment portfolio, the investment income of the Group will
decrease as interest rates decrease. This may be offset to an extent by changes in the
market value of fixed interest investments. The impact on profit and shareholder equity
depends on the relative profiles of assets and liabilities, to the extent that these are not
matched.
For insurance contracts that pay a death benefit, higher rates of mortality increase the claim
cost and therefore reduce both profit and shareholder equity. For lifetime annuity contracts,
lower mortality rates increase the duration of annuity payments and therefore reduce both
profit and shareholder equity.
The cost of health-related claims depends on both the incidence of policyholders becoming ill
and the duration which they remain ill. Higher than expected incidence and duration would be
likely to increase claim costs, reducing profit and shareholders’ equity.
The impact of the discontinuance rate assumption depends on a range of factors including
the type of contract, the surrender value basis (where applicable) and the duration in force.
For example, an increase in discontinuance rates at earlier durations of life insurance
contracts usually has a negative effect on performance and net assets. However, due to the
interplay between the factors, there is not always an adverse outcome from an increase in
discontinuance rates.
For contracts where benefit payments depend on the value of underlying assets, market risk
is borne by policyholders. However, the Group derives fee income based on the value of the
underlying funds; hence revenues are always sensitive to changes in market value. For
assets which are not contractually linked to policy liabilities, the Group is exposed to market
risk.
The table below shows the sensitivity of insurance contract liabilities (gross and net of reinsurance), current years profits and
shareholder equity to changes in assumptions on key variables. The sensitivity of the insurance contract liability to changes in
assumptions will be dependent on whether the product is (or remains) in loss recognition after the assumptions change and whether
the change is made to an economic assumption. The interest rate sensitivity includes the impact of the change on both the policy
liabilities and assets.
Result of change in variables (1)
Interest rates – 1% increase
Mortality and morbidity on lump sum
products – 10% increase in total costs
Annuitant mortality – 20% increase in rate of
future mortality improvement
Morbidity on Income Protection – 10%
increase in total cost
Discontinuance – 10% increase in
discontinuance rates
Expenses – 10% increase in maintenance
expenses assumption
(1) Represents Australia and New Zealand only.
Gross (before reinsurance)
Net (after reinsurance)
Profit/(loss)
2006
$M
Policy
Liabilities
2006
$M
Profit/(loss)
2006
$M
Policy
Liabilities
2006
$M
Shareholder
Equity
2006
$M
(17)
(2)
(12)
(7)
-
(1)
(10)
2
16
7
-
1
(18)
(2)
(12)
(6)
-
(1)
(8)
2
16
6
-
1
(18)
(2)
(12)
(6)
-
(1)
Commonwealth Bank of Australia Annual Report 2006 195
Notes to the Financial Statements
Note 38 Life Insurance Business (continued)
Life Investment Contract Liabilities
Life Insurance Contract Liabilities
Investment contracts consist of a financial instrument and an
investment management services element, both of which are
measured at fair value. The resulting liability to policyholders is
closely linked to the performance and the value of the assets
(after tax) that back those liabilities. The fair value of such
liabilities is therefore the same as the fair value of those assets,
after tax on the basis charged to the policyholders.
Appropriately qualified actuaries have been appointed for each
life insurance entity and they have reviewed and satisfied
themselves as to the accuracy of the contract liabilities included
in this financial report, including compliance with the regulations
of the Life Insurance Act (Life Act) 1995 where appropriate.
Details are set out in the various statutory returns of these life
insurance entities.
Components of life insurance contract liabilities
Future policy benefits (1)
Future bonuses
Future expenses
Future profit margins
Future charges for acquisition expenses
Balance of future premiums
Provisions for bonuses not allocated to participating policyholders
Total Contract Liabilities
(1) Including bonuses credited to policyholders in prior years.
Life Insurance
Contracts
2006
$M
6,205
1,128
1,810
1,321
(407)
(5,705)
89
4,441
2005
$M
n/a (2)
(2) No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.
Taxation
Actuarial Methods and Assumptions
Taxation has been allowed for in the determination of policy
liabilities in accordance with the relevant legislation applicable in
each market.
Insurance contract policy liabilities have been calculated in
accordance with AASB 1038 (Life Insurance Contracts) and the
Margin on Services (MoS) methodology as set out in Actuarial
Standard 1.04 – Valuation Standard (‘AS1.04’) issued by the
Insurance Actuarial Standards Board (‘LIASB’). The principal
methods and profit carriers used for particular product groups
were as follows:
Product Type
Individual
Conventional
Investment account
Lump sum risk
Income stream risk
Immediate annuities
Group
Investment account
Lump sum risk
Income stream risk
Method
Projection
Projection
Projection
Projection
Projection
Projection
Accumulation
Projection
Profit Carrier
Bonuses or expected claim payment
Bonuses or funds under management
Premiums/expected claim payment
Expected claim payments
Annuity payments
Bonuses or funds under management
Not applicable
Expected claim payments
The ‘Projection Method’ measures the present values of
estimated future policy cash flows to calculate policy liabilities.
The policy cash
income,
premiums, expenses, redemptions and benefit payments.
incorporate
investment
flows
Bonuses were amounts added, at the discretion of the life
insurer, to the benefits currently payable under Participating
Business. Under the Life Act, bonuses are a distribution to
policyholders of profits and may take a number of forms
including reversionary bonuses, interest credits and terminal
bonuses (payable on the termination of the policy).
196 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 38 Life Insurance Business (continued)
Actuarial Assumptions
Set out below is a summary of the material assumptions used in the calculation of policy liabilities.
Discount Rates
These were the rates used to discount future cash flows to
determine their net present value in the policy liabilities. The
discount rates were risk free rates or were determined with
reference to the expected earnings rate of the assets that
support the policy liabilities adjusted for taxation where relevant.
The following table shows the applicable rates for the major
classes of business in Australia and New Zealand. The
changes relate to changes in long term earnings rates and
asset mix.
Class of Business (1)
Traditional – ordinary business (after tax)
Traditional – superannuation business (after tax)
Annuity based (after tax)
Term insurance – ordinary business (before tax)
Term insurance – superannuation business (before tax)
Income protection business (before tax)
Investment account – ordinary business (after tax)
Investment account – superannuation business (after tax)
Investment account – exempt (after tax)
(1) For New Zealand, investment earning rates assumed were 3.9% to 5.6% net of tax.
Bonuses
Taxation
June 2006
Rate Range %
6. 00 – 6. 75
7. 33 – 8. 26
5. 79 – 6. 30
5. 58 – 5. 81
5. 58 – 5. 81
5. 58 – 5. 81
4. 21
5. 12
5. 98
June 2005
Rate Range %
5. 52 – 6. 26
6. 74 – 7. 67
5. 71 – 6. 49
5. 11 – 5. 50
5. 11 – 5. 50
5. 11
3. 74
4. 55
5. 31
The valuation assumes that the long-term supportable bonuses
will be paid, which is in line with company bonus philosophy.
There have been no significant changes to these assumptions.
Maintenance Expenses
The maintenance expenses are based on an internal analysis of
experience and are assumed to increase in line with inflation
each year and to be sufficient to cover the cost of servicing the
business in the coming year after adjusting for one-off expenses.
For participating business, expenses continue on the previous
charging basis with adjustments for actual experience, and are
assumed to increase in line with inflation each year.
Investment Management Expenses
Investment management expense assumptions now vary by
asset classes and are based on the recently negotiated
investment fees as set out in Fund Management Agreements.
There has been no significant change to overall investment fees.
Inflation
The inflation assumption is consistent with the investment
earning assumptions.
Benefit Indexation
The indexation rates are based on an analysis of past
experience and estimated long term inflation and vary by
business and product type. There have been no significant
changes to these assumptions.
The taxation basis and rates assumed vary by market and
product type.
Voluntary Discontinuance
Discontinuance rates were based on recent company and
industry experience and vary by market, product, age and
duration inforce. The experience has been broadly in line with
assumptions. There have been no significant changes to these
assumptions.
Surrender Values
Current surrender value bases were assumed to apply in the
future. There have been no significant changes to these
assumptions.
Mortality and Morbidity
Rates vary by sex, age, product type and smoker status. Rates
were based on standard mortality tables applicable to each
market e.g. IA95-97 in Australia for risk, IM/IF80 for annuities,
adjusted for recent company and industry experience where
appropriate. Mortality and morbidity assumptions have been
reduced on some products.
Commonwealth Bank of Australia Annual Report 2006 197
Notes to the Financial Statements
Note 38 Life Insurance Business (continued)
Risk Management Policies and Procedures
The financial condition and operating results of the Life
Insurance Business in the Group are affected by a number of
key financial and non-financial risks. The objectives and policies
in respect of managing these risks are set out below.
There are two risk types that are considered to be unique to life
insurance businesses. These are the risks that the incidence of
mortality (death) and morbidity (illness and injury) claims are
higher than assumed when pricing life insurance policies, or is
greater than best estimate assumptions used to determine the
policy liabilities of the business.
Insurance risk may arise through reassessment of the incidence
of claims, the trend of future claims and the effect of unforeseen
diseases or epidemics. In addition, in the case of morbidity, the
time to recovery may be longer than assumed.
Insurance risk is controlled by ensuring underwriting standards
adequately identify potential risk, retaining the right to amend
premiums on risk policies where appropriate and through the
use of reinsurance. The experience of the Group’s life
insurance business and those of the industry as a whole are
reviewed annually.
Terms and Conditions of Insurance Contracts
The nature of the terms of the insurance contracts written is
such that certain external variables can be identified on which
related cash flows for claim payments depend. The tables
below provide an overview of the key variables upon which the
related cash flows are dependent.
Nature of compensation for
claims
Benefits, defined by the insurance
contracts, are determined by the
contract. They are not directly
affected by the performance of
underlying assets or the
performance of the contracts as a
whole.
Key variables that affect the
timing and uncertainty of future
cash flows
Mortality
Morbidity
Discontinuance rates
Expenses
Benefits arising from the
discretionary participation feature
are based on the performance of a
specified pool of contracts or a
specified type of contract.
Market earnings rates
Mortality
Discontinuance rates
Expenses
Managed Assets and Fiduciary Activities
Arrangements are in place to ensure that asset management
and other
fiduciary activities of controlled entities are
independent of the life insurance funds and other activities of the
Bank.
Disaggregated Information
in Australia and overseas. Under
Life insurance business is conducted through a number of life
insurance entities
the
Australian Life Insurance Act 1995, life insurance business is
conducted within one or more separate statutory funds, which
are distinguished from each other and from the shareholders’
funds. The financial statements of Australian life insurers
prepared in accordance with AASB 1038 (and which are lodged
with
regulators) show all major
components of the financial statements disaggregated between
the various life insurance statutory funds and their shareholder
funds and as well as between investment linked business and
those relating to non-investment linked businesses.
relevant Australian
the
Type of Contract
Non-participating life insurance
contracts with fixed and
guaranteed terms (Term Life,
Trauma and Disability)
Detail of contract workings
Guaranteed benefits paid on death,
ill health or maturity that are fixed
and guaranteed and not at the
discretion of the issuer.
Life insurance contracts with
discretionary participating benefits
(endowment and whole of life)
These policies include a clearly
defined initial guaranteed sum
assured which is payable on death.
The guaranteed amount is multiple
of the amount that is increased
throughout the duration of the
policy by the addition of regular
annual bonuses which, once
added, are not removed. Bonuses
are also added on maturity.
Solvency
Australian Life Insurers
to support solvency
Australian life insurers are required to hold prudential reserves in
excess of the amount of policy liabilities. These reserves are
required
requirements and provide
protection against adverse experience. Actuarial Standard
AS2.04 - ‘Solvency Standard’ (‘AS2.04’) prescribes a minimum
solvency requirement and the minimum level of assets required
to be held in each statutory fund. All controlled Australian
insurance entities complied with the solvency requirements of
AS2.04. Further information is available from the individual
statutory returns of subsidiary life insurers.
Overseas Life Insurers
Overseas life insurance subsidiaries were required to hold
reserves in excess of policy liabilities in accordance with local
Acts and prudential rules. Each of the overseas subsidiaries
complied with
is
local requirements. Further
available from the individual statutory returns of subsidiary life
insurers.
information
198 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 39 Remuneration of Auditors
Amounts paid or due and payable for audit services to:
Ernst & Young
Other Auditors
Amounts paid or due and payable for non-audit services to
Ernst & Young:
Audit related services
Taxation services
All other services
Other services
Total Remuneration of Auditors
2006
$’000
9,481
176
9,657
5,122
-
1,423
6,545 (1)
16,202
Group
2005
$’000
7,921
114
8,035
2,077
16
327
2,420
10,455
2006
$’000
7,559
-
7,559
1,660
-
782
2,442
10,001
Bank
2005
$’000
4,084
-
4,084
1,664
8
11
1,683
5,767
(1) An additional amount of $4,056,000 was paid to Ernst & Young by way of fees paid for Non-Audit Services provided to entities not consolidated into the Financial
Statements, being managed investment schemes and superannuation funds. $3,923,000 of this amount relates to statutory audits, with the residual relating to
reviews attestations and assurances.
The Audit Committee has considered the non-audit services
provided by Ernst & Young and is satisfied that the services and
the level of fees are compatible with maintaining auditors’
independence.
Audit related fees principally include audit of the Group’s US
Forms 20-F and 6-K, services
to regulatory
requirements and other services that only the external auditor
can provide, as well as investigations and reviews of internal
control systems and financial or regulatory information.
in relation
Taxation fees include income tax and GST compliance and
related advice, and tax technology and related training.
All other fees principally include transaction support services
related to potential and actual acquisition and disposition
transactions and advice regarding implementation of revised
compliance and regulatory requirements.
Note 40 Commitments for Capital Expenditure Not Provided for in the Accounts
Not later than one year
Total Commitments for Capital Expenditure Not Provided for in the
Accounts
2006
$M
36
36
Group
2005
$M
13
13
2006
$M
14
14
Bank
2005
$M
13
13
Commonwealth Bank of Australia Annual Report 2006 199
Notes to the Financial Statements
Note 41 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 five years
Later than five years
Total Lease Commitments – Property, Plant and Equipment
Group’s share of lease commitments of associated entities due:
Not later than one year
Later than one year but not later than five years
Later than five years
Total Lease Commitments – Property, Plant and Equipment
2006
$M
258
610
214
1,082
Bank
2005
$M
263
540
165
968
2006
$M
298
732
255
1,285
3
3
2
8
Group
2005
$M
297
635
214
1,146
-
-
-
-
The Group as lessee has no purchase options over premises
occupied. In a small number of cases, the Group as lessee has
a right of first refusal if the premises are to be sold.
There are no restrictions imposed on the Group’s lease of space
other
lease
forming part of
arrangements for each specific premise.
the negotiated
those
than
Lease Arrangements
Leases entered into by the Group are for the purpose of
accommodating the business needs. Leases may be over retail,
commercial, industrial and residential premises and reflect the
needs of the occupying business and market conditions. All
internal or external
leases are negotiated using either
professional property resources acting for the Group.
Rental payments are determined in terms of relevant lease
requirements, usually reflecting market rentals.
200 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 42 Contingent Liabilities, Assets and Commitments
The Group is involved in a range of transactions that give rise to
contingent and/or future liabilities which are distinct from
transactions and other events that result in the recognition of
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 that would have a material adverse effect on the
financial condition of the Bank and its controlled entities.
Details of contingent liabilities and off balance sheet business 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
Guarantees represent unconditional undertakings by the Group
to support the obligations of its customers to third parties.
Standby letters of credit are undertakings by the Group to pay,
against production of documents, an obligation in the event of a
default by a customer.
Bill endorsements relate to bills of exchange that have been
endorsed by the Group 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 or
accept drafts drawn by an overseas supplier of goods against
production of documents in the event of payment default by a
customer.
Performance related contingents involve undertakings by the
Group 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 Group to provide credit facilities. These credit facilities are
both fixed and variable.
Fixed rate or fixed spread commitments extended to customers
that allow net settlement of the change in value of the
commitment are written options and are recorded at fair value.
Refer Note 11.
Other commitments include the Group’s obligations under sale
and repurchase agreements, outright forward purchases and
forward deposits and underwriting facilities. Other commitments
also include obligations, not already disclosed to extend credit
that are irrevocable because they cannot be withdrawn at the
discretion of the Bank without the risk of incurring significant
penalty or expense. In addition commitments to purchase or sell
loans are included in other commitments.
transactions are categorised and credit equivalents
The
calculated under APRA guidelines
risk based
measurement of capital adequacy. The credit equivalent
amounts are a measure of the potential loss to the Group in the
event of non-performance by the counterparty.
the
for
Face Value
Group
Credit Equivalent
2006
$M
2,592
342
230
613
1,753
82,162
8,048
95,740
2005
$M
2,438
321
276
185
1,095
76,162
8,279
88,756
2006
$M
2,592
342
230
123
876
16,135
1,179
21,477
2005
$M
2,438
321
276
37
547
13,421
942
17,982
The credit equivalent exposure from direct credit substitutes
(guarantees, standby letters of credit and bill endorsements) is
the face value of the transaction, whereas the credit equivalent
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. The amounts
reflected assume that the amounts may be fully advanced. The
contractual amount of these instruments is the maximum
amount at risk if the customer fails to meet its obligations. The
risk is similar to the risk involved in extending loan facilities.
As the potential loss depends on the performance of a
counterparty, the Group 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 raised.
Contingent Assets
The credit risk related contingent liabilities of $95,740 million
(2005: $88,756 million) detailed above also represent contingent
assets of the Group. Such commitments to provide credit may in
the normal course convert to loans and other assets of the
Group.
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 and
reliably estimatable an appropriate provision has been made.
Commonwealth Bank of Australia Annual Report 2006 201
Notes to the Financial Statements
Note 42 Contingent Liabilities, Assets and Commitments (continued)
Fiduciary Activities
The Group and its associated entities conduct investment
management and other fiduciary activities as responsible entity,
trustee, custodian or manager for numerous investment funds
and trusts, including superannuation and approved deposit
funds, wholesale and retail trusts. The amounts of funds
concerned that are not reported in the Group’s balance sheet
are as follows:
2006
$M
2005
$M
99,000
15,526
9,353
6,842
130,721
77,208
11,914
8,579
2,404
100,105
In 2004, the Bank entered into an agreement with Optus Pty Ltd
for the provision of Eftpos Telecommunications Services from 21
October 2004 until 21 October 2007.
In 2005, the Bank entered into an agreement with Telstra
Corporation Pty Ltd for the provision of Remote Access Services
from 14 July 2005 until 14 July 2008.
Failure to Settle Risk
The Bank is subject to a credit risk exposure in the event that
another financial institution fails to settle for its payments
clearing activities, in accordance with the regulations and
procedures of the following clearing systems of the Australian
Payments Clearing Association Limited: The Australian Paper
Clearing System (“Clearing Stream 1”), The Bulk Electronic
Clearing System
(“Clearing Stream 2”), The Consumer
Electronic Clearing System ("Clearing Stream 3") and the High
Value Clearing System (“Clearing Stream 4”, only if operating in
‘bypass mode’). This credit risk exposure is unquantifiable in
advance, but is well understood, and is extinguished upon
settlement at 9am each business day.
Service Agreements
The maximum contingent liability for termination benefits in
respect of service agreements with the Chief Executive Officer
and other Group Key Management Personnel at 30 June 2006
was $6.3 million (2005: $7.1 million).
Funds under administration
Australia
United Kingdom
New Zealand
Asia
Total
Certain entities within the Group act as responsible entity or
trustee of virtually all managed
investment schemes
(“schemes”), wholesale and retail trusts (“trusts”) managed by
the Group in Australia, the United Kingdom and New Zealand.
The above funds under administration do not include on balance
sheet investments and policyholder liabilities held in the statutory
funds of the life insurance business (refer to Note 10) where an
entity within the Group may act as a trustee. Where entities
within
the Group act as responsible entity of managed
investment schemes, obligations may exist under the relevant
Constitutions whereby upon request from a scheme member,
the responsible entity has an obligation to redeem units from the
assets of those schemes. Liabilities are incurred by these
entities in their capacity as responsible entity or trustee. Rights
of Indemnity are held against the schemes and trusts whose
assets exceeded their liabilities at 30 June 2006. The Bank does
not provide a general guarantee of the performance or
obligations of its subsidiaries.
Long Term Contracts
In June 2006, the Bank entered into a 6 year contract with EDS
(Australia) Pty Ltd, relating to the provision of Information
Technology Services. The contract was signed on 30 June 2006
and it is effective from 1 July 2006.
In 1997, the Bank entered into a ten year contract with EDS
(Australia) Pty Ltd, relating to the provision of Information
Technology Services. This arrangement is in place for remaining
services until 10 October 2006.
In 2000, the Bank entered into a five year agreement with TCNZ
Australia Pty Ltd for the provision of telecommunications
services. In late 2005, the Bank entered into two separate
agreements with Gen-i Pty Ltd for the provision of Network
Perimeter Security Services from 1 January 2006 until 1 January
2008 as well as Data Communications Services effective from 1
September 2005 until 1 September 2008. The remainder of
telecommunication services, with the exception of Eftpos and
Remote Access Services, currently provided under
the
Telecommunications Services Agreement by Gen-i to the Bank,
were extended until 1 September 2008.
202 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 42 Contingent Liabilities, Assets and Commitments (continued)
Collateral
The Group has secured liabilities of $2,354 million. The table below sets out the assets pledged by the Bank to secure these liabilities.
Assets pledged
Cash
Assets at fair value through Income Statement
Available-for-sale investments
Assets pledged
Collateral held
Cash
Assets at fair value through Income Statement
Collateral held
2006
$M
1,633 (2)
1,192
58
2,883
2006
$M
312
2,334
2,646
Group
2005
$M
N/A (1)
Group
2005
$M
N/A (1)
2006
$M
1,633
1,192
58
2,883
2006
$M
312
2,334
2,646
Bank
2005
$M
N/A (1)
Bank
2005
$M
N/A (1)
(1) No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.
(2) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 23.
Commonwealth Bank of Australia Annual Report 2006 203
Notes to the Financial Statements
Note 43 Market Risk
The Group in its daily operations is exposed to a number of
market risks. Market risk relates to the risk that market rates and
prices will change and that this will have an adverse affect on
the profitability and/or net worth of the Group, e.g. an adverse
interest rate movement. Market risk also includes the operational
risks of market access for funding and liquidity.
Under the authority of the Board of Directors, the Risk
Committee of the Board ensures that all the market risk
exposure is consistent with the business strategy and within the
risk tolerance of the Group. Regular market risk reports are
tabled before the Risk Committee of the Board.
Within the Group, market risk is greatest in the balance sheets of
the banking and insurance businesses. Market risk also arises in
the course of its intermediation activities in financial services and
in financial markets trading.
Market Risk in Balance Sheet Management
The Risk Committee of the Board approves the Bank’s balance
sheet market risk policies and limits. Implementation of the
policy is delegated to the Group Executives of the associated
business units with senior management oversight by the
Group’s Asset and Liability Committee.
For bank balance sheets, market risk includes liquidity risks,
funding risks, interest rate risk and foreign exchange risk. On life
and general insurance balance sheets, market risk is part of the
principal means by which long term liabilities are actuarially
managed. In this sense and in contrast to banking, market risk is
structural for these businesses.
Liquidity risk
Balance sheet liquidity risk is the risk of being unable to meet
financial obligations as they fall due. The Group manages
liquidity requirements by currency and by geographical location
of its operations. Subsidiaries are also included in the Group’s
liquidity policy framework.
Liquidity policies are in place to manage liquidity in a day-to-day
sense, and also under crisis scenarios.
Under current APRA Prudential Standards, each bank is
required to develop a liquidity management strategy that is
appropriate for itself, based on its size and nature of operations.
The objectives of the Group’s funding and liquidity policies are
to:
• Ensure all financial obligations are met when due;
• Provide adequate protection, even under crisis scenarios, at
lowest cost; and
• Achieve sustainable,
lowest-cost
funding within
the
limitations of funding diversification requirements.
Funding risk
Funding risk is the risk of over-reliance on a funding source to
the extent that a change in that funding source could increase
overall funding costs or cause difficulty in raising funds. The
funding requirements are integrated into the Group’s liquidity
and funding policy with its aim to assure the Group has a stable
diversified funding base without over-reliance on any one market
sector.
Domestically, the Group continues to obtain a large portion of its
AUD funding from a stable retail deposit base, which has a lower
interest cost than wholesale funds. The relative size of the
Group’s retail base has enabled it to source funds at a lower
than average rate of interest than the other major Australian
banks. Funding diversification is particularly important in offshore
markets where the absence of any ‘natural’ offshore funding
base means the Group is principally reliant on wholesale money
market and capital market sources for funding. The Group has
imposed internal prudential constraints on the relative mix of
offshore sources of funds.
204 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 43 Market Risk (continued)
The following table outlines the range of financial instruments used by the Group 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.
Market Risk
Australia
Cheque accounts
Savings accounts
Term deposits
Cash management accounts
Debt issues
Bank acceptances
Certificates of deposits
Life insurance policy liabilities
Loan capital
Securities sold under agreements to repurchase and short sales
Liabilities at fair value through Income Statement
Managed funds units on issue
Other
Total Australia
Overseas
Deposits and interbank
Commercial paper
Life insurance policy liabilities
Other debt issues
Loan capital
Liabilities at fair value through Income Statement
Total Overseas
Total Funding Sources
Provisions and other liabilities
Total Liabilities
2006
$M
31,962
32,070
43,210
23,387
65,426
18,310
18,185
20,001
8,887
1,380
1,948
1,109
3,354
269,229
30,863
7,710
2,224
5,455
1,008
11,863
59,123
328,352
19,408
347,760
Group
2005
$M
27,455
31,947
41,582
21,831
52,384
16,786
16,038
20,636
6,291
2,258
-
-
2,353
239,561
32,230
12,266
4,058
6,115
-
-
54,669
294,230
20,531
314,761
Commonwealth Bank of Australia Annual Report 2006 205
Notes to the Financial Statements
Note 43 Market Risk (continued)
Interest rate risk (Banking)
(b) Economic value
Some of the Group’s assets and liabilities have interest rate risk
that is not fully captured within a measure of risk to the next 12
months earnings. To measure this longer-term sensitivity, the
Group utilises an economic value-at-risk (“VaR”) analysis. This
analysis measures the potential change in the net present value
of cash flows of assets and liabilities. Cash flows for fixed rate
products are included on a contractual basis, after adjustment
for forecast prepayment activities. Cash flows for products
repriced at the discretion of the Group are based on the
expected repricing characteristics of those products.
The total cash flows are revalued under a range of possible
interest rate scenarios using the VaR methodology. The interest
rate scenarios are based on actual interest rate movements that
have occurred over one year and five year historical observation
periods. The measured VaR exposure is an estimate to a 97.5%
confidence level (one-tail) of the potential loss that could occur if
the balance sheet positions were to be held unchanged for a
one month holding period. For example, VaR exposure of $1
million means that in 97.5 cases out of 100, the expected net
present value will not decrease by more than $1 million given
the historical movement 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 all existing assets and liabilities held for
hedging purposes.
Exposure as at 30 June
Average monthly exposure
High month exposure
Low month exposure
2006
$M
117
53
127
7
2005
$M
7
24
78
5
Interest rate risk in the bank balance sheet arises from the
potential for a change in interest rates to change the expected
net interest earnings, in the current reporting period and in future
years. Similarly, interest rate risk also arises from the potential
for a change in interest rates to cause a fluctuation in the fair
value of the financial instruments. Interest rate risk arises from
the structure and characteristics of the Group’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
achieve stable and sustainable net interest earnings in the long
term.
The Group measures and manages balance sheet interest rate
risk from two perspectives:
(a) Next 12 months earnings
The risk to the net interest earnings over the next 12 months for
a change in interest rates is measured on a monthly basis. Risk
is measured assuming an immediate 1% parallel movement in
interest rates across the whole yield curve as well as other
interest rate scenarios with variations in size and timing of
interest rate movements. Potential variations in net interest
earnings are measured using a simulation model that takes into
account the projected change in balance sheet asset and liability
levels 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 the other assets and liabilities
(those priced at the discretion of the Group) is measured by
taking into account both the manner 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 following table represent the potential change
to net interest earnings during the year (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 percentage of
expected next 12 months’ earnings)
Average monthly exposure
High month exposure
Low month exposure
2006
%
1. 1
2. 1
0. 2
2005
%
1. 1
1. 5
0. 5
206 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 43 Market Risk (continued)
The following table represents the Group’s contractual interest
rate sensitivity for repricing mismatches as at 30 June 2006 and
corresponding weighted average effective interest rates. The
net mismatch represents the net value of assets, liabilities and
off balance sheet instruments that may be repriced in the time
periods shown.
Interest Rate Risk Sensitivity
All assets and liabilities are shown according to contractual
repricing dates. Options are shown in the mismatch report using
the delta equivalents of the option face values.
Repricing Period at 30 June 2006
Australia
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Bank acceptances of customers
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Bank acceptances
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Managed funds units on issue
Bills payable and other liabilities
Loan capital
Total Liabilities
Shareholders’ Equity
Share capital and other equity
Minority interests
Total Shareholders’ Equity
Derivatives
Net Mismatch
Cumulative Mismatch
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
4,393
3,413
-
3,191
2,348
687
12,832
22,091
394
6,924
6,011
217,054
18,310
258
1,157
178
7,057
610
4,270
304,730
12,763
660
343
-
1,657
140,016
-
-
-
-
-
-
-
161,200
50
333
38
-
385
16,557
-
-
-
-
-
-
-
18,050
-
37
-
1,800
-
-
369
6,677
-
-
-
-
-
-
-
8,883
-
-
-
102
13
-
193
13,371
-
-
-
-
-
-
-
13,679
-
-
-
-
980
5. 05
119
5. 31
-
2,099
-
-
2,453
38,294
-
-
-
-
-
-
-
42,846
-
1,777
-
-
340
3,204
-
-
-
-
-
-
-
5,321
19
15,320
-
6,924
614
(1,065)
18,310
258
1,157
178
7,057
610
4,270
54,751
6. 17
6. 28
6. 20
-
7. 41
7. 54
-
-
-
-
-
-
-
6. 37
150,194
102,755
19,413
11,508
8,611
1,924
111
5,872
4. 53
3,354
2,967
161
215
6
5
-
-
4. 70
1,948
8,557
18,310
368
1,234
794
20,001
65,426
1,109
5,156
276,451
8,887
285,338
19,782
3
19,785
(2)
(2)
(2)
1,948
-
-
-
-
-
-
10,562
-
-
118,232
1,093
119,325
-
-
-
-
-
-
-
25,766
-
-
45,340
2,484
47,824
-
-
-
-
-
-
-
7,791
-
-
19,514
628
20,142
-
-
-
-
-
-
-
2,457
-
-
11,074
-
11,074
-
-
-
-
-
-
-
14,854
-
-
16,783
1,266
18,049
-
-
8,557
-
18,310
-
368
-
1,234
-
-
794
- 20,001 (1)
58
1,109
5,156
61,459
-
61,459
3,938
-
-
4,049
3,416
7,465
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
19,782
3
19,785
2,827
(25,735)
9,069
11,447
1,378
1,014
-
44,702
44,702
(55,509)
(10,807)
(2,190)
(12,997)
14,052
1,055
26,175
27,230
(1,130)
26,100
(26,493)
(393)
5. 52
-
-
-
-
-
-
5. 99
-
-
5. 22
4. 01
-
-
-
(3)
(3)
(3)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly
so with investment linked policies.
(2) No balance sheet amount applicable.
(3) No rate applicable.
Commonwealth Bank of Australia Annual Report 2006 207
Notes to the Financial Statements
Note 43 Market Risk (continued)
Interest Rate Risk Sensitivity
Repricing Period at 30 June 2006
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Overseas
Assets
Cash and liquid assets
Receivables due from other
financial institutions
Assets at fair value through Income
Statement:
Trading
Insurance
Other
Derivative assets
Available-for-sale investments
Loans, advances and other
receivables
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Liabilities at fair value through
Income Statement
Derivative liabilities
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Shareholders’ Equity
Share capital and other equity
Minority interests
Total Shareholders’ Equity
Derivatives
Net Mismatch
Cumulative Mismatch
738
630
67
9
3,916
3,112
445
157
2,926
2,346
2,550
2,751
5,192
42,122
157
12
752
40
871
64,373
467
832
1,551
-
471
10,102
-
-
-
-
-
17,165
1,470
1
911
-
2,493
5,812
-
-
-
-
-
11,199
513
3
26
-
1,172
5,433
-
-
-
-
-
7,313
-
-
10
1
8
-
352
4,981
-
-
-
-
-
5,352
23,033
10,694
6,937
2,567
1,015
7,830
5,144
1,018
283
178
5,541
-
-
-
-
-
4,767
-
26,146
-
26,146
3,993
-
-
-
-
-
4,093
-
16,041
-
16,041
-
-
-
-
-
-
1,271
-
-
-
-
-
69
-
4,190
-
4,190
-
-
-
406
-
-
-
-
-
136
-
1,735
-
1,735
-
-
-
11,863
2,263
10
102
27
2,224
13,165
897
61,414
1,008
62,422
1,053
505
1,558
(2)
(2)
(2)
-
7
299
17
9
-
684
15,446
-
-
-
-
-
16,462
651
322
641
-
-
-
-
-
4,100
-
5,714
253
5,967
-
-
-
-
28
166
23
-
-
21
419
-
-
-
-
-
657
3
-
11
-
-
-
-
-
-
-
14
740
754
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
32
1. 64
167
3. 64
1
1,469
45
2,751
(1)
(71)
157
12
752
40
871
6,225
6. 20
2. 09
7. 42
-
4. 73
7. 37
-
-
-
-
-
6. 25
1,166
5. 69
885
3. 69
-
2,263
10
102
27
2,224 (1)
-
897
7,574
15
7,589
-
-
-
1,053
505
1,558
4. 83
-
-
-
-
-
5. 22
-
3. 96
4. 65
-
-
-
(3)
(3)
(3)
5,632
12,782
(2,464)
(3,650)
(11,806)
(494)
-
(3,349)
(3,349)
7,940
4,591
659
5,250
(33)
5,217
(1,311)
3,906
(591)
3,315
(2,922)
393
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly
so with investment linked policies.
(2) No balance sheet amount applicable.
(3) No rate applicable.
208 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 43 Market Risk (continued)
Interest Rate Risk Sensitivity
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
Repricing Period at 30 June 2005
Australia
Assets
Cash and liquid assets
Receivables from other financial
institutions
Trading securities
Life insurance investment assets
Investment securities
Loans, advances and other
receivables
Bank acceptances of customers
Investment property
Property, plant and equipment
Investment in associates
Intangible assets
Deferred tax assets
Other assets
Total Assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Bank acceptances
Current tax liabilities
Deferred tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Loan capital
Total Liabilities
Shareholders’ Equity
Share capital and other equity
Minority interests
Total Shareholders’ Equity
Off Balance Sheet Items
Swaps
Options
Futures
Net Mismatch
Cumulative Mismatch
4,804
3,423
-
-
1,381
4. 95
-
534
-
882
136
-
82
-
76
325
-
-
-
358
165
-
-
2,467
2,517
2,816
11,015
3,097
1,295
113,394
-
12,329
-
9,401
-
14,707
-
40,810
-
-
-
-
-
-
-
-
-
-
-
-
135,040
-
13,881
-
9,884
-
15,230
-
45,794
-
4,917
-
-
2,123
697
2,097
-
-
-
96
11
13,768
2
(1,267)
16,786
252
978
52
7,249
651
15,562
55,521
3. 55
4. 77
4. 67
5. 98
7. 18
-
-
-
-
-
-
-
5. 71
3,528
11,026
22,771
5,137
191,471
16,786
252
978
52
7,249
651
15,562
280,267
141,111
93,698
21,222
12,435
4,479
3,288
136
5,853
4. 27
2,708
16,786
748
921
830
20,636
52,384
16,777
252,901
6,291
259,192
15,429
1,270
16,699
(2)
(2)
(2)
(2)
(2)
2,086
-
-
-
-
-
7,122
-
102,906
608
103,514
544
-
-
-
-
-
19,389
-
41,155
2,202
43,357
56
-
-
-
-
-
3,218
-
15,709
146
15,855
-
-
-
-
-
-
-
-
-
9
-
-
-
-
-
2,848
-
7,336
-
7,336
-
-
-
13
-
-
-
-
-
19,298
-
22,599
1,939
24,538
-
-
16,786
-
748
-
921
-
830
-
- 20,636 (1)
-
16,777
62,551
-
62,551
509
-
645
1,396
2,041
-
-
-
-
-
-
15,429
1,270
16,699
3,296
-
-
(17,956)
84
3,420
4,543
(15)
3,196
3,322
-
(3,890)
6,726
(69)
(2,208)
69
-
(518)
-
-
-
34,696
34,696
(43,351)
(8,655)
1,787
(6,868)
7,166
298
26,214
26,512
2,392
28,904
(24,527)
4,377
3. 45
-
-
-
-
-
5. 76
-
7. 13
3. 70
-
-
-
(3)
(3)
(3)
(3)
(3)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly
so with investment linked policies.
(2) No balance sheet amount applicable.
(3) No rate applicable.
Commonwealth Bank of Australia Annual Report 2006 209
Notes to the Financial Statements
Note 43 Market Risk (continued)
Interest Rate Risk Sensitivity
Balance
Sheet
Total
$M
0 to 1
month
$M
1 to 3
months
$M
3 to 6
months
$M
6 to 12
months
$M
1 to 5
years
$M
Over 5
years
$M
Not
Interest
Bearing
$M
Weighted
Average
Rate
%
Repricing Period at 30 June 2005
Overseas
Assets
Cash and liquid assets
Receivables from other financial
institutions
Trading securities
Life insurance investment assets
Investment securities
Loans, advances and other
receivables
Property, plant and equipment
Intangible assets
Other assets
Total Assets
Liabilities
Deposits and other public
borrowings
Payables due to other financial
institutions
Current tax liabilities
Other provisions
Insurance policy liabilities
Debt issues
Bills payable and other liabilities
Total Liabilities
Shareholders’ Equity
Share capital and other equity
Minority interests
Total Shareholders’ Equity
Off Balance Sheet Items
Swaps
FRAs
Futures
Net Mismatch
Cumulative Mismatch
1,251
1,094
82
2,559
3,605
4,713
5,701
36,875
154
407
1,872
57,137
1,017
291
1,005
500
11,633
-
-
-
15,540
1,143
2,335
64
3,406
3,633
-
-
-
10,663
-
351
152
9
573
3,027
-
-
-
4,112
1
-
97
25
151
6,449
-
-
-
6,723
-
-
492
433
713
12,158
-
-
-
13,796
26,915
16,866
4,995
3,220
1,102
542
3,538
-
-
3,378
-
23,782
-
-
-
670
-
-
-
4,059
-
9,724
-
-
-
870
-
-
-
9,389
-
13,479
-
-
-
237
-
-
-
387
-
1,726
-
-
-
-
-
-
-
1,122
-
1,664
-
-
-
3,942
(459)
-
9,056
463
1,167
(1,039)
(551)
(592)
(3,254)
547
(575)
(8,832)
-
-
5,315
85
41
4,058
18,381
774
55,569
5,425
519
5,944
(2)
(2)
(2)
(2)
(2)
-
233
831
357
98
-
-
-
1,519
186
-
-
-
-
46
-
232
-
-
-
87
-
-
-
74
2. 77
48
5
2,346
1
(123)
154
407
1,872
4,784
3. 60
5. 81
2. 32
4. 37
7. 49
-
-
-
6. 04
4
5. 44
-
85
41
4,058 (1)
-
774
4,962
5,425
519
5,944
39
-
-
4. 23
-
-
-
2. 28
-
3. 80
-
-
-
(3)
(3)
(3)
(3)
(3)
(4,759)
(4,759)
11,625
6,866
(11,549)
(4,683)
1,715
(2,968)
3,300
332
1,374
1,706
(6,083)
(4,377)
(1) Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly
so with investment linked policies.
(2) No balance sheet amount applicable.
(3) No rate applicable.
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. The Group has a
significant portfolio of loans with fixed interest rates maturing in
the one to five years repricing period.
Funding is principally raised from retail deposits with at call
variable interest rates. The interest rate risk exposure is
managed in accordance with the principles outlined above in
this note.
210 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 43 Market Risk (continued)
Within 6 months
Within 6 months – 1 year
Within 1 – 2 years
Within 2 – 5 years
After 5 years
Net deferred gain/(loss) (1)
Exchange Rate
Related Contracts
Interest Rate
Related Contracts
2006
$M
-
-
-
-
-
-
2005
$M
(8)
(7)
29
34
65
113
2006
$M
6
7
55
(10)
30
88
2005
$M
(51)
17
(20)
(208)
(87)
(349)
2006
$M
6
7
55
(10)
30
88
Total
2005
$M
(59)
10
9
(174)
(22)
(236)
(1) Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further
details refer to Note 11. The 2006 data reflects those hedge derivatives classified as Cash Flow hedges which have been deferred into the Cash Flow Hedge
Reserve.
Foreign exchange risk
Market Risk in Financial Markets Trading
Foreign exchange risk is the risk to earnings and value caused
by a change in foreign exchange rates. The Group principally
hedges balance sheet foreign exchange risks except for long
term investments in offshore subsidiaries.
The Group trades and distributes financial markets products and
provides risk management services to clients on a global basis.
The objectives of the Group’s financial markets activities are to:
• Provide
risk management products and services
to
Net deferred gains and losses (2005 only)
customers;
Net deferred unrealised gains and losses arising from derivative
hedging contracts entered into in order to manage risk arising
from assets,
future
transactions, together with the expected term of deferral are
shown above.
liabilities, commitments of anticipated
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 rate 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 VaR
measure outlined above.
Market Risk in Financial Services
in
life
the
insurance business arises
Market risk
from
mismatches between asset returns and guaranteed liability
returns on some policy changes (which may not be capable of
being hedged through matching assets), adverse movements in
market prices affecting fee income on investment-linked policies
and from returns obtained from investing the shareholders
capital held in each life company. As at 30 June 2005,
shareholders funds in the life insurance business are invested
75% in income assets (cash and fixed interest) and 25% in
growth assets (shares and property) with the asset mix varying
from company to company. Policyholder funds are invested to
meet policyholder reasonable expectations without putting the
shareholder at undue risk.
leases
The Group provides operating
to customers on
equipment such as motor vehicles, computers and industrial
equipment. Residual value risk is the risk that the amount
recouped by selling the equipment at lease expiry will be less
than the residual value of the lease. In managing this risk the
Group utilises policies, limits, controls and industry experts to
ensure that the residual value of equipment is prudently
estimated at the start of the lease and the Group realises the
maximum value of the equipment at lease expiry.
• Efficiently assist in managing the Group’s own market risks;
and
• Conduct profitable trading within a controlled framework,
leveraging off the Group’s market presence and expertise.
The Group 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.
In foreign exchange, the Group is a participant in all major
currencies and is a major participant in the Australian dollar
institutional,
market, providing services
corporate and retail customers. Positions are also taken in the
interest rate, debt, equity and commodity markets based on
views of future market movements.
for central banks,
Income is earned from spreads achieved through market making
and from taking market risk. All trading positions are valued at
fair value 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. Market liquidity risk is
controlled by concentrating trading activity in highly liquid
markets.
Assets at fair value through Income Statement - Trading are
further detailed in Note 10 to the financial statements. Note 2 to
the financial statements details Financial Markets Trading
Income contribution to the income of the Group. In addition, this
contribution provides important diversification benefits to the
Group.
AASB 7 Disclosure
The Trading book of the Banking business measures their
market value using a Value-at-Risk (VaR) model. Further
discussion around assumptions used in the quantitative analysis
is given in the Integrated Risk Management section.
Derivative Contracts (2005 only)
Under AIFRS the Group now discloses all Derivative Assets and
Liabilities at fair value on the balance sheet. As a result further
disclosure is outlined in Note 11.
Commonwealth Bank of Australia Annual Report 2006 211
Notes to the Financial Statements
Note 43 Market Risk (continued)
The following table details the Group’s outstanding derivative
contracts as at the end of the year. Each derivative type is split
between those held for ‘Trading’ purposes and those for
‘Hedging’ purposes. Derivatives classified as ‘Hedging’ are
transactions entered into in order to manage the risks arising
from non traded assets, liabilities and commitments in Australia
and offshore centres.
The ‘Face Value’ is the notional or contractual amount of the
derivatives. This amount is not necessarily exchanged and
predominantly acts as a reference value upon which interest
payments and net settlements can be calculated and on which
revaluation is based.
Derivatives
Exchange rate related contracts
Forwards
Trading
Fair value through Income Statement
Hedging (1)
Total Forwards
Swaps
Trading
Fair value through Income Statement
Hedging (1)
Total Swaps
Futures
Trading
Fair value through Income Statement
Hedging
Total Futures
Options purchased and sold
Trading
Fair value through Income Statement
Hedging
Total Options Purchased and Sold
Total Exchange Rate Related Contracts
(1) Derivative book restructured to meet AIFRS hedging guidelines.
The “Credit Equivalent” is calculated using a standard APRA
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 (ff).
Face Value
2005
$M
2006
$M
Group
Credit Equivalent
2006
$M
2005
$M
245,943
6,802
1,253
253,998
104,942
5,838
16,231
127,011
8,063
-
-
8,063
17,051
252
101
17,404
406,476
164,491
-
31,776
196,267
85,978
-
46,969
132,947
25
-
-
25
21,523
-
141
21,664
350,903
4,080
242
16
4,338
2,730
334
330
3,394
-
-
-
-
240
8
3
251
7,983
3,542
-
786
4,328
7,439
-
2,165
9,604
-
-
-
-
304
-
5
309
14,241
212 Commonwealth Bank of Australia Annual Report 2006
Note 43 Market Risk (continued)
Notes to the Financial Statements
Face Value
2005
$M
2006
$M
Group
Credit Equivalent
2006
$M
2005
$M
Interest rate related contracts
Forwards
Trading
Fair value through Income Statement
Hedging
Total Forwards
Swaps
Trading (1)
Fair value through Income Statement
Hedging
Total Swaps
Futures
Trading
Fair value through Income Statement
Hedging
Total Futures
Options purchased and sold
Trading
Fair value through Income Statement
Hedging
Total Options Purchased and Sold
Total Interest Rate Related Contracts
Credit risk related contracts
Swaps
Trading
Fair value through Income Statement
Hedging
Total Swaps
Total Credit Risk Related Contracts
Equity risk related contracts
Swaps
Hedging
Futures
Hedging
Options purchased and sold
Trading
Fair value through Income Statement
Hedging
Total Options Purchased and Sold
Total Equity Risk Related Contracts
Commodity contracts
Forwards
Trading
Fair value through Income Statement
Total Forwards
Swaps
Trading
Hedging
Total Swaps
Options purchased and sold
Trading
Total Options Purchased and Sold
Total Commodity Contracts
Total Derivative Exposures
64,865
7,691
-
72,556
404,493
8,069
95,321
507,883
83,075
1,916
1,500
86,491
34,899
627
-
35,526
702,456
3,073
275
-
3,348
3,348
159
-
-
171
-
171
330
1,919
5
1,924
2,944
47
2,991
25,312
-
120
25,432
273,456
-
146,799
420,255
44,362
-
14,558
58,920
26,659
-
4,098
30,757
535,364
3,002
-
3,972
6,974
6,974
276
115
395
-
29
424
815
-
-
-
-
-
-
19
2
-
21
4,031
67
283
4,381
-
-
-
-
238
2
-
240
4,642
263
-
-
263
263
3
-
-
19
-
19
22
234
1
235
563
1
564
6
-
2
8
3,185
-
2,843
6,028
-
-
249
249
185
-
43
228
6,513
250
-
290
540
540
44
115
27
-
3
30
189
-
-
-
-
-
-
1,522
1,522
6,437
1,119,047
-
-
-
894,056
152
152
951
13,861
-
-
-
21,483
(1) Derivative book restructured to meet AIFRS hedging guidelines.
The Group has also entered swaps to hedge property values and income related to investment property risk. In the prior year, these
had a face value of $252 million and a credit equivalent of $5 million.
Commonwealth Bank of Australia Annual Report 2006 213
Notes to the Financial Statements
Note 43 Market Risk (continued)
Following the adoption of AASB 132 and AASB 139 at 1 July
2005 all derivatives including hedging derivatives are now at fair
value on the balance sheet. For further details refer Note 11.
The comparatives for the fair or market value of trading
derivative contracts, disaggregated into gross unrealised gains
and gross unrealised losses, are shown below.
Exchange rate related contracts
Forwards contracts:
Gross unrealised gains
Gross unrealised losses
Total Forwards
Swaps:
Gross unrealised gains
Gross unrealised losses
Total Swaps
Futures:
Gross unrealised gains
Gross unrealised losses
Total Futures
Options purchased and sold:
Gross unrealised gains
Gross unrealised losses
Total Options Purchased and Sold
Net Unrealised Gains on Exchange Rate Related Contracts
Interest rate related contracts
Forward contracts:
Gross unrealised gains
Gross unrealised losses
Total Forwards
Swaps:
Gross unrealised gains
Gross unrealised losses
Total Swaps
Futures:
Gross unrealised gains
Gross unrealised losses
Total Futures
Options purchased and sold:
Gross unrealised gains
Gross unrealised losses
Total Options Purchased and Sold
Net Unrealised Gains/(Losses) on Interest Rate Related Contracts
Credit related trading derivative contracts
Swaps:
Gross unrealised gains
Gross unrealised losses
Net Unrealised Losses on Credit Related Contracts
Equity related contracts
Options purchased and sold:
Gross unrealised gains
Gross unrealised losses
Net Unrealised Gains on Equity Related Contracts
Net Unrealised Gains on Trading Derivative Contracts
losses were
These unrealised gains and
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, trading securities or
other financial instruments (refer to Note 2). In aggregate,
derivatives trading was profitable for the Group during the prior
year.
2006
$M
Fair Value
2005
$M
Group
Average Fair Value
2006
$M
2005
$M
1,532
(1,686)
(154)
6,603
(6,177)
426
1
-
1
146
(191)
(45)
228
2
(2)
-
3,727
(3,761)
(34)
10
(28)
(18)
108
(50)
58
6
4
(8)
(4)
13
(13)
-
230
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
2,147
(2,306)
(159)
6,409
(5,382)
1,027
1
(1)
-
262
(351)
(89)
779
6
(5)
1
3,538
(3,792)
(254)
14
(15)
(1)
74
(48)
26
(228)
7
(12)
(5)
13
(13)
-
546
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
n/a (1)
(1) Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further
details refer Note 11.
214 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 43 Market Risk (continued)
In accordance with the accounting policy set out in Note 1, the above trading derivative contract revaluations for 2005 have been
presented on a gross basis on the balance sheet.
Unrealised gains on trading derivatives (Note 22)
Unrealised losses on trading derivatives (Note 30)
Net unrealised gains on trading derivatives
Group
Fair Value
2005
$M
12,144
11,914
230
2006
$M
n/a (1)
(1) Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further
details refer Note 11.
Note 44 Retirement Benefit Obligations
Name of Plan
Officers’ Superannuation Fund
(“OSF”)
Commonwealth Bank of Australia
(UK) Staff Benefits Scheme
(“CBA(UK)SBS”)
Type
Defined Benefits (1) and
Accumulation
Defined Benefits (1) and
Accumulation
Form of Benefit
Indexed pension and
lump sum
Indexed pension and
lump sum
(1) The defined benefit formulae are generally comprised of final salary and service.
Date of Last Actuarial
Assessment of the Fund
30 June 2003
1 July 2005
An actuarial assessment of the CBA(UK)SBS at 1 July 2005
revealed a deficit of GBP32 million (AUD79 million at 30 June
2006 exchange rate). Following from this assessment, the Bank
agreed to contribute to the recommended contributions to
finance future accruals of defined benefits (dollar contributions
estimated at AUD6 million per annum at 30 June 2006
exchange rate) and to continue making additional contributions
of GBP3.24 million per annum (AUD8 million per annum at 30
June 2006 exchange rate) payable over 14 years to finance the
fund deficit.
Contributions
For the plans listed in the above table, entities of the Group
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 Bank ceased contributions to the OSF
from 8 July 1994. Further, the Bank ceased contributions to the
OSF relating to salary sacrifice benefits from 1 July 1997.
An actuarial assessment of the OSF, as at 30 June 2003 was
completed during the year ended 30 June 2004. In line with the
actuarial advice contained in the assessment, the Bank does
not intend to make contributions to the OSF until further
consideration of the next actuarial assessment of the OSF as at
30 June 2006. An actuarial assessment of the OSF at 30 June
2006 is currently in progress.
Funding Status of Defined Benefit Plans
Net Market Value of Assets (3)
Present Value of Accrued Benefits (4)
Difference between Net Market Value of Assets And Present Value of Accrued Benefits
Differences as a percentage of plan assets (%)
Value of Vested Benefits (4)
(1) The values for the OSF are the fund actuary’s estimates as at 31 March 2006.
(2) The values for the CBA(UK)SBS are the fund actuary’s estimates as at 31 March 2006.
(3) These values have been extracted from the latest available fund financial statements (which are unaudited).
(1)
OSF
$M
6,540
4,593
1,947
30
4,593
CBA (UK)
(2)
SBS
$M
380
427
(47)
(12)
422
Total
$M
6,920
5,020
1,900
28
5,015
(4) The Present Value of Accrued Benefits and Value of Vested Benefits for the OSF have been calculated in accordance with the Australian Accounting Standard
AAS25 – Financial Reporting by Superannuation Plans. For CBA(UK)SBS, the Present Value of Accrued Benefits and Value of Vested Benefits have been
calculated in accordance with relevant UK actuarial standards and practices.
Commonwealth Bank of Australia Annual Report 2006 215
Notes to the Financial Statements
Note 44 Retirement Benefit Obligations (continued)
Defined Benefit Superannuation Plans
The amounts reported in the balance sheet are reconciled as follows:
Present value of funded obligations
Fair value of plan assets
Total pension asset as at 30 June
Present value of unfunded obligations
Unrecognised prior service cost
Unrecognised actuarial gains/(losses)
Unrecognised past service cost
Asset/(liability) in balance sheet as at 30 June
Amounts in the balance sheet:
Liabilities (Note 30)
Assets (Note 22)
Net Asset
The amounts recognised in the Income Statement
are as follows:
Current service cost
Interest cost
Expected return on plan assets
Past service cost
Employer financed benefits within Accumulation
Division
Gains/(losses) on curtailment and settlements
Actuarial gains/(losses) recognised in Income
Statement
Total included in defined benefit superannuation
plan expense
Actual Return on Plan Assets
Changes in the present value of the defined benefit
obligation are as follows:
Opening defined benefit obligation
Service cost
Interest cost
Member contributions
Actuarial gains/(losses)
(Losses)/gains on curtailments
Liabilities extinguished on settlements
Liabilities assumed in a business combination
Benefits paid
Exchange differences on foreign plans
Closing Defined Benefit Obligation
Changes in the fair value of plan assets are as
follows:
Opening fair value of plan assets
Expected return
Experience gains/(losses)
Assets distributed on settlements
Total contributions
Assets acquired in a business combination
Exchange differences on foreign plans
Benefits and expenses paid
Employer financial benefits within Accumulation
Division
Closing Fair Value of Plan Assets
2006
$M
(3,388)
4,616
1,228
-
-
-
-
1,228
-
1,228
1,228
(39)
(173)
312
-
(129)
-
-
(29)
668
(3,593)
(36)
(173)
(14)
184
-
-
-
244
-
(3,388)
4,310
312
356
-
14
-
-
(247)
(129)
4,616
OSF
2005
$M
(3,593)
4,310
717
-
-
-
-
717
-
717
717
(48)
(197)
298
-
(121)
-
-
(68)
592
(3,504)
(45)
(197)
(14)
(142)
-
-
-
309
-
(3,593)
4,137
298
294
-
14
-
-
(312)
(121)
4,310
CBA(UK)SBS
2005
$M
(408)
329
(79)
-
-
-
-
(79)
(79)
-
(79)
(5)
(20)
18
-
-
-
-
(7)
46
(398)
(4)
(20)
-
(35)
-
-
-
12
37
(408)
321
18
28
-
4
-
(30)
(12)
-
329
2006
$M
(430)
365
(65)
-
-
-
-
(65)
(65)
-
(65)
(5)
(21)
20
-
-
-
-
(6)
22
(408)
(5)
(21)
-
12
-
-
-
12
(20)
(430)
329
20
2
-
11
-
15
(12)
-
365
2006
$M
(3,818)
4,981
1,163
-
-
-
-
1,163
(65)
1,228
1,163
(44)
(194)
332
-
(129)
-
-
(35)
690
(4,001)
(41)
(194)
(14)
196
-
-
-
256
(20)
(3,818)
4,639
332
358
-
25
-
15
(259)
(129)
4,981
Total
2005
$M
(4,001)
4,639
638
-
-
-
-
638
(79)
717
638
(53)
(217)
316
-
(121)
-
-
(75)
638
(3,902)
(49)
(217)
(14)
(177)
-
-
-
321
37
(4,001)
4,458
316
322
-
18
-
(30)
(324)
(121)
4,639
216 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 44 Retirement Benefit Obligations (continued)
Defined Benefit Superannuation Plans (continued)
Experience gains/(losses) on plan liabilities
Experience gains/(losses) on plan assets
Gains/(losses) from changes in actuarial
assumptions
Total net actuarial gains/(losses)
2006
$M
(55)
356
239
540
OSF
2005
$M
448
294
(590)
152
CBA(UK)SBS
2006
$M
15
2
(3)
14
2005
$M
6
28
(41)
(7)
2006
$M
(40)
358
236
554
Total
2005
$M
454
322
(631)
145
Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes
in actuarial assumptions. Total net actuarial gains recognised in equity from commencement of AIFRS to 30 June 2006 were $699
million.
Economic Assumptions
The above calculations were based on the economic assumptions set out below:
Discount rate at 30 June (gross of tax)
Expected return on plan assets at 30 June
Expected rate salary increases
2006
%
5. 80
8. 25
4. 75 (1)
OSF
2005
%
5. 10
7. 50
4. 25 (1)
CBA(UK)SBS
2005
%
5. 00
5. 75
3. 70
2006
%
5. 25
6. 00
4. 10
(1) For the OSF, additional age related allowances were made for the expected salary increases from future promotions. At 30 June 2006, these assumptions were
broadly between 1.6% and 2.6% per annum for full time employees and 1.0% per annum for part time employees (30 June 2005: 2.6% and 3.6% per annum for full
time employees and 1.0% per annum for part time employees).
The return on asset assumption for the OSF is determined as
the weighted average of the long term expected returns of each
asset class where the weighting is the benchmark asset
allocations of the assets backing the defined benefit risks. The
long term expected returns of each asset class are determined
following receipt of actuarial advice. The discount rate (gross of
tax) assumption for the OSF is based on the yield on 10 year
Expected Life Expectancies for Pensioners
Male pensioners currently aged 60
Male pensioners currently aged 65
Female pensioners currently aged 60
Female pensioners currently aged 65
Further, the proportion of the retiring members of the main OSF
defined benefit division electing to take pensions instead of lump
sums may materially impact the defined benefit obligations. 30%
of these retiring members were assumed to take pension
benefits, increasing to 50% in 2020.
Australian and UK legislation requires that superannuation
(pension) benefits be provided through trusts. These trusts
(including their investments) are managed by trustees who are
legally independent of the employer. The investment objective
of the OSF (the Bank’s major superannuation (pension) plan) is
“to maximise long term rate of return subject to net returns over
rolling five year periods exceeding the growth in Average
Asset Allocations
Australian Equities
Overseas Equities
Real Estate
Fixed Interest Securities
Cash
Other (1)
In addition
financial
Australian government securities.
assumptions, the mortality assumptions for pensioners can
materially
the defined benefit obligations. These
assumptions are age related and allowances are made for
future improvement in mortality. The expected life expectancies
for pensioners are:
impact
to
2006
30. 1
25. 3
33. 5
28. 4
OSF
2005
31. 2
26. 2
34. 6
29. 3
CBA(UK)SBS
2006
22. 9
18. 5
25. 9
21. 4
2005
22. 9
18. 5
25. 9
21. 4
Weekly Ordinary Time Earnings (AWOTE) 80% of the time”. To
meet this investment objective, the OSF Trustee invests a large
part of the OSF’s assets in growth assets, such as shares and
property. These assets have historically earned higher rates of
return than other assets, but they also carry higher risks,
especially in the short term. To manage these risks, the Trustee
has adopted a strategy of spreading the OSF’s investments
over a number of asset classes and investment managers.
As at 30 June 2006, the benchmark asset allocations and
actual asset allocations for the assets backing the defined
benefit portion of the OSF is as follows:
Benchmark Allocation
%
27. 5
21. 0
15. 0
25. 5
5. 0
6. 0
Actual Allocation
%
29. 2
20. 2
14. 3
26. 6
4. 4
5. 3
(1) These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure
investments as well as high yield and emerging market debt.
The value of the OSF’s equity holding in the Group as at 30 June 2006 was $95 million (2005: $91 million). Amounts on deposit with
the Bank at 30 June 2006 totalled $7 million (2005: $13 million). Other financial instruments with the Group at 30 June 2006 totalled
$90 million (2005: $108 million).
Commonwealth Bank of Australia Annual Report 2006 217
Notes to the Financial Statements
Note 45 Controlled Entities
Entity Name
Australia
(a) Banking
Commonwealth Bank of Australia
Controlled Entities:
CBA Investments Limited
Industrie Limited Partnership
Luca Limited Partnership
CBA Investments (No. 2) Pty Limited
CBA International Finance Pty Limited
CBCL Australia Limited
CBFC Limited
Collateral Leasing Pty Limited
Commonwealth Securities Limited
Homepath Pty Limited
Commonwealth Investments Pty Limited
Sparad (No. 24) Pty Limited Australia
Colonial Finance Limited
PERLS III Trust (formally Preferred Capital Limited)
PERLS II Trust
GT Funding No.1 Pty Ltd
GT Operating No.1 Pty Ltd
Loft No.1 Pty Ltd
Loft No.2 Pty Ltd
Fringe Pty Ltd
Lily Pty Ltd
Medallion 2003-2G
Broadcasting Infrastructure Asset Partnership
Greenwood Lending Pty Ltd
Series 2000-IG Medallion Trust
Series 2000-2G Medallion Trust
Series 2001-IG Medallion Trust
Series 2002-IG Medallion Trust
Series 2003-IG Medallion Trust
Series 2004-IG Medallion Trust
Series 2005-IG Medallion Trust
Series 2005-2G Medallion Trust
Hemisphere Lane Pty Ltd
Medallion Series Trust 2006 1G
Medallion Trust Series 2005 4P
GT Operating No. 3 Pty Limited
(b) Insurance and Funds Management
Commonwealth Insurance Limited
Colonial Holding Company Limited
Colonial Holding Company (No. 2) Pty Limited
Commonwealth Insurance Holdings Limited
Commonwealth Managed Investments Limited
Colonial AFS Services Pty Limited
Colonial First State Group Limited
Colonial First State Investments Limited
Avanteos Pty Limited
Colonial First State Property Limited
Colonial First State Property Retail Pty Limited
Colonial First State Property Retail Trust
Colonial International Holdings Pty Limited
The Colonial Mutual Life Assurance Society Limited
Jacques Martin Pty Limited
Gandel Retail Management Trust
Commonwealth Financial Planning Limited
218 Commonwealth Bank of Australia Annual Report 2006
Extent of Beneficial
Interest if not 100%
Incorporated in
99.84
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
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Note 45 Controlled Entities (continued)
Entity Name
New Zealand
(a) Banking
ASB Holdings Limited
ASB Bank Limited
CBA Funding (NZ) Limited
ASB Capital No. 2 Limited
CBA USD Funding Limited
(b) Insurance and Funds Management
ASB Group (Life) Limited
Sovereign Group Limited
Sovereign Limited
Colonial First State Investments (NZ) Limited
Kiwi Income Properties Limited
Kiwi Property Management Limited
Other Overseas
(a) Banking
CBA Asia Limited
CTB Australia Limited
PT Bank Commonwealth
National Bank of Fiji Limited
CBA (Delaware) Finance Incorporated
CBA Capital Trust 1
CBA Funding Trust 1
Capital Trust II
CBA (Europe) Finance Limited
Pontoon PLC
Quay (Funding) PLC
Burdekin Investments
Pavillion Limited
Newport Limited
CommInternational Limited
CommCapital S.a.r.l
CommBank Europe Limited
(b) Insurance and Funds Management
CMG Asia Life Holdings Limited
Colonial Fiji Life Limited
Colonial First State (UK) Holdings Limited
First State (HK) LLC
First State Investment Holdings (Singapore) Ltd
Notes to the Financial Statements
Extent of Beneficial
Interest if not 100%
Incorporated in
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
Singapore
Hong Kong
Indonesia
Fiji
Delaware USA
Delaware USA
Delaware USA
Delaware USA
United Kingdom
United Kingdom
United Kingdom
Cayman Islands
UK
Malta
Malta
Luxembourg
Malta
Bermuda
Fiji
United Kingdom
United States
Singapore
Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above
list.
Commonwealth Bank of Australia Annual Report 2006 219
Notes to the Financial Statements
Note 46 Investments in Associated Entities and Joint Ventures
Extent of
Ownership
Interest % Principal Activities
Country of
Incorporation
Indonesia
50
30
49
50
Life Insurance
Financial Services Virgin Islands
Life Insurance
Life Insurance
Investment
Management
China
Vietnam
50
33. 3 Airport Services
Australia
Australia
Investment
Management
30
19. 9 Commercial Banking China
25
Leasing
Australia
Delaware
46
Funds Management China
2006
$M
8
(1)
7
190
2006
$M
9,569
9,098
220
89
2006
$M
122
81
65
69
Group
Balance
Date
31 Dec
31 Dec
31 Dec
31 Dec
31 Mar
30 Jun
30 Jun
31 Dec
31 Dec
31 Dec
Group
2005
$M
7
(2)
5
52
Group
2005
$M
204
167
18
22
Group
2005
$M
58
32
26
30
PT Astra CMG Life
AMTD Group Limited (1)
China Life CMG Life Assurance Company Limited
Bao Minh CMG Life Insurance Company
CMG CH China Funds Management Limited
BAC Airports Pty Ltd (2)
452 Capital Pty Limited
Hangzhou City Commercial Bank Limited
Alster & Thames Partnership
First State Cinda Fund Management Company
Limited
Total
(1) Formally Allday Enterprises Ltd.
(2) Investment sold 2 May 2005.
2006
$M
12
1
11
9
1
-
43
102
3
8
190
2005
$M
10
1
10
12
1
18
-
-
-
-
52
Share of associates’ profits/(losses)
Operating profits/(losses) before income tax
Income tax expense
Operating profits/(losses) after income tax
Carrying amount of investments in associated entities
Financial Information of Associates
Assets
Liabilities
Revenues
Expenses
Financial Information of Joint Ventures
Assets
Liabilities
Revenues
Expenses
220 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 47 Director and Executive Disclosures
Details of the Directors’ and Specified Executives’ remuneration,
interests in long-term incentive plans, shares, options and loans
are included in the Remuneration Report of the Directors’
Report. The company has applied the exemption under
Corporations Amendment Regulation 2006 which exempts
listed companies from providing remuneration disclosures in
relation to their key management personnel in their annual
financial reports by AASB 124 Related Party Disclosures.
These
the
remuneration disclosures are provided
Remuneration Report of the Directors’ Report on pages 51 to
68 and are designated as audited.
in
Note 48 Related Party Disclosures
Ultimate Parent
Commonwealth Bank of Australia is the ultimate Australian
parent company in the Group.
Controlled Entities
Transactions with related parties in the Group 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.
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.
Group
Interest and dividend income
Interest expense
Fees and commissions for services rendered
Fees and commissions for services provided
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Other liabilities
Bank
Interest and dividend income
Interest expense
Fees and commissions for services rendered
Fees and commissions for services provided
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Other liabilities
For the year ended and as at 30 June 2006
Associates
$M
-
-
1
(8)
Joint
Ventures
$M
-
-
11
11
200
-
-
-
-
1
30
-
4
-
-
6
Total
$M
-
-
12
3
230
-
4
-
-
7
For the year ended and as at 30 June 2006
Subsidiaries
$M
2,739
854
55
124
Associates
$M
-
-
-
-
Joint
Ventures
$M
-
-
-
1
36,150
680
2,078
38,652
487
1,069
102
-
-
-
-
-
-
-
2
-
-
-
Total
$M
2,739
854
55
125
36,252
680
2,080
38,652
487
1,069
Commonwealth Bank of Australia Annual Report 2006 221
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Group
Interest and dividend income
Interest expense
Fees and commissions for services rendered
Fees and commissions for services provided
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Other liabilities
Bank
Interest and dividend income
Interest expense
Fees and commissions for services rendered
Fees and commissions for services provided
Loans, advances and equity contributions
Derivative assets
Other assets
Deposits
Derivative liabilities
Other liabilities
For the year ended and as at 30 June 2005
Associates
$M
-
-
-
-
Joint
Ventures
$M
-
-
4
6
30
-
-
-
-
-
22
-
1
-
-
1
Total
$M
-
-
4
6
52
-
1
-
-
1
For the year ended and as at 30 June 2005
Subsidiaries
$M
1,715
496
48
126
Associates
$M
-
-
-
-
Joint
Ventures
$M
-
-
4
5
29,161
-
1,897
26,428
-
918
-
-
-
-
-
-
-
-
1
-
-
1
Total
$M
1,715
496
52
131
29,161
-
1,898
26,428
-
919
Refer to Note 45 for details of controlled entities.
The Bank’s aggregate investment in and loans to controlled
entities are disclosed in Note 18.
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.
222 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Equity Holdings of Key Management Personnel
Shareholdings
All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan.
Shares awarded under the Equity Reward Plan and the mandatory component of the Equity Participation Plan are registered in the
name of the Trustee. For further details of the Non-Executive Directors’ Share Plan, Equity Reward Plan, previous Executive Option
Plan and Equity Participation Plan refer to Note 33.
Details of shareholdings of Key Management Personnel (or close family or entities controlled, jointly controlled, or significantly
influenced by them, or any entity over which any of the aforementioned hold significant voting power) are as follows:
Shares held by Directors
Name
Directors
R J Clairs
A B Daniels (3)
C R Galbraith
S C H Kay
W G Kent
D V Murray (4)
R J Norris (5)
F D Ryan
J M Schubert
F J Swan
B K Ward (6)
Total For Directors
Class
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Deferred STI
Reward Shares
Ordinary
Reward Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Deferred STI
Reward Shares
Balance
1 July 2005
13,357
17,669
8,824
3,669
15,286
323,638
21,866
325,000
10,000
-
7,430
18,508
5,954
5,766
430,101
21,866
325,000
Acquired/Granted
as
Compensation
(1)
776
721
740
721
740
-
-
-
-
100,328
812
2,165
704
739
8,118
-
100,328
On Exercise of
Options
-
-
-
-
-
250,000
-
-
-
-
-
-
-
-
250,000
-
-
Net Change
(2)
Other
-
301
466
-
87
(78,093)
(21,866)
(325,000)
-
-
-
515
316
124
(76,284)
(21,866)
(325,000)
Balance
30 June 2006
14,133
18,691
10,030
4,390
16,113
495,545
-
-
10,000
100,328
8,242
21,188
6,974
6,629
611,935
-
100,328
(1) For Non-Executive Directors, this represents shares acquired under NEDSP on 2 September 2005 and 15 March 2006 by mandatory sacrifice of fees. All shares
acquired through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 33 Share Capital to
the Financial Statements for further details on the NEDSP. For Mr Norris, this represents Reward Shares granted under the Equity Reward Plan (ERP) and subject
to a performance hurdle. The first possible date for meeting the performance hurdle is 15 July 2008 with the last possible date for vesting being 15 July 2010. See
Note 33 Share Capital to the Financial Statements for further details on the ERP.
(2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of deferred STI shares on
retirement (which became Ordinary shares).
(3) A related party of Mr Daniels beneficially holds an investment of $62,838 in Colonial First State Global Health and Biotech Fund, $403,860 in Colonial First State
Future Leaders Fund and $361,464 in Colonial First State Imputation Fund.
(4) Mr Murray retired on 22 September 2005. Mr Murray acquired 10,000 PERLS III securities during the year and continued to hold them at 30 June 2006.
(5) Mr Norris commenced on 22 September 2005.
(6) Ms Ward continued to hold 250 PERLS II securities at 30 June 2006.
Commonwealth Bank of Australia Annual Report 2006 223
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Shares held by Key Management Personnel
Name
Executives
M A Cameron
L G Cupper (3)
S I Grimshaw
H D Harley
M R Harte (4)
M A Katz (5)
Class
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
R V McKinnon (6) Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
Ordinary
Deferred STI
Reward Shares
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key
Management
Personnel
(1) Represents:
Balance
30 June 2005
-
8,094
60,430
44,540
9,385
84,000
16,365
14,133
113,800
25,852
10,241
85,700
-
-
-
303,748
14,061
139,130
43,991
7,083
58,750
27,319
10,134
83,230
5,565
6,702
59,440
8,572
5,177
35,500
475,952
85,010
719,980
Acquired/Granted
as
Compensation
(1)
-
-
29,190
-
-
22,440
-
-
35,140
-
-
32,440
-
-
-
-
-
38,380
-
-
17,030
-
-
27,570
-
-
23,250
-
-
20,280
-
-
245,720
On Exercise of
Options
-
-
-
-
-
-
100,000
-
-
87,500
-
-
-
-
-
250,000
-
-
37,500
-
-
-
-
-
-
-
-
-
-
-
475,000
-
-
Net Change
(2)
Other
-
(5,246)
-
6,815
(6,118)
-
(91,057)
(9,442)
-
(87,071)
(6,388)
-
-
-
-
(378,748)
(14,061)
(177,510)
(81,491)
(7,083)
(75,780)
7,611
(6,742)
-
3,351
(3,351)
-
1,335
(3,327)
-
(619,255)
(61,758)
(253,290)
Balance
30 June 2006
-
2,848
89,620
51,355
3,267
106,440
25,308
4,691
148,940
26,281
3,853
118,140
-
-
-
175,000
-
-
-
-
-
34,930
3,392
110,800
8,916
3,351
82,690
9,907
1,850
55,780
331,697
23,252
712,410
• Deferred STI - acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal
tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 33 for further details on the EPP.
• Reward Shares - granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The first possible date for meeting the performance hurdle
is 16 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 for further details on the ERP.
(2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which
became Ordinary shares).
(3) Mr Cupper acquired 6,000 PERLS III securities during the year, and continued to hold them at 30 June 2006.
(4) Mr Harte commenced on 10 April 2006.
(5) Mr Katz ceased employment on 24 March 2006. Mr Katz acquired 2,250 PERLS III securities during the year, and continued to hold these and 250 PERLS II
securities as at 30 June 2006.
(6) Mr McKinnon ceased employment on 31 December 2005.
224 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Option Holdings
Name
Directors
D V Murray
(retired on 22 September 2005)
R J Norris
(commenced on 22 September 2005)
Executives
M A Cameron
L G Cupper
S I Grimshaw
H D Harley
M R Harte
M A Katz
(ceased employment on 24 March 2006)
R V McKinnon
(ceased employment on 31 December 2005)
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key Management Personnel
Vested and Exercisable at
30 June 2006
(1)
Balance
1 July 2005
Options
Exercised
Balance
30 June 2006
Number
Exercise Price
$
250,000
(250,000)
-
-
-
75,000
100,000
87,500
-
-
-
(100,000)
(87,500)
-
-
-
-
75,000
-
-
-
-
-
-
75,000
-
-
-
250,000
(250,000)
-
-
37,500
-
-
-
800,000
(37,500)
-
-
-
(725,000)
-
-
-
-
75,000
-
-
-
-
75,000
-
-
-
30. 12
-
-
-
-
-
-
-
-
n/a
(1) ‘Vested and Exercisable’ options represents those granted on 3 September 2001 with an exercise price of $30.12.
Commonwealth Bank of Australia Annual Report 2006 225
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Shares Vested and Options Exercised During the Year
Name
Directors
D V Murray (3)
R J Norris (4)
Executives
M A Cameron
L G Cupper
S I Grimshaw
H D Harley
M R Harte (5)
M A Katz (6)
R V McKinnon (7)
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key
Management
Personnel
Deferred STI
Vested
Reward Shares
Vested
21,866
-
5,246
6,118
9,442
6,388
-
14,061
4,696
6,742
3,351
3,327
81,237
-
-
-
-
-
-
-
-
-
-
-
-
-
Shares Granted on Exercise of Options
Exercise Price
$
Value in Excess
of Exercise
(1)
Price
$
Total Value
of Options
(2)
Exercised
$
30. 12
-
-
-
30. 12
26. 97
30. 12
-
26. 97
30. 12
30. 12
-
-
-
n/a
10. 88
2,720,000
-
-
7. 15
16. 85
13. 70
-
18. 48
15. 33
13. 53
-
-
-
-
-
715,000
631,875
685,000
-
2,310,000
1,916,250
507,375
-
-
-
n/a
9,485,500
Number
250,000
-
-
100,000
37,500
50,000
-
125,000
125,000
37,500
-
-
-
725,000
(1) “Value in Excess of Exercise Price” represents the difference between the exercise price and closing market value of CBA shares on date of exercise.
(2) “Total Value of Options Exercised” represents the number of options exercised multiplied by the “Value in Excess of Exercise Price”. No options were granted or
lapsed during the year. Accordingly, this value represents the total value of options that were granted, lapsed and exercised during the year.
(3) Mr Murray retired on 22 September 2005 and deferred STI vested at this time.
(4) Mr Norris commenced on 22 September 2005.
(5) Mr Harte commenced in the role on 10 April 2006.
(6) Mr Katz ceased employment on 24 March 2006.
(7) Mr McKinnon ceased employment on 31 December 2005.
226 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 48 Related Party Disclosures (continued)
Loans to Key Management Personnel
All loans to Key Management Personnel (or related entities controlled or significantly influenced by them) have been provided on an
arms-length commercial basis including the term of the loan, security required and the interest rate (which may be fixed or variable).
Total Loans to Key Management Personnel
Year Ended
30 June
Balance
1 July
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June
$000s
Number in
Group at
30 June
Directors
Executives
Total for Key
Management
Personnel
2006
2005
2006
2005
2006
2005
-
2
9,894
8,706
9,894
8,708
379
-
550
523
929
523
-
-
-
-
-
-
-
-
-
-
-
-
5,729
3
9,284
8,803
15,013
8,806
1
1
7
6
8
7
Individual Loans above $100,000 to Key Management Personnel
Balance
1 July 2005
$000s
Interest
Charged
$000s
Interest Not
Charged
$000s
Write-off
$000s
Balance
30 June 2006
$000s
Highest
Balance
in Period
$000s
Directors
D V Murray
Executives
M A Cameron
S I Grimshaw
H D Harley
M A Katz
G L Mackrell
J K O’Sullivan
G A Petersen
Total for Key
Management
Personnel
-
379
-
-
1,485
-
332
243
347
175
175
500
100
1,080
1,500
392
696
258
647
200
201
400
800
9,531
5
3
73
16
19
11
7
11
11
31
-
43
97
26
42
17
42
12
7
11
52
915
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,729
5,729
358
300
857
391
304
-
-
175
175
500
100
1,017
1,500
582
614
274
647
200
-
155
800
546
302
1,485
394
334
243
427
175
175
500
100
1,080
1,500
587
696
277
647
200
203
400
800
14,678
16,800
Commonwealth Bank of Australia Annual Report 2006 227
Notes to the Financial Statements
Note 49 Notes to the Statements of Cash Flows
Note 49(a) Reconciliation of Operating Profit after Income Tax to Net Cash Provided by Operating Activities
Net profit after income tax
Net (Increase)/decrease in interest receivable
Increase in interest payable
Net decrease in trading securities
Net (increase) in assets at fair value through Income Statement
(excluding life insurance)
Net (gain) on sale of investments
Net (gain)/loss on sale of controlled entities and associates
Decrease/(increase) in derivative assets
(Gain)/loss on sale property plant and equipment
Charge for bad debts
Depreciation and amortisation
Increase in liabilities at fair value through Income Statement
(excluding life insurance)
(Decrease)/increase in derivative liabilities
(Decrease) in other provisions
(Decrease)/increase in income taxes payable
Increase/(decrease) in deferred income taxes payable
Decrease/(increase) in deferred tax assets
(Increase)/decrease in accrued fees/reimbursements receivable
Increase in accrued fees and other items payable
Amortisation of premium on investment securities
Unrealised loss on revaluation of trading securities
Unrealised (gain) on revaluation of assets at fair value through Income Statement
(excluding life insurance)
Change in life insurance contract policy liabilities
Decrease in managed fund units on sale
Increase in cash flow hedge reserve
Dividend received from controlled entities
Changes in operating assets and liabilities arising from cash flow movements
Other
Net Cash (used in) Operating Activities
Group
2005
$M
3,410
(17)
64
318
-
(8)
13
-
(4)
322
176
-
-
(86)
406
332
(86)
(41)
106
(4)
408
-
56
-
-
-
(5,921)
220
(336)
Year Ended 30 June
Bank
2006
$M
4,267
219
24
-
(2,620)
-
-
(381)
2
380
155
504
78
(50)
(430)
(434)
727
71
217
-
-
(22)
-
-
7
(2,080)
(2,405)
144
(1,627)
2005
$M
3,012
(667)
531
505
-
(4)
35
-
(4)
292
95
-
(79)
406
209
(337)
94
9
(4)
454
-
-
-
(988)
(1,420)
100
2,239
2006
$M
3,959
(99)
784
-
(53)
-
(163)
128
(4)
398
209
1,374
(445)
(92)
(455)
182
184
(88)
133
-
-
(112)
(814)
(46)
31
-
(3,458)
(387)
(1,166)
Note 49(b) Reconciliation of Cash
For the purposes of the statement of cash flows, cash includes cash, money at short call, at call deposits with other financial institutions and
settlement account balances with other banks.
Notes, coins and cash
Other short term liquid assets
Receivables due from other financial institutions – at call (1)
Payables due to other financial institutions – at call (1)
Cash and cash equivalents at end of year
2006
$M
1,703
491
4,657
(4,813)
2,038
Group
2005
$M
1,723
859
2,893
(4,199)
1,276
Year Ended 30 June
2006
$M
1,213
342
3,437
(4,751)
241
Bank
2005
$M
1,318
415
2,737
(4,156)
314
(1) At call includes certain receivables and payables due from and to financial institutions within three months.
228 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 49 Notes to the Statements of Cash Flows (continued)
Note 49(c) Disposal of Controlled Entities
Disposal Proceeds
Cash received on disposals
Fair value of net tangible assets disposed
Cash and liquid assets
Assets at fair value through Income Statement
Trading
Insurance
Other
Other assets
Life Insurance policy liabilities
Bills payable and other liabilities
Profit on sale
Cash consideration received
Inflows of cash on disposals
Cash payments
Less cash and cash equivalents disposed
Net cash inflow on disposal
Note 49(d) Non Cash Financing and Investing Activities
Shares issued under the Dividend Reinvestment Plan for 2006 were $481 million.
Note 49(e) Acquisition of Controlled Entities
Consideration
Cash paid on acquisitions
Fair value of net tangible assets acquired
Cash and liquid assets
Other intangibles
Other assets
Bills payable and other liabilities
Minority interests
Goodwill
Cash consideration paid
Outflow/(inflows) of cash on acquisitions
Cash payments
Less cash and cash equivalents acquired
Net cash outflow on acquisition
Note 49(f) Financing Facilities
Standby funding lines are immaterial.
2006
$M
608
608
55
-
2,297
-
148
(1,996)
(41)
145
608
608
(55)
553
2005
$M
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2006
$M
2005
$M
414
414
-
122
167
(8)
126
7
414
414
-
414
44
44
4
-
4
(8)
-
44
44
44
(4)
40
Commonwealth Bank of Australia Annual Report 2006 229
Notes to the Financial Statements
Note 50 Disclosures about Fair Value of Financial Instruments
50(a) Fair Value of Financial Assets and Financial
Liabilities
These amounts represent estimates of the fair values of the
Group’s financial assets and financial liabilities at balance sheet
date based on the following valuation methods and assumptions.
Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in an
arm’s length transaction. Quoted market prices are used to
determine fair value where an active market (such as a
recognised stock exchange) exists, as it is the best evidence of
the fair value of a financial instrument. Quoted market prices are
not, however, available for a significant number of the financial
assets and liabilities held and issued by the Group. Therefore, for
financial instruments where no quoted market price is available,
the fair values presented in the following table have been
estimated using present value or other valuation techniques
based on market conditions existing at balance sheet dates.
These valuation techniques rely on market observable inputs
wherever possible, or in a limited number of instances, rely on
inputs which are reasonable assumptions based on market
conditions at balance date.
While the 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 Group’s financial
instruments lack an available trading market as characterised by
willing parties engaging in an exchange transaction.
Assets
Cash and liquid assets
Receivables from other financial institutions
Assets at Fair Value through Income Statement:
Trading
Insurance
Other
Derivative assets (1)
Available-for-sale investments
Investment securities
Loans, advances and other receivables
Bank acceptances of customers
Other assets
Liabilities
Deposits and other public borrowings
Payables due to other financial institutions
Liabilities at Fair Value through Income Statement
Derivative liabilities (1)
Bank acceptances
Insurance policy liabilities
Debt issues
Managed fund units on issue
Bills payable and other liabilities
Loan capital
Asset and liability hedges – unrealised gains/(losses) (1)
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
fair values shown would be realised in a current transaction.
liabilities
that are not considered
The estimated fair values disclosed do not reflect the value of
assets and
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 considered significant.
Because of the wide range of valuation techniques and the
numerous estimates that must be made, it may be difficult to
make reasonable comparisons of the Bank’s fair value
information with that of other financial institutions. It is
important that the many uncertainties discussed above be
considered when using the estimated fair value disclosures
and to realise that because of these uncertainties, the
aggregate fair value amount should in no way be construed as
representative of the underlying value of the Commonwealth
Bank of Australia.
Group 2006
Group 2005
Carrying
Value
$M
5,131
7,107
15,758
24,437
2,944
9,675
11,203
-
259,176
18,310
5,190
173,227
11,184
13,811
10,820
18,310
22,225
78,591
1,109
6,053
9,895
-
Fair
Value
$M
5,131
7,107
15,758
24,437
2,944
9,675
11,203
-
258,547
18,310
5,190
173,108
11,184
13,811
10,820
18,310
22,225
76,645
1,109
6,056
9,913
-
Carrying
Value
$M
6,055
6,087
14,631
27,484
-
-
-
10,838
228,346
16,786
17,056
168,026
8,023
-
-
16,786
24,694
70,765
-
17,551
6,291
-
Fair
Value
$M
6,055
6,087
14,631
27,484
-
-
-
10,999
228,867
16,786
17,074
168,562
8,023
-
-
16,786
24,694
69,799
-
17,548
6,113
(277)
(1) Following the adoption of AASB 132 and 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further
details refer Note 11.
230 Commonwealth Bank of Australia Annual Report 2006
Notes to the Financial Statements
Note 50 Disclosures about Fair Value of Financial Instruments (continued)
50(a) Fair Value of Financial Assets and Financial
Liabilities (continued)
The 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 from
other financial institutions and bank acceptances of customers
approximate their fair value as they are short term in nature or
are receivable on demand.
Receivables from other financial institutions also includes
statutory deposits with central banks. The fair value is assumed
to be equal to the carrying value as the Group is only able to
continue as a going concern with the maintenance of these
deposits.
Assets at Fair Value through Income Statement
Assets at fair value through Income Statement are carried at fair
value determined using quoted market prices or valuation
techniques including discounted cash flow models using market
observable and non market observable inputs.
Available-for-sale investments
Assets available-for-sale are measured at fair value determined
using quoted market prices. For shares in companies, the
estimated fair values are estimated based on market price
inputs.
Loans, advances and other receivables
The carrying value of loans, advances and other receivables is
individually assessed
net of accumulated collective and
provisions for impairment.
For variable rate loans, excluding impaired loans, the carrying
amount is a reasonable estimate of fair value. The fair value for
fixed rate loans was calculated by utilising discounted cash flow
models (i.e. 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 fair value of impaired loans was calculated by discounting
estimated future cash flows using the loan’s original effective
interest rate.
Retirement benefit surplus / (liability)
The fair value of the retirement benefit surplus liability is the
carrying value at balance sheet date determined using a present
value calculation based on assumptions that are outlined in
Note 44.
All other financial assets
Included in this category are interest and fees receivable,
unrealised income, and investments in associates of $190
million (2005: $52 million), where the carrying amount is
considered to be a reasonable estimate of fair value. Other
financial assets are net of goodwill and other intangibles, future
income tax benefits and prepayments/unamortised payments,
as these do not constitute financial instruments.
Deposits and other public borrowings
The carrying value of non interest bearing, call and variable rate
deposits, and fixed rate deposits repricing within six months,
approximate their value as they are short term in nature or are
payable on demand. Discounted cash flow models based upon
deposit type and its related maturity, were used to calculate the
fair value of other term deposits.
Short term liabilities
The carrying value of payables to other financial institutions and
bank acceptances approximate their fair value as they are short
term in nature and reprice frequently.
Debt issues and loan capital
The fair values of debt issues and loan capital were calculated
using quoted market price at balance sheet date. For those
debt issues where quoted market prices were not available,
discounted cash flow and option pricing models were used,
utilising a yield curve appropriate to the expected remaining
maturity of the instrument.
Liabilities at Fair Value through Income Statement
Liabilities at Fair Value through Income Statement are carried at
fair value determined using quoted market prices, or valuation
techniques including discounted cash flow models using market
observable inputs.
Derivative Assets and Liabilities
The fair value of trading and hedging derivative contracts, were
obtained from quoted market prices, discounted cash flow
models or option pricing models that used market based and
non market based inputs.
The fair value of these instruments is disclosed in Note 11.
Life Insurance Policy Holder Liabilities
Life insurance policyholder liabilities are measured on a net
present value basis using assumptions outlined in Note 38. This
treatment is in accordance with accounting standard AASB
1038: Life Insurance Business.
All other financial liabilities
includes
This category
interest payable and unrealised
expenses payable for which the carrying amount is considered
to be a reasonable estimate of net fair value. For liabilities that
are long term, 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.
Other off-balance sheet financial instruments (2005 only)
The fair value of trading and hedging derivative contracts, were
obtained from quoted market prices, discounted cash flow
models or option pricing models as appropriate. The fair value
of these instruments is disclosed in Note 43.
Commonwealth Bank of Australia Annual Report 2006 231
Notes to the Financial Statements
Note 50 Disclosures about Fair Value of Financial Instruments (continued)
50(c) The Impact of Profit of the Change in Fair Values
of Financial instruments Estimated using a Valuation
Technique
The Group holds a large portfolio of trading securities and
derivatives that are measured at fair value using quoted market
prices and valuation techniques based on market observable
assumptions. In addition, the Group holds a smaller portfolio of
short term commercial loans and debt issues that have been
designated at Fair Value through income Statement using
valuation techniques based on market observable assumptions.
The total amount of change in fair value recognised in profit for
the period which was determined using valuation techniques
was $1,067 million net loss. This comprised an $82 million gain
in trading income and a $1,149 million loss in other operating
income.
50(a) Fair Value of Financial Assets and Financial
Liabilities (continued)
Commitments to extend credit, letters of credit, guarantees,
warranties and indemnities issued
The 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 fair value may be represented by
the present value of fees expected to be received, less
associated costs, however the overall level of fees involved is
not material.
50(b) The Impact of Fair Values Calculated Using Non-
market Observable Assumptions
The Group’s exposure to financial instruments measured at fair
value based in full or in part on non-market observable
assumptions is restricted to short term loans and margins on
trading securities where pricing is counterparty specific.
These financial instruments comprise a small component of the
portfolios they are part of and have short tenor, such that any
change in the assumptions used to value the instruments to a
reasonably possible alternative do not have a material effect on
the portfolio balance or the Group’s result.
232 Commonwealth Bank of Australia Annual Report 2006
Directors’ Declaration
In accordance with a resolution of the Directors of the Commonwealth Bank of Australia the Directors declare that :
(a) the financial statements and notes thereto of the Bank and the Group, and the additional disclosures included in the Directors’
Report designated as audited, comply with Accounting Standards and in their opinion are in accordance with the Corporations Act
2001;
(b) the financial statements and notes thereto give a true and fair view of the Bank’s and the Group’s financial position as at 30 June
2006 and of their performance for the year ended on that date;
(c) in the opinion of the Directors, there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they
become due and payable; and
(d) the directors have been given the declarations required under Section 295A of the Corporations Act 2001 for the financial year
ended 30 June 2006
Signed in accordance with a resolution of the Directors.
J M Schubert
Chairman
23 August 2006
R J Norris
Managing Director and Chief Executive Officer
Commonwealth Bank of Australia Annual Report 2006 233
Independent audit report to the members of Commonwealth Bank
of Australia
Scope
The financial report, remuneration disclosures and directors’ responsibility
The financial report comprises the balance sheet, income statement, statement of recognised income and
expense, statement of cash flows, accompanying notes to the financial statements, and the directors’
declaration for Commonwealth Bank of Australia (“the Bank”) and the consolidated Group, for the year
ended 30 June 2006. The consolidated Group comprises both the Bank and the entities it controlled during
that year.
The Bank has disclosed information as required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting
Standard 124 Related Party Disclosures (“remuneration disclosures”), under the heading “Remuneration
Report” on pages 51 to 68 of the directors’ report, as permitted by Corporations Regulation 2M.6.04.
The directors of the Bank are responsible for preparing a financial report that gives a true and fair view of
the financial position and performance of the Bank and the consolidated entity, and that complies with
Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes
responsibility for the maintenance of adequate accounting records and internal controls that are designed
to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in
the financial report. The directors are also responsible for the remuneration disclosures contained in the
directors’ report.
Audit approach
We conducted an independent audit of the financial report in order to express an opinion to the members of
the Bank. Our audit was conducted in accordance with Australian Auditing Standards in order to provide
reasonable assurance as to whether the financial report is free of material misstatement and the
remuneration disclosures comply with Accounting Standard AASB 124 Related Party Disclosures. The
nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the
inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence.
Therefore, an audit cannot guarantee that all material misstatements have been detected.
We performed procedures to assess whether in all material respects the financial report presents fairly, in
accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia,
and other mandatory financial reporting requirements in Australia, a view which is consistent with our
understanding of the Bank’s and the consolidated entity’s financial position, and of their performance as
represented by the results of their operations and cash flows and whether the remuneration disclosures
comply with Accounting Standard AASB 124 Related Party Disclosures.
We formed our audit opinion on the basis of these procedures, which included:
• examining, on a test basis, information to provide evidence supporting the amounts and disclosures in
the financial report and the remuneration disclosures; and
• assessing the appropriateness of the accounting policies and disclosures used and the reasonableness
of significant accounting estimates made by the directors.
While we considered the effectiveness of management’s internal controls over financial reporting when
determining the nature and extent of our procedures, our audit was not designed to provide assurance on
internal controls.
We performed procedures to assess whether the substance of business transactions was accurately
reflected in the financial report and the remuneration disclosures. These and our other procedures did not
include consideration or judgement of the appropriateness or reasonableness of the business plans or
strategies adopted by the directors2 and management of the Bank.
234 Commonwealth Bank of Australia Annual Report 2006
Independent audit report to the members of Commonwealth Bank
of Australia
Independence
We are independent of the Bank and the consolidated entity and have met the independence requirements
of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the
directors of the Bank a written Auditor’s Independence Declaration a copy of which is included in the
Directors’ Report. In addition to our audit of the financial report and the remuneration disclosures, we were
engaged to undertake the services disclosed in the notes to the financial statements. The provision of these
services has not impaired our independence.
Audit opinion
In our opinion:
1. the financial report of the Commonwealth Bank of Australia is in accordance with:
a) the Corporations Act 2001, including:
i.
ii.
giving a true and fair view of the financial position of Commonwealth Bank of Australia and the
consolidated Group at 30 June 2006 and of their performance for the year ended on that date; and
complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
b) other mandatory financial reporting requirements in Australia.
2. the remuneration disclosures that are contained on pages 51 to 68 of the directors’ report comply with
Accounting Standard AASB 124 Related Party Disclosures.
Ernst & Young
Sydney
23 August 2006
S J Ferguson
Partner
Commonwealth Bank of Australia Annual Report 2006 235
Shareholding Information
Top 20 Holders of Fully Paid Ordinary Shares as at 18 August 2006
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
J P Morgan Nominees Australia Limited
National Nominees Limited
Westpac Custodian Nominees Ltd
Citicorp Nominees Ltd
RBC Dexia Services Australia Nominees Pty Limited
ANZ Nominees Limited
Cogent Nominees Pty limited
Queensland Investment Corporation
AMP Life Limited
HSBC Custody Nominees (Australia) Limited
Australian Foundation Investment Company Limited
Bond Street Custodian Pty Limited
Invia Custodian Pty Limited
Westpac Financial Services Ltd
UBS Wealth Management Australia Nominees Pty Ltd
Australian Reward Investment Alliance
Suncorp Custodian Services Pty Ltd
Perpetual Trustee Co Ltd
Belike Nominees Pty Limited
CSFB Third Nominees Pty
Number of Shares
113,464,882
111,655,869
72,147,286
71,998,891
31,846,699
29,898,579
22,471,900
16,508,932
11,616,993
8,668,658
8,095,245
7,183,574
6,833,176
4,989,074
4,968,605
2,935,854
2,626,440
2,524,354
2,490,207
2,428,198
%
8. 84
8. 70
5. 62
5. 61
2. 48
2. 33
1. 75
1. 29
0. 91
0. 68
0. 63
0. 56
0. 53
0. 39
0. 39
0. 23
0. 20
0. 20
0. 19
0. 19
The top 20 shareholders hold 535,353,416 shares which is equal to 41.72% of the total shares on issue
Stock Exchange Listing
The shares of the Commonwealth Bank of Australia are listed
on the Australian Stock Exchange under the trade symbol CBA,
with Sydney being the home exchange.
trading activity are published
in most daily
Details of
newspapers, generally under the abbreviation of CBA or
C’wealth Bank. The Bank does not have a current on-market
buyback of its shares.
Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 18 August 2006
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Less than marketable parcel of $500
Number of
Shareholders
525,439
153,355
14,017
5,802
271
698,884
12,493
Percentage
Shareholders
75. 19
21. 94
2. 00
0. 83
0. 04
100. 00
Number of
Shares
181,715,794
312,046,698
96,342,827
111,633,195
581,515,795
1,283,254,309
15,641
Percentage
Issued Capital
14. 16
24. 32
7. 51
8. 70
45. 31
100. 00
Voting Rights
Under the Bank’s Constitution, each person who is a voting
member and who is present at a general meeting of the Bank in
person or by proxy, attorney or official representative is entitled:
• on a show of hands – to one vote; and
• on a poll – to one vote for each share held or represented.
If a person present at a general meeting represents personally
or by proxy, attorney or official representative more than one
member, on a show of hands the person is entitled to one vote
even though he or she represents more than one member.
If a member is present in person and votes on a resolution, any
proxy or attorney of that member is not entitled to vote.
• on a poll only one official representative may exercise the
member’s voting rights and the vote of each attorney shall be
of no effect unless each is appointed to represent a specified
proportion of the member’s voting rights, not exceeding in
aggregate 100%.
•
•
if a member appoints two proxies and both are present at the
meeting:
if the appointment does not specify the proportion or number
of the member’s votes each proxy may exercise, then on a
poll each proxy may exercise one half of the member’s votes;
• neither proxy shall be entitled to vote on a show of hands;
and
If more than one official representative or attorney is present for
a member:
• on a poll each proxy may only exercise votes in respect of
those shares or voting rights the proxy represents.
• none of them is entitled to vote on a show of hands; and
236 Commonwealth Bank of Australia Annual Report 2006
Top 20 Holders of Preferred Exchangeable Resettable Listed Securities II (“PERLS II”) as at 18 August 2006
Shareholding Information
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
J P Morgan Nominees Australia Limited
National Nominees Limited
Citicorp Nominees Pty Limited
UBS Nominees Pty Ltd
UBS Warburg Private Clients Nominees Pty Ltd
Questor Financial Services Limited
RBC Dexia Services Australia Nominees Limited
Invia Custodian Pty Limited
Westpac Custodian Nominees Limited
Bond Street Custodians Limited
ANZ Nominees Limited
The Australian National University Investment Section
Gordon Merchant No 2 Pty Ltd
Clycut Pty Ltd
J Neave Investments Pty Limited
Cogent Nominees Pty Limited
Cryton Investments No 9 Pty Ltd
Tynong Pastoral Co Pty Ltd
Woodross Nominees Pty Ltd
Perpetual Trustee Company Limited
Number of Units
336,831
179,669
114,175
99,570
90,780
67,631
65,135
51,550
50,000
39,754
30,912
25,000
24,440
21,892
19,697
19,581
17,600
17,450
16,000
15,066
%
8. 98
4. 79
3. 04
2. 66
2. 42
1. 80
1. 74
1. 37
1. 33
1. 06
0. 82
0. 67
0. 65
0. 58
0. 53
0. 52
0. 47
0. 47
0. 43
0. 40
The top 20 PERLS II unitholders hold 1,302,733 units which is equal to 34.73% of the total units on issue. More than 20 PERLS
unitholders are disclosed in the above table due to a number of unitholders having the same number of PERLS II.
Stock Exchange Listing
PERLS II are units in a registered managed investment scheme
of which Commonwealth Managed Investments Limited is the
responsible entity and are listed on the Australian Stock
Exchange under the trade symbol PCBPA, with Sydney being
the home exchange. Details of trading activity are published in
most daily newspapers.
Range of Units (PERLS II): 18 August 2006
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Less than marketable parcel of $500
Number of
Unitholders
9,203
310
36
26
2
9,577
3
Percentage
Unitholders
96. 09
3. 24
0. 38
0. 27
0. 02
100. 00
Number of
Units
1,531,679
694,594
274,297
732,930
516,500
3,750,000
4
Percentage
Issued Units
40. 85
18. 52
7. 31
19. 55
13. 77
100. 00
Voting Rights
• On a proposal that affects rights attached to Commonwealth
PERLS II do not confer any voting rights in the Bank but if they
are exchanged for or convert into ordinary shares or preference
shares of the Bank in accordance with their terms of issue, the
voting rights of the Bank’s ordinary shares are set out on page
236 and Article 3.2.7 of the Bank’s Constitution.
The holders will be entitled to receive notice of any general
meeting of the Bank and a copy of every circular or other like
document sent out by the Bank to ordinary shareholders and to
attend any general meeting of the Bank.
The holders will not be entitled to vote at a general meeting of
the Bank except in the following circumstances:
•
If at the time of the meeting, a dividend has been declared
but has not been paid in full by the relevant payment date;
• On a proposal to reduce the Bank’s share capital;
• On a resolution to approve the terms of a buy-back
agreement;
Bank PERLS;
• On a proposal to wind up the Bank;
• On a proposal for the disposal of the whole of the Bank’s
property, business and undertaking;
• During the winding up of the Bank; or
• As otherwise required under the Listing Rules from time to
time, in which case the holders will have the same rights as
to manner of attendance and as to voting in respect of each
unit as those conferred on ordinary shareholders in respect
of each ordinary share.
At a general meeting of the Bank, holders are entitled:
• On a show of hands, to exercise one vote when entitled to
vote in respect of the matters listed above; and
• On a poll, to one vote for each unit.
Commonwealth Bank of Australia Annual Report 2006 237
Shareholding Information
Top 20 Holders of Preferred Exchangeable Resettable Listed Securities III (“PERLS III”) as at 18 August 2006
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Name of Holder
AMP Life Limited
RBC Dexia Services Australia Nominees Pty Limited
UBS Wealth Management Australia Nominees Pty Ltd
Cogent Nominees Pty Limited
J P Morgan Nominees Australia Limited
Bond Street Custodian Limited
ANZ Executors & Trustee Company Limited
Goldman Sachs JB Were Pty Ltd
Goldman Sachs JB Were Capital Markets Ltd
Mr Walter Lawton + Mrs Jan Rynette Lawton
Invia Custodian Pty Limited
The Australian National University Investment Section
Mr Reginald Surtees Geary
National Nominees Limited
Citicorp Nominees Pty limited
Questor Financial Services Limited
Truckmate (Australia) Pty Ltd
Equity Trustees Limited
Kerlon Pty Ltd
Australian Executor Trustees Limited
Number of Shares
375,000
169,791
153,734
140,476
108,025
93,909
75,333
75,000
72,001
60,000
54,045
51,282
50,000
42,885
35,320
35,061
35,000
30,639
30,000
28,168
%
6. 43
2. 91
2. 64
2. 41
1. 85
1. 61
1. 29
1. 29
1. 23
1. 03
0. 93
0. 88
0. 86
0. 74
0. 61
0. 60
0. 60
0. 53
0. 51
0. 48
The top 20 PERLS III shareholders hold 1,715,669 shares which is equal to 29.43% of the total shares on issue
Stock Exchange Listing
PERLS III are preference shares issued by Preferred Capital
Limited (a wholly-owned subsidiary of the Bank) and are listed
on the Australian Stock Exchange under the trade symbol
PCAPA, with Sydney being the home exchange. Details of
trading activity are published in most daily newspapers.
Range of Shares (PERLS III): 18 August 2006
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Less than marketable parcel of $500
Number of
Shareholders
15,397
510
38
45
4
15,994
16
Percentage
Shareholders
96. 26
3. 19
0. 24
0. 28
0. 03
100. 00
Number of
Shares
2,428,892
1,120,472
300,646
1,222,126
760,145
5,832,281
31
Percentage
Issued Capital
41. 65
19. 21
5. 16
20. 95
13. 03
100. 00
Voting Rights
Trust Preferred Securities
PERLS III do not confer any voting rights in the Bank but if they
are exchanged for or convert into ordinary shares or preference
shares of the Bank in accordance with their terms of issue, the
voting rights of the ordinary or preference shares (as the case
may be) will be as set out on pages 236 and 237 respectively
for the Bank’s ordinary shares and preference shares.
550,000 Trust Preferred Securities were issued on 6 August
2003. Cede & Co is registered as the sole holder of these
securities.
700,000 Trust Preferred Securities were issued on 15 March
2006. Cede & Co is registered as the sole holder of these
securities.
The Trust Preferred Securities do not confer any voting rights in
the Bank but if they are exchanged for or convert into ordinary
shares or preference shares of the Bank in accordance with their
terms of issue, the voting rights of the ordinary or preference
shares (as the case may be) will be as set out on pages 236 and
237 respectively for the Bank’s ordinary shares and preference
shares.
238 Commonwealth Bank of Australia Annual Report 2006
International Representation
Singapore
CBA Branch Office
3 Temasek Avenue #20-01
Centennial Tower
Singapore 039190
Telephone: (65) 6349 7000
Facsimile: (65) 6224 5812
General Manager
R Buchan
First State Investments (Singapore)
3 Temasek Avenue
#20-01 Centennial Tower
Singapore 039190
Telephone: (65) 6538 0008
Facsimile: (65) 6538 0800
Regional Head Asia
L Mann
Vietnam
CBA Representative Office
Suite 202-203A
The Central Building
31 Hai Ba Trung, Hanoi
Telephone: (84 4) 826 9899
Facsimile: (84 4) 824 3961
Bao Minh CMG Life Insurance Co Ltd
Level 3, Saigon Riverside Office Center
2A-4A Ton Duc Thang
District 1, Ho Chi Minh City
Telephone: (84 4) 829 1919
Facsimile: (84 4) 829 3131
General Director
R Carkeet
Americas
United States of America
CBA Branch Office
Level 17, 599 Lexington Avenue
New York NY 10022
Telephone: (1 212) 848 9200
Facsimile: (1 212) 336 7725
General Manager, Head of North America
L C Tuzo
Europe
United Kingdom
CBA Branch Office
Senator House
85 Queen Victoria Street
London EC4V 4HA
Telephone: (44 20) 7710 3999
Facsimile: (44 20) 7710 3939
Regional General Manager Europe & North
America
P Orchart
First State Investments (UK) Limited
3rd Floor, 30 Cannon Street
London EC4M 6YQ
Telephone: (44 20) 7332 6500
Facsimile: (44 20) 7332 6501
Edinburgh
23 St Andrew Square
Edinburgh EH2 1BB
Telephone: (44 131) 473 2200
Facsimile: (44 131) 473 2222
Managing Partners
S Paul & A Tulloch
Australia
Head Office
Commonwealth Bank of Australia
48 Martin Place,
Sydney NSW 1155
Telephone: (61 2) 9378 2000
New Zealand
ASB Bank Limited
Level 28 ASB Bank Centre
135 Albert Street, Auckland
Telephone: (64 9) 377 8930
Facsimile: (64 9) 358 3511
Managing Director
H Burrett
Sovereign Group Limited
33-45 Hurstmere Road
Takapuna, Auckland
Telephone: (64 9) 487 9000
Facsimile: (64 9) 486 1913
Acting Managing Director
J Raby
Asia Pacific
Fiji Islands
Colonial National Bank
Colonial Life Limited
3 Central Street, Suva
Telephone: (67 9) 3214 400
Facsimile: (67 9) 3303 448
Managing Director
L Mellsop
China
CBA Representative Office
2909 China World Towers 1
1 Jian Guo Men Wai Avenue
Beijing 100004
Telephone: (86 10) 6505 5350
Facsimile: (86 10) 6505 5354
Chief Representative
Y T Au
Room 3805-3806 K.Wah Centre
1010 Huahai (M) Road
Shanghai 200031
Telephone: (86 21) 6103 6500
Facsimile: (86 21) 6103 6598
Head of China Retail Banking
Vicky Liem
CommFinance
Room 3805-3806 K.Wah Centre
1010 Huahai (M) Road
Shanghai 200031
Telephone: (86 21) 6103 6500
Facsimile: (86 21) 6103 6598
Chief Executive Officer
L. Zhang
China Life – CMG Asia Life Assurance Co Ltd
21st Floor
China Insurance Building
166 Lujiazui Dong Road
Shanghai 200120
Telephone: (86 21) 5882 5245
Facsimile: (86 21) 6887 5720
General Manager
C Lee
CBA Representative Office
Room 4007 Bund Center
222 Yan An Road East
Shanghai 200002
Telephone: (86 21) 6335 1686
Facsimile: (86 21) 6335 1766
First State Cinda Fund Management
No. 29 Dong Zhong Street
Dong Cheng District
Beijing
Telephone: (86 10) 6418 1266
Facsimile: (86 10) 6418 1243
Regional Head Asia
L Mann
Hong Kong
15th Floor, Chater House
8 Connaught Place,
Central
Hong Kong
Telephone: (852) 2844 7500
Facsimile: (852) 2845 9194
Regional General Manager Asia
S Poon
Hong Kong Commonwealth Bank of Australia
Room 1501 – 1505, Chater House
8 Connaught Road Centre
Hong Kong
Telephone: (852) 3667 8900
Facsimile: (852) 3667 8939
Executive General Manager
P Fancke
First State Investments (Hong Kong) Limited
Level 6 Three Exchange Square
8 Connaught Place, Central
Hong Kong
Telephone: (852) 2846 7555
Facsimile: (852) 2868 4742/4783
Regional Head Asia
L Mann
India
CBA Representative Office
Unit 201, Level 2 (front portion) of Embassy
Classic
No. 11, Vittal Mallya Road
Bangalore 560001
Telephone: (91 80) 2210 7411
Fascimile: (91 80) 5112 1462
Chief Representative
Ravi Kushan
Indonesia
PT Bank Commonwealth
Ground Flr, Wisma Metropolitan II
Jl. Jendral Sudirman Kav. 29-31
Jakarta 12920
Telephone: (62 21) 5296 1222
Facsimile: (62 21) 5296 2293
President Director
S Brewis-Weston
PT Astra CMG Life
11/F Sentra Mulia
Jl. H.R. Rason Said, Kav X-6 No 8
Jakarta 12940
Telephone: (62 21) 250 0385
Facsimile: (62 21) 250 0389
President Director
Malakai Naiyaga
PT First State Investments Indonesia
29th Floor, Gedung Artha Graha
Sudirman Central Business District
Jl. Jend. Sudirman Kav. 52-53
Jakarta 12190
Telephone: (62 21) 515 0088
Facsimile: (62 21) 515 0033
Regional Head Asia
L Mann
Japan
CBA Branch Office
8th Floor
Toranomon Waiko Building
5-12-1 Toranomon
Minato-ku, Tokyo 105-0001
Telephone: (81 3) 5400 7280
Facsimile: (81 3) 5400 7288
General Manager
L Xia
Commonwealth Bank of Australia Annual Report 2006 239
Contact Us
www.commbank.com.au
132 221 General Enquiries
131 998 Business Line
For your everyday banking including paying bills using BPAY our
automated service is available 24 hours a day, 365 days a year.
For a full range of business banking solutions.
Available from 8am to 6pm, Monday to Friday.
From overseas call +61 132 221. Operator assistance is
available 24 hours a day, 365 days a year.
13 2224 Home Loans & Investment Home Loans
To apply for a new home loan/investment home loan or to
maintain an existing loan. Available from 8am to 10pm, 365 days
a year.
131 431 Personal Loan Sales
To apply for a new personal loan.
132 015 Commonwealth Financial Services
For enquires on retirement and superannuation products, or
managed investments. Available from 8.30am to 6pm (Sydney
Time), Monday to Friday.
Unit prices are available 24 hours a day, 365 days a year.
CommInsure
For all your general insurance needs call 132 423 8am to 8pm
(Sydney Time), Monday to Friday – or visit
Available from 8am to 8pm, Monday to Friday.
www.comminsure.com.au
131 519 CommSec (Commonwealth Securities)
Available from 8am to 7pm (Sydney Time), Monday to Friday.
CommSec provides the information and tools to make smart
investment easy, accessible and affordable for all Australians, by
phone or Internet at
www.commsec.com.au
131 709 CommSec Margin Loan
Enables you to expand your portfolio by borrowing against your
existing shares and managed funds. To find out more simply call
13 17 09 8am to 5pm (Sydney Time) Monday to Friday or visit
www.commsec.com.au.
1800 240 889 Telephone Typewriter Service
A special telephone banking service for our hearing and speech
impaired customers. The service covers all the services
available on 13 2221. Available from 8am to 8pm, Monday to
Friday.
1800 011 217 Lost or Stolen Cards
To report a lost or stolen card 24 hours a day, 365 days a year.
For general claims assistance call 132 420, 24 hours a day,
365 days a year.
For all your life insurance needs call 131 056 8am to 8pm
(Sydney Time), Monday to Friday – or visit
www.comminsure.com.au
Internet Banking
You can apply for a home loan, credit card, personal loan, term
deposit or a savings account on the internet by visiting our
website at www.commbank.com.au available 24 hours a day,
365 days a year.
Do your everyday banking on our internet banking service
NetBank at www.commbank.com.au/netbank available 24 hours
a day, 365 days a year.
To apply for access to NetBank, call 132 828 between 8am and
8pm (Sydney Time), 7 days a week.
240 Commonwealth Bank of Australia Annual Report 2006
Corporate Directory
Registered Office
Level 7, 48 Martin Place
Sydney NSW 1155
Telephone (02) 9378 2000
Facsimile (02) 9378 3317
Company Secretary
JD Hatton
Shareholder Information
www.commbank.com.au/shareholder
Share Registrar
Link Market Services Limited
Locked Bag A14
SYDNEY SOUTH NSW 1235
Telephone: (02) 8280 7199
Facsimile: (02) 9287 0303
Freecall: 1800 022 440
Internet
www.linkmarketservices.com.au
Email
registrars@linkmarketservices.com.au
Telephone numbers for overseas shareholders
New Zealand
0800 442 845
United Kingdom
0845 769 7502
Fiji
008 002 054
Other International
612 8280 7199
Australian Stock Exchange Listing
CBA
Annual Report
To request a copy of the annual report
please call 1800 022 440
Commonwealth Bank of Australia Annual Report 2006 241
2006
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Commonwealth Bank of Australia ACN 123 123 124
AnnuAl RepoRt 2006