Commonwealth Bank of Australia
Annual Report 2016

Plain-text annual report

C o m m o n w e a l t h B a n k o f A u s t r a l i a A N N U A L R E P O R T 2 0 1 6 ANNUAL REPORT 2016 WHEN , WE BELIEVE . WE CAN CBA1421 011016 COMMONWEALTH BANK OF AUSTRALIA | ACN 123 123 124 Contents Chairman’s Statement Chief Executive Officer’s Statement Highlights Group Performance Analysis Group Operations and Business Settings Corporate Responsibility Directors’ Report Five Year Financial Summary Financial Statements Income Statements Statements of Comprehensive Income Balance Sheets Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholding Information International Representation Corporate Directory Contact Us 2 6 9 13 23 33 38 72 74 75 76 77 78 80 82 182 183 185 189 191 192 Commonwealth Bank of Australia – Annual Report 2016 1 Chairman’s Statement The past year has been dominated by political and economic uncertainty. In Australia and beyond we’ve seen a splintering of consensus around how countries and economies should be managed. This is resulting in outcomes that diverge from what we had come to consider the norm, such as Britain deciding to leave the EU, and central banks setting interest rates below zero in a range of advanced economies. after tax on a cash basis was $9,450 million, up 3% on last year. The final dividend for the year was $2.22, taking the full year dividend to $4.20 per share fully franked. Earnings per share on a cash basis was flat on the prior year at $5.55 per share. Return on equity was 16.5%, down 170 basis points, due to the increased equity base following the Group’s $5.1 billion capital raising in the first half of the year. While questions remain about the outlook for Australia, we are in a position of relative strength. The transition from the mining investment boom to a broader based economy, plus the lower Australian dollar, are supporting employment and moderate growth; and with competitive advantages in industries like education, tourism, agribusiness and health, we should be well-positioned for the future. relatively Against this backdrop, in the Commonwealth Bank we remain steadfast in our vision, to excel at securing and enhancing the financial wellbeing of people, businesses and communities. We employ 51,700 people, support nearly 16 million customers, are the largest taxpayer in Australia(1), and pay dividends to more than 800,000 shareholders. We will continue to work hard to deliver security and performance for all our stakeholders. In doing so, we are committed to acting in accordance with our values of integrity, accountability, collaboration, excellence and service. Over the last three years we have been implementing a long-term program to strengthen these values and embed them in the culture of the Group. Most recently this has included providing our people with further guidance on the behavioural expectations for each of our values; and ensuring our vision and values are reflected in recruitment, training and performance management practices. In terms of customer facing measures we have established a new Customer Advocate function in the Group, to drive fair customer outcomes and complaint resolution, and to improve our prevention and remediation processes. We are also continuing to evolve our remuneration structures to ensure alignment with our values. In the broader arena there has been heightened scrutiny of the financial services industry in the past year. We welcome this scrutiny because trust is critical to our business. Our industry is committed to a wide range of measures to address concerns and improve practices. This includes moving to a user-pays model whereby the industry will contribute to ASIC’s funding to enhance its ability to exercise its regulatory powers. An independent review of product sales-commissions and product based payments is already underway, with a view to removing or changing them where they could lead to poor customer outcomes; and the industry is working with consumer organisations to customers in the Code of Banking Practice. to strengthen commitments An industry register is being established to help prevent the recruitment of individuals who have breached the law or a code of conduct, with the aim of removing them from the industry; and protections for bank employees who speak out the At against poor conduct will be standardised. Commonwealth Bank we have had a long-standing Whistleblower Protection Policy and in 2014 introduced an external, is available 24/7 to any employees who wish to raise a concern. independently run SpeakUp Hotline which Operating and Financial Results Detailed commentary on the operating and financial results for 2016 is included in the CEO’s statement. In summary, the Group delivered a solid performance for the year. Net profit 2 Commonwealth Bank of Australia – Annual Report 2016 Capital and Funding To reinforce our ability to support our customers for the long- term, we continue to strengthen our capital and funding positions. As at 30 June 2016, the Group had a Common Equity Tier 1 (CET1) capital ratio of 10.6% on an APRA basis, up from 9.1% at 30 June 2015. On an internationally comparable basis our CET1 capital ratio was 14.4%, up from 12.7%. This bolsters our position at the top end of the top quartile of international peer bank capital rankings. Our capital position has been strengthened by our $5.1 billion entitlement offer to all shareholders, and through sound organic capital growth. We are also one of a very small number of global banks with ratings in the AA band which allows us to secure lower cost funding for our customers. With regulators both domestically and internationally now taking a broader view of the necessary foundations for a strong and resilient banking system, we have also strengthened our funding and liquidity positions. The Group’s Liquidity Coverage Ratio of 120% is significantly higher than the APRA requirement of 100%, and our net stable funding ratio, on current calculations, exceeds 100%. The regulatory outlook will evolve and towards the end of the 2016 calendar year the Basel enhancements are expected to be announced. We are confident that we will maintain our position of strength across all required metrics. Dividends The Group’s dividend policy seeks to deliver:    Cash dividends at strong and sustainable levels; A full-year payout ratio of between 70% and 80%; and The maximum use of franking by paying fully franked dividends. In keeping with this policy, the Board determined a final dividend of $2.22 per share for the second half year of the year, representing a dividend payout ratio of 82.3%. This brings the total dividend for the year to $4.20, flat on the prior year, and represents an overall dividend payout ratio (cash basis) of 76.5%. Our dividend policy has again been financial supported by performance. the Group’s consistently strong Customer satisfaction Over a number of years, our most important metric has been customer satisfaction and this remains the case. Serving our customers and acting in their best interests is what makes our business sustainable. Our people have been working tremendously hard in recent years to deliver the service, products and innovation that customers expect. A mark of their success is that we have held the top spot for retail customer satisfaction for 13 consecutive months to June 2016, and ranked outright or equal first for small business satisfaction for 22 consecutive months. We rank first or equal first for customer satisfaction in all key business banking segments, mobile and online banking, and adviser satisfaction in Wealth Management. While these are all real achievements, we know that customer (1) Source: Bloomberg expectations will continue to grow and evolve, so we must keep raising our standards and maintain our focus on the satisfaction and financial wellbeing of every customer. Innovation Another area where we continue to work extremely hard is innovation. Innovating purposefully and for the benefit of our customers has been at the centre of our strategy for the last 10 years. This focus has seen Commonwealth Bank deliver unparalleled digital banking capabilities, including our industry-leading CommBank app which is now regularly used by 3.7 million customers. In addition to providing frequent improvements for existing customers such as new “photo a for easy bill payment, new-to-bank bill” customers can now download the CommBank app, open an account and start transacting immediately. functionality Business customers are benefitting from services like Daily IQ, our award-winning data analytics app which provides insights about their business, customers and market. Our state-of-the-art Innovation Lab network, established across Sydney, Hong Kong and London, now allows us to partner with clients, to workshop bespoke solutions for their needs, and to work with start-up and FinTech companies to develop cutting-edge products and services. We are also using our investments and presence overseas to bring new thinking and ways of working into the Group. A current example is the lessons we are learning from TYME (Take Your Money Everywhere), the South Africa based financial services technology company that we acquired in 2015. TYME designs, builds and operates digital banking ecosystems that serve customers in emerging markets, and recently launched MoneyTransfer, a secure and low-cost remittance service that these operates innovations in support of financial inclusion will supplement our strategies in India, China and Vietnam. supermarkets. We believe through We are also investing in blue-sky projects like blockchain and quantum computing. We know that computing power will be a limit to accelerated innovation in the future, so we have committed an additional $10 million to Australian researchers who are building the world’s first silicon-based quantum computer. Mindful not just of the opportunities, but also of potential future threats, we are investing in cyber security and have partnered with the University of New South Wales to develop a centre of expertise for cyber security education. Our people, diversity and inclusion We are first and foremost a people-business and our people are our biggest asset. We therefore seek to create an environment in which everyone can do their best work, and feel motivated, included and respected. In the past year this has meant having discussions with our people across the Group about the contribution they make to our vision by living our values. We also seek to create a workforce that reflects the communities in which we operate. Our workforce is 58 percent female, and having achieved our target to have women in 35 percent of Executive Manager and above positions, we have increased the target to 40 percent by 2020. Recently a sixth woman was appointed to our most senior leadership team, which will take us to gender equality on the Executive Committee in the first half of the 2017 financial year. Our 12 member Board also now comprises four women. Chairman’s Statement As a mark of our progress we have again been awarded an Employer of Choice for Gender Equality citation from the Workplace Gender Equality Agency. We have also been named the second-most inclusive employer in the 2016 Australian Workplace Equality Index Awards, and the Group’s the 2016 LGBTI employee network Unity was named Employee Network of the Year. Looking ahead we will be focusing on improving the Group’s ethnic diversity, so that we better represent our customers and communities. Environment, Social and Governance (ESG) priorities We actively consider the environmental, social and economic impacts of our activities. We are committed to operating sustainably and to making a positive contribution beyond our core business. to acknowledge In the first half of the 2016 financial year we revised our international Group Environment Policy efforts to limit global warming to two degrees Celsius, and to define the role we play in supporting the transition to a low carbon economy and in tackling climate change. On the lending side, we have entrenched our ESG Lending Commitments through extensive training and a new ESG risk management tool that is central to the credit decision process. We also disclose the assessed carbon emissions of our business lending portfolio, a first for any Australian bank. Our lending exposure to renewable energy generation is now more than five times greater than our exposure to direct coal- fired electricity generation. the On investment side, a new “Wealth Management Responsible Investing Framework” integrates ESG factors investment processes, across our Wealth Management consistent with long-term investment outcomes for clients. A responsible investing training module has also been rolled out to Wealth Management professionals. the pursuit of sustainable In terms of our own environmental footprint, we continue to raise our targets for reductions in waste, water and energy usage. We are the first Australian Bank to be awarded, by the Green Building Council of Australia, a 5 Star Green Star rating for our current branch design; and Commonwealth Bank Place in Sydney is the first Australian office awarded a 6 Star Green Star rating across all four aspects: design, construction, interior fit-out and operational performance. We have issued a new Human Rights Position Statement which states our responsibility and commitment to respect human rights across all of our operations. The Group is committed to being a responsible corporate taxpayer and to acting with the highest integrity in complying with all prevailing tax laws. From a governance perspective, the Group is a signatory to the Voluntary Tax Transparency Code. As part of our compliance with this code, we will continue to provide transparency on our approach to tax risk, governance and tax paid in Australia. Commonwealth Bank is now the largest corporate taxpayer in Australia. We benchmark our progress in these areas against a number of leading global sustainability indices and surveys. In 2016 we were pleased to be named the number one Australian company and number one bank in the world in the Global 100 (G100) Most Sustainable Corporations Index. We have also again been included in the Dow Jones Sustainability Index World the CDP ASX 200 Climate Disclosure Leadership Index, and the FTSE4Good Index. Index, Commonwealth Bank of Australia – Annual Report 2016 3 Chairman’s Statement We are not perfect but we continue to make good progress in this arena. Open Advice Review program In 2014 we set up the most comprehensive review of financial planning advice ever undertaken in Australia in response to concerns raised regarding past instances of poor financial advice. The program was open to all Financial Wisdom and Commonwealth Financial Planning customers who received financial advice between 2003 and 2012. Following an extensive advertising campaign and a mail-out to around 350,000 households, approximately 8,600 customers requested a review of their advice. Examining each individual customer’s case and circumstances has been a complex process, but more than 500 people have been dedicated to the program to ensure that each case gets the attention it deserves and that we can put things right where mistakes were made. Good progress has been made, and as at the end of June 2016, 4,014 assessments have been issued and compensation totalling $7.6m has been offered in 562 cases. The program, which is overseen by a range of independent parties, is on track to deliver all assessments by the end of the 2016 calendar year. CommInsure We have taken the recent discovery of poor experiences for a number of our CommInsure insurance customers extremely seriously. The allegations made are completely inconsistent with the culture that underpins the Commonwealth Bank and are not a reflection of the values of our people and business. All five customer cases aired by the ABC have been resolved, with three resolved before the program went to air. We have also launched investigations into the root causes of the concerns raised, particularly in light of allegations made in the program that these were widespread, and the result of deliberate action. To date we have not found evidence to substantiate any of the claims of widespread problems and wilful misconduct. These reviews involve well-regarded independent specialists and encompass policy definitions, claims review processes, and other factors such as remuneration and whistleblower practices. We have been working constructively with the regulators on the reviews. The reviews are making good progress, though given the size of the business, and our determination remains ongoing. thoroughly, work investigate to To determine whether other past denied claims warrant further action we have appointed Deloitte Touche Tohmatsu to review a sample of life insurance claims declined over the last five years. Deloitte is further mandated to provide recommendations to the CommInsure Board with regard to any improvements that can be made to claims policies and procedures. We have also committed to update our policy definitions more frequently to reflect medical advances. To ensure transparency and consistency going forward, a Claims Review Panel has been established as a permanent and additional layer of assurance. The Panel includes four independent experts, drawn from the medical, consumer protection, and legal professions. Where CommInsure recommends that a complex life insurance claim be declined, it will be referred to the Panel for independent review and assessment to ensure that the outcomes are fair, balanced and consistent. 4 Commonwealth Bank of Australia – Annual Report 2016 Corporate Governance and Board Appointments A critical goal of the Commonwealth Bank Board is to ensure the Group is trusted and achieves the highest ethical standards, so that we continue to best serve our customers, shareholders and the broader community. As Chairman, I the sustainable performance of your seek to advance company by bringing the experience, skills and insights of Board members to bear, so that we remain Australia’s leading bank. innovation thought-leader on This year I am pleased to have been able to bring to the Board the skills and experience of Catherine Livingstone and Mary Padbury. The Group’s ability to consistently drive customer-focused is absolutely critical. We welcome the depth and breadth of knowledge Catherine brings as a innovation, and as an experienced leader of several of Australia’s most innovation- focused organisations. As an eminent intellectual property lawyer, Mary brings both her insights on how the interplay of technology and regulation will shape our industry in future as well as her management and broad international experience to Board deliberations. More information about both Catherine and Mary can be found on pages 40 and 41 of this report. We will miss Jane Hemstritch who retired from the Board in March after serving more than nine years as a Director. Jane chaired the Remuneration Committee for six years and made a distinguished contribution through her judgement, insight, and humour. I thank Jane for her outstanding contribution. On Jane’s departure, Sir David Higgins assumed the role of Chairman of the Remuneration Committee. At the end of September the chairmanship of the Risk Committee will transition from Harrison Young to Shirish Apte. Harrison has done a tremendous job as Chairman, and will remain a member of the Risk Committee. In the year ahead your Board will meet both with and without the Chief Executive Officer to discuss the Group’s business and strategy and to carry out our duties in the context of the Audit, Risk and Remuneration Committees. We also look forward to meeting with management, our people and shareholders, to communicate the Board’s priorities, centred on our vision, values and culture, and to listen to feedback. I am very grateful to all my colleagues on the Board for the effort and hard work they put into performing their duties, which requires extreme dedication. Outlook Turning to the outlook for the 2017 financial year, we believe that the Australian economy is as well-positioned as it can be. We have key strategic advantages, including our proximity to populous growth markets, our rich natural reserves, and our dynamic and multicultural workforce. The transitions that have been taking place – with the services sector taking up the slack from mining, our exports becoming more diversified, and SMEs playing a greater role – are providing the foundations we need for prosperity and success. The ability to realise this potential however, is greatly dependent on the supporting environment, both domestic and international. Stable and well-communicated policy settings are of course necessary to ensure that businesses have the confidence to invest for growth, and to give people assurance about their employment prospects and costs and quality of living. However, the external backcloth of political, economic and security uncertainty around the world takes a toll on confidence; and the policy responses to-date, including Chairman’s Statement quantitative easing and a creep towards closed borders, will inevitably present challenges. We now face the prospect that low or negative interest rates, low inflation and low growth are the new norm, and we are yet to understand what long-term impacts this will have. That’s why we invest in innovation, support new industries such as renewable energy, help traditional sectors like agriculture adapt and prosper through new technology, and fund education initiatives that will build the skills needed for the future. While this is a most uncertain global environment, at the Commonwealth Bank we are focused on what will make Australia and of course, your bank, successful in the future, and how we can help achieve that. The importance of our basic responsibility – to supply businesses with credit so they can grow and employ more people, and to provide people with loans and financial products so they can buy a home and plan for their future – will remain our top priority. But in doing so, we seek to leverage our resources – our capital, our innovation and our people – to support the economic activities future. that we believe are critical to our common Through these strategies we will seek to remain a highly successful bank for our people and our shareholders. I would like to thank everyone in the Group for their continuing hard work and commitment to our vision and values, and express my gratitude to our shareholders and customers for your continuing support. David Turner Chairman 9 August 2016 Commonwealth Bank of Australia – Annual Report 2016 5 Chief Executive Officer’s Statement Continued execution of our long term strategy, focused on customer satisfaction, innovation and strength, has ensured that the Group performed well during the 2016 financial year. Guided by our vision to excel at securing and enhancing the financial wellbeing of people, businesses and communities, this strategy has delivered for the Group’s many stakeholders for more than 10 years, in a constantly changing environment. This year it has supported solid returns for you, our shareholders, in the form of dividend payments totalling $7 billion. It has delivered innovative financial products and services for nearly 16 million customers. It has provided $6.2 billion in salaries and wages to more than 50,000 colleagues, and income of $4.2 billion for 5,000 SME partners and suppliers. It has also enabled $3.6bn in corporate tax payments, and made a significant contribution to the health of our economy. In executing our strategy we concentrate on four key capabilities: people, productivity, technology and strength. Our efforts in each of these areas are guided by the basic principle that we put the customer at the centre of everything we do. Leading in customer satisfaction Customer satisfaction is the key metric we use to benchmark execution of Group strategy. Satisfied customers look to us to meet more of their needs. This year we have achieved our best ever customer satisfaction results, and this has again translated into increased customer activity. Commonwealth Bank ranked outright number one for retail customer satisfaction for each month during the 2016 financial year in the Roy Morgan Retail MFI Customer Satisfaction survey; and ranked first or equal first in all segments of business customer satisfaction at year end, according to the DBM Business Financial Services Monitor. Our institutional bank has performed particularly well on this measure, rating outright or equal first for 57 consecutive months. Wealth Management regained the top spot for adviser satisfaction in April 2016 in the Wealth Insights Platform Service Level Survey, and we have again been named Bank of the Year for Small Business and for Online Banking (for the seventh year in a row) by Canstar. Internationally we’ve also experienced success, with PT Bank Commonwealth (Indonesia) awarded for service excellence in its market. focus converts A demonstration of how customer into customer activity is the growth we’ve achieved in meeting more customer needs, up from 3.05 products per customer at the end of last financial year, to 3.15 as at 30 June 2016. We have maintained our position as market leader in key product areas including home lending, household deposits and the FirstChoice platform. Our commitment to putting our customers first extends to making things right if we discover that anything has gone wrong. As the Chairman has mentioned in his statement, we extended our Open Advice Review program to financial advice customers spanning a decade. More than 500 staff have been dedicated to investigating each individual case and to remediating any customers who were adversely affected by the advice they received. Recent concerns about the experiences of a number of CommInsure customers are also including independent investigations into the root causes of the concerns raised. To date no evidence has been found that comprehensively addressed, being 6 Commonwealth Bank of Australia – Annual Report 2016 substantiates any of the claims of widespread problems and wilful misconduct. To ensure we learn from these experiences, we are making a wide range of improvements to our processes and practices. In addition to the additional levels of independent review and assurance highlighted by the Chairman, we will continue to advocate for and participate in industry-wide initiatives that improve practices and customer experiences across the sector. The strength of our people, and our culture The strength of our customer satisfaction performance is entirely a reflection of the commitment and dedication our people have shown to their customers, and to the values of the Commonwealth Bank. Our values of integrity, accountability, collaboration, excellence and service are integral to our culture, and they dictate how we must treat our customers and each other. We have been working intensely for several years to embed a values-driven way of working across the Group, and this year are review, including mine, an assessment of how we have demonstrated our values and enhanced our risk culture. This aligns with our determination to be a financial institution with the highest ethical standards. into everyone’s performance incorporating Another priority is to ensure that the Group is a place where our people feel motivated to give of their best, regardless of gender, ethnicity, sexual orientation, age, or whether they have a disability. The Chairman has highlighted some of our successes in this area, particularly in setting and achieving ambitious gender diversity targets. We have also launched a range of initiatives to improve the representation of Indigenous Australians in our workforce. In June we launched our fifth Reconciliation Action Plan (RAP) which received “Elevate” status. As part of our new RAP, we announced that we will increase the number of Indigenous the goal of achieving Australians we employ, with employment parity within 10 years. This builds on our existing Indigenous Careers Program which includes school-based traineeships, university student internships, and partnerships with the Australian Indigenous Education Foundation and the Australian Indigenous Mentoring Experience. The Chairman and I both agree however, that work remains to be done to ensure we truly reflect the diversity of the communities in which we live and work. Customer-focused innovation In addition to on-going investment in our people, we continue to prioritise investment in technology and innovation. This has been a core pillar of our strategy for more than a decade. The Group’s investment in a new core banking system is now delivering market-leading advantages given the dependence of digital banking and related functionality on integrated, real- time systems. It allows us to deliver important benefits to our customers – to businesses who want their payments to be processed in real-time, and to retail customers who value features like instant credit card Lock, Block & Limit. This has again transaction in above-system growth accounts. resulted in We are also using our investment in technology to achieve our broader vision of financial wellbeing and to create value for the community. A recent example is the launch of Clever Kash, a cashless money box, by ASB in New Zealand, to help Chief Executive Officer’s Statement teach children the value of money. Family members or friends can virtually swipe money from their ASB banking app to the child’s elephant shaped money box, and the amount will appear on a screen on its tummy. By keeping money tangible, we can help children develop good money habits and learn the importance of saving. Looking ahead, we will continue to invest in leading-edge technologies so that the Group is positioned to seize the opportunities of the future. We are also focusing on creating an internal culture of entrepreneurialism and opportunity so that our people can anticipate and meet customers’ future needs. To ‘CommBank this end, we recently ran a Intrapreneur’ competition to encourage creative and future- focused thinking among our people, and to provide a fast- track channel for their ideas. More than 500 contestants submitted concepts for new customer-focused products and services, and we look forward to the winning ideas becoming a commercial reality. Driving productivity and efficiency At the heart of our approach to productivity and efficiency is a commitment to continuous improvement for better customer outcomes. This means making processes simpler, easier and faster – which is good for the customer and good for our shareholders. This way of thinking extends across all our interfaces with our customers – from extending the range of functionality offered, to building better branches and providing more intelligent deposit machines to allow customers to save time and duplicated effort through efficient self-service. The emphasis on productivity is just as relevant in our behind- the-scenes processes, with our people working collaboratively to fully understand processes end-to-end, and being accountable and empowered to take steps towards making improvements. This is essential in the current environment of enterprise mobility, rapidly changing business operations and heightened customer expectations. The success of our productivity initiatives and our productivity culture change are demonstrated in a continued improvement in our cost-to-income ratio, which was down another 40 basis points this year to 42.4%. Strengthened capital, funding and liquidity positions Our capacity to support our customers is directly related to the strength of our balance sheet. Our stakeholders rely on our stability, particularly when markets are volatile. During the financial year, we responded to increased regulatory capital requirements, and raised additional capital through an entitlement offer for all shareholders. As a result of the capital raising and strong organic capital growth, we have substantially boosted our capital position. We are now positioned among the most highly capitalised banks internationally and are placed above any ‘unquestionably strong’ benchmark for Common Equity Tier 1 capital. Our funding and liquidity positions are similarly strong. Thanks to 8% growth in customer deposits in the year, customer deposits now represent 66% of group funding. Notwithstanding the increased capital levels, we have seen funding costs move higher recently due to global volatility and increased regulatory pressures. Contribution to our community In addition to fulfilling our responsibility to support individuals and businesses directly, we also look for ways to make a positive contribution beyond our core business. In particular, we are committed to operating sustainably and to supporting the communities in which we operate through a range of education and community investment focused initiatives. Continuing our 85 year history of providing financial education to school children through our School Banking program, last year we made a 25 year pledge to invest in education, with an initial commitment of $50 million over three years. This has facilitated the launch of Evidence for Learning, an initiative aimed at evaluating and funding evidence-based education practices in schools and learning centres. This year we also extended our Start Smart financial literacy workshops to more than 550,000 students. Given our focus on financial wellbeing we seek to help those excluded from the financial system to gain access to appropriate and affordable financial services. Earlier this year we signed up to the national Financial Inclusion Action Plan to support under-served members of the Australian community. We also run financial inclusion programs internationally and intend to leverage the expertise of TYME in designing, building and operating digital banking ecosystems, to serve customers in emerging markets. These are only a few examples. Such activities, where we contribute our finance-specific expertise, are just part of our ongoing community investment contribution which totalled more than $262 million this year. Financial highlights Cash net profit after tax (NPAT) was $9,450 million for the 2016 financial year, an increase of 3% on the prior year. The total dividend per share for the year was $4.20, equivalent to a dividend payout ratio (cash basis) of 76.5%. Earnings per share were $5.55, and return on equity was 16.5%. At a business division level the results were:    Total banking income growth of 8% in Retail Banking Services, primarily driven by home lending volume growth and improved net interest margin. The income result combined with continued improvements in cost-to- income saw the division’s NPAT grow 11%. Growth in savings and in total deposit balance growth of 7%. transaction accounts resulted Business and Private Banking achieved business lending growth of 6% in a competitive market, and deposit growth of 8%. The credit quality of the lending portfolio also remained strong, with loan impairment expense to average gross loans and acceptances of 18 basis points. In Institutional Banking and Markets, lending growth in strategic areas of focus, and strong sales and trading performance in Markets, were offset by lower lending impairment expense, margins and primarily due to a small number of exposures in the portfolio. increased loan  Growth in funds management and general insurance for Wealth Management was offset by a lower under income significantly investment administration increased 3%. lower experience. insurance result and Average funds life  Cash earnings from New Zealand were flat. ASB delivered a 5% increase in earnings due to home and Commonwealth Bank of Australia – Annual Report 2016 7 Chief Executive Officer’s Statement We also expect continuing scrutiny of the banking system. Given the importance of banks to Australia's economy, that is not surprising. We will continue to listen carefully to the public debate, and we will be prepared to emphasise the importance of a strong banking system, and of balancing the needs of all our stakeholders. There has been a great deal of discussion about the interests of people borrowing money to buy a home. Their interests are very important, and we will continue to do our best for them. Equally, we need to consider the interests of our depositors and our shareholders. Three quarters of our term deposit holders are over 55. Lower deposit rates have had a major impact on their lifestyle. More than 800,000 Australian households own shares directly in your bank, and millions more own them through their superannuation. These are Australians from all walks of life. As at the date of this letter, their collective investment in your bank is worth over $100 billion. For many, the dividends they receive are an important part of their financial wellbeing. So effective balancing of all these interests has been, and will be, an important factor in our success. We are the market leader in customer satisfaction thanks to the dedication of our people, we have continued to grow market share in the right places, we have a significant technology advantage through ongoing investment, we have consistently reinforced our balance sheet, and we have a values-based culture. Of course we need to keep raising our standards, in a market where we have strong, well-run competitors. Building on these strengths, we will continue to manage for the long term, putting customers first and investing for the future, to ensure your company is resilient, strong and successful, and that we remain Australia’s leading bank. Ian Narev Chief Executive Officer 9 August 2016 increased business lending growth but saw margin compression and impairment expense. Higher investment in technology and expense growth impacted Sovereign’s contribution. loan   Bankwest achieved core business lending growth of 6%. Total transaction deposits grew 20%. The profit result was impacted by lower margins and lower impairment benefit with the slower run-off of the legacy troublesome and impaired book. International Financial Services continues to be affected by the slowdown in emerging markets, which has adversely impacted business volume growth. However, our investments off-shore are showing promising early signs of impact. technology-related Focusing on our long-term strategy The current operating environment has its challenges. However, we remain positive about the Australian economy. for Australian resources, a vibrant Continuing demand construction sector in NSW and Victoria, and growth in key services sectors have supported real GDP growth and employment stability. The economy’s future prospects are also underpinned by population growth, our proximity to growth in Asia, and the attractiveness of Australia as a destination and a trusted source of a broad range of goods and services. Weakness in commodity prices has however suppressed nominal growth and low wage inflation has meant that households are not feeling better off. These factors, combined with the new phenomenon of low growth, low inflation and low interest rates, are impacting confidence and rendering businesses and consumers cautious and more hesitant to respond to monetary stimulus. At the Commonwealth Bank our outlook is of course impacted by these macroeconomic factors, in addition to increased competition and regulation. In these circumstances, we will continue to concentrate on productivity and credit quality. But we remain committed to thinking long-term, through continued investment in our long term strategy. 8 Commonwealth Bank of Australia – Annual Report 2016 Group Performance Highlights Highlights Financial Performance Capital The Group’s net profit after tax (“statutory basis”) for the year ended 30 June 2016 increased 2% on the prior year to $9,227 million. Return on equity (“statutory basis”) was 16.2% and Earnings per share (“statutory basis”) was 542.5 cents, a decrease of 2% on the prior year. The Management Discussion and Analysis discloses the net profit after tax on both a statutory and cash basis. The statutory basis is prepared and audited in accordance with the Corporations Act 2001 and the Australian Accounting Standards, which comply with International Financial Reporting Standards (IFRS). The cash basis is used by management the Group’s to present a clear view of underlying operating results, excluding items that introduce volatility and/or one-off distortions of the Group’s current period performance. These items, such as hedging and IFRS volatility, are calculated consistently with the prior year and prior half disclosures and do not discriminate between positive and negative adjustments. A list of items excluded from statutory profit is provided in the reconciliation of the Net profit after tax (“cash basis”) on page 10 and described in greater detail on page 20. The Group’s vision is to excel at securing and enhancing the financial wellbeing of people, businesses and communities. The long-term strategies that the Group has pursued to achieve this vision have continued to deliver high levels of customer satisfaction across all businesses and another solid financial result. Operating income growth was solid, relative to the prior year. Operating expenses increased due to higher staff costs, the impact of foreign exchange, and increased investment spend, partly offset by the incremental benefit generated from productivity initiatives. Loan impairment expense increased, primarily due to higher provisioning levels in Institutional Banking and Markets, New Zealand and IFS. Provisioning levels remain prudent and there has been no change to the economic overlay. Net profit after tax (“cash basis”) for the year ended 30 June 2016 to $9,450 million. Cash earnings per share remained flat at 555.1 cents per share. increased 3% on the prior year the year ended Return on equity (“cash basis”) 30 June 2016 was 16.5%, a decrease of 170 basis points on the prior year. for The Group strengthened its capital position during the year, by undertaking a $5.1 billion institutional and retail entitlement offer, ahead of the APRA requirement to hold additional capital with respect to Australian residential mortgages effective from 1 July 2016. The capital raising places the Group in a strong position both domestically and on an internationally comparable basis. As at 30 June 2016, the Basel III Common Equity Tier 1 (CET1) ratio was 14.4% on an internationally comparable basis and 10.6% on an APRA basis. Funding The Group continued to maintain conservative Balance Sheet settings, with a considerable portion of the Group’s lending growth in customer deposits, which increased to $518 billion as at 30 June 2016, up $40 billion on the prior year. funded by growth Dividends The final dividend declared was $2.22 per share, bringing the total dividend for the year ended 30 June 2016 to $4.20 per share, in line with the prior year. This represents a dividend payout ratio (“cash basis”) of 76.5%. The final dividend payment will be fully franked and paid on 29 September 2016 to owners of ordinary shares at the close of business on 18 August 2016 (record date). Shares will be quoted ex–dividend on 17 August 2016. Outlook Continuing demand for Australian resources, a vibrant construction sector in NSW and Victoria, and employment growth in key services sectors have underpinned real GDP growth and employment stability. However, on-going economic strength will require a lift in the low rates of nominal growth. Income growth inside and outside Australia remains weak, so people are not feeling better off. When combined with on-going global economic and political uncertainty this makes households and businesses cautious, and hesitant to respond to monetary stimulus. At CBA, we are cognisant of the combined impact of weaker demand, strong competition and increasing regulation. An on- going focus on productivity and credit quality will be important. But we remain positive about Australia’s economic prospects, driven by population growth, our proximity to growth in Asia and the attractiveness of Australia as a destination and a trusted source of a broad range of goods and services. So we will continue to manage for the long term, putting customers first and investing for the future. Commonwealth Bank of Australia – Annual Report 2016 9 Jun 16 vsJun 16 vsJun 16 vs 30 Jun 16Jun 15 % 30 Jun 1630 Jun 15Jun 15 % 30 Jun 16 31 Dec 15Dec 15 %Net profit after tax ($M)9,22729,4509,13734,6464,804(3)Return on equity (%)16. 2(200)bpts16. 518. 2(170)bpts15. 617. 2(160)bptsEarnings per share - basic (cents)542. 5(2)555. 1557. 5-270. 8284. 4(5)Dividends per share (cents)420-420420-22219812Half Year Ended("statutory basis")("cash basis")("cash basis")Full Year EndedFull Year Ended Highlights (1) Comparative information has been restated to reflect the changes in presentation disclosed in the prior half, and reclassification of fixed rate prepayment recoveries from Other banking income to Net interest income to align with the associated hedge costs. (2) For the purposes of presentation of Net profit after tax (“cash basis”), policyholder tax expense components of corporate tax expense are shown on a net basis (30 June 2016: $101 million and 30 June 2015: $99 million, and for the half years ended 30 June 2016: $92 million and 31 December 2015: $9 million). (3) Non-controlling interests include preference dividends paid to holders of preference shares in ASB Capital Limited and ASB Capital No.2 Limited. (4) Refer to page 20 for details. Group Return on Equity Group Return on Assets 10 Commonwealth Bank of Australia – Annual Report 2016 Group Performance30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs30 Jun 16Jun 16 vsSummary$M$MJun 15 %$M$MDec 15 %$MJun 15 %Net interest income (1)16,93515,82778,5088,427116,9357Other banking income (1)4,8604,81112,4442,41614,576(5)Total banking income21,79520,638610,95210,843121,5114Funds management income2,0161,93849841,032(5)2,0613Insurance income795792-308487(37)1,006(1)Total operating income24,60623,368512,24412,362(1)24,5784Investment experience141210(33)835843--Total income24,74723,578512,32712,420(1)24,5784Operating expenses(10,429)(9,993)4(5,213)(5,216)-(10,468)4Loan impairment expense(1,256)(988)27(692)(564)23(1,256)27Net profit before tax13,06212,59746,4226,640(3)12,8542Corporate tax expense (2)(3,592)(3,439)4(1,767)(1,825)(3)(3,607)2Non-controlling interests (3)(20)(21)(5)(9)(11)(18)(20)(5)Net profit after tax ("cash basis")9,4509,13734,6464,804(3)n/an/aHedging and IFRS volatility (4)(200)6large(49)(151)(68)n/an/aOther non-cash items (4)(23)(80)(71)12(35)largen/an/aNet profit after tax ("statutory basis")9,2279,06324,6094,618-9,2272Represented by: (1)Retail Banking Services 4,4363,994112,2212,215-Business and Private Banking 1,5671,4955764803(5)Institutional Banking and Markets 1,1641,285(9)556608(9)Wealth Management617653(6)245372(34)New Zealand877882(1)414463(11)Bankwest763795(4)367396(7)IFS and Other2633(21)79(53)largeNet profit after tax ("cash basis")9,4509,13734,6464,804(3)Investment experience after tax(100)(150)(33)(56)(44)27Net profit after tax ("underlying basis")9,3508,98744,5904,760(4)Full Year EndedHalf Year EndedFull Year Ended("statutory basis")("cash basis")("cash basis") 18.7%19.5%18.4%18.2%18.7%18.2%16.5%2010201120122013201420152016RoE - Cash (%) 646 668 719 754 791 873 933 6.16.87.07.88.79.19.51.0%1.0%0.0%0.2%0.4%0.6%0.8%1.0%1.2%02004006008001,0002010201120122013201420152016Total Assets ($bn)Cash NPAT ($bn)RoA - Cash (%) Highlights (1) Comparative information has been restated to reflect the changes in presentation disclosed in the prior half, and reclassification of fixed rate prepayment recoveries from Other banking income to Net interest income to align with the associated hedge costs. (2) Key financial metrics are calculated in New Zealand dollar terms. (3) Analysis aligns with the 13 July 2015 APRA study titled “International capital comparison study”. (4) As the Group commenced disclosure of its leverage ratio at 30 September 2015, no full year comparatives have been presented. (5) The Tier 1 Capital included in the calculation of the internationally comparable leverage ratio aligns with the 13 July 2015 APRA study titled “International capital comparison study”, and includes Basel III non-compliant Tier 1 instruments that are currently subject to transitional rules. Commonwealth Bank of Australia – Annual Report 2016 11 Jun 16 vsJun 16 vsKey Performance Indicators 30 Jun 16 30 Jun 15Jun 15 % 30 Jun 16 31 Dec 15Dec 15 %GroupStatutory net profit after tax ($M)9,2279,06324,6094,618-Cash net profit after tax ($M)9,4509,13734,6464,804(3)Net interest margin (%) 2. 072. 09(2)bpts2. 062. 08(2)bptsNet interest margin excluding Treasury and Markets (%) 2. 062. 06-2. 052. 06(1)bptAverage interest earning assets ($M) 817,457755,8728829,127805,9163Average interest bearing liabilities ($M) 760,615713,0847758,994762,221-Funds Under Administration (FUA) - average ($M)143,312138,3584143,730143,120-Assets Under Management (AUM) - average ($M)202,000199,2641200,075203,603(2)Average inforce premiums ($M) 3,4013,25943,4173,3861Operating expenses to total operating income (%)42. 442. 8(40)bpts42. 642. 240 bptsEffective corporate tax rate ("cash basis") (%) 27. 527. 320 bpts27. 527. 5-Retail Banking ServicesCash net profit after tax ($M)4,4363,994112,2212,215-Operating expenses to total banking income (%)32. 634. 1(150)bpts32. 332. 8(50)bptsBusiness and Private BankingCash net profit after tax ($M)1,5671,4955764803(5)Operating expenses to total banking income (%)38. 138. 4(30)bpts38. 437. 860 bptsInstitutional Banking and MarketsCash net profit after tax ($M)1,1641,285(9)556608(9)Operating expenses to total banking income (%)37. 934. 6330 bpts38. 737. 1160 bptsWealth ManagementCash net profit after tax ($M)617653(6)245372(34)FUA - average ($M)132,632128,8803132,723132,721-AUM - average ($M) 197,569195,4061195,513199,294(2)Average inforce premiums ($M) 2,4742,38842,4802,470-Operating expenses to total operating income (%) 70. 073. 5(350)bpts76. 864. 3largeNew ZealandCash net profit after tax ($M)877882(1)414463(11)FUA - average ($M)10,6809,4781311,00710,3996AUM - average ($M) 4,4313,858154,5624,3096Average inforce premiums ($M)67263856826643Operating expenses to total operating income (%) (2)40. 040. 2(20)bpts40. 839. 3150 bptsBankwestCash net profit after tax ($M)763795(4)367396(7)Operating expenses to total banking income (%)41. 742. 0(30)bpts41. 941. 540 bptsCapital (Basel III) Common Equity Tier 1 (Internationally Comparable) (%) (3)14. 412. 7170 bpts14. 414. 310 bptsCommon Equity Tier 1 (APRA) (%)10. 69. 1150 bpts10. 610. 240 bptsLeverage Ratio (Basel III) (4)Leverage Ratio (Internationally Comparable) (%) (5)5. 6n/an/a5. 65. 6-Leverage Ratio (APRA) (%)5. 0n/an/a5. 05. 0-Full Year Ended (1)Half Year Ended (1) Highlights (1) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted average number of ordinary shares. (2) Diluted EPS and weighted average number of shares are disclosed in Note 6 to the Financial Statements. (1) Prior periods have been restated in line with market updates and comparatives have not been restated to include the impact of new market entrants in the current period. (2) As at 31 May 2016. (3) Other household lending market share includes personal loans, margin loans and other forms of lending to individuals. (4) As at 31 March 2016. 12 Commonwealth Bank of Australia – Annual Report 2016 Jun 16 vsJun 16 vsShareholder Summary 30 Jun 16 30 Jun 15Jun 15 %30 Jun 16 31 Dec 15Dec 15 %Dividends per share - fully franked (cents) 420420-22219812Dividend cover - "cash basis" (times)1. 31. 3-1. 21. 4(14)Earnings Per Share (EPS) (cents) (1)Statutory basis - basic (2)542. 5553. 7(2)268. 9273. 6(2)Cash basis - basic555. 1557. 5-270. 8284. 4(5)Dividend payout ratio (%)Statutory basis78. 375. 7260 bpts82. 973. 7largeCash basis 76. 575. 1140 bpts82. 370. 8largeWeighted average no. of shares ("statutory basis") - basic (M) (1) (2)1,6921,62741,7071,6762Weighted average no. of shares ("cash basis") - basic (M) (1)1,6931,63041,7091,6782Return on equity ("statutory basis") (%) 16. 218. 2(200)bpts15. 616. 6(100)bptsReturn on equity ("cash basis") (%) 16. 518. 2(170)bpts15. 617. 2(160)bptsFull Year EndedHalf Year Ended30 Jun 1631 Dec 1530 Jun 15Jun 16 vsJun 16 vsMarket Share (1)%%%Dec 15 Jun 15Home loans 25. 325. 125. 220 bpts10 bptsCredit cards - RBA (2)24. 424. 724. 3(30)bpts10 bptsOther household lending (3)16. 816. 917. 4(10)bpts(60)bptsHousehold deposits29. 229. 329. 4(10)bpts(20)bptsBusiness lending - RBA 16. 917. 017. 0(10)bpts(10)bptsBusiness lending - APRA 18. 718. 718. 8-(10)bptsBusiness deposits - APRA 20. 220. 320. 3(10)bpts(10)bptsAsset Finance12. 813. 113. 2(30)bpts(40)bptsEquities trading 4. 75. 66. 0(90)bpts(130)bptsAustralian Retail - administrator view (4)15. 715. 615. 810 bpts(10)bptsFirstChoice Platform (4)11. 111. 011. 110 bpts-Australia life insurance (total risk) (4)11. 411. 612. 1(20)bpts(70)bptsAustralia life insurance (individual risk) (4)10. 911. 011. 6(10)bpts(70)bptsNZ home loans21. 821. 821. 7-10 bptsNZ retail deposits21. 020. 921. 410 bpts(40)bptsNZ business lending12. 411. 911. 650 bpts80 bptsNZ retail FUA (4)15. 615. 716. 2(10)bpts(60)bptsNZ annual inforce premiums (4)28. 528. 728. 8(20)bpts(30)bptsAs atCredit RatingsLong-termShort-termOutlookFitch RatingsAA- F1+ Stable Moody's Investors ServiceAa2 P-1 Stable S&P Global RatingsAA- A-1+ Negative Group Performance Analysis Financial Performance and Business Review Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 The Group’s net profit after tax (“cash basis”) increased 3% on the prior year to $9,450 million. The Group’s net profit after tax (“cash basis”) decreased 3% on the prior half to $4,646 million. Earnings per share (“cash basis”) was flat on the prior year at 555.1 cents per share and return on equity (“cash basis”) decreased 170 basis points on the prior year to 16.5%. Earnings per share (“cash basis”) decreased 5% on the prior half to 270.8 cents per share, and return on equity (“cash basis”) decreased 160 basis points on the prior half to 15.6%. The key components of the Group result were:  Net interest income increased 7% to $16,935 million, reflecting 8% growth in average interest earning assets, partly offset by a two basis point decrease in net interest margin. Net interest margin excluding Treasury and Markets remained flat at 2.06%;  Other banking income increased 1% to $4,860 million, reflecting a strong sales performance in Markets and an increased share of profits from associates, partly offset by unfavourable derivative valuation adjustments;  Funds management income increased 4% to $2,016 million including a 3% benefit from the lower Australian dollar. This reflects a 4% increase in average Funds Under Administration (FUA), and improved FUA margins;  Insurance income was flat at $795 million with average inforce premium growth of 4% and fewer event claims, offset by an increase in income protection claims reserves resulting in loss recognition;  Operating expenses increased 4% to $10,429 million, including a 1% increase from the lower Australian dollar, higher staff costs, increased investment spend, and the higher amortisation. This was partly offset by from realisation of continued productivity initiatives; and incremental benefits  Loan impairment expense to $1,256 million, due to higher provisioning primarily in Institutional Banking and Markets, New Zealand and IFS. increased 27% It should be noted when comparing current half financial performance to the prior half that there are two fewer calendar days, impacting revenue in the current half. Key points of note in the result included the following:  Net interest income increased 1% to $8,508 million, reflecting 3% growth in average interest earning assets, partly offset by a two basis point decrease in net interest margin. Net interest margin excluding Treasury and Markets decreased one basis point to 2.05%;  Other banking income increased 1% to $2,444 million, reflecting strong growth in trading income, partly offset by lower commissions;   income decreased 5% Funds management to $984 million including a 1% decrease from the higher Australian dollar, and a 2% decrease in average Assets Under Management (AUM) and lower AUM margins; Insurance income decreased 37% to $308 million due to higher event claims, and an increase in income protection claims reserves resulting in loss recognition;  Operating expenses were flat at $5,213 million due to higher occupancy costs, offset by the continued realisation of incremental benefits from productivity initiatives; and  increased 23% impairment expense Loan to $692 million, primarily due to higher provisioning in Retail Banking Services and New Zealand, partly offset by increased write-backs in Institutional Banking and Markets. Commonwealth Bank of Australia – Annual Report 2016 13 Group Performance Analysis Net Interest Income (1) Comparative information has been reclassified to conform to presentation in the current period. NIM movement since June 2015 (1) Group NIM Group NIM excluding Treasury and Markets Group NIM (Half Year Ended) (1) Group NIM Group NIM excluding Treasury and Markets (1) Comparative information has been reclassified to conform to presentation in the current period. Year Ended June 2016 versus June 2015 Net interest income increased 7% on the prior year to $16,935 million. The result was driven by growth in average interest earning assets of 8%, partly offset by a two basis point decrease in net interest margin. Average Interest Earning Assets Average interest earning assets increased $62 billion on the prior year to $817 billion, driven by:    Home loan average balances increased $26 billion or 6% on the prior year to $437 billion. The growth in home loan balances was largely driven by domestic banking growth. Average balances for business and corporate loans increased $21 billion or 11% on the prior year to $211 billion driven by growth in institutional and business banking lending balances; and Average non-lending interest earning assets increased $14 billion or 11% on the prior year to $146 billion due to higher cash, liquid assets and trading assets. Net Interest Margin The Group’s net interest margin decreased two basis points on the prior year to 2.07%. The key drivers of the movement were: Asset pricing: Flat with the impact of home loan repricing, offset by the impact of competition on home and business lending. Funding costs: Flat with the benefit from lower wholesale funding costs of one basis point offset by a one basis point increase in deposit costs, mainly due to the lower cash rate. Portfolio mix: Increased margin of two basis points reflecting a favourable change in funding mix from proportionally higher levels of transactions and savings deposits, partly offset by an unfavourable change in lending mix. Capital and Other: Decreased margin of two basis points. The positive impact from higher capital was offset by the impact of the falling cash rate environment on free equity funding. Treasury and Markets: Decreased margin of two basis points driven by increased holdings of liquid assets and a lower contribution from Treasury and Markets. 14 Commonwealth Bank of Australia – Annual Report 2016 30 Jun 1630 Jun 15Jun 16 vs 30 Jun 1631 Dec 15Jun 16 vs $M$MJun 15 %$M$MDec 15 %Net interest income - "cash basis"16,93515,82778,5088,4271Average interest earning assetsHome loans436,530410,3066443,497429,6393Personal loans23,72223,481123,83823,6081Business and corporate loans211,356190,53711215,027207,7264Total average lending interest earning assets671,608624,3248682,362660,9733Non-lending interest earning assets 145,849131,54811146,765144,9431Total average interest earning assets817,457755,8728829,127805,9163Net interest margin (%)2. 072. 09(2)bpts2. 062. 08(2)bptsNet interest margin excluding Treasury and Markets (%)2. 062. 06-2. 052. 06(1)bpt Full Year Ended (1)Half Year Ended (1) --0.02%-(0.02%)(0.02%)1.00%1.20%1.40%1.60%1.80%2.00%2.20%Jun 15AssetpricingFundingcostsPortfoliomixBasisriskCapitalandOtherTreasuryandMarketsJun 162.06%2.07%Group NIM excluding Treasury and Markets was flat2.06%2.09% 1.00%1.20%1.40%1.60%1.80%2.00%2.20%Jun 14HalfDec 14HalfJun 15HalfDec 15HalfJun 16Half2.08%2.07%2.12%2.14%2.06%2.05%2.04%2.09%2.10%2.06% Group Performance Analysis Net Interest Income (continued) Half Year Ended June 2016 versus December 2015 Net interest income increased 1% on the prior half, with growth in average interest earning assets of 3% partly offset by a two basis point decrease in net interest margin to 2.06%. Average Interest Earning Assets the bank bill swap rate. The margin decreased one basis point as a result of an increase in the spread between the cash rate and the bank bill swap rate during the half. Capital and Other: Decreased margin of one basis point. The positive impact from higher capital was offset by the impact of the falling cash rate. Average interest earning assets increased $23 billion on the prior half to $829 billion, driven by: Treasury and Markets: Decreased margin of one basis point driven by a lower contribution from Treasury and Markets.    Home loan average balances increased $14 billion or 3% on the prior half to $443 billion, primarily driven by growth in the domestic banking business; Average balances for business and corporate loans increased $7 billion or 4% on to $215 billion, driven by growth institutional and business banking lending balances; and the prior half in Average non-lending interest earning assets increased $2 billion or 1% on the prior half. NIM movement since December 2015 (1) Net Interest Margin The Group’s net interest margin decreased two basis points on the prior half to 2.06%. The key drivers were: Asset pricing: Increased margin of one basis point, reflecting the impact of home loan repricing, partly offset by the impact of competition on home and business lending. Funding costs: Decreased margin of two basis points, reflecting an increase in deposit costs due to the lower cash rate, and an increase in wholesale funding costs. Portfolio mix: Increased margin of two basis points reflecting a favourable change in funding mix from proportionally higher levels of transactions and savings deposits. Basis risk: Basis risk arises from funding assets which are priced relative to the cash rate with liabilities priced relative to Other Banking Income Group NIM Group NIM excluding Treasury and Markets (1) Comparative information has been restated to conform to presentation in the current period. (1) Comparative information has been reclassified to conform to presentation in the current period. Year Ended June 2016 versus June 2015 Other banking income increased 1% on the prior year to $4,860 million, driven by the following revenue items: Commissions were flat on the prior year, with higher merchant fee income offset by lower credit card income following a reduction in the interchange rate; Lending fees were flat on the prior year with volume driven increases offset by reflecting competitive pressures; Institutional lower fees income to increased 5% on Trading $1,087 million. This was primarily driven by a strong sales performance in Markets and higher Treasury earnings, partly offset by unfavourable derivative valuation adjustments; and the prior year income decreased 2% on Other to $548 million, with a higher realised loss on the hedge of New Zealand earnings and lower structured asset finance income partly offset by a higher contribution from investments in associates. the prior year Commonwealth Bank of Australia – Annual Report 2016 15 0.01%0.02%(0.02%)(0.01%)(0.01%)(0.01%)1.00%1.20%1.40%1.60%1.80%2.00%2.20%Dec 15AssetpricingFundingCostsPortfoliomixBasisriskCapitalandOtherTreasuryandMarketsJun 162.08%Group NIM excludingTreasury and Markets decreased one basis point2.06%2.05%2.06%30 Jun 1630 Jun 15Jun 16 vs 30 Jun 1631 Dec 15Jun 16 vs $M$MJun 15 %$M$MDec 15 %Commissions2,2152,209-1,0641,151(8)Lending fees1,0101,005-503507(1)Trading income1,0871,039559149619Other income548558(2)2862629Other banking income - "cash basis"4,8604,81112,4442,4161Full Year Ended (1)Half Year Ended (1) Group Performance Analysis Other Banking Income (continued) Net Trading Income ($M) Half Year Ended June 2016 versus December 2015 Other banking income increased 1% on the prior half to $2,444 million, driven by the following revenue items: Commissions decreased 8% on to $1,064 million driven by a decrease in credit card income reflecting the interchange rate reduction, seasonally lower purchases and an increase in loyalty points issued in the half; the prior half Lending fees decreased 1% on the prior half to $503 million, with higher business lending fee income offset by a decrease in Institutional fees, reflecting competitive pressures; income Trading to increased 19% on $591 million due to a strong sales performance in Markets, and less unfavourable derivative valuation adjustments, partly offset by a reclassification of interest on collateral to Net- interest income; and the prior half Other income increased 9% on the prior half to $286 million due to recognition of a new associate investment, and higher gains on sales of lower structured asset finance income. investments, partly offset by Funds Management Income (1) Colonial First State incorporates the results of all Wealth Management Financial Planning businesses. Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 Funds management income increased 4% on the prior year to $2,016 million, driven by: Funds management income decreased 5% on the prior half to $984 million, driven by:    A 4% increase in average FUA reflecting positive net flows and investment market returns across the Australia and New Zealand businesses; A 1% increase in average AUM as a result of strong net flows in New Zealand and positive investment performance across the Australia and New Zealand businesses; and Improved FUA margins as a result of reduced provisioning for Advice customer remediation in CFS.    A 2% decrease in average AUM reflecting weakness in global investment markets; A decline in AUM margins as a result of a change in asset mix in the Australia business; and Flat average FUA due to subdued industry flows in Australia and New Zealand. 16 Commonwealth Bank of Australia – Annual Report 2016 32033435742617924520617230(69)(67)(7)529510496591(80)20120220320420520620Dec 14 Jun 15Dec 15 Jun 16SalesTradingCVA/FVA30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Colonial First State (CFS) (1)9298667462467(1)CFS Global Asset Management (CFSGAM)842847(1)405437(7)CommInsure120133(10)6060-New Zealand8071134040-Other4521large1728(39)Funds management income - "cash basis"2,0161,93849841,032(5)Half Year EndedFull Year Ended Insurance Income Group Performance Analysis Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 Insurance income was flat on the prior year at $795 million, driven by:     A 4% increase $3,401 million; in average inforce premiums to Fewer severe weather CommInsure General Insurance; and related event claims in Higher Wholesale Life income from repricing; offset by in increase An income protection claims reserves resulting in loss recognition in CommInsure in the current year. Insurance income decreased 37% on the prior half to $308 million, driven by:    Lower CommInsure Retail life income due to higher claims, and an increase in income protection claims reserves resulting in loss recognition; Higher weather related event claims in the current half in CommInsure; and Unfavourable claims experience in New Zealand and lower investment returns in the IFS business. Operating Expenses Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 Operating expenses increased 4% on the prior year to $10,429 million. The key drivers were: Staff expenses increased 6% to $6,164 million, driven by a 1% impact from the lower Australian dollar, salary increases and investment in frontline; Occupancy and equipment expenses increased 4% to $1,134 million, primarily due to rental reviews and an increase in depreciation; Information technology services expenses increased 15% to $1,485 million, due to higher software amortisation, increased investment spend, and volume-driven maintenance and data processing costs; Other expenses decreased 9% to $1,646 million, due to lower professional fees, lower remediation costs and reduced marketing spend; and Group expense to income ratio improved 40 basis points on the prior year to 42.4%, reflecting income growth and productivity initiatives. The banking expense to income ratio improved 90 basis points on the prior year to 38.2%. Operating expenses were $5,213 million. The key drivers were: flat on the prior half at Staff expenses were flat at $3,079 million with benefits from productivity initiatives, offset by the timing of provisions for employee entitlements; Occupancy and equipment expenses increased 3% to $575 million, primarily due to rental reviews and an increase in depreciation; Information technology services expenses decreased 3% to $733 million, driven by benefits from productivity initiatives, partly offset by higher software amortisation and increased investment spend; Other expenses increased 1% to $826 million, due to higher professional fees and an increase in non-lending losses, partly offset by reduced marketing spend; and Group expense to income ratio increased 40 basis points on the prior half to 42.6% reflecting lower relative income growth, partly offset by productivity initiatives. The banking expense to income ratio improved 60 basis points on the prior half to 38.0%. Commonwealth Bank of Australia – Annual Report 2016 17 30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %CommInsure 502503-172330(48)New Zealand2422324115127(9)IFS4642102224(8)Other515(67)(1)6largeInsurance income - "cash basis"795792-308487(37)Full Year EndedHalf Year Ended30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Staff expenses6,1645,81663,0793,085-Occupancy and equipment expenses1,1341,08645755593Information technology services expenses1,4851,29215733752(3)Other expenses1,6461,799(9)8268201Operating expenses - "cash basis"10,4299,99345,2135,216-Operating expenses to total operating income (%)42. 442. 8(40)bpts42. 642. 240 bptsBanking expense to operating income (%)38. 239. 1(90)bpts38. 038. 6(60)bptsFull Year EndedHalf Year Ended Group Performance Analysis Operating Expenses (continued) Investment Spend (1) Included within the Operating Expenses disclosure on page 17. Year Ended June 2016 versus June 2015 The Group continued to invest strongly to deliver on the strategic priorities of the business with $1,373 million incurred in the full year to 30 June 2016, an increase of 10% on the prior year. The increase is due to higher spend on risk and compliance and branch refurbishment. Significant spend on risk and compliance projects continued as systems are implemented to assist in satisfying new regulatory obligations, including Anti-Money Laundering, Stronger Super and Future of Financial Advice (FOFA) reforms. in the Group safeguarding to mitigate risks and provide greater stability for customers. information security In addition, invested further Loan Impairment Expense Year Ended June 2016 versus June 2015 Loan impairment expense increased 27% on the prior year to $1,256 million. The increase was driven by:    An increase in Retail Banking Services as a result of higher home loan arrears and losses, predominantly from deterioration in mining towns, and higher personal loan arrears; A lower level of write-backs in Business and Private Banking; An increase in Institutional Banking and Markets due to a small number of large individual provisions, a lower level of write-backs and higher collective provisions; 18 Commonwealth Bank of Australia – Annual Report 2016 Spend on branch refurbishment and other costs increased on the prior year, increased spend on largely driven by commercial office space and the refreshing of branches. further enhancements Spend on productivity and growth continued to focus on the Group’s sales delivering management capabilities, product systems across retail, business and institutional segments, digital channels and customer data insights. to Ongoing investment in the Group’s One Commbank strategy, continued to focus on better understanding customer needs and developing deeper customer relationships.    Higher rural lending provisioning within the New Zealand dairy sector, and higher unsecured retail provisioning, partly offset by improved home loan arrears; Continued albeit slower run-off of the troublesome and impaired book in Bankwest; and An increase in IFS as a result of provisions in the commercial lending portfolio. 30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Expensed investment spend (1)604539123052992Capitalised investment spend76970793873821Investment spend1,3731,246106926812Comprising:Productivity and growth701728(4)346355(3)Risk and compliance505378342622438Branch refurbishment and other1671401984831Investment spend 1,3731,246106926812Full Year EndedHalf Year Ended30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Retail Banking Services660626535530516Business and Private Banking179152181087152Institutional Banking and Markets25216751112140(20)New Zealand12083458337largeBankwest(10)(50)(80)6(16)largeIFS and Other5510large28274Loan impairment expense "cash basis"1,2569882769256423Full Year EndedHalf Year Ended Group Performance Analysis Loan Impairment Expense (continued) Half Year Loan Impairment Expense (Annualised) as a % of Average Gross Loans and Acceptances (bpts) Half Year Ended June 2016 versus December 2015 Loan impairment expense increased 23% on the prior half to $692 million mainly driven by:      An increase in home loan and personal loan arrears due to expected seasonal in Western Australia and Queensland, in Retail Banking Services; trends and deterioration A lower level of write-backs and higher collective provisions in Business and Private Banking; An increase in New Zealand rural lending provisioning and higher unsecured retail expense due to seasonal trends; and Seasonally higher consumer arrears, and slower run off of the troublesome and impaired book in Bankwest; partly offset by Lower collective provision charges and higher write- backs in Institutional Banking and Markets, partly offset by increased individual provisions. Taxation Expense Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 Corporate tax expense for the year ended 30 June 2016 increased 4% on the prior year representing a 27.5% effective tax rate. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of the profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. Corporate tax expense for the half year ended 30 June 2016 decreased 3% on the prior half representing a 27.5% effective tax rate. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of the profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. Commonwealth Bank of Australia – Annual Report 2016 19 17161714171720Jun 13Dec 13Jun 14Dec 14Jun 15Dec 15Jun 16(1) 16basis points, including the Bell group write-back (non-cash item).(1)30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Corporate tax expense ($M)3,5923,43941,7671,825(3)Effective tax rate (%)27. 527. 320 bpts27. 527. 5-Full Year EndedHalf Year Ended Group Performance Analysis Non-Cash Items Included in Statutory Profit These items were not recognised in cash profit as they were not representative of the Group’s expected ongoing financial performance. Treasury shares valuation adjustment in life funds and the managed Under IFRS, Commonwealth Bank of Australia shares held by the Group insurance businesses are defined as treasury shares and are held at cost. Distributions, realised and unrealised gains and losses were recognised in cash profit representing the underlying performance of the asset portfolio attributable to the wealth and life insurance businesses. These distributions, gains and losses are reversed as non-cash items for statutory reporting purposes. A $4 million after tax gain was included in statutory profit the year ended 30 June 2016 (30 June 2015: $28 million after tax loss). in Policyholder tax of expense 30 June 2016, Policyholder tax is included in the Wealth Management business results for statutory reporting purposes. In the year $101 million ended tax income (30 June 2015: $99 million), refund of $8 million (30 June 2015: $21 million income) and insurance income of $109 million (30 June 2015: $78 million) were recognised. The gross up of these items is excluded from cash profit, as they do not reflect the underlying performance of the business, which is measured on a net of policyholder tax basis. funds management Investment experience Investment experience primarily includes the returns on shareholder capital invested in the wealth management and insurance businesses, as well as the volatility generated through the annuity portfolio held by the Group’s Wealth Management division. This item is classified separately within cash profit. Non-cash items are excluded from net profit after tax (“cash basis”), which is management’s preferred measure of the Group’s financial performance, as they tend to be non- recurring in nature or are not considered representative of the Group’s ongoing financial performance. The impact of these items on the Group’s net profit after tax (“statutory basis”) is outlined below and treated consistently with prior comparative period and prior half disclosures. Hedging and IFRS volatility Hedging and IFRS volatility includes unrealised fair value gains or losses on economic hedges that do not qualify for hedge accounting under IFRS, including:   Cross currency interest rate swaps hedging foreign currency denominated debt issues; and Foreign exchange hedges relating Zealand earnings. to future New Hedging and IFRS volatility also includes unrealised fair value gains or losses on the ineffective portion of economic hedges that qualify for hedge accounting under IFRS. from cash profit, since Fair value gains or losses on all of these economic hedges are excluded the asymmetric recognition of the gains or losses does not affect the Group’s performance over the life of the hedge. A $200 million after tax loss was recognised in statutory profit for the year ended 30 June 2016 (30 June 2015: $6 million after tax gain). Bankwest non-cash items The acquisition of Bankwest resulted in the recognition of assets at fair value, representing certain financial instruments, core deposits, customer lists and brand name totalling $463 million. The core deposits and customer lists have been amortising over their useful life, resulting in amortisation charges of $27 million after the year ended 30 June 2016 (30 June 2015: $52 million). The core deposits have now been fully amortised. tax in 20 Commonwealth Bank of Australia – Annual Report 2016 30 Jun 1630 Jun 15Jun 16 vs30 Jun 1631 Dec 15Jun 16 vs$M$MJun 15 %$M$MDec 15 %Hedging and IFRS volatility(200)6large(49)(151)(68)Bankwest non-cash items(27)(52)(48)(1)(26)(96)Treasury shares valuation adjustment4(28)large13(9)largeOther non-cash items(23)(80)(71)12(35)largeTotal non-cash items (after tax)(223)(74)large(37)(186)(80)Full Year EndedHalf Year Ended Review of Group Assets and Liabilities Group Performance Analysis (1) Loans, bills discounted and other receivables exclude provisions for impairment which are included in Other assets. (2) Comparative information has been restated to conform to presentation in the current period. (3) During the period, following a change in terms, Interest bearing transaction deposits of $18,314 million became Non-interest bearing and have been disclosed accordingly. Year Ended June 2016 versus June 2015 Asset growth of $60 billion or 7% on the prior year was driven by increased home lending and business and corporate lending. The Group continued to satisfy a significant portion of lending growth from customer deposits. Customer deposits represent 66% of total funding (30 June 2015: 65%). Home loans Home loan balances increased $33 billion to $456 billion, reflecting an 8% increase on the prior year, driven by growth in Retail Banking Services, New Zealand and Bankwest. Consumer finance Personal loans, including credit cards and margin lending increased 2% on the prior year to $24 billion, reflecting growth in credit cards within a competitive market environment. Business and corporate loans increased $22 billion Business and corporate to loans $221 billion, an 11% increase on the prior year. This was driven by strong growth in institutional lending, particularly in the strategic focus industries of Financial Institutions and Infrastructure, and business lending in Business and Private Banking and New Zealand. Non-lending interest earning assets Non-lending interest earning assets were flat on the prior year. Other assets Other assets, including derivative assets, insurance assets and intangibles, increased $4 billion to $95 billion, a 5% increase on the prior year, reflecting higher trading and derivative asset balances. Interest bearing deposits Interest bearing deposits increased $21 billion to $549 billion, a 4% increase on the prior year. This was driven by strong growth of $15 billion in savings deposits and a $4 billion increase in other demand deposits. Debt issues Debt issues increased $6 billion to $163 billion, a 4% increase on the prior year. While deposits satisfied the majority of the Group’s funding requirements, strong access was maintained to both domestic and international wholesale debt markets. Refer to page 32 for further information on debt programs and issuance for the year ended 30 June 2016. Other interest bearing liabilities interest bearing Other loan capital, liabilities, liabilities at fair value through income statement and amounts due to other financial institutions, decreased $3 billion to $54 billion, a 6% decrease on the prior year. including Non-interest bearing transaction deposits Non-interest bearing transaction deposits, including business and personal transaction accounts, increased $23 billion to $37 billion. This includes an $18 billion increase in non- interest bearing transaction deposits following a change in terms, with underlying growth remaining strong. Other non-interest bearing liabilities Other non-interest bearing liabilities, including derivative liabilities and insurance policy liabilities, increased $5 billion to $69 billion, a 7% increase on the prior year, reflecting higher derivative liability balances driven by foreign exchange volatility. Commonwealth Bank of Australia – Annual Report 2016 21 30 Jun 1631 Dec 1530 Jun 15Jun 16 vsJun 16 vsTotal Group Assets and Liabilities$M$M$MDec 15 %Jun 15 %Interest earning assetsHome loans456,074437,176422,85148Consumer finance23,86224,01223,497(1)2Business and corporate loans220,611213,278198,476311Loans, bills discounted and other receivables (1)700,547674,466644,82449Non-lending interest earning assets (2)137,838138,499138,166--Total interest earning assets838,385812,965782,99037Other assets (1) (2)94,69390,11090,45655Total assets933,078903,075873,44637Interest bearing liabilitiesTransaction deposits (2) (3)89,78097,32789,360(8)-Savings deposits 191,313189,560176,49718Investment deposits 197,085195,814195,06511Other demand deposits 71,29360,86167,074176Total interest bearing deposits549,471543,562527,99614Debt issues 162,716162,438156,372-4Other interest bearing liabilities54,10158,14757,523(7)(6)Total interest bearing liabilities766,288764,147741,891-3Non-interest bearing transaction deposits (2) (3)37,00015,65214,168largelargeOther non-interest bearing liabilities69,03463,42964,39497Total liabilities872,322843,228820,45336As at Group Performance Analysis Review of Group Assets and Liabilities (continued) Interest bearing deposits Interest bearing deposits increased $6 billion, a 1% increase on the prior half, reflecting growth in other demand deposits, partly offset by an $18 billion decrease in transaction deposits following a change in terms. Debt issues Debt issues were flat on the prior half. Refer to page 32 for further information on debt programs and issuance for the half year ended 30 June 2016. Other interest bearing liabilities interest bearing Other loan capital, liabilities, liabilities at fair value through income statement and amounts due to other financial institutions, decreased $4 billion, a 7% decrease on the prior half. including Non-interest bearing transaction deposits Non-interest bearing transaction deposits, including business and personal transaction accounts, increased $21 billion to $37 billion. This was primarily due to an $18 billion increase in non-interest bearing transaction deposits following a change in terms, with underlying growth remaining strong. Other non-interest bearing liabilities Other non-interest bearing liabilities, including derivative liabilities and insurance policy liabilities, increased $6 billion, a 9% increase on the prior half, reflecting higher derivative liability balances driven by foreign exchange volatility. Half Year Ended June 2016 versus December 2015 Asset growth of $30 billion or 3% on the prior half was driven by increased home lending and business and corporate lending. Continued deposit growth allowed the Group to continue to satisfy a significant portion of its funding requirements through customer deposits. Customer deposits made up 66% of total funding (31 December 2015: 66%). Total assets and total liabilities include a 1% decrease due to the higher Australian dollar. Home loans Home loan balances increased $19 billion, a 4% increase on the prior half, reflecting growth in Retail Banking Services, New Zealand and Bankwest. Consumer finance Personal loans, including credit cards and margin lending decreased 1% on the prior half, due to seasonally lower credit card balances. Business and corporate loans Business and corporate loans increased $7 billion, a 3% increase on the prior half. This includes a 1% decrease due to the higher Australian dollar, and solid growth in commercial and lending balances. Non-lending interest earning assets Non-lending interest earning assets were flat on the prior half. Other assets Other assets, including derivative assets, insurance assets and intangibles increased $5 billion, a 5% increase on the prior half, reflecting higher trading and derivative asset balances. 22 Commonwealth Bank of Australia – Annual Report 2016 Group Operations and Business Settings Loan Impairment Provisions and Credit Quality Provisions for Impairment Year Ended June 2016 versus June 2015 Half Year Ended June 2016 versus December 2015 Total provisions for impairment losses increased 3% on the prior year to $3,762 million. The movement in the level of provisioning reflects: Total provisions for impairment losses increased 1% on the prior half. The movement in the level of provisioning reflects:  An increase in consumer collective provisions in home      A small number of large individually assessed provisions in Institutional Banking and Markets; An increase in commercial collective provisions from the annual review of provisioning factors and an increase in Institutional Banking and Markets collective provisions; and An increase in consumer collective provisioning, mainly due to higher home loan and personal loan arrears; partly offset by A reduction in Bankwest collective and individually assessed provisions from run-off of the troublesome and impaired book; and Reduced management overlays, mainly due to model factor updates. Economic overlays remain unchanged on the prior year. loans and personal loans;  Higher commercial collective provisions, mainly due to the annual review of provisioning factors; and  An increase in consumer individually assessed provisions due to home loan impairments in Western Australia and Queensland; partly offset by  A reduction in Bankwest collective provisions from run-off of the troublesome book and stabilising credit quality in the business portfolio; and  Reduction in management overlays, mainly due to model factor updates. Economic overlays remain unchanged. Collective Provisions ($M) Individually Assessed Provisions ($M) Commonwealth Bank of Australia – Annual Report 2016 23 30 Jun 1631 Dec 1530 Jun 15 Jun 16 vsJun 16 vs$M$M$MDec 15 %Jun 15 %Provisions for impairment lossesCollective provision2,8182,8012,76212Individually assessed provisions94490988746Total provisions for impairment losses3,7623,7103,64913Less: Provision for Off Balance Sheet exposures(44)(47)(31)(6)42Total provisions for loan impairment 3,7183,6633,61823As at 762812 859 981983 1,077 264232 187 755774 695 Jun 15Dec 15Jun 162,8012,818492558 566 128132 169 267219 209 Jun 15Dec 15Jun 16909944OverlayBankwestConsumerCommercial2,762887 Group Operations and Business Settings Loan Impairment Provisions and Credit Quality (continued) Credit Quality 90+ Days Arrears Ratios (%) (1) Troublesome and Impaired Assets Commercial troublesome assets increased 14% during the year to $3,476 million. Gross impaired assets increased 9% on the prior year to $3,116 million. Gross impaired assets as a proportion of GLAAs of 0.44% was unchanged on the prior year. Troublesome and Impaired Assets ($B) Provision Ratios Provision coverage ratios remain prudent. The impaired asset portfolio remains well provisioned with provision coverage of 36.17%. Asset Quality Troublesome and impaired assets have increased over the year reflecting increased stress in the commodity and commodity related sectors. The arrears for the home loan and credit card portfolios are relatively low, however personal loan arrears continues to be elevated, primarily in Western Australia and Queensland. Retail Portfolios – Arrears Rates from 0.52% Home loan arrears were mixed over the year, with 30+ day arrears decreasing from 1.25% to 1.21% and 90+ day arrears increasing to 0.54%. Credit card arrears improved over the year with 30+ day arrears falling from 2.66% to 2.41% and 90+ day arrears reducing from 1.05% to 0.99%. Personal loan arrears deteriorated with 30+ day arrears increasing from 3.28% to 3.46%, and 90+ day arrears increasing from 1.34% to 1.46%. 30+ Days Arrears Ratios (%) (1) (1) Includes retail portfolios of Retail Banking Services, Bankwest and New Zealand. 24 Commonwealth Bank of Australia – Annual Report 2016 Jun 16 vsJun 16 vsCredit Quality Metrics30 Jun 1630 Jun 15Jun 15 %30 Jun 1631 Dec 15Dec 15 %Gross loans and acceptances (GLAA) ($M)701,730646,1729701,730675,7284Risk weighted assets (RWA) ($M) - Basel III 394,667368,7217394,667392,6621Credit RWA ($M) - Basel III 344,030319,1748344,030334,9573Gross impaired assets ($M) 3,1162,85593,1162,78812Net impaired assets ($M) 1,9891,82991,9891,75613Provision RatiosCollective provision as a % of credit RWA - Basel III0. 820. 87(5)bpts0. 820. 84(2)bptsTotal provisions as a % of credit RWA - Basel III1. 091. 14(5)bpts1. 091. 11(2)bptsTotal provisions for impaired assets as a % of gross impaired assets36. 1735. 9423 bpts36. 1737. 02(85)bptsTotal provisions for impairment losses as a % of GLAAs0. 540. 56(2)bpts0. 540. 55(1)bpt Asset Quality RatiosGross impaired assets as a % of GLAAs0. 440. 44-0. 440. 413 bptsLoans 90+ days past due but not impaired as a % of GLAAs 0. 330. 36(3)bpts0. 330. 303 bptsLoan impairment expense ("cash basis") annualised as a % of average GLAAs0. 190. 163 bpts0. 200. 173 bptsFull Year EndedHalf Year Ended 1.0%2.0%3.0%4.0%Jun 14Dec 14Jun 15Dec 15Jun 16Personal LoansHome LoansCreditCards 0.0%1.0%2.0%Jun 14Dec 14Jun 15Dec 15Jun 16Home LoansPersonal LoansCreditCards 5.2 4.33.63.13.13.13.54.3 3.93.43.42.92.83.1Jun 13Dec 13Jun 14Dec 14Jun 15Dec 15Jun 16Commercial TroublesomeGross Impaired6.09.58.27.06.55.96.6 Group Operations and Business Settings Capital Basel Regulatory Framework Background The Basel Committee on Banking Supervision (BCBS) has implemented a set of capital, liquidity and funding reforms known as “Basel III”. The objectives of the reforms are to increase the quality, consistency and transparency of capital, to enhance the risk coverage framework, and to reduce systemic and pro-cyclical risk. The major reforms are being implemented on a phased approach to 1 January 2019. were reforms implemented The Australia on 1 January 2013. APRA has adopted a more conservative approach than the minimum standards published by the for BCBS and also adopted an accelerated implementation. timetable in The APRA prudential standards require a minimum CET1 ratio of 4.5% effective from 1 January 2013. An additional CET1 capital conservation buffer of 3.5%, inclusive of a Domestic Systemically Important Bank (DSIB) requirement of 1% and a countercyclical capital buffer (CCyB)(1) of 0%, was effective from 1 January 2016, bringing the CET1 requirement to at least 8%. Financial System Inquiry In December 2014, the Government released the final report of the Financial System Inquiry (FSI). In July 2015, in connection with the FSI recommendations, APRA released the following:   (APRA study), which endorsed Information paper: “International capital comparison study” the FSI recommendation that the capital of Australian ADIs should be unquestionably strong; and An announcement in relation to increases in the capital requirements under the IRB approach for Australian residential mortgages, effective from 1 July 2016, with the change aimed at increasing mortgage competition between the major banks and non-major banks. In September 2015, the Group completed a $5.1 billion institutional and retail entitlement offer, ahead of the implementation of the increased capital requirements for Australian residential mortgages. APRA is expected to consult further with the industry on the FSI recommendations during 2017. Internationally Comparable Capital Position The Group’s CET1 as measured on an internationally comparable basis was 14.4% as at 30 June 2016, placing it amongst the top quartile of international peer banks. In July 2016, APRA updated their analysis of the international capital comparison and confirmed that the major Australian banks all hold capital at levels which place them in the top quartile of international peer banks. (1) In December 2015, APRA announced that the CCyB for Australian exposures has been set at 0%, and the Group has limited exposures to those offshore jurisdictions in which a CCyB in excess of 0% has been imposed. International Peer Basel III CET1 Source: Morgan Stanley and CBA. Based on last reported CET1 ratios up to 5 August 2016 assuming Basel III capital reforms fully implemented. Peer group comprises listed commercial banks with total assets in excess of AUD750 billion and which have disclosed fully implemented Basel III ratios or provided sufficient disclosure for a Morgan Stanley estimate. (1) APRA Insight Issue Two “International capital comparison update” (4 July 2016). (2) Domestic peer figures as at 31 March 2016. NAB included in peer bank top quartile in accordance with APRA update (see 1 above). (3) Deduction for accrued expected future dividends added back for comparability. Commonwealth Bank of Australia – Annual Report 2016 25 17.7 14.9 14.7 14.5 14.4 14.0 13.9 13.5 13.5 13.5 13.2 13.0 12.9 12.5 12.4 12.1 12.1 11.9 11.8 11.6 11.6 11.4 11.4 11.4 11.3 11.3 11.1 10.8 10.8 10.7 10.6 10.6 10.5 10.3 10.3 10.2 10.1 10.1 NordeaUBSWBCRBSCBAANZINGLloydsIntesa SanpaoloChina Construct. BankStandard CharteredNABICBCCitiHSBCSumitomo MitsuiChina Merchants BankJP MorganCredit SuisseBarclaysCommerzbankCredit Agricole SAMitsubishi UFJBNP ParibasSocGenBank of ChinaBank of CommBBVADeutscheMizuhoWells FargoSantanderBank of AmericaUniCreditRBCAgri. Bank of ChinaScotiabankToronto Dominion32223333%APRA top quartile (1)3333333333 Group Operations and Business Settings Other Regulatory Changes Basel Committee on Banking Supervision The BCBS has issued a number of consultation documents, associated with:       Design of a framework for the application of capital floors based on standardised approaches; Revisions to the standardised approach for credit risk; Implementation of constraints on the use of internal credit risk models; Fundamental review of the trading book; Revisions to operational risk; and Interest rate risk in the banking book. Finalisation of the review of the trading book requirements was completed in January 2016 with an effective implementation date of 1 January 2019. The review of IRRBB was completed in April 2016 with the BCBS concluding that there will be no requirement to include this risk in the capital ratio calculation. However additional disclosure requirements will be implemented from 1 January 2018. Finalisation with respect to the remaining proposals is expected to be completed by the BCBS by the end of 2016. APRA is expected to consult on the domestic application of the above changes in 2017. Composition of Level 2 ADI Groups In May 2014, APRA provided more clarity on the definition of the Level 2 Banking Group. Subsidiary intermediate holding companies are considered part of the Level 2 Group, regardless of the nature of any activity undertaken by their operating subsidiaries. As a result, capital benefits arising from the debt issued by the Colonial Group are being phased out. APRA granted these changes, in line with the maturity profile of the debt. transition arrangements on Conglomerate Groups APRA is extending its prudential supervision framework to Conglomerate Groups that have material operations in more than one APRA regulated industry and/or have one or more material unregulated entities. In March 2016 APRA advised that it was deferring finalisation of the capital requirements with respect to conglomerates until after the completion of other domestic and international policy initiatives. APRA does not anticipate that consultation on the capital requirements will commence earlier than mid-2017 and implementation will be no earlier than 2019. Non capital related requirements, which include such items as governance, risk exposures and intra group exposures, will become effective on 1 July 2017. Capital (continued) Capital Position The Group strengthened its capital position during the year with its CET1 ratio as measured on an APRA basis of 10.6% at 30 June 2016, compared with 10.2% at 31 December 2015 and 9.1% at 30 June 2015. The capital ratios were maintained well in excess of regulatory minimum capital adequacy requirements at all times throughout the year. (1) (1) Analysis aligns with the 13 July 2015 APRA study titled “International capital comparison study”. The increase in the Group’s CET1 ratio across the June 2016 half year reflects the impact of the capital generated from earnings, partly offset by the December 2015 interim dividend (net of issuance of shares in respect of the impact of the Dividend Reinvestment Plan (DRP)). The movement in Total Risk Weighted Assets (RWA) over the half year was minimal with growth in credit, operational and market RWA, offset by a decrease in interest rate risk in the banking book (IRRBB) RWA. The increase in the Group’s CET1 ratio across the June 2016 full year incorporates the benefit of the issuance of shares as part of the entitlement offer completed in September 2015. Capital Initiatives following significant CET1 capital The undertaken during the year: initiatives were    $5.1 billion institutional and retail entitlement offer; The DRP in respect of the 2015 final dividend was satisfied by the issuance of $657 million of ordinary shares, representing a participation rate of 18.1%; and The DRP in respect of the 2016 interim dividend was satisfied by the issuance of $552 million of ordinary shares, representing a participation rate of 16.3%. Pillar 3 Disclosures Details on the market disclosures required under Pillar 3, per prudential standard APS 330 “Public Disclosure”, are provided on the Group’s website at: www.commbank.com.au/about-us/investors/shareholders. 26 Commonwealth Bank of Australia – Annual Report 2016 9.1%10.2%10.6%14.4%Jun 15Basel IIIDec 15Basel IIIJun 16Basel IIIJun 16Basel IIICET1 Ratio (Internationally Comparable)CET1 Ratio (APRA) Group Operations and Business Settings Capital (continued) The tables below show the APRA Basel III capital adequacy calculation at 30 June 2016 together with prior period comparatives. (1) Represents shares held by the Group's life insurance operations ($104 million) and employee share scheme trusts ($180 million). (2) Represents foreign currency translation reserve and available-for-sale investments reserve balances associated with the insurance and funds management entities and those entities through which securitisation of the Group's assets are conducted. These entities are classified as non- consolidated subsidiaries by APRA and are excluded from the Level 2 Regulatory Consolidated Banking Group. (3) Cumulative current period profit and retained earnings adjustments for subsidiaries not consolidated for regulatory purposes. (4) Non-controlling interests predominantly comprise ASB Perpetual Preference Shares of NZD550 million issued by a New Zealand subsidiary entity. These are non-redeemable and carry limited voting rights. These are classified as additional Tier 1 Capital. Commonwealth Bank of Australia – Annual Report 2016 27 30 Jun 1631 Dec 1530 Jun 15Risk Weighted Capital Ratios%%%Common Equity Tier 110. 610. 29. 1Tier 112. 312. 211. 2Tier 22. 01. 91. 5Total Capital14. 314. 112. 730 Jun 1631 Dec 1530 Jun 15$M$M$MOrdinary Share Capital and Treasury SharesOrdinary Share Capital33,84533,25227,619Treasury Shares (1)284325279Ordinary Share Capital and Treasury Shares34,12933,57727,898ReservesReserves2,7342,5542,345Reserves related to non-consolidated subsidiaries (2)(143)(181)(93)Total Reserves2,5912,3732,252Retained Earnings and Current Period ProfitsRetained earnings and current period profits23,62722,54821,528Retained earnings adjustment from non-consolidated subsidiaries (3)(451)(481)(529)Net Retained Earnings23,17622,06720,999Non-controlling interestNon-controlling interest (4)550554562Less ASB perpetual preference shares(505)(505)(505)Less other non-controlling interests not eligible for inclusion in regulatory capital(45)(49)(57)Minority Interest---Common Equity Tier 1 Capital before regulatory adjustments59,89658,01751,149 Group Operations and Business Settings Capital (continued) (1) Goodwill excludes $322 million which is included in equity investments in non-controlled subsidiaries. (2) Other intangibles (including capitalised software costs), net of any associated deferred tax liability. (3) In accordance with APRA regulations, the surplus in the Group’s defined benefit superannuation fund, net of any deferred tax liability, must be deducted from Common Equity Tier 1. (4) Adjustment to ensure the Group has sufficient provisions and capital to cover credit losses estimated to arise over the full life of individual facilities, as required by APRA Prudential Standard APS 220. (5) Represents the Group’s non-controlling interest in other entities. (6) Non-consolidated subsidiaries primarily represents the insurance and funds management companies operating within the Colonial Group. The adjustment at 30 June 2016 is net of $900 million in non-recourse debt (31 December 2015: $900 million, 30 June 2015: $900 million) and $1,000 million in Colonial Group Subordinated Notes (31 December 2015: $1,000 million, 30 June 2015: $1,000 million). The Group’s insurance and fund management companies held $1,215 million of capital in excess of minimum regulatory capital requirements at 30 June 2016. (7) Regulatory Expected Loss (pre-tax) using stressed loss given default assumptions associated with the loan portfolio in excess of eligible credit provisions (pre-tax). (8) As at 30 June 2016, comprises PERLS VIII $1,450 million issued in March 2016, PERLS VII $3,000 million issued in October 2014 and PERLS VI $2,000 million issued in October 2012. (9) Represents APRA Basel III non-compliant Additional Tier 1 Capital Instruments that are eligible for Basel III transitional relief. In the June 2016 half year the Group redeemed USD700 million in Trust Preferred Securities 2006 and bought back and cancelled AUD1,166 million of PERLS III. (10) Represents holdings of Additional Tier 1 capital instruments issued by the Colonial Mutual Life Assurance Society Limited. (11) In the June half year, the Group issued AUD750 million Tier 2 subordinated notes (December half year issued USD1,250 million Tier 2 subordinated notes). (12) Includes both perpetual and term instruments subordinated to depositors and general creditors, having an original maturity of at least five years. APRA require these to be included as if they were unhedged. Term instruments are amortised 20% of the original amount during each of the last five years to maturity. These instruments are eligible for Basel III transitional relief. (13) Represents the collective provision and general reserve for credit losses for exposures in the Group which are measured for capital purposes under the Standardised approach to credit risk. 28 Commonwealth Bank of Australia – Annual Report 2016 30 Jun 1631 Dec 1530 Jun 15$M$M$MCommon Equity Tier 1 regulatory adjustmentsGoodwill (1)(7,603)(7,597)(7,599)Other intangibles (including software) (2)(2,313)(2,294)(2,253)Capitalised costs and deferred fees(535)(498)(559)Defined benefit superannuation plan surplus (3)(183)(307)(193)General reserve for credit losses (4)(386)(270)(242)Deferred tax asset(1,443)(1,078)(1,164)Cash flow hedge reserve(473)(137)(263)Employee compensation reserve(132)(85)(122)Equity investments (5)(3,120)(3,263)(3,179)Equity investments in non-consolidated subsidiaries (1) (6)(1,458)(1,688)(1,705)Shortfall of provisions to expected losses (7)(314)(245)(134)Gain due to changes in own credit risk on fair valued liabilities(161)(132)(144)Other(112)(207)(194)Common Equity Tier 1 regulatory adjustments(18,233)(17,801)(17,751)Common Equity Tier 141,66340,21633,398Additional Tier 1 CapitalBasel III complying instruments (8)6,4505,0005,000Basel III non-complying instruments net of transitional amortisation (9)6402,7562,749Holding of Additional Tier 1 Capital (10)(200)--Additional Tier 1 Capital6,8907,7567,749Tier 1 Capital48,55347,97241,147Tier 2 CapitalBasel III complying instruments (11)5,8345,0333,268Basel III non-complying instruments net of transitional amortisation (12)1,9342,1412,257Holding of Tier 2 Capital (25)(19)(20)Prudential general reserve for credit losses (13)181178156Total Tier 2 Capital7,9247,3335,661Total Capital56,47755,30546,808 Group Operations and Business Settings Capital (continued) (1) APRA requires RWA amounts that are derived from IRB risk weight functions to be multiplied by a factor of 1.06. Commonwealth Bank of Australia – Annual Report 2016 29 30 Jun 1631 Dec 1530 Jun 15Risk Weighted Assets$M$M$MCredit RiskSubject to Advanced IRB approachCorporate67,62469,39260,879SME Corporate28,26125,06625,289SME Retail4,6735,3285,068SME Retail secured by residential mortgage 2,6542,6702,949Sovereign6,2476,1475,163Bank12,35712,58112,024Residential mortgage79,01775,01074,382Qualifying revolving retail 9,3379,3068,861Other retail14,24714,24913,942Impact of the regulatory scaling factor (1)13,46513,18512,513Total Risk Weighted Assets subject to Advanced IRB approach237,882232,934221,070Specialised lending exposures subject to slotting criteria56,79554,88551,081Subject to Standardised approachCorporate10,98210,28410,357SME Corporate4,1334,5715,921SME Retail6,1226,0935,843Sovereign268206209Bank224236244Residential mortgage7,4287,0446,728Other retail2,7502,7442,679Other assets5,3605,8114,982Total Risk Weighted Assets subject to Standardised approach37,26736,98936,963Securitisation1,5111,5671,653Credit valuation adjustment8,2737,6867,712Central counterparties2,302896695Total Risk Weighted Assets for Credit Risk Exposures344,030334,957319,174Traded market risk9,4397,4516,335Interest rate risk in the banking book7,44817,51110,847Operational risk33,75032,74332,365Total Risk Weighted Assets394,667392,662368,721 Group Operations and Business Settings Dividends Final Dividend for the Year Ended 30 June 2016 The final dividend declared was $2.22 per share, bringing the total dividend for the year ended 30 June 2016 to $4.20 per share, in line with the prior full year dividend. This represents a dividend payout ratio (“cash basis”) of 76.5%. The final dividend will be fully franked and will be paid on 29 September 2016 to owners of ordinary shares at the close of business on 18 August 2016 (record date). Shares will be quoted ex-dividend on 17 August 2016. Dividend Reinvestment Plan (DRP) The DRP will continue to be offered to shareholders but no discount will be applied to shares allocated under the plan for the final dividend. Dividend Policy The Group will seek to:   Pay cash dividends at strong and sustainable levels; Target a full-year payout ratio of 70% to 80%; and  Maximise the use of its franking account by paying fully Full Year Dividend History (cents per share) franked dividends. 80% Target Range 70% _______________________________________________________________________________________________________ Leverage Ratio (1) Total exposures is the sum of on Balance Sheet exposures, derivatives, Securities Financing Transactions (SFTs), and off Balance Sheet exposures, net of any Tier 1 regulatory deductions, as outlined in APS 110 “Capital Adequacy”. (2) The Tier 1 Capital included in the calculation of the internationally comparable leverage ratio aligns with the 13 July 2015 APRA study titled “International capital comparison study”, and includes Basel III non-compliant Tier 1 instruments that are currently subject to transitional rules. The Group’s leverage ratio, defined as Tier 1 Capital as a percentage of total exposures, was 5.0% at 30 June 2016 on an APRA basis and 5.6% on an internationally comparable basis. The BCBS has advised that the leverage ratio will migrate to from a Pillar 1 minimum capital requirement of 3% 1 January 2018. The BCBS will confirm the final calibration in 2017. The ratio remained stable across the June 2016 half year with an increase in capital levels offset by growth in exposures. The Group commenced disclosure of its leverage ratio from 30 September 2015, thus no prior year comparatives have been presented. 30 Commonwealth Bank of Australia – Annual Report 2016 29032033436440142042073.9%73.2%75.8%75.9%75.1%75.1%76.5%0%20%40%60%80%100%120%140%-5050150250350450Jun 10Jun 11Jun 12Jun 13Jun 14Jun 15Jun 16DPSPayout Ratio ("cash basis")Summary Group Leverage Ratio 30 Jun 1631 Dec 15Tier 1 Capital ($M)48,55347,972Total Exposures ($M) (1)980,846952,969Leverage Ratio (APRA) (%)5. 05. 0Leverage Ratio (Internationally Comparable) (%) (2)5. 65. 6As at Group Operations and Business Settings Liquidity (1) (2) (3) Includes all repo-eligible securities with the Reserve Bank of New Zealand. The Exchange Settlement Account (ESA) cash balance is netted down by the Reserve Bank of Australia open-repo of internal Residential Mortgage-Backed Securities (RMBS). Includes all interbank deposits that are included as short-term wholesale funding on page 32. Includes cash inflows. June 2016 versus June 2015 June 2016 versus December 2015 The Group holds high quality, well diversified liquid assets to meet Balance Sheet liquidity needs and internal and external regulatory requirements, such as APRA’s Liquidity Coverage Ratio (LCR). At 30 June 2016, the Group’s LCR was 120%, which remained flat on the prior year. High Quality Liquid Assets (HQLA) in the form of cash, deposits with central banks, Australian Commonwealth Government and Semi-Government securities increased $9 billion to $75 billion, as the group managed its liquidity position ahead of a reduction in the RBA’s Committed Liquidity Facility (CLF) effective 1 January 2016. At 30 June 2016, the Group’s LCR was 120%, down from 123% on the prior half. LCR liquid assets of $134 billion, decreased $6 billion on the prior half, primarily due to a decrease in the CLF. Projected NCOs decreased $2 billion on the prior half. Projected customer deposit cash outflows increased $3 billion while wholesale funding projected cash outflows decreased $6 billion due to lower debt maturities in the next 30 days. Liquid assets surplus to regulatory requirements remained stable at $22 billion, with 30 June 2016 of $134 billion, including the CLF. total liquid assets as at Projected Net Cash Outflows (NCOs) increased $1 billion on the prior year to $111 billion. Projected customer deposit cash outflows increased $4 billion to $70 billion. Wholesale funding projected cash outflows decreased $11 billion to $19 billion as a result of lower debt maturities in the next 30 days. Other projected cash outflows increased $8 billion to $22 billion due to an increase in collateral requirements and growth in credit facilities. For further information on the Group’s liquidity management please see Note 34 of the Annual Report. Commonwealth Bank of Australia – Annual Report 2016 31 30 Jun 1631 Dec 1530 Jun 15Jun 16 vsJun 16 vsLevel 2$M$M$MDec 15 %Jun 15 %Liquidity Coverage Ratio (LCR) Liquid AssetsHigh Quality Liquid Assets (HQLA) (1)75,14773,657 65,940 214Committed Liquidity Facility (CLF)58,50066,00066,000(11)(11)Total LCR liquid assets133,647139,657131,940(4)1Net Cash Outflows (NCO)Customer deposits70,13967,13765,83247Wholesale funding (2)19,40625,31630,753(23)(37)Other net cash outflows (3)21,85420,75413,819558Total NCO111,399113,207110,404(2)1Liquidity Coverage Ratio (%)120123120(300)bpts-LCR surplus 22,24826,45021,536(16)3As at Group Operations and Business Settings Funding (1) Total funding has been restated to better align with peers and international best practice. (2) Shareholders’ equity is excluded from this view of funding sources, other than the USD Trust Preferred Securities (redeemed March 2016), which are classified as other equity instruments in the statutory Balance Sheet. (3) Residual maturity of long-term wholesale funding included in Debt issues, Loan capital and Share capital – other equity instruments, is the earlier of the next call date or final maturity. (4) Short-term collateral deposits includes net collateral received and the amount of internal RMBS pledged with the Reserve Bank to facilitate intra-day cash flows in the Exchange Settlement Account. June 2016 versus June 2015 June 2016 versus December 2015 Customer Deposits Customer Deposits Customer deposits accounted for 66% of total funding at 30 June 2016, an increase of 1% on the prior year. Strong deposit growth has seen the Group satisfy a significant proportion of its funding requirements from retail, business and institutional customer deposits. Customer deposits accounted for 66% of total funding at 30 June 2016, in line with the prior half. Strong deposit growth has seen the Group satisfy a significant proportion of its funding requirements from retail, business and institutional customer deposits. Short-Term Wholesale Funding Short-Term Wholesale Funding Short-term wholesale funding(1) accounted for 42% of total wholesale funding at 30 June 2016, a decrease of 1% on the prior year. The increase in short-term wholesale funding of $4 billion was driven largely by the impact of the lower Australian dollar. Long-Term Wholesale Funding The cost of new long-term wholesale funding(2) increased compared to the prior year. During the period, the Group raised $38 billion of long-term wholesale funding in multiple currencies including AUD, USD, EUR, and GBP. Most issuance was in senior unsecured format, although the Group used its covered bond and RMBS programs to provide cost, tenor and diversification benefits. The Group also issued Basel III compliant Tier 2 capital deals in the Australian and US dollar markets. issued The Weighted Average Maturity (WAM) of new long-term wholesale debt to June 2016 was 5.2 years. The WAM of outstanding long-term wholesale debt with a residual maturity greater than 12 months was 4.1 years at 30 June 2016. in the year Long-term wholesale funding (including an adjustment for IFRS MTM and derivative FX revaluations) accounted for 58% of total wholesale funding at 30 June 2016, compared to 57% in the prior year. Short-Term Collateral Deposits Short-term collateral deposits accounted for 1% of total funding at 30 June 2016, a decrease of 1% on the prior year. Net Collateral received decreased $3 billion driven by restructure of swaps and lower interest yields, partly offset by the impact of the lower Australian dollar. 32 Commonwealth Bank of Australia – Annual Report 2016 Short-term wholesale funding accounted for 42% of total wholesale funding at 30 June 2016, a decrease of 1% on the prior half. Long-Term Wholesale Funding The cost of new long-term wholesale funding increased on the prior half as ongoing macroeconomic uncertainty, particularly in commodity markets and emerging economies, weighed on markets. During the half, the Group raised $21 billion of long-term wholesale funding. The WAM of new long-term wholesale debt issued in the six months to June 2016 was 5.2 years. Long-term funding (including an adjustment for IFRS MTM and derivative FX revaluations) accounted for 58% of total wholesale funding at 30 June 2016, compared to 57% in the prior half. Short-Term Collateral Deposits Short-term collateral deposits accounted for 1% of total funding at 30 June 2016, which was in line with the prior half. Net Collateral received decreased $2 billion, largely due to the impact of the higher Australian dollar. For further information on Funding risk, please refer to Note 34 to the Financial Statements. (1) Short term wholesale funding includes debt with an original maturity or call date of less than or equal to 12 months, and consists of certificates of deposit and bank acceptances, debt issued under the EMTN program and the domestic, Euro and US commercial paper programs of Commonwealth Bank of Australia and ASB. Short-term wholesale funding also includes deposits from banks and central banks as well as net repurchase agreements. (2) Long-term wholesale funding includes debt with an original maturity or call date of greater than 12 months. 30 Jun 1631 Dec 1530 Jun 15Jun 16 vsJun 16 vsGroup Funding (2)$M$M$MDec 15 %Jun 15 %Customer deposits517,974500,356477,81148Short-term wholesale funding110,714108,783106,76324Long-term wholesale funding - less than or equal to one year residual maturity29,29728,07528,39243Long-term wholesale funding - more than one year residual maturity (3)118,121113,332111,42946IFRS MTM and derivative FX revaluations4,1492,4882,3466777Total wholesale funding 262,281252,678248,93045Short-term collateral deposits (4)8,3239,94211,729(16)(29)Total funding788,578762,976738,47037As at (1) Introduction Corporate Responsibility takes many forms in the Group as we look to deliver long-term value through our role in society, our people and the way we do business. Guided by the Group’s vision we actively consider the environmental, social and economic impacts of our activities and look for ways to make a positive contribution beyond our core business. Creating Long-Term Value for Stakeholders Examples of the value created for the stakeholders of the Group during the 2016 financial year (2016) include:  With more than 51,000 people, the Group’s annual payroll expenditure was more than $6.1 billion;     The Group returned more than 75 per cent of its profits to more than 800,000 Australians who hold CBA shares directly, and millions more who hold them through superannuation funds; The Group’s tax expense was more than $3.5 billion, making it Australia’s largest taxpayer; The Group directly helped 229 grassroots community organisations make a positive impact on the health and wellbeing of Australian youth; and The Group made voluntary community contributions of $262 million in the form of cash, time, foregone revenue and program implementation costs. This represents more than 2.0 per cent of pre-tax profits. Our Approach to Corporate Responsibility The Group’s Corporate Responsibility 2016 - 2018 Strategy has two pillars: Our Role in Society and The Way We Do Business, with key priorities under each pillar to address the Group’s material Environmental, Social and Governance (ESG) issues. It guides the Group’s approach to the effective management of those issues and associated risks and opportunities and complies with the ASX Corporate Governance Principles and Recommendations. In 2016 the Group further mapped out its priorities and as a result, identified the need to specifically call out programs of work to related communities. their contribution its people and to Strengthening our Approach to Reporting Progress and performance against the Group’s Corporate Responsibility Strategy 2016 - 2018 is publicly available in the standalone Corporate Responsibility Report, released alongside the Annual Report. The Group’s non-financial is organised and presented in accordance with the Global Reporting Initiative (GRI) G4 Framework using the 'Core' option. reporting The Group is a signatory to the United Nations Global Compact (UNGC) and committed to working with local and international peers, as well as the United Nations Environment Programme for Finance Initiative (UNEPFI) to establish consistent measures and methodologies across the industry. In addition, the Group continues its progress against a number of sustainability global leading indices and surveys including: to benchmark  Global 100 Index (G100). In 2016, the Group ranked fourth in the world, making it the number one Australian company and number one bank in the world in the G100. Corporate Responsibility    Dow Jones Sustainability Indices (DJSI). In 2016, the Group was again included in the World Index. CDP (formerly the Carbon Disclosure Project). In 2016 and for the seventh consecutive year, the Group was included in the CDP ASX 200 Climate Disclosure Leadership Index. FTSE4Good Index. The Group continues to be included in the Index, which measures the performance of companies demonstrating strong ESG practices. Our Role in Society Invest in Education and Skills for the Workforce of the Future As the Australian economy transitions to more knowledge- based industries, the Group continues to focus its community investment to support the skills needed for a new economy. In 2015 the Group made a $50 million investment in education, to be delivered over the following three years. Teaching Students Financial Skills to Participate in the Economy of the Future continues The Group to demonstrate its commitment to the Start through education Smart Program with more than 1.9 million students booked since the program started in 2009 and the School Banking than Program, with more 330,000 students actively participating in 2016. Supporting Evidence for Learning and Education Excellence As part of its commitment to education, the Group launched Evidence for Learning, a new social enterprise set up by Social Ventures Australia, incubated with Commonwealth Bank funding. A new Learning Impact Fund evaluates education programs in Australia to raise the academic achievement of children and young adults. Develop Innovative Products and Services to Support our Customers in the Economy of the Future For the Group, innovation is about providing customers with technologies and services that fundamentally change the way they access and manage their finances, for the better. Drive Digital Innovation for Improved Products and Services During 2016, the Group delivered the following innovations:    Instant Banking - New to bank customers are able to download the CommBank app and open a transaction account within a couple of minutes without needing to go into a branch or make a phone call when required identification is provided. New property app - The updated CommBank Property app, available on Android and iOS uses multiple data sources to provide customers with informative data, estimated market prices and allow them to apply for conditional eligibility. the Hong Kong Launch of in January 2016, which enables customers, employees and start-up communities to access the latest FinTech developments. Innovation Lab Commonwealth Bank of Australia - Annual Report 2016 33 Corporate Responsibility In addition, the Group has invested in cybersecurity and quantum computing projects in partnership with the University of New South Wales, providing $1.6 million to develop a centre of expertise for cybersecurity education and boost the nation’s reserve of quality security engineering professionals. The Group also committed in-principle $10 million to support first silicon-based quantum efforts computer in Sydney. the world’s to build Develop Products and Services that Consider Economic, Environmental and Social Issues Internationally, the Group is investing in innovation to support emerging markets and provide underserved communities with banking services. For example in Indonesia, as part of the WISE (Women the Group launched a mobile app built as a platform for women to receive and exchange information with other women, with a focus on financial education. Investment Series) initiative Within Australia, the Group provides specialised banking services to the not-for-profit sector, with reduced fees and tailored products. The Women in Focus online community supports women-led businesses, while the Group’s Community Business Finance team offers affordable banking solutions to groups such as Indigenous Australians, the disadvantaged and migrants. Our People Treat all People with Respect and Fairness The Group has a range of strategies and programs to ensure that employees, other stakeholders and the wider community are valued and respected. Implement 2015-2017 Diversity and Inclusion Strategy The 2015-2017 Diversity and Inclusion Strategy provides a roadmap for the Group to enhance its culture so that all people feel included and connected. The strategy comprises five strategic goals – Inclusive Leadership; Diversity in Leadership; You Can Be You; Flexibility; and Reputation and Engagement. The Group was named the second most inclusive employer in the 2016 Australian Workplace Equality Index (AWEI) Awards, which recognises workplace support for LGBTI people. Its employee network Unity was also named the 2016 LGBTI Employee Network of the Year. In 2015 the Group made a further commitment to women in senior leadership roles by announcing a 40 per cent target for women in Executive Manager and above positions by 2020. Women currently make up 58 per cent of the Group’s workforce. 43.6 per cent are in management roles, with 35.2 per cent in Executive Manager or above roles. The Group is a signatory to the United Nations Women’s Empowerment Principles. In May 2016, in accordance with the requirements of the Workplace Gender Equality (WGE) Act 2012, the Group’s annual WGE Compliance report was lodged with the WGE Agency and can be viewed at www.commbank.com.au/diversitycommitment. Commonwealth Bank has also been awarded the Workplace Gender Equity Agency Employer of Choice for Gender Equality citation. 34 Commonwealth Bank of Australia – Annual Report 2016 In late 2015, the Group’s Executive Committee and Board endorsed a cultural diversity target for its Executive Manager and above positions to match the cultural diversity of the Australian population by 2020. Implement Accessibility and Inclusion Programs In 2016, the Group continued to roll out a number of initiatives to deliver more accessible services and better employment access for people with disability, as well as training and awareness campaigns to build disability confidence in its leaders and employees. The Group also embedded this into the Group’s operating systems and processes with the establishment of an internal Digital Accessibility Guild, to share better practice and knowledge internally. Launch Elevate Reconciliation Action Plan including Commitment to Indigenous Employment Parity the Group launched an Elevate In June 2016 level Reconciliation Action Plan (RAP), building on its previous RAPs, and announced it would significantly raise the number of Indigenous Australians it employs, with an aim of achieving Indigenous employment parity within 10 years. The parity announcement in Commonwealth Bank’s Indigenous Careers Program, which launched in 2002. Key developments in the program include: latest stage the is     Ran a school-based traineeship program for Indigenous teens (more than 400 trainees have progressed through the program since 2002). Established partnerships with the Australian Indigenous Education Foundation (AIEF) in 2008 and the Australian Indigenous Mentoring Experience (AIME) in 2010 to support their important work providing young Indigenous with the right foundations for a prosperous career. Committed to provide at least 25 Indigenous university students with internship placements each year until 2025. three additional Recruited graduates into the 2016 Graduate Program. Indigenous university Contribute to Disaster Relief In 2016, the Group and its employees supported a number of communities including those affected by bushfires in Victoria, South Australia and Western Australia and flooding in Eastern New South Wales through various grants and recovery programs. In addition, the Group has provided support to its agribusiness customers, including a range of measures to help dairy producers struggling with the recent fall in milk prices. Create Opportunities for our People to Contribute to their Communities Facilitate Employee Participation in Volunteering and Skilled Secondment Activities Strategy to and charities registered The Group encourages its employees to give time and expertise not-for-profit organisations. During 2016, more than 5,000 employees volunteered in 264 domestic and international community organisations representing more than 31,000 volunteer hours. Since 2011, 83 of the Group’s people have participated in the six-week Jawun to Indigenous communities. Indigenous Secondment Program Support Local Communities with Targeted Activities The Staff Community Fund has been running since 1917, making longest-running it Australia’s workplace-giving program. The staff matches Group contributions dollar for dollar and covers all administrative costs to ensure 100 per cent of the is distributed raised money directly to not-for-profit organisations. The Group has the highest participation rate of employees for an organisation its size, with more than 13,200 members at June 2016. A total of $2 million was granted in 2016 to 229 grassroots programs focused on improving the health and wellbeing of Australian youth. The Way We Do Business Make Transparent and Balanced Decisions During 2016, the Group continued to see an increase in engagement with ESG issues. The Group is committed to maintaining an honest and transparent dialogue with all stakeholders including non- governmental organisations (NGOs). Support and Embed a Culture of ‘Doing the Right Thing’ The values of integrity, accountability, collaboration, excellence and service are integral to the Group’s culture and to the way we do business. The Group has a range of policies, frameworks, compliance measures and education programs the highest professional standards. The Group is also committed to making things right for customers who may have received inappropriate advice. its people maintain to ensure The Group has taken recent allegations about CommInsure seriously. We aspire to get every claim right the first time, however if we make mistakes we will apologise and act to fix things, as CommInsure did after learning of the poor experience of some of its insurance customers. A number of additional measures have been taken to provide a greater level of assurance for new claims and investigate the concerns raised in recent media reports, including appointing an independent expert in May 2016 to oversee a review of past declined life insurance claims. A long-term program is underway to embed the values in the day to day work of all of the Group’s people and further integrate the values in the Group’s policies and performance management systems. As part of its focus on values, the Group is committed to having a culture of 'speaking up'. A SpeakUp hotline, run by an independent provider, is available to raise a concern 24/7 anonymously. to all employees who wish Along with other major banks and through the Australian Banking Association, the Group is committed to addressing community concerns about poor conduct in the industry, the handling of customer complaints, treatment of whistleblowers and how staff are paid. Commitments include reviewing product sales commissions, making it easier for customers when things go wrong, reaffirming support for employees who ‘blow the whistle’ on inappropriate conduct, removing individuals from the industry for poor conduct, strengthening commitment to customers in the Code of Banking Practice and supporting ASIC in its regulatory role. the Corporate Responsibility Strengthen the Management of ESG impacts in our Lending and Investing Practices the Group has continued In 2016, the management of ESG in its lending and investing practices. The following new and updated policies and practices were announced in November 2015: to strengthen      An updated Group Environment Policy that expresses the Group’s commitment to support the transition to a low carbon economy and builds on the Group’s existing commitments to reduce its direct environmental impacts; carefully consider its loan and investment book; and actively support businesses and that reduce dependence on fossil fuels and mitigate the effects of climate change. technologies Investing A new Wealth Management Responsible Framework to integrate ESG factors across investment processes, consistent with the pursuit of sustainable long-term the Group’s customers. A tailored training module has been rolled out to the Group’s Wealth Management Professionals. investment outcomes for A new Human Rights Position Statement to publicly affirm the Group’s responsibility and commitment to respect human rights across all of its operations. The Position Statement complements, guides and informs the application of a number of existing policies and procedures. A report on progress made in embedding responsible lending across the Group’s business lending operations with the development of an ESG Risk Assessment Tool and lending the professionals. training of more than 1,600 Further disclosures on the carbon emissions arising from the Group’s business lending portfolio to enhance existing reporting of the carbon emissions arising from the bank’s business lending to the energy sector, its total credit exposure to the resources sector, and its direct carbon footprint. As part of building a balanced portfolio, the Group continues to strongly support the growth of the renewable energy sector whilst recognising the importance of the resources sector to the Australian economy and way of life. Advocate for Public Policies that Secure and Enhance the Financial Wellbeing of People, Businesses and Communities As Australia’s largest financial institution, the Group has a responsibility to speak up on matters of importance to the nation, its people and its customers. Adding the Group’s economic and policy knowledge to the national public policy debate increases the likelihood of good policy outcomes, helping to secure and enhance the financial wellbeing of people, businesses and communities. For joined 10 other the Group recently community and industry organisations in making a Statement of Commitment to a national Financial Inclusion Action Plan (FIAP). The FIAP is an extension of many initiatives the Group already has in place to help more Australians become active participants in the financial system. this reason, The Group continues to engage with Government in a financial constructive dialogue on services industry and economic and social issues generally. In October 2015 the Federal Government announced its response to the Financial System Inquiry (FSI), accepting largely all of the Inquiry’s recommendations across the areas issues covering the Commonwealth Bank of Australia - Annual Report 2016 35 Further Information Visit https://www.commbank.com.au/cr-report2016 microsite for more information on the Group’s approach to corporate responsibility initiatives, achievements and independently assured metrics. including insights key on The microsite covers the activities of companies wholly owned by financial year ending 30 June 2016. the Group the for Corporate Responsibility regulatory resilience; superannuation; innovation; of strength and consumer outcomes and capability. The Government found that Australia’s financial system was strong, stable and well-regulated and that an efficient financial system is central to delivering prosperity. The Government then initiated processes to implement the resulting reforms in consultation with industry. The Group welcomed the strong focus on innovation in the Government’s response, with the Treasurer establishing an advisory group on developments in innovation in the financial sector, to which CBA Group Executive Institutional Banking and Markets Kelly Bayer Rosmarin was appointed. Improve the Environmental Efficiency of our Operations The Group has a longstanding commitment to reducing the environmental impact of its operations and is in the process of implementing a three year Property Sustainability Strategy. During 2016, CBA and Bankwest reduced their combined domestic Scope 1 and 2 carbon emissions by 7,213 tCO2-e. Since 2009, CBA and Bankwest have reduced scope 1 and scope 2 carbon emissions by 42.4 per cent. 36 Commonwealth Bank of Australia – Annual Report 2016 Corporate Responsibility Scorecard Our Role in Society Units 2016 2015 2014 Corporate Responsibility Community and Education Investment School Banking Students (active) Start Smart Students (booked) Total Community Investment (1) Our People Engagement Employee Engagement Index Employee Turnover (Voluntary) (2) Diversity Women in Manager and above roles Women in Executive Manager and above roles (2) Safety and Wellbeing Lost Time Injury Frequency Rate (LTIFR) (2) Absenteeism Training Total training per employee The Way We Do Business Environmental, Social and Governance (ESG) 330,874 557,475 310,474 298,505 273,034 288,728 $M 262 243 - % % % % 77 11.3 43.6 35.2 Rate Rate 1.2 6.0 81 10.2 43.2 33.9 1.9 6.0 81 10.2 42.9 31.8 1.5 6.1 Hours 36.8 31.1 24.6 Employees completing ESG Training (3) 1,786 - - Customer Satisfaction Roy Morgan Research Main Financial Institution % 82.8 Rank DBM Business Financial Services Monitor (score out of 10) Rank Wealth Insights Platform Service Level Survey (score out of 10) Rank Supply Chain Operating expenses at significant locations of operation (4) Australia New Zealand Other Overseas Greenhouse Gas Emissions CBA Scope 1 emissions Scope 2 emissions Scope 3 emissions Emissions per FTE 1st 7.2 Equal 1st 8.07 1st 84.2 1st 83.2 1st 7.5 Equal 1st 7.4 Equal 1st 7.75 2nd 7.94 1st $M $M $M 3,537 355 328 tCO2-e tCO2-e tCO2-e tCO2-e 6,847 81,307 33,854 2.7 3,516 333 269 7,249 86,264 39,361 2.9 - - - 7,936 91,275 44,826 3.1 (1) As the Group began disclosing total Community Investment data in 2015, no 2014 data has been presented. (2) Comparatives have been restated to conform to presentation in the current year. (3) As the Group began disclosing ESG training hours in 2016, no comparatives have been presented. (4) The Group began disclosing operating expenses at significant locations in 2016, 2015 balances have been included for comparative purposes only. For definition and notes, please see the online version of this table available in the Download section of the Corporate Responsibility report https://www.commbank.com.au/cr-report2016 Commonwealth Bank of Australia - Annual Report 2016 37 Directors’ Report The Directors of the Commonwealth Bank of Australia submit their report, together with the financial report of the Commonwealth Bank of Australia (the Bank) and of the Group, being the Bank and its controlled entities, for the year ended 30 June 2016. The names of the Directors holding office during the financial year are set out below, together with details of Directors’ experience, qualifications and special responsibilities. David Turner, Chairman Director of the Bank since August 2006. Other Directorships and Interests: Ashurst, O’Connell Street Associates Pty Ltd and Great Barrier Reef Foundation. Qualifications: Fellow of the Australian Institute of Company Directors and Fellow of the Institute of Chartered Accountants in England and Wales. Mr Turner is a resident of New South Wales. Age 71. David Turner was appointed Chairman of the Bank in February 2010. He is Chairman of the Board Performance and Renewal Committee, and a member of the Risk Committee and the Remuneration Committee. Mr Turner has extensive experience in finance, international business and governance. He was Chairman of Cobham plc from May 2008 until May 2010. He has held a number of directorships including Whitbread plc and the Iron Trades Insurance Group and has been a member of the Quotations Committee of the London Stock Exchange. He was Chief Executive Officer of Brambles Limited from October 2003 until his retirement in June 2007, and formerly Chief Financial Officer from 2001 until 2003. He was also Finance Director of GKN plc and Finance Director of Booker plc, and spent six years with Mobil Oil. Ian Narev, Managing Director and Chief Executive Officer Director of the Bank since December 2011. Ian Narev was appointed Managing Director and Chief Executive Officer on 1 December 2011. Other Directorships and Interests: Sydney Theatre Company (Chairman), Business Council of Australia, Financial Markets Foundation for Children and Institute of International Finance. Qualifications: BA LLB (Hons) (Auckland), LLM (Cantab), LLM (NYU). Mr Narev is a resident of New South Wales. Age 49. Mr Narev joined the Group in May 2007. From then until January 2009, he was Group Head of Strategy, with responsibility for corporate strategy development, mergers and acquisitions and major cross business strategic initiatives. From January 2009 until September 2011, Mr Narev was Group Executive, Business and Private Banking, one of the Group’s six operating divisions. Prior to joining CBA, Mr Narev was a partner of McKinsey’s New York, Sydney and Auckland offices (1998 to 2007). He became a global partner in 2003, and from 2005 until his departure in 2007 was head of McKinsey’s New Zealand office. Prior to joining McKinsey, Mr. Narev was a lawyer specialising in mergers and acquisitions. Other Directorships and Interests: APN News & Media Ltd, NPT Ltd (Chairman), Steel & Tube Holdings Ltd (Chairman) and T&G Global Ltd (Deputy Chairman). Qualifications: Fellow of Chartered Accountants Australia and New Zealand, Fellow of the Institute of Financial Professionals New Zealand, Fellow of the Institute of Directors and Life Member of the Australian Institute of Banking and Finance. Sir John is a resident of Wellington, New Zealand. Age 71. Sir John Anderson, KBE Director of the Bank since March 2007. Sir John Anderson is a member of the Risk Committee, the Board Performance and Renewal Committee and the Audit Committee. industry, He has held many senior positions in the New Zealand finance including Chief Executive Officer and Director of ANZ National Bank Limited from 2003 until 2005 and the National Bank of New Zealand Limited from 1989 until 2003. In 1994, he was awarded Knight Commander of the Civil Division of the Order of the British Empire, and in 2005 “Outstanding received Leadership Contributions to New Zealand”. In 2012, he was awarded an Honorary Doctorate of Commerce by Victoria University, Wellington. inaugural Blake Medal the for 38 Commonwealth Bank of Australia – Annual Report 2016 Directors’ Report Shirish Apte Director of the Bank since June 2014. Shirish Apte is a member of the Audit Committee. He is also a member of the Risk Committee and from the end of September 2016 will assume the role of Chairman of that Committee. He was Co-Chairman of Citi Asia Pacific Banking from January 2012 until January 2014. Previously he was Chief Executive Officer of Citi Asia Pacific (2009 to 2011), with responsibility including Australia, New Zealand, India and ASEAN countries. for South Asia, Other Directorships and Interests: IHH Healthcare Bhd, Crompton Greaves Ltd, Citibank Japan, AIG Asia Pacific Pte Ltd, Clifford Capital Pte Ltd, Pierfront Capital Mezzanine Fund Pte Ltd (Chairman), Parkway Hospitals Singapore, Acibadem Hospital Group, Turkey and Supervisory Board of Citibank Handlowy, Poland. Qualifications: Chartered Accountant, Institute of Chartered Accountants in England and Wales and Bachelor of Commerce (Calcutta), MBA (London Business School). Mr Apte is a resident of Singapore. Age 63. He has more than 32 years’ experience with Citi, including as CEO of Central & Eastern Europe, Middle East & Africa and, before that, as Country Manager and Deputy President of Citibank Handlowy, Poland, where he is now Vice Chairman of the Supervisory Board. Sir David Higgins Director of the Bank since September 2014. Other Directorships and Interests: High Speed Two (HS2) Ltd (Chairman). Qualifications: Bachelor of Engineering (Civil), USyd, and Diploma, Securities Institute of Australia. Sir David is a resident of London, United Kingdom. Age 61. Sir David Higgins is the Chairman of the Remuneration Committee and a member of the Risk Committee. Sir David is the Chairman of High Speed Two (HS2) Ltd, the company responsible for developing and promoting the UK’s new high speed rail network. He is a senior advisor to Global Infrastructure Partners (US) and to Lone Star Funds. Prior to that, he was Chief Executive Officer of Network Rail Infrastructure Ltd which is involved in the maintenance and development of railway infrastructure throughout the UK. From 2006 until 2011, he was Chief Executive Officer of the Olympic Delivery Authority where he oversaw the creation of the London 2012 Olympic Games venues, the Olympic Village and transport projects. For the three years prior to 2005, he was Chief Executive Officer of English Partnerships, the UK Government’s national housing and regeneration agency. In 1985, he joined Lend Lease, and was Managing Director and Chief Executive Officer of Lend Lease from 1995 until 2002. Launa Inman Director of the Bank since March 2011. Launa Inman is a member of the Audit Committee and the Remuneration Committee. International Limited She was Managing Director and Chief Executive Officer of from May 2012 until Billabong August 2013. Prior to this, she was Managing Director of Target Australia Pty Limited (2005 to 2011), and Managing Director of Officeworks (2004 to 2005). She has significant international and Australian experience in retailing, wholesale, property and logistics, as well as extensive marketing experience in traditional, digital and social media channels. Other Directorships and Interests: Bellamy’s Australia Ltd, Super Retail Group Ltd, Precinct Properties New Zealand Ltd, Virgin Australia Melbourne Fashion Festival and The Alannah and Madeline Foundation. Qualifications: MCom, University of South Africa (UNISA), BCom (Hons) (UNISA), BCom (Economics and Accounting) (UNISA) and Australian Institute of Company Directors (Member). Ms Inman is a resident of Victoria. Age 60. Commonwealth Bank of Australia - Annual Report 2016 39 Directors’ Report Catherine Livingstone (Appointed 1 March 2016) Director of the Bank since March 2016. Catherine Livingstone is a member of the Audit Committee. Ms Livingstone is a highly respected company director with extensive business and finance experience across a broad range of industries and organisations. She is also a Chartered Accountant. Her executive career spanned more than 22 years in which she held general management and finance leadership roles, primarily in the medical devices sector and including six years as the Chief Executive Officer of Cochlear Limited. the Ms Livingstone was former Chairman of Telstra Corporation Limited and of the CSIRO. She has served on the Boards of Macquarie Group Limited, Goodman Fielder Limited and Rural Press Limited and has contributed to the work of the Innovation and Productivity Council for the New South Wales Government. In 2008, Catherine was awarded Officer of the Order of Australia. Other Directorships and Interests: WorleyParsons Ltd, The George Institute for Global Health, Saluda Medical Pty Ltd, Business Council of Australia (President) and Australian Museum Trust (President). Qualifications: BA (Accounting) (Hons), Fellow of Chartered Accountants Australia and New Zealand, Fellow of Australian Academy of Technological Sciences and Engineering, Fellow of the Australian Institute of Company Directors and Fellow of the Australian Academy of Science. Ms Livingstone is a resident of New South Wales. Age 60. Other Directorships and Interests: Brambles Ltd, Ten Network Holdings Limited (Ceased 25 July 2016), Cantarella Bros Pty Ltd and a Member of the Council of the University of NSW. Qualifications: Fellow of Chartered Accountants Australia and New Zealand. Mr Long is a resident of New South Wales. Age 70. Brian Long Director of the Bank since September 2010. Brian Long is Chairman of the Audit Committee, a member of the Risk Committee and the Board Performance and Renewal Committee. He retired as a partner of EY in 30 June 2010. Until that time he was the Chairman of both the EY Global Advisory Council and the Oceania Area Advisory Council. He was one of the firm’s most experienced audit partners with over 30 years’ experience in serving as audit signing partner on major Australian public companies including those in the financial services, property, insurance and media sectors. is currently a member of Mr Long the NSW Court Consultation Committee as an appointee of the NSW Attorney General. Andrew Mohl Director of the Bank since July 2008. Other Directorships and Interests: Nil. Qualifications: BEc (Hons), Monash. Mr Mohl is a resident of New South Wales. Age 60. Andrew Mohl is a member of the Risk Committee and the Remuneration Committee. He has over 35 years’ financial services experience. He was Managing Director and Chief Executive Officer of AMP Limited from October 2002 until December 2007. His previous roles at AMP included Managing Director, AMP Financial Services and Managing Director and Chief Investment Officer, AMP Asset Management. He was a former Group Chief Economist, Chief Manager, Retail Banking and Managing Director, ANZ Funds Management at ANZ Banking Group. Mr. Mohl commenced his career at the Reserve Bank of Australia where his roles included Senior Economist and Deputy Head of Research. 40 Commonwealth Bank of Australia – Annual Report 2016 Directors’ Report Mary Padbury (Appointed 14 June 2016) Director of the Bank since June 2016. Mary Padbury is a member of the Remuneration Committee. Ms Padbury is a pre-eminent intellectual property lawyer with an Australian and international legal career spanning over 30 years. She is a partner and the Vice Chairman of Ashurst, having been the Chairman of Ashurst Australia for eight years prior to the firm's full merger with Ashurst LLP into an integrated global firm in 2013. Earlier in her career, Ms Padbury spent a number of years in the United Kingdom with boutique firm, Bristows, and as resident partner of Ashurst Australia. She has undertaken intellectual property work for Australian and multinational corporations in a range of technology areas and has extensive international, legal and governance experience. Other Directorships and Interests: Ashurst (Vice Chairman), the Macfarlane Burnet Institute for Medical Research and Public Health Ltd, Australasian Gastro-Intestinal Trials Group, Chief Executive Women, Melbourne University Law School Foundation, Professional Standards Board for Patent and Trade Marks Attorneys and Victorian Legal Admissions Board. Qualifications: Bachelor of Laws (Hons) and Bachelor of Arts, University of Melbourne. Ms Padbury is a resident of Victoria. Age 57. Other Directorships and Interests: Board Member of Fitted For Work Ltd, Council Member of the University of Melbourne and Member of Chief Executive Women, serving on the Scholarships and Marketing & Communications Committees. Qualifications: Bachelor of Applied Science (Information Technology) and Graduate Member of the Australian Institute of Company Directors. Ms Stops is a resident of Victoria. Age 55. Wendy Stops Director of the Bank since March 2015. Wendy Stops is a member of the Remuneration Committee. Ms Stops was Senior Managing Director, Technology – Asia Pacific for Accenture Limited from 2012 until her retirement in June 2014. In this role she had responsibility for over 11,000 professional personnel spanning all industry groups and technology disciplines across 13 countries in Asia Pacific. Other most recent senior leadership positions held prior to this time included Global Managing Director, Technology Quality & Risk Management (2009 to 2012), Global Managing Director, Outsourcing Quality & Risk Management (2008 to 2009) and Director of Operations, Asia Pacific (2006 to 2008). She also served on Accenture’s Global Leadership Council from 2008 until her retirement. Ms Stops career at Accenture spanned some 32 years. Harrison Young Director of the Bank since February 2007. Other Directorships and Interests: Nil. Qualifications: A.B (Cum Laude), Harvard and LLD (Honoris Causa), Monash. Mr Young is a resident of Victoria. Age 71. Harrison Young is Chairman of the Risk Committee and a member of the Audit Committee and the Board Performance and Renewal Committee. At the end of September the Chairmanship of the Risk Committee will transition from Harrison Young to Shirish Apte. Mr Young will remain a member of the Risk Committee. He was Chairman of NBN Co Limited from March 2010 until March 2013. Previously he was a Director and Member of the Financial Stability Committee of the Bank of England (2009 to 2012), Chairman of Morgan Stanley Australia (2003 to 2007) and Vice Chairman of Morgan Stanley Asia (1998 to 2003). Prior to that, Mr Young spent two years in Beijing as Chief Executive Officer of China International Capital Corporation. From 1991 until 1994, he was a senior officer of the Federal Deposit Insurance Corporation in Washington. Commonwealth Bank of Australia - Annual Report 2016 41 Directors’ Report Jane Hemstritch (Retired 31 March 2016) Director of the Bank from October 2006 until her retirement in March 2016. Jane Hemstritch was Chairman of Committee and a member of the Risk Committee. the Remuneration She was Managing Director Asia Pacific for Accenture Limited from 2004 until her retirement in February 2007. In this role, she was a member of Accenture’s global executive leadership team and oversaw the management of Accenture’s business portfolio in Asia Pacific. Ms Hemstritch had a 24 year career with Accenture, preceded by seven years in the accounting profession. Other Directorships and Interests: Herbert Smith Freehills (Member of Global Council), Lend Lease Corporation Ltd, National Library of Australia (Member of Council), Tabcorp Holdings Ltd, Victorian Opera Company Ltd (Chairman) and Walter and Eliza Hall Institute of Medical Research. the Qualifications: Fellow of Institute of Chartered Accountants in England and Wales, Fellow of the Institute of in Australia, BSc (Hons) London Chartered Accountants University and Fellow of the Australian Institute of Company Directors. Ms Hemstritch is a resident of Victoria. Age 61. 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. Further to the Directors’ individual details above, the following table summarises the collective key skills and experience of the Board: Skills and Experience Retail and Corporate Banking/ Financial Institutions Financial Acumen New Media/Technology Experience as a non-executive director of at least two other listed entities General management exposure to international operations Held CEO or similar position in non-financial organisation Expert experience in financial regulation or legal expertise No. of Directors 5 12 5 7 12 7 7 42 Commonwealth Bank of Australia – Annual Report 2016 Directors’ Report Other Directorships The Directors held the following directorships in other listed companies in the three years prior to the end of the 2016 financial year: Director Company Sir John Anderson APN News & Media Limited Jane Hemstritch Tabcorp Holdings Limited Date of Ceasing Date Appointed (if applicable) 26/03/2015 13/11/2008 Santos Limited 16/02/2010 04/05/2016 Lend Lease Corporation Limited 01/09/2011 Launa Inman Billabong International Limited 14/05/2012 02/08/2013 Bellamy’s Australia Limited Super Retail Group Limited Catherine Livingstone WorleyParsons Limited Telstra Corporation Limited Macquarie Bank Limited Macquarie Group Limited Brian Long Ten Network Holdings Limited Brambles Limited Directors’ Meetings 18/02/2015 21/10/2015 01/07/2007 17/11/2000 27/04/2016 19/11/2003 25/07/2013 30/08/2007 25/07/2013 01/07/2010 25/07/2016 01/07/2014 The number of Directors’ meetings (including meetings of standing committees of Directors) and the number of meetings attended by each of the Directors during the financial year were: Director David Turner Ian Narev John Anderson Shirish Apte Jane Hemstritch (2) David Higgins Launa Inman Catherine Livingstone (3) Brian Long Andrew Mohl Mary Padbury (4) Wendy Stops Harrison Young No. of Meetings No. of Meetings Held (1) Attended 11 11 11 11 9 11 11 3 11 11 1 11 11 11 11 9 11 9 11 10 2 11 11 1 11 11 (1) The number of meetings held during the time the Director was a member of the Board and was eligible to attend. (2) Jane Hemstritch retired effective 31 March 2016. (3) Catherine Livingstone commenced effective 1 March 2016. (4) Mary Padbury commenced effective 14 June 2016. Commonwealth Bank of Australia - Annual Report 2016 43 Directors’ Report Committee Meetings Risk Committee Audit Committee Remuneration Committee Board Performance and Renewal Committee No. of No. of No. of No. of No. of No. of No. of No. of Meetings Meetings Meetings Meetings Meetings Meetings Meetings Meetings Director Held (1) Attended Held (1) Attended Held (1) Attended Held (1) Attended David Turner Ian Narev (2) John Anderson Shirish Apte Jane Hemstritch (3) David Higgins (4) Launa Inman Catherine Livingstone (5) Brian Long (6) Andrew Mohl Mary Padbury (7) Wendy Stops Harrison Young 9 - 9 9 7 2 - - 9 9 - - 9 9 - 6 9 7 2 - - 9 9 - - 9 - - 8 8 - 6 8 2 8 - - - 8 - - 5 8 - 6 8 1 8 - - - 8 7 - - - 5 7 7 - - 7 1 7 - 7 - - - 5 7 7 - - 7 1 7 - 8 - 8 - - - - - 7 - - - 8 8 - 5 - - - - - 7 - - - 8 Ian Narev attends Committee Meetings in an ex-officio capacity. (1) The number of meetings held during the time the Director was a member of the relevant committee. (2) (3) Jane Hemstritch retired effective 31 March 2016. (4) David Higgins ceased as a member of the Audit Committee effective 1 April 2016 and commenced as a member of the Risk Committee effective 1 April 2016. (5) Catherine Livingstone commenced effective 1 March 2016. (6) Brian Long commenced as a member of the Board Performance and Renewal Committee effective 12 August 2015. (7) Mary Padbury commenced effective 14 June 2016. Principal Activities Dividends is one of Australia’s The Group leading providers of integrated financial services, including retail, business and institutional banking, funds management, superannuation, life insurance, general insurance, broking services and finance company activities. The Group conducts its operations primarily in Australia, New Zealand and the Asia Pacific region. It also operates in a number of other countries including the United Kingdom and the United States. There have been no significant changes in the nature of the principal activities of the Group during the financial year. Consolidated Profit The Group’s net profit after income tax and non-controlling interests for the year ended 30 June 2016 was $9,227 million (2015: $9,063 million). The Group’s vision is to excel at securing and enhancing the financial wellbeing of people, businesses and communities. The long-term strategies that the Group has pursued to achieve this vision have continued to deliver high levels of customer satisfaction across all businesses and another solid financial result. Operating income growth was solid, relative to the prior year. Operating expenses increased due to higher staff costs, the impact of foreign exchange and increased investment spend, partly offset by the incremental benefit generated from productivity initiatives. impairment expense Loan to higher provisioning levels in Institutional Banking and Markets, New Zealand and IFS. Provisioning levels remain prudent and there has been no change to the economic overlay. increased due 44 Commonwealth Bank of Australia – Annual Report 2016 The Directors have determined a fully franked (at 30%) final dividend of 222 cents per share amounting to $3,808 million. The dividend will be payable on 29 September 2016 to shareholders on the register at 5pm EST on 18 August 2016. Dividends paid in the year ended 30 June 2016 were as follows:   In respect of the year to 30 June 2015, a fully franked final dividend of 222 cents per share amounting to $3,613 million was paid on 1 October 2015. The payment comprised direct cash disbursements. The Dividend Reinvestment Plan (DRP) in respect of the final dividend was satisfied in full by the on market purchase of shares; and In respect of the year to 30 June 2016, a fully franked interim dividend of 198 cents per share amounting to $3,381 million was paid on 31 March 2016. The payment comprised direct cash disbursements of $2,829 million reinvested by participants with $552 million being through the DRP. Review of Operations An analysis of operations for the financial year is set out in the Highlights and Group Performance Analysis sections. Changes in State of Affairs The Group continues to make progress against each of the key strategic priorities in pursuit of our vision to secure and enhance the financial wellbeing of people, businesses and communities. There have been no significant changes in the state of affairs of the Group during the financial year. Events Subsequent to Balance Sheet Date The Bank expects the DRP for the final dividend for the year ended 30 June 2016 will be satisfied by the issue of shares of approximately $628 million. 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 The Group’s Strategy Anchored firmly to the Group’s vision to ‘excel at securing and enhancing the financial wellbeing of people, businesses and communities’, the Group’s strategy is focussed on creating long-term value for its customers, shareholders and people. The Group’s overarching priority is customer focus supported by four market-leading capabilities: people, productivity, technology and strength. Since 2012, the Group has sustained strong performance across key metrics, including customer satisfaction, total shareholder returns, productivity and people engagement. With an ongoing is appropriate to deliver future growth for the Group and will continue to underpin the Group’s performance. focus on execution, the strategy The strategy is split into three elements:    Underpinning the Group’s vision, an overarching objective of Customer Focus is to continuously improve the value and experiences provided to customers. Customers remain the Group’s foremost priority with the goal to be number one in customer satisfaction across all segments; that the Group Four capabilities in and leverages, to reinforce and enhance its competitive advantage, namely People, Productivity, Technology and Strength; and invests that define the Group the most Three growth opportunities significant opportunities to create for shareholder value, namely One CommBank where the Group aims to meet more of its customers’ financial needs; continued growth in business and institutional banking; and disciplined capability-led growth outside Australia. There are a number of material business risks that could adversely affect the Group and the achievement of the Group’s performance objectives. Those risks and how they are managed are described in Notes 31 to 34 of the Financial Statements on pages 137 to 160. Environmental Reporting The Group is subject to the Federal Government’s National Greenhouse and Energy Reporting (NGER) scheme. The scheme makes it mandatory for controlling corporations to report annually on greenhouse gas emissions, energy production and energy consumption, if they exceed certain threshold levels. The Group has a long history in voluntary environmental reporting, including Corporate Responsibility Reporting and CDP (formerly the Carbon Disclosure Project). As a result, the Group is well placed to meet the NGER requirements. The Group is not subject to any other particular or significant environmental regulation under any law of the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Group Environment Directors’ Report Policy is updated to ensure risk is managed appropriately. For further details, please see: https://www.commbank.com.au/content/dam/commbank/abou t-us/docs/susatinability-20151103-group-environment- policy.pdf Directors’ Shareholdings and Options Particulars of shares held by Directors and the Chief Executive Officer in the Commonwealth Bank or in a related body corporate are set out in the Remuneration Report that forms part of this report. No options have been granted to the Directors or Chief Executive Officer during the period. Options and Share Rights Outstanding As at the date of this Report there are no employee options and 2,475,157 share rights outstanding to Commonwealth Bank ordinary shares. in relation 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 The Directors, as named on pages 38 to 42 of this report, and the Secretaries of the Bank, being named on page 46 of this the Constitution of Report, are Commonwealth Bank of Australia (the Constitution), as are all senior managers of the Bank. indemnified under The indemnity extends to such other officers, employees, former officers or former employees of the Bank, or of its related bodies corporate, as the Directors in each case determine (each, including the Directors and Secretaries, defined as an ‘Officer’ for the purposes of this section). The Officers are indemnified on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses incurred by the Officer as an Officer of the Bank or of a related body corporate. Deeds of Indemnity have been executed by the Bank, consistent with the Constitution, in favour of each Director of the Bank which includes indemnification in substantially the same terms to that provided in the Constitution. An Indemnity Deed Poll has been executed by the Bank, includes consistent with indemnification in substantially the same terms to that provided in the Constitution, in favour of each: the Constitution which also     secretary and senior manager of the Bank; director, secretary or senior manager of a related body corporate of the Bank; person who, at the prior formal request of the Bank or a related body corporate, acts as director, secretary or senior manager of a body corporate which is not a related body corporate of the Bank (in which case the indemnity operates only in excess of protection provided by that body corporate); and person who, at the request of a related body corporate of the compliance the Bank, acts as a member of committee of a registered scheme for which the related body corporate of the Bank is the responsible entity. In the case of a partly-owned subsidiary of the Bank, where a director, secretary or senior manager of that entity is a nominee of a third party body corporate which is not a related Commonwealth Bank of Australia - Annual Report 2016 45 Directors’ Report body corporate of the Bank, the Indemnity Deed Poll will not apply to that person unless the Bank's CEO has certified that the indemnity will apply to that person. Directors’ and Officers’ Insurance The Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of the Bank and those named and referred to above including the directors, secretaries, officers and certain employees of the Bank and related bodies corporate as defined in the insurance policy. The insurance is appropriate pursuant to section 199B of the Corporations Act 2001 (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. Proceedings on behalf of the Bank No application has been made under section 237 of the Corporations Act 2001 in respect of the Bank, and there are no proceedings that a person has brought or intervened in on behalf of the Bank under that section. Rounding and Presentation of Amounts Unless otherwise indicated, the Bank has rounded off amounts in this Directors’ Report and the accompanying financial statements in the nearest million dollars accordance with ASIC Corporations Instrument 2016/191. to The financial information included in this Annual Report has been prepared and presented in accordance with Australian Accounting Standards, unless otherwise indicated. This ensures compliance with International Financial Reporting Standards. The Group manages its business performance using a “cash basis” profit measure. The key items that are excluded from statutory profit for this purpose are non-recurring or not considered representative of the Group’s ongoing financial performance. Profit on an “underlying basis” is used primarily in the Wealth Management businesses. It provides a profit measure that excludes both the volatility of equity markets on shareholder funds and the mark to market revaluations on the Guaranteed Annuity portfolio for a measure of core operating performance. Corporate Governance Statement The Bank is committed to ensuring that its policies and practices reflect a high standard of corporate governance. The Board has adopted a comprehensive framework of Corporate Governance Guidelines, designed to balance performance and conformance. Throughout the 2016 financial year, the Bank’s governance arrangements were the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. consistent with The Group’s Corporate Governance Statement can be viewed at: www.commbank.com.au/about-us/shareholders/corporate- profile/corporate-governance. Company Secretaries Details of the Bank’s Company Secretaries, including their experience and qualifications, are set out below. Taryn Morton was appointed Group Company Secretary of the Bank in October 2015. She has over 17 years of combined corporate governance, company secretarial and legal experience. Prior to the Bank, she was with Insurance Australia Group and before that held the role of Company Secretary of Qantas Airways, where she was also a director of Qantas subsidiaries. Her earlier governance roles were at Babcock & Brown, Ten Network Holdings and Ashurst. She holds Bachelor degrees in Arts and Law and is a Fellow of the Governance Institute of Australia. David Cohen was a Company Secretary of the Bank from February 2015 until June 2016. David joined the Bank in 2008 and was appointed to the position of Group Chief Risk Officer with effect from 1 July 2016. Prior to his current role, David held the position of Group General Counsel and Group Executive Corporate Affairs with responsibility for advising the CEO and the Board on legal matters and for the Group’s external and internal affairs, communications, sustainability and corporate governance. Previously he was General Counsel of AMP and a partner with Allens Arthur Robinson for 12 years. Carla Collingwood was appointed a Company Secretary of the Bank in July 2005. From 1994 until 2005, she was a solicitor with the Bank’s Legal Services, before being appointed to the position of General Manager, Secretariat. She holds a Bachelor of Laws degree (Hons) and a Graduate Diploma the in Applied Corporate Governance Governance Institute of Australia. She is a Graduate of the Australian Institute of Company Directors. from 46 Commonwealth Bank of Australia – Annual Report 2016 Directors’ Report – Remuneration Report Message from the Remuneration Committee Chairman Dear Shareholder, I am pleased to present my first CBA Group Remuneration Report in 2016. The CBA remuneration framework is designed to create sustainable value for shareholders, customers, our people and communities. The report reflects the Board’s assessment of the Group’s performance for the year ended 30 June 2016 and includes consideration of any material risk incidents and conduct. This year, the Committee also looked forward and made incentive changes arrangements reputational performance are appropriately balanced. to both short-term and financial and to ensure long-term Remuneration Outcomes In relation to the 2016 financial year, in aggregate, Group Executives received on-target short-term incentive (STI) awards reflecting the Group’s achievement of solid overall performance in challenging circumstances. In determining STI outcomes, the Committee assessed individual performance and gave consideration to the impact of CommInsure issues on the Group’s performance. As a result, the Committee applied some discretionary reductions, resulting in STI outcomes overall being lower than last year. The Committee also commissioned an independent review of performance measures for roles within CommInsure. The review did not identify any issues that would drive undesirable outcomes reviews for customers. There are separate underway into declined claims over the past five years and the ethical concerns raised in the media in March and April 2016. The reviews are ongoing, and to date we have not found evidence the claims of to substantiate any of widespread problems or willful misconduct. As with any issue, if any material risk items are identified over the coming year, the Committee will again consider impacts on Executive remuneration outcomes as part of next year’s review. In section 3.4, you will note that the CEO’s total remuneration received during the 2016 financial year increased significantly from last year. This was due to equity awards granted through the Group Leadership Reward Plan (GLRP) in 2011 which covered the four year period to mid-2015. These awards vested during the year ended 30 June 2016, reflecting total returns to shareholders of 110% and top quartile performance by the CBA Group over the four year period. Next year’s report will show significantly lower GLRP vesting, which relates to the 2012 award. There was no vesting of the Total Shareholder Return (TSR) performance component for the 2012 GLRP award, while Customer Satisfaction performance, which counted for 25% of the award, was strong. As a result the award vested to Executives at 20.31% of the maximum. Consistent with previous commitments, no upward discretion was exercised by the Committee in relation to the outcome of the 2012 award. This award will be reflected total remuneration during the 2017 financial year. the CEO’s and Group Executives’ in During the period Group Executives received modest fixed remuneration increases, less than 1% on average. The CEO did not receive an increase and there was no increase to Board and Committee fees during 2016. Remuneration Changes During the 2016 financial year, the Committee undertook a review of remuneration arrangements for the CEO and Group Executives. The objective of the review was to ensure our executive remuneration approach drives a strong focus on achieving long-term superior performance for the Group’s key stakeholder groups being shareholders, customers, our people and the community in line with our vision and values. On the basis of the review the Board has approved the following changes for the 2017 financial year:   Executive STI balanced performance scorecards, which largely determine individual outcomes, will include an assessment of exemplary leadership and exceptional personal demonstration of the Group’s vision and values; and The 2016 GLRP will incorporate a new focus on our people and the community, weighted at 25%, measuring long-term progress and achievement in the areas of diversity and inclusion, sustainability, and culture. TSR and customer satisfaction performance components, weighted 50% and 25% respectively, remain to continue our strong focus on delivering long-term value for shareholders and better customer outcomes. Changes to the GLRP are explained in more detail in the report. I invite you to review the full report, and thank you for your interest. Sir David Higgins Committee Chairman 9 August 2016 Commonwealth Bank of Australia - Annual Report 2016 47 Directors’ Report – Remuneration Report 2016 Remuneration Report This Remuneration Report details the approach to remuneration frameworks, outcomes and performance, for the Commonwealth Bank of Australia (CBA) and its Key Management Personnel (KMP) for the year ended 30 June 2016. In the 2016 financial year, KMP included the Non-Executive Directors, CEO and Group Executives listed in the table below. (1) David Cohen commenced in the Chief Risk Officer role from 1 July 2016. (2) Alden Toevs ceased as a KMP on 30 June 2016. Alden Toevs will continue to work with the Group for a period of two years in the role of Chief Risk Officer, Emeritus and Board Risk Adviser with a particular focus on balance sheet management and quantitative analysis. The report has been prepared and audited against the disclosure requirements of the Corporations Act 2001. 48 Commonwealth Bank of Australia – Annual Report 2016 NamePositionTerm as KMPNon-Executive DirectorsDavid TurnerChairman Full YearJohn AndersonDirectorFull YearShirish ApteDirectorFull YearDavid HigginsDirector Full YearLauna InmanDirectorFull YearCatherine LivingstoneDirector (from 1 March 2016)Part YearBrian LongDirectorFull YearAndrew MohlDirectorFull YearMary PadburyDirector (from 14 June 2016)Part YearWendy StopsDirectorFull YearHarrison YoungDirectorFull YearFormer Non-Executive DirectorJane HemstritchDirector (until 31 March 2016)Part YearManaging Director and CEOIan Narev Managing Director and CEOFull YearGroup ExecutivesKelly Bayer RosmarinGroup Executive, Institutional Banking and MarketsFull YearAdam BennettGroup Executive, Business and Private BankingFull YearDavid Cohen(1)Group General Counsel and Group Executive, Group Corporate AffairsFull YearMatthew ComynGroup Executive, Retail Banking Services Full YearDavid CraigGroup Executive, Financial Services and Chief Financial OfficerFull YearRobert JesudasonGroup Executive, International Financial ServicesFull YearMelanie LaingGroup Executive, Human ResourcesFull YearVittoria ShorttGroup Executive, Marketing and StrategyFull YearAnnabel SpringGroup Executive, Wealth ManagementFull YearAlden Toevs(2)Group Chief Risk OfficerFull YearDavid WhiteingGroup Executive, Enterprise Services and Chief Information Officer Full Year Directors’ Report – Remuneration Report 1. Remuneration Governance 1.1 Remuneration Committee The Remuneration Committee (the Committee) is the main governing body for setting remuneration policy across the remuneration Group. The Committee develops philosophy, framework and policies for Board approval. the As at 30 June 2016, the Committee is made up of independent Non-Executive Directors and consists of the following members:  David Higgins (Chairman);   Launa Inman; Andrew Mohl;  Mary Padbury;  Wendy Stops; and  David Turner. The responsibilities of the Committee are outlined in its Charter, which is reviewed annually by the Board. The Charter the Group’s website at www.commbank.com.au/about-us/shareholders/corporate- profile/corporate-governance.html. is available on summary, In is recommending to the Board approval of: the Committee responsible for     Remuneration arrangements and all reward outcomes for the CEO, senior direct reports to the CEO and other individuals whose roles may affect the financial soundness of the Group; Remuneration arrangements for finance, risk and internal control employees; Remuneration arrangements for employees who have a significant portion of their total remuneration based on performance; and Significant changes remuneration policy and structure, including superannuation and employee equity plans. in This year, the Committee’s key areas of focus were:        A review of long-term incentive arrangements for the CEO and Group Executives to ensure they continue to deliver long-term value to shareholders, align with the reflect dynamic business Group’s vision and strategies; A review of sales incentive plan governance across the Group to ensure the model is appropriate in the future; The retirement of Alden Toevs from the Group Chief Risk Officer role, effective 30 June 2016. Alden Toevs will continue to work with the Group for a period of two years in the role of Chief Risk Officer, Emeritus and Board Risk Adviser (not a KMP role), with a particular focus on balance sheet management and quantitative analysis; The appointment of David Cohen to the role of Group Chief Risk Officer, effective 1 July 2016, following the retirement of Alden Toevs; The appointment of Anna Lenahan to the role of Group General Counsel and Group Executive, Group Corporate Affairs. Anna will commence with the Group in late 2016; The annual review of the Group Remuneration Policy; An independent review of performance measures for roles within CommInsure to confirm they were not driving poor customer outcomes;  Ongoing monitoring of regulatory and legislative changes, both locally and offshore, ensuring that the Group’s policies and practices remain compliant; and  focus on embedding a remuneration Continued framework that is appropriate for the Group’s different businesses with in design, strong transparency governance and risk oversight. Independent Remuneration Consultant The Committee obtains remuneration information directly from its external independent remuneration consultant EY. Throughout the 2016 financial year, the main information received from the Committee’s remuneration consultant related to:     Regulatory reforms; Key performance indicators for individual roles within CommInsure; Current market practices; and Long-term incentive arrangements for the CEO and Group Executives. EY provides information to assist the Committee in making remuneration decisions. EY has not made any remuneration recommendations during the 2016 financial year. The Committee is responsible for making decisions within the terms of its Charter. 1.2 Remuneration Philosophy The Group’s remuneration philosophy is the backbone of its remuneration In summary, the remuneration philosophy for the CEO and Group Executives is to: framework, policies and processes.       target Provide is market competitive, without putting upward pressure on the market; remuneration which Align remuneration with shareholder interests and our business strategy; Articulate clearly to Executives the link between individual and Group performance, and individual remuneration; Reward superior performance, while managing risks associated with delivering and measuring that performance; Provide emerging market practice; and flexibility to meet changing needs and Provide appropriate benefits on termination that do not deliver any windfall payments not to performance. related 1.3 Remuneration and Risk Management The Committee has a robust framework for the systematic review of impacting remuneration. The Committee: risk and compliance issues   Takes note of any material risk issues impacting remuneration, with issues raised by the Committee provided to the Board’s Risk Committee for noting; Considers issues and recommendations raised by the Risk and Remuneration Review Committee, a management committee that monitors material risk and compliance issues throughout the year; Commonwealth Bank of Australia - Annual Report 2016 49 Directors’ Report – Remuneration Report 1.3 Remuneration and Risk Management (continued)  May impose adjustments to remuneration outcomes of Executives before or after awards are made, subject to Board approval; and  Works closely with the Board’s Risk Committee to ensure that any risks associated with remuneration arrangements are managed within the Group’s Risk Management Framework. The following diagram illustrates the Group’s remuneration and risk governance framework: holdings below this threshold, 20% of their after-tax base fees are used to purchase CBA shares until a holding of 5,000 shares has been reached. The statutory table on page 62 provides the individual remuneration expense for each Non-Executive Director in relation to the 2016 financial year. 2. Remuneration Framework The remuneration arrangements for the CEO and Group fixed and at risk Executives are made up of both remuneration. This is composed of the following three elements:    Fixed remuneration; Short-Term Incentive (STI) at risk; and Long-Term Incentive (LTI) at risk. The at risk components are based on performance against key financial and non-financial measures. More detail on executive remuneration and the link to performance is included in section 3 of this report. 2.1 Total Target Remuneration The following diagram illustrates the total target mix of the three remuneration elements: 1.4 Non-Executive Directors Remuneration Non-Executive Directors receive fees to recognise their contribution to the work of the Board and the associated committees that they serve. Non-Executive Directors do not receive any performance-related remuneration. The Board Performance and Renewal Committee reviews the Non-Executive Directors fee schedule regularly and examines fee levels against the market. The three remuneration elements are broken down into equal portions of total target remuneration. Non-Executive statutory superannuation contributions and were last increased on 1 January 2015. Directors include fees The following table outlines the Non-Executive Directors fees for the main Board and the Committees as at 30 June 2016: Position Chairman Non-Executive Director Chairman Member Chairman Member Chairman Member Board Audit Committee Risk Committee Remuneration Committee Board Performance & Chairman Renewal Committee Member Fees (1) ($) 870,000 242,000 65,000 32,500 65,000 32,500 60,000 30,000 11,600 11,600 (1) Fees are inclusive of base fees and superannuation. The Chairman does not receive separate Committee fees. The total amount of Non-Executive Directors fees is capped at a maximum pool that is approved by shareholders. The current fee pool is $4.75 million, which was approved by shareholders at the Annual General Meeting (AGM) on 17 November 2015. Non-Executive Directors are required to hold 5,000 or more CBA shares. For those Non-Executive Directors who have 50 Commonwealth Bank of Australia – Annual Report 2016 In setting target remuneration levels the Group aims to remain competitive by attracting and retaining highly talented Executives. This is done by considering the experience of the Executive, the size and scope of role responsibilities, competitive remuneration sourced from remuneration market surveys and disclosed data. level of market and Each component of remuneration has a specific purpose and direct link to our business strategy as detailed below. 2.2 Fixed Remuneration    Fixed remuneration is made up of base remuneration and superannuation. Base remuneration includes cash salary and any salary sacrifice items; recommendations the The Board, with Committee, determines an appropriate level of fixed remuneration for the CEO and Group Executives with consideration of role and market incumbent, factors; and from Fixed remuneration is reviewed annually, following the end of the 30 June performance year. For the 2016 financial year the average fixed remuneration increase for Executives who did not change roles was 0.9%. 2.3 Short-Term Incentive  The CEO and Group Executives have an STI target equal to 100% of their fixed remuneration. STI outcomes reflect the Executive’s performance against a balanced scorecard and CBA’s overall performance; Remuneration CommitteeRisk & Remuneration Review CommitteeMonitoring and reporting of Group risk & compliance issuesIndependent RemunerationConsultantCBA BoardRisk Committee 1/31/31/350% STI paid as cash50% STI deferred for 1 yearFixed remuneration100% LTI deferred for 4 years Directors’ Report – Remuneration Report 2.3 Short-Term Incentive (continued)      STI outcomes for the CEO and Group Executives may be awarded between zero and 150% of their STI target depending on performance; Executives receive 50% of their STI payment as cash following the Group’s year-end results. The remaining 50% of the STI payment is deferred for one year and earns interest at the CBA one year term deposit rate; The CEO and Group Executives will forfeit the deferred portion of their STI if they resign or are dismissed from the Group before the end of the deferral period, unless the Board determines otherwise; The deferral assists in managing the risk of losing key Executive talent. It also allows the Board to reduce or cancel the deferred component of the STI where business outcomes are materially lower than expected or with consideration of other circumstances; and STI payments are made within a funding cap which is determined by the Board after consideration of Group performance in the year. The Board retains discretion to adjust remuneration outcomes up or down to ensure consistency with the Group’s remuneration philosophy and to prevent any inappropriate reward outcomes. See section 3.1 for more detail on STI outcomes and the link to performance. 2.4 Long-Term Incentive       The CEO and each Group Executive has an LTI target that is equal to 100% of their fixed remuneration, based on the expected values at the end of the performance period, in today’s dollars; The LTI award has a four year vesting period and is measured against relative Total Shareholder Return (TSR) and relative Customer Satisfaction performance hurdles; The performance hurdles are aligned to our key business priorities of Customer Focus and long-term shareholder value creation; Executives only receive value if performance hurdles are met at the end of the four years, subject to final Board review; Executives equivalent) for each right that vests; and receive one CBA share (or cash No dividends are paid while LTI awards are unvested. See section 3.2 for more detail on how the LTI award operates and its direct link to performance outcomes. 2.5 Mandatory Shareholding Policy The CEO and each Group Executive are required to accumulate CBA shares over a five year period to the value of 300% of fixed remuneration for the CEO and 200% of fixed remuneration for Group Executives. 2.6 Sign-on and Retention Awards   Sign-on awards may be offered to new Executives to compensate for existing incentive arrangements that they will forgo due to the termination of their non-CBA employment before the end of the vesting period. Retention awards are pre-determined future payments that may be awarded to Executives at a defined future date to encourage retention.  No sign-on or retention awards were made Executives during the 2016 performance year. to 3. Linking Remuneration to Performance The remuneration framework is designed to attract and retain high calibre Executives by rewarding them for achieving goals that are aligned to the Group’s business strategy and shareholder interests. All our incentives are directly long-term performance goals. to both short-term and linked 3.1 Short-Term Performance 2016 the Overall Group performance, together with an assessment of individual Executive performance through a balanced scorecard approach, determines individual STI outcomes of Executives. Financial and non-financial objectives and weightings vary by role. The CEO has a 40% weighting on financial outcomes, Executives managing business units typically have a 45% weighting on financial outcomes and Executives managing support functions have a typical weighting of 25% on financial outcomes. Risk is an important factor in accounting for short-term performance. The Group uses Profit After Capital Charge (PACC), a risk-adjusted measure, as one of our key measures of financial performance. It not only takes into account the profit achieved, but also reflects the risk to capital that was taken to achieve it. Moreover, Executives are required to comply with the Group and relevant Business Unit Risk Appetite Statements and provide leadership of strong risk culture. The following table provides the Board’s assessment of the the year ended Group’s overall performance 30 June 2016 and highlights key financial and non-financial performance outcomes. Performance categories have been assessed as above, on, or below target. for Commonwealth Bank of Australia - Annual Report 2016 51 Directors’ Report – Remuneration Report 3.1 Short-Term Performance 2016 (continued) Strategic Pillar Strength 2016 Performance Measures Outcome Commentary  Group Cash Net Profit After Tax (Cash NPAT) ($m)  Group Underlying PACC ($m)  Risk On-Target    The Group reported solid performance with a 3% increase in cash NPAT to $9,450 million. The Group enhanced the Common Equity Tier 1 capital ratio to 10.6%, primarily through the $5.1bn institutional and retail entitlement offer. The above factors contributed to a solid risk adjusted underlying PACC performance for the period in a changing regulatory environment. Customer Customer Satisfaction    Retail Business Institutional  Wealth Above-Target The Group continued its commitment to a customer focused culture and maintained the number one ranking among for customer satisfaction across retail and business customers. Specifically: the major banks    For Retail Banking, CBA finished the financial year ranked number one in Main Financial Institution (MFI) customer satisfaction(1). During this time, CBA attained the highest score ever recorded by a major bank at 84.5%. In Business Banking, CBA ended the financial year equal first in MFI customer satisfaction(1) among the major banks across most key business segments. In to Institutional Banking, CBA continues perform strongly and ended the financial year ranked number one customer satisfaction(1) among the major banks. in MFI  Wealth Management’s platforms were ranked number one for adviser satisfaction among the four major banks and other key competitors. The Group continued its leadership in financial technology, providing market leading solutions for our customers and our people, while investing now for the future. For consumers, the Group provided:    for non-Commonwealth Bank The ability customers the CommBank app to become a customer within minutes; to download and use Photo-a-Bill functionality allowing customers to automatically populate biller payment details by photographing their bills; and international share New CommSec. trading through For businesses, the Group:    Placed over 37,000 additional Albert terminals (the Group’s next generation EFTPOS tablet) in the market place; Introduced instant credit decisioning for online asset finance applications; and Provided a new Simple Business Overdraft product. Technology Strategy Execution On-Target 52 Commonwealth Bank of Australia – Annual Report 2016 Directors’ Report – Remuneration Report  In addition, the Group launched and strengthened multiple research and development partnerships and initiatives, security, blockchain cyber technology, quantum computing and farming peer to peer platforms. covering Talent & Leadership On-Target  Over 2,000 leaders attended targeted leadership People      Safety Diversity Engagement Culture      Productivity Productivity Execution On-Target    development programs during the 2016 financial year. Continual improvement of health, safety and wellbeing systems, processes and programs, saw the Group achieve a 30% reduction in lost time injury frequency over the past 12 months. Having achieved the initial gender diversity target of 35% women in senior leadership positions, the Group set a new target of 40% women in senior leadership by 2020 and established a target for more diverse cultural representation in senior leadership. The Group’s engagement score of 77% indicates that culture and people engagement remain strong, with an increase in the survey completion rate. Significant investment was made in embedding the Group’s vision and values across policies and processes, and performance. recruitment, including talent, Successfully implemented a global human resource management system across offshore locations. The Group’s productivity focus remains on simplifying and standardising processes to support the execution of its process centricity and digitisation efforts. initiatives, Productivity including expense benefit targets, have been embedded in business and support unit plans, delivering significant process efficiencies. initiatives Productivity cost management in the 2016 financial year, with the Group’s cost-to-income ratio improving 40 basis points from prior year to 42.4%. supported sound  Group-wide, there were demonstrated on-going improvements in turnaround times, error rates and unit costs of processes. Examples ranged from a 97% improvement in Bankwest’s small business credit card turnaround time, to an 85% advancement in Colonial customer request response times.   Productivity savings allow the Group to invest for the future. More than $600 million was reinvested in the 2016 financial year to support future productivity and including growing productivity growth capability through leadership focused courses and embedded productivity resources. initiatives, Future initiatives will help to ensure our continuous improvement culture is fully embedded and cascades from people leaders to all employees of the Group, with progress through accreditation and benefits measurement. tracked (1) Customer satisfaction is measured by three separate surveys. For the Retail Bank, this is measured by Roy Morgan Research. Roy Morgan Research Main Financial Institution (MFI) Retail Customer Satisfaction measures percentage of the Australian population 14+, % “Very Satisfied” or “Fairly Satisfied” with their relationship with that MFI, based on a 6-month rolling average to June 2016. CBA excludes Bankwest. Rank refers to CBA’s outright position relative to NAB, ANZ and Westpac. For Business Banking and Institutional Banking, MFI customer satisfaction is measured by DBM Business Financial Services Monitor which takes the average satisfaction rating of business customers’ MFI, using an 11 point scale where 0 is Extremely Dissatisfied and 10 is Extremely Satisfied based on a 6 month rolling average to June 2016. Institutional Banking includes businesses with turnover of $100 million and above. For Wealth Management, customer satisfaction is measured by the Wealth Insights 2016 Service Level Report, Platforms. This survey measures satisfaction with the service of master trusts/wraps in Australia, by financial advisers. It includes Colonial First State’s FirstChoice and FirstWrap platforms. Commonwealth Bank of Australia - Annual Report 2016 53 Directors’ Report – Remuneration Report 2016 STI outcomes Overall, 2016 financial and non-financial performance was solid. Against this background, the average STI payment for the CEO and Group Executives was 112% of their STI targets. 3.2 Long-Term Performance The executive remuneration structure also focuses on driving performance and creating shareholder alignment in the longer term, by providing Executives with LTI awards in the form of Reward Rights with a four year vesting period. CEO and Group Executives’ current LTI awards are issued under the Group Leadership Reward Plan (GLRP). Vesting is subject to performance against relative TSR and relative Customer Satisfaction hurdles. 2012 GLRP Award The 2012 GLRP award reached the end of its four year performance period on 30 June 2016. The 2012 GLRP award was weighted against two performance hurdles, relative TSR (75% of the award) and relative Customer Satisfaction (25% of the award). At the end of the performance period, the results against these measures were:     0% vesting against the TSR hurdle; 89.5% vesting against the Customer Satisfaction hurdle; In line with the plan rules for this award, 20.31% of the total award vested; and The Board reviewed the measurement outcomes of this award and concluded that the above vesting appropriately reflects performance over the four year performance period. Overview of Unvested LTI Awards Equity Plan (1) 2013 GLRP (2) 2014 GLRP (3) 2015 GLRP (4) Performance Period – Performance Period – Start Date End Date Performance Hurdles 1 July 2013 1 July 2014 1 July 2015 30 June 2017 30 June 2018 30 June 2019 Each award is split and tested:  75% TSR ranking relative to peer group  25% Customer Satisfaction average ranking relative to peer group (1) Naming convention updated to align with the start of the performance period. (2) For Ian Narev, the grant date was 11 November 2013. For Kelly Bayer Rosmarin the grant date was 13 February 2014. For all other Executives the grant date was 23 September 2013. (3) For Ian Narev, the grant date was 13 November 2014. For Adam Bennett the grant date was 12 February 2015. For Vittoria Shortt the grant date was 7 May 2015. For all other Executives the grant date was 18 September 2014. (4) For Ian Narev, the grant date was 17 November 2015. For all other Executives the grant date was 10 November 2015. 2015 GLRP Award The CEO and Group Executives were granted LTI awards during the 2016 financial year under the 2015 GLRP. The awards granted may deliver value to Executives at the end of the four year performance period, subject to meeting performance hurdles as set out in the diagram below: The following table provides the key features of the 2015 GLRP award: Feature Description Instrument Reward Rights. Each Reward Right entitles the Executive to receive one CBA share in the future, subject to meeting the performance hurdles set out below. The number of rights that vest will not be known until the end of the performance period. Determining the number of Reward Rights The number of Reward Rights allocated depends on each Executive’s LTI Target (see diagram on page 50 for explanation of target remuneration). The number of Reward Rights allocated aligns the Executive’s LTI Target to the expected value at the end of the performance period, in today’s dollars. Performance Period The performance period commences at the beginning of the financial year in which the award is granted. For the GLRP award granted in the 2016 financial year, the performance period started on 1 July 2015 and ends after four years on 30 June 2019. 54 Commonwealth Bank of Australia – Annual Report 2016 GLRP Reward Rightsgranted4 year performance periodCustomer Satisfaction hurdle = 25%Total Shareholder Return hurdle = 75% Directors’ Report – Remuneration Report Performance Hurdles  75% of each award is subject to a performance hurdle that measures the Group’s TSR performance relative to a set peer group(1).This is made up of the 20 largest companies on the Australian Securities Exchange (ASX) by market capitalisation at the beginning of the performance period, excluding resources companies and Commonwealth Bank of Australia. The next five largest companies listed on the ASX by market capitalisation will form a reserve bench of companies. A reserve bench company will be substituted (in order of market capitalisation as at the beginning of the performance period) into the peer group when a peer group Company ceases to be listed on the ASX as a result of an acquisition, merger or other relevant corporate action or delisting; and  25% of each award is subject to a performance hurdle that measures the Group’s Customer Satisfaction outcomes relative to a peer group of Australia & New Zealand Banking Group Limited (ANZ), National Australia Bank Limited (NAB), Westpac Banking Corporation (WBC), and other key competitors for the wealth business. Vesting TSR (75% of the award) Framework     100% vesting is achieved if the Group’s TSR is ranked in the top quarter of the peer group (i.e. 75th percentile or higher)(1); If the Group is ranked at the median, 50% of the Reward Rights will vest; Vesting occurs on a sliding scale if the Group is ranked between the median and the 75th percentile; and No Reward Rights in this part of the award will vest if the Group’s TSR is ranked below the median of the peer group. Customer Satisfaction (25% of the award)  100% vesting applies if the weighted average ranking for the Group over the performance period is 1st; 50% will vest if the Group’s weighted average ranking is 2nd;      Calculation of the Performance Results Vesting of between 50% and 100% will occur on a pro-rata straight line basis if the Group’s weighted average ranking is between 2nd and 1st; and No Reward Rights in this part of the award will vest if the Group’s weighted average ranking is less than 2nd. TSR is calculated independently by Orient Capital. Customer Satisfaction is measured with reference to the three independent surveys below: – Roy Morgan Research (measuring customer satisfaction across Retail Banking); – DBM, Business Financial Services Monitor (measuring customer satisfaction across Business Banking); and – Wealth Insights Service Level Report, Platforms (measuring customer satisfaction across Wealth Management). Board Discretion The award is subject to a risk and compliance review. The Board also retains sole discretion to determine the amount and form of any award that may vest (if any) to prevent any unintended outcomes, or in the event of a corporate restructuring or capital event. Expiry At the end of the applicable performance period, any Reward Rights that have not vested will expire. (1) The peer group (at the beginning of the performance period) for the TSR performance hurdle (at the time of grant) comprised Amcor Limited, AMP Limited, Australia and New Zealand Banking Group Limited, Brambles Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, QBE Insurance Group Limited, Ramsey Health Care Limited, Scentre Group, Suncorp Group Limited, Sydney Airport, Telstra Corporation Limited, Transurban Group, Vicinity Centres, Wesfarmers Limited, Westfield Corporation, Westpac Banking Corporation and Woolworths Limited. The reserve bench comprised AGL Energy Limited, APA Group, Aurizon Holdings Limited, Goodman Group and Stockland. Retail Entitlement Offer During the 2016 financial year, additional Reward Rights were granted to all existing rights holders as part of the Retail Entitlement Offer, including the CEO and Group Executives. The grant of additional Reward Rights for Ian Narev in respect of 2012, 2013 and 2014 GLRP awards was approved by shareholders at the AGM on 17 November 2015. Additional Reward Rights will vest only if the original performance hurdles in respect of each award are met. Commonwealth Bank of Australia - Annual Report 2016 55 Directors’ Report – Remuneration Report 3.2 Long-Term Performance (continued) Changes to the 2016 GLRP award Following a review of our LTI framework the Board has introduced changes to the GLRP award for the 2017 financial year. The 2016 GLRP award changes reflect the Group’s unique strategy and vision, support the delivery of long-term value in a dynamic environment and focus on sustainable performance for the Group’s key stakeholder groups, shareholders, customers, people and the community. 2016 GLRP award changes Rationale for change An additional performance hurdle – People and Community (25% weighting). Executive performance assessed over a two, three and four year period, with vesting occurring after four years. A third performance hurdle will be introduced, focused on People and Community, measuring long-term progress in the areas of diversity and inclusion, sustainability and culture. This new hurdle aims to strengthen the Group’s culture by further aligning the executive reward framework with the Group’s vision and values. The TSR and Customer Satisfaction performance components, weighted 50% and 25% respectively, remain to continue to support a focus on long-term value creation for shareholders and better customer outcomes. The GLRP retains a four year vesting period to maintain a strong focus on sustainable long-term value creation. Different performance hurdles will be assessed over either two, three or four years to allow a more dynamic approach to ensuring hurdles are meaningful in the changing environment the Group operates in, and aligned to the Group’s strategic time horizons. The change to the Customer Satisfaction performance period will better enable the to focused culture while providing agility Group’s commitment progressively build on our customer satisfaction performance as the market evolves. to a customer Together with the three and four year TSR performance periods, the GLRP changes enhance the focus on long-term sustainable performance by requiring consistent performance throughout the entire period. The following diagram sets out the 2016 GLRP award. Hedging of Unvested Equity Awards Employees are prohibited from hedging their unvested CBA equity awards, including shares or rights. Executives controlling their exposure to risk in relation to their unvested awards is prohibited. Executives are also prohibited from using instruments or arrangements for margin borrowing, short selling or stock lending of any Bank securities or the securities of any other member of the Group. All hedging restrictions are included in CBA’s Group Securities Trading Policy. 56 Commonwealth Bank of Australia – Annual Report 2016 1 year additional service period4 year performance period3 year performance period4 year performance period25%Total Shareholder Return Customer Satisfaction People and Community25%2 year additional service period25%25%2 year performance periodAugust 2020Vests subject to risk review and meeting set performance hurdles30 June 201830 June 201930 June 2020 Directors’ Report – Remuneration Report Long-Term Performance against Key Measures As detailed above, long-term incentive arrangements are designed to align Executives with the Group’s long-term strategy and shareholder interests. The remainder of this section illustrates performance against key related metrics over time. Financial Performance The following graphs show the Group’s cash NPAT, cash Earnings per Share (cash EPS), share price movement and full-year dividend results over the past five financial years (including 2016). The solid performance has delivered sound returns to shareholders. Cash NPAT Cash EPS (1) (1) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted number of ordinary shares for June 15 and June 14 only in line with comparatives presented in the Financial Statements. Share Price Dividends per Share Commonwealth Bank of Australia - Annual Report 2016 57 7,0397,7608,6809,1379,45001,0002,0003,0004,0005,0006,0007,0008,0009,00010,000Jun 12Jun 13Jun 14Jun 15Jun 16$ Million444.7482.1532.7557.5555.10100200300400500600Jun 12Jun 13Jun 14Jun 15Jun 16Cents$0$10$20$30$40$50$60$70$80$90$100Jun 11Jun 12Jun 13Jun 14Jun 15Jun 163.343.644.014.204.20$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50Jun 12Jun 13Jun 14Jun 15Jun 16 Directors’ Report – Remuneration Report Long-Term Performance against Key Measures (continued) Relative TSR Performance against the Group’s Peers The graph below represents CBA’s TSR performance against the comparator peer group for the period 1 July 2012 to 30 June 2016. The Group was ranked at the 45th percentile of the peer group(1) at the end of the period. TSR is calculated by Orient Capital. (1) For the 2012 GLRP, the peer group (at the end of the performance period) for the TSR performance hurdle comprised AGL Energy Limited, Amcor Limited, AMP Limited, Australia and New Zealand Banking Group Limited, Brambles Limited, Coca-Cola Amatil Limited, CSL Limited, GPT Group, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, Orica Limited, QBE Insurance Group Limited, Stockland, Suncorp Group Limited, Telstra Corporation Limited, Transurban Group, Wesfarmers Limited, Westpac Banking Corporation and Woolworths Limited. Performance against Customer Satisfaction The following graphs show CBA’s customer satisfaction performance across Retail, Business and Wealth Management. During the 2016 financial year, CBA maintained the number one ranking among the major banks in Retail MFI customer satisfaction and has been ranked equal or outright first position in MFI customer satisfaction among the major banks in most key business segments. The Wealth Management results ranked the Group first for adviser satisfaction among the four major banks and other key competitors. (1) Roy Morgan Research Main Financial Institution (MFI) Retail Customer Satisfaction. Australian population 14+, % “Very Satisfied” or “Fairly Satisfied” with relationship with that MFI. 6 month rolling average to June 2016. CBA excludes Bankwest. Rank refers to CBA’s position relative to NAB, ANZ and Westpac. 58 Commonwealth Bank of Australia – Annual Report 2016 -60%-30%0%30%60%90%120%150%180%210%240%Total Shareholder Return 2016 (4 Years)Comparator Peer Group (1)CBA70%75%80%85%90%Jun-12Aug-12Oct-12Dec-12Feb-13Apr-13Jun-13Aug-13Oct-13Dec-13Feb-14Apr-14Jun-14Aug-14Oct-14Dec-14Feb-15Apr-15Jun-15Aug-15Oct-15Dec-15Feb-16Apr-16Jun-16% Satisfied ('Very Satisfied' or 'Fairly Satisfied')Major Bank 1Major Bank 2Major Bank 3CBARetail Main Financial Institution Customer Satisfaction -Competitive ContextSource: Roy Morgan Research6 month rolling average(1) Directors’ Report – Remuneration Report Business Main Financial Institution Customer Satisfaction - Competitive Context (1) (1) CBA and Major Bank 1 and Major Bank 2 are ranked equal 1st (DBM Business Financial Services Monitor, June 2016) as the difference in average satisfaction rating is not considered to be statistically significant. (2) DBM Business Financial Services Monitor (June 2016), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, 6 month rolling average. Wealth Management Customer Satisfaction (1) In the 2012 year, the satisfaction score was calculated on a straight average of FirstChoice and FirstWrap. Due to the change in calculation of the satisfaction score in 2013, historical results have been restated. As a result, the score and ranking for 2012 has changed from 7.69 (2nd) to 7.86 (1st). For remuneration purposes the ranking of 2nd has been applied. (2) For Wealth Management, customer satisfaction is measured by the Wealth Insights 2016 Service Level Report, Platforms. 3.3 Performance Timeline of At Risk Remuneration Outcomes The performance management framework supports decisions in awarding appropriate annual STI outcomes for Executives. The balanced scorecard performance objectives are communicated to Executives at the beginning of the financial year. Executive annual performance evaluations are conducted following the end of the financial year. For the 2016 financial year, the evaluations were conducted in July 2016. The following diagram outlines the timing of the 2016 STI award and the 2016 GLRP award made to the Executives over the relevant performance periods. All awards are subject to risk and compliance reviews. Commonwealth Bank of Australia - Annual Report 2016 59 678 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16Satisfaction -AverageMajor Bank 1Major Bank 2Major Bank 3CBASource: DBM, Business Financial Services Monitor6 month rolling average(2)30-Jun-1630-Jun-1530-Jun-1430-Jun-1330-Jun-12 (1)Score (2)8.077.757.948.327.86CBA Rank1st2nd1st1st1stSTI Annual Performance ReviewSTI outcomes determined & approved by Board50% of STI outcome paid as cashAugust2017Following shareholder approvalLTI 2016 GLRP awards approved by BoardCEO and Group Executives grant of 2016 GLRP awardJuly 201530 June 2016July2016August2016September2016November2016August2020Vests subject to risk review and meeting set performance hurdlesBoard sets strategySTI targets are set Subject to risk & compliance reviewVests subject to risk reviewPerformance measurement period50% STI deferredfor 1 year 2016 GLRP award deferred for 4 years (1 July 2016 to 30 June 2020) Directors’ Report – Remuneration Report 3.4 CEO and Group Executive Remuneration Received in the year ended 30 June 2016 The incentives awarded to the CEO and Group Executives are linked to the Group’s and individual financial and non-financial performance. Total statutory remuneration recognised for the CEO and Group Executives for the 2016 financial year was $44.8 million and is the total of the values for each Executive shown in the statutory remuneration table on page 63. Statutory remuneration disclosures are prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards. Total cash remuneration received by the CEO and Group Executives in relation to the 2016 performance year was $22.4 million. The total cash remuneration received is used to present a clear view of the Group’s remuneration payments made to the CEO and Group Executives during the performance year. Table (a) below shows remuneration received in relation to the 2016 financial year. The total cash payments received are made up of base remuneration and superannuation (fixed remuneration), and the portion of the 2016 STI award which is not deferred. These amounts are consistent with that disclosed in section 4.2 for the same items. This table also includes the value of previous years’ deferred STI and LTI awards which vested during 2016. This differs to the table in section 4.2, which presents the accounting expense for both vested and unvested awards. (a) Remuneration in relation to the 2016 Financial Year (1) Fixed Remuneration includes base remuneration and superannuation. (2) This is the 50% of the 2016 STI for performance during the 12 months to 30 June 2016 (payable September 2016). The remaining 50% is deferred until 1 July 2017. Deferred STI awards are subject to Board review at the time of payment. (3) The value of all deferred cash awards that vested during the 2016 financial year plus any interest accrued during the vesting period. For Rob Jesudason, a portion of his 2015 deferred STI award that vested during the 2016 financial year was paid in Australian dollars and a portion was paid in Hong Kong dollars. For the purpose of disclosure, the portion paid in Hong Kong dollars has been converted to Australian dollars using the average year-to-date exchange rate as at 30 June 2016. (4) The value of deferred equity awards that vested during the 2016 financial year plus any dividends accrued during the vesting period. For Ian Narev, David Cohen, David Craig, Melanie Laing, Annabel Spring and Alden Toevs this reflects the portion of the 2011 GLRP award that vested during the 2016 financial year. For Kelly Bayer Rosmarin, Adam Bennett, Matthew Comyn, Robert Jesudason and Vittoria Shortt this amount reflects the 2012 deferred STI awarded prior to their appointment as Group Executive under Executive General Manager arrangements that vested during the 2016 financial year. A portion of Ian Narev’s deferred equity award was delivered in the form of cash, which was paid to registered charities pursuant to an option that the Board made available in the current year. (5) The value of any deferred cash and/or equity awards that were forfeited/lapsed during the 2016 financial year. (6) Group Executives as at 30 June 2016. 60 Commonwealth Bank of Australia – Annual Report 2016 Fixed Remuneration (1)Cash STI (2)Total cash in relation to 2016Deferred cash awards (3)Deferred equity awards (4)Total remuneration received during 2016Previous years' awards forfeited/lapsed during 2016 (5)$$$$$$$Managing Director and CEOIan Narev 2,650,000 1,431,000 4,081,000 1,625,834 6,597,473 12,304,307 (925,991) Current Executives (6)Kelly Bayer Rosmarin1,050,600 586,235 1,636,835 626,771 466,671 2,730,277 - Adam Bennett980,000 554,239 1,534,239 259,295 393,185 2,186,719 - David Cohen900,000 529,594 1,429,594 595,883 2,178,446 4,203,923 (305,721) Matthew Comyn1,055,750 653,193 1,708,943 632,915 549,041 2,890,899 - David Craig1,380,000 812,044 2,192,044 871,355 3,340,159 6,403,558 (468,772) Robert Jesudason1,193,421 712,174 1,905,595 630,361 385,378 2,921,334 - Melanie Laing845,000 483,499 1,328,499 506,546 1,936,282 3,771,327 (271,724) Vittoria Shortt845,000 501,455 1,346,455 170,430 263,529 1,780,414 - Annabel Spring1,055,750 501,481 1,557,231 677,005 2,371,784 4,606,020 (332,868) Alden Toevs1,430,000 752,091 2,182,091 864,542 3,461,148 6,507,781 (485,770) David Whiteing980,000 510,519 1,490,519 563,418 - 2,053,937 - Previous years' awards that vested during 2016 Directors’ Report – Remuneration Report (b) CEO Reconciliation Table of Cash Payments from Table (a) and Statutory Remuneration Table on Page 63 (1) Awards vest in August each year subject to Board Risk Review and meeting set performance hurdles. (2) Naming convention updated to align with the start of the performance period. (3) (4) Includes the accounting expense for additional Reward Rights granted as part of the Retail Entitlement Offer. Includes true up for prior year award. Commonwealth Bank of Australia - Annual Report 2016 61 2016$Year Award Vests (1)Cash remuneration received in relation to 2016 - refer to table (a) above4,081,000n/a2016 STI deferred for 12 months at risk1,431,0002017Annual leave and long service leave accruals137,247n/aOther Payments50,886n/aShare-based payments: accounting expense for 2016 for LTI awards made over the past 4 years:(2)(3) 2012 GLRP:(4)Expense for 1 award that may vest subject to customer satisfaction performance506,4012016 2012 GLRP:Expense for 1 award that may vest subject to relative TSR performance516,2512016 2013 GLRP:Expense for 1 award that may vest subject to customer satisfaction performance287,1582017 2013 GLRP:Expense for 1 award that may vest subject to relative TSR performance647,5432017 2014 GLRP:Expense for 1 award that may vest subject to customer satisfaction performance226,6312018 2014 GLRP:Expense for 1 award that may vest subject to relative TSR performance530,8312018 2015 GLRP:Expense for 1 award that may vest subject to customer satisfaction performance107,6952019 2015 GLRP:Expense for 1 award that may vest subject to relative TSR performance245,7092019Total Statutory Remuneration as per page 638,768,352 Directors’ Report – Remuneration Report 4. KMP Disclosure Tables 4.1 Non-Executive Directors Statutory Remuneration The statutory table below details individual statutory remuneration for the Non-Executive Directors for the year ended 30 June 2016 and the previous financial year. (1) Cash includes Board and Committee fees received as cash. For Shirish Apte this also includes payments made on his behalf in relation to tax advice in the prior year. (2) Superannuation contributions are capped at the superannuation maximum contributions base as prescribed under the Superannuation Guarantee legislation. For Shirish Apte, superannuation is paid on the Australian portion of his fees and includes minor adjustments made in relation to the prior year. (3) The values shown in the table represent the post-tax portion of fees received as shares. Catherine Livingstone met the Non-Executive Director shareholding requirement at the time of her appointment and is not required to purchase any additional shares. To comply with the Non-Executive Director shareholding requirement, post-tax deductions for Mary Padbury will commence in the 2017 financial year. (4) For 2015 comparison, David Higgins was appointed as a Non-Executive Director on 1 September 2014 and Wendy Stops was appointed as a Non- Executive Director on 9 March 2015. Their remuneration was prorated accordingly in 2015. (5) Catherine Livingstone was appointed as a Non-Executive Director on 1 March 2016 and Mary Padbury was appointed as a Non-Executive Director on 14 June 2016. Their remuneration has been prorated accordingly. (6) Jane Hemstritch retired from the Group on 31 March 2016 and her remuneration has been prorated accordingly. 62 Commonwealth Bank of Australia – Annual Report 2016 Short-Term BenefitsPost Employment BenefitsShare-Based paymentsNon-ExecutiveTotalSuper-Directors'StatutoryCash (1)annuation (2)Share Plan (3)Remuneration$$$$ChairmanDavid Turner2016854,887 19,308 -874,195 2015841,034 18,783 -859,817 Non-Executive DirectorsJohn Anderson2016300,768 19,308 -320,076 2015289,173 18,783 -307,956 Shirish Apte2016299,140 7,860 -307,000 2015296,395 4,753 -301,148 David Higgins (4)2016294,078 19,308 - 313,386 2015217,848 15,593 - 233,441 Launa Inman2016257,222 19,308 29,233 305,763 2015251,185 18,783 28,533 298,501 Catherine Livingstone (5)201684,890 6,436 - 91,326 Brian Long2016332,094 19,308 - 351,402 2015311,290 18,783 - 330,073 Andrew Mohl2016286,599 19,308 - 305,907 2015279,718 18,783 - 298,501 Mary Padbury (5)201612,386 1,177 - 13,563 Wendy Stops (4)2016253,938 19,308 - 273,246 201579,087 5,867 - 84,954 Harrison Young2016333,428 19,308 - 352,736 2015322,739 18,783 - 341,522 Former Non-Executive DirectorJane Hemstritch (6)2016238,164 14,507 - 252,671 2015308,810 18,783 - 327,593 Directors’ Report – Remuneration Report 4.2 Executive Statutory Remuneration The following statutory tables detail the statutory accounting expense of all remuneration related items for the CEO and all Group Executives. This includes remuneration costs in relation to both the 2015 and 2016 performance years. The tables are different to the cash table on page 60, which shows the remuneration received in the 2016 financial year rather than the accrual amounts on the statutory accounting basis, as outlined in these statutory tables. The tables have been developed and audited against the relevant accounting standards. Refer to the footnotes below each table for more detail on each remuneration component. (1) Fixed Remuneration comprises Base Remuneration and Superannuation (post-employment benefit). Superannuation contributions for Robert Jesudason are made in line with Hong Kong Mandatory Provident Fund regulations. (2) Base Remuneration is the total cost of salary including cash salary, short-term compensated absences and any salary sacrificed benefits. (3) Non-Monetary represents the cost of car parking (including associated fringe benefits tax). (4) This is 50% of the 2016 STI for performance during the 12 months to 30 June 2016 (payable September 2016). (5) Deferred STI represents 50% of the 2016 STI award that is deferred until 1 July 2017. Deferred STI awards are subject to Board review at the time of payment. (6) Other short-term benefits relate to company funded benefits (including associated fringe benefits tax where applicable). This item also includes interest accrued in relation to the 2015 STI deferred award, which vested on 1 July 2016, and the net change in accrued annual leave. For Robert Jesudason, includes costs in relation to his Hong Kong assignment. Includes long service entitlements accrued during the year as well as the impact of changes to long service leave valuation assumptions, which are determined in line with Australian Accounting Standards. For Kelly Bayer Rosmarin, Adam Bennett, Vittoria Shortt and David Whiteing this also includes amounts relating to deferred STI payments awarded under Executive General Manager arrangements and/or equity sign-on awards. These equity awards are subject to forfeiture if the Executive ceases to be employed by the Group due to his or her resignation in any circumstances. (7) (8) This includes the 2016 expense for the 2012, 2013, 2014 and 2015 GLRP awards (including true up for previous year award). It also includes the accounting expense for additional Reward Rights granted as part of the Retail Entitlement Offer. Commonwealth Bank of Australia - Annual Report 2016 63 Long-Term BenefitsShare-Based PaymentsBase Remuner-ation (2)Superan-nuationNonMonetary (3)Cash STI (at risk) (4)Deferred STI (at risk) (5)Other (6)Long- Term (7) Reward Rights (at risk) (8)Total Statutory Remuneration (9)$$$$$$$$$Managing Director and CEOIan Narev 20162,625,00025,00015,0521,431,0001,431,00035,870137,2113,068,2198,768,35220152,625,00025,00014,7561,590,0001,590,00059,021123,0402,291,4718,318,288Group ExecutivesKelly Bayer Rosmarin20161,025,60025,00015,052586,235586,2353,760279,193555,2033,076,2782015995,00025,00014,756612,957612,9575,228354,416329,3712,949,685Adam Bennett (10)2016955,00025,00015,052554,239554,2399,385234,469283,3292,630,7132015444,79411,6447,041253,580253,58033,624250,64756,5491,311,459David Cohen2016875,00025,00015,052529,594529,59460,30835,088964,2543,033,8902015875,00025,00014,756582,750582,75032,07234,785737,0412,884,154Matthew Comyn20161,030,75025,00013,846 653,193653,1936,65636,150982,7363,401,52420151,005,00025,00013,652 618,966618,96648,121132,653703,7763,166,134David Craig20161,355,00025,00015,052812,044812,04457,91660,0571,478,4284,615,54120151,355,00025,00014,756852,150852,15086,44655,6861,129,7954,370,983Robert Jesudason (11)20161,190,2373,184-712,174712,174627,30224,014853,2864,122,3712015930,55217,2156,050575,295575,295230,592164,243594,8213,094,063Melanie Laing2016820,00025,00015,052483,499483,499(4,412)17,412885,2332,725,2832015820,00025,00014,756495,382495,38250,87516,155705,3092,622,859Vittoria Shortt (10)2016820,00025,00015,052501,455501,455(19,300)151,532185,1752,180,3692015271,8358,2885,025166,674166,6748,272108,77210,885746,425Annabel Spring20161,030,75025,00013,846501,481501,48116,21543,8651,080,0903,212,72820151,005,00025,00013,652662,084662,08438,16428,352838,7303,273,066Alden Toevs20161,405,00025,00015,052752,091752,09146,67648,0741,531,9004,575,88420151,405,00025,00014,756845,488845,488(7,527)60,9891,170,6404,359,834David Whiteing(10)2016960,69219,30813,846510,519510,5198,81067,110346,1022,436,9062015898,04918,11513,167531,375531,37516,21161,424158,1312,227,847Fixed Remuneration (1)Other Short-Term Benefits Directors’ Report – Remuneration Report (9) The percentage of 2016 remuneration related to performance was: Ian Narev 68%, Kelly Bayer Rosmarin 56%, Adam Bennett 53%, David Cohen 67%, Matthew Comyn 67%, David Craig 67%, Robert Jesudason 55%, Melanie Laing 68%, Vittoria Shortt 54%, Annabel Spring 65%, Alden Toevs 66%, and David Whiteing 56%. (10) For 2015 comparative, David Whiteing commenced in the KMP role on 14 July 2014, Adam Bennett commenced in the KMP role on 12 January 2015 and Vittoria Shortt commenced in the KMP role on 2 March 2015. Their remuneration reflects time in the KMP role. (11) For Robert Jesudason remuneration is paid in Hong Kong dollars and was impacted by movements in exchange rates. 4.3 Executive STI Allocations for 2016 (1) The maximum STI is represented as a percentage of fixed remuneration. The minimum STI is zero. (2) (3) This represents 50% of the STI award that is deferred until 1 July 2017. Deferred STI awards are subject to Board review at the time of payment. Includes 50% of the annual STI award payable as cash in recognition of performance for the year ended 30 June 2016. 4.4 Equity Awards Received as Remuneration The table below details the value and number of all equity awards that were granted or forfeited/lapsed to Executives during their time in a KMP role in 2016. It also shows the number of previous year’s awards that vested during the 2016 performance year (some of which relate to past non-KMP roles). (1) Represents the maximum number of GLRP Reward Rights and Deferred Rights that may vest to each Executive. For GLRP Reward Rights the value represents the fair value at grant date. For Ian Narev, the grant date for his GLRP Reward Rights was 17 November 2015. For all other Executives the grant date for GLRP Reward Rights was 10 November 2015. The grant date for additional GLRP Reward Rights granted as part of the Retail Entitlement Offer was 17 November 2015. Deferred Rights represent the deferred STI awarded under Executive General Manager arrangements, sign-on and retention awards received as restricted rights. For Deferred Rights the value reflects the face value at grant date. The minimum potential outcome for GLRP Reward Rights and Deferred Rights is zero. Includes the following additional rights granted as part of the Retail Entitlement Offer: Ian Narev 444 rights, Kelly Bayer Rosmarin 97 rights, Adam Bennett 39 rights, David Cohen 155 rights, Matthew Comyn 173 rights, David Craig 239 rights, Robert Jesudason 147 rights, Melanie Laing 142 rights, Vittoria Shortt 25 rights, Annabel Spring 173 rights, Alden Toevs 246 rights and David Whiteing 51 rights. (2) (3) As at 1 July 2015, the maximum value of GLRP Reward Rights granted during 2016 (excluding additional rights granted as part of the Retail Entitlement Offer in relation to unvested 2012, 2013 and 2014 GLRP awards), based on the volume weighted average price of the Group’s ordinary shares over the five trading days up to and including 1 July 2015 was: Ian Narev $4,639,026, Kelly Bayer Rosmarin $1,839,251, Adam Bennett $1,715,570, David Cohen 64 Commonwealth Bank of Australia – Annual Report 2016 STI Target (1)Maximum STI (1)$ %%$%$Managing Director and CEOIan Narev 2,650,000 150%50% 1,431,000 50% 1,431,000 Group ExecutivesKelly Bayer Rosmarin 1,050,600 150%50% 586,235 50% 586,235 Adam Bennett 980,000 150%50% 554,239 50% 554,239 David Cohen 900,000 150%50% 529,594 50% 529,594 Matthew Comyn 1,055,750 150%50% 653,193 50% 653,193 David Craig 1,380,000 150%50% 812,044 50% 812,044 Robert Jesudason 1,193,421 150%50% 712,174 50% 712,174 Melanie Laing 845,000 150%50% 483,499 50% 483,499 Vittoria Shortt 845,000 150%50% 501,455 50% 501,455 Annabel Spring 1,055,750 150%50% 501,481 50% 501,481 Alden Toevs 1,430,000 150%50% 752,091 50% 752,091 David Whiteing 980,000 150%50% 510,519 50% 510,519 Cash STI (2)Deferred STI (3)Previous Years'Awards Vested during 2016 (4)NameClassUnits$UnitsUnits$Managing Director and CEOIan NarevGLRP Reward Rights 54,493 2,480,651 70,398 (11,222) (925,991)Group ExecutivesKelly Bayer RosmarinGLRP Reward Rights 21,507 921,888 - - - Deferred Rights 19 1,359 5,201 - - Adam BennettGLRP Reward Rights 20,010 857,673 - - - Deferred Rights 2,073 157,101 4,382 - - David Cohen GLRP Reward Rights 18,512 794,437 23,245 (3,705) (305,721)Matthew ComynGLRP Reward Rights 21,707 931,534 - - - Deferred Rights - - 6,119 - - David Craig GLRP Reward Rights 28,385 1,218,155 35,641 (5,681) (468,772)Robert JesudasonGLRP Reward Rights 20,544 881,456 - - - Deferred Rights - - 4,295 - - Melanie LaingGLRP Reward Rights 17,377 745,713 20,661 (3,293) (271,724)Vittoria ShorttGLRP Reward Rights 17,249 739,341 - - - Deferred Rights 2,264 171,609 2,937 - - Annabel SpringGLRP Reward Rights 21,707 931,534 25,308 (4,034) (332,868)Alden Toevs GLRP Reward Rights 29,413 1,262,286 36,932 (5,887) (485,770)David WhiteingGLRP Reward Rights 20,034 858,552 - - - Deferred Rights 5 358 - - - Forfeited orGranted Lapsedduring 2016 (1)(2)(3) during 2016 (5) Directors’ Report – Remuneration Report $1,575,581, Matthew Comyn $1,848,263, David Craig $2,415,771, Robert Jesudason $1,750,675, Melanie Laing $1,479,280, Vittoria Shortt $1,479,280, Annabel Spring $1,848,263, Alden Toevs $2,503,404 and David Whiteing $1,715,570. (4) Previous years' awards that vested include the 2011 GLRP award and other deferred equity awards. A portion of Ian Narev’s vested equity award was delivered in the form of cash, which was paid to registered charities pursuant to an option that the Board made available in the current year. (5) This includes the portion of the 2011 GLRP award that vested during 2016 that did not meet the performance hurdle and was forfeited. The value of the lapsed award is calculated using the Volume Weighted Average Closing Price for the five days preceding the transaction date. 4.5 Fair Value Assumptions for Unvested Equity Awards For the Customer Satisfaction component of all LTI awards, the fair value is the closing market price of a CBA share as at the grant date. For the TSR component of the LTI awards, the fair value has been calculated using a Monte Carlo simulation method using the below assumptions. The exercise price is nil across all GLRP awards. (1) For the TSR component of the GLRP awards, a zero dividend yield has been assumed given that dividends are incorporated into the fair value of the rights. (2) The performance hurdle for this portion of the GLRP award is TSR relative to the Group’s peers. (3) The performance hurdle for this portion of the GLRP award is Customer Satisfaction relative to the Group’s peers. (4) Additional Reward Rights granted as part of the Retail Entitlement Offer as outlined in section 3.2. 4.6 Termination Arrangements The table below provides the termination arrangements included in all Executive contracts for current KMP. (1) Permanent contracts are ongoing until notice is given by either party. (2) Severance applies where the termination is initiated by the Group, other than for misconduct or unsatisfactory performance. The termination entitlements are appropriate and do not deliver windfall payments on termination that are not related to performance. As part of these arrangements, Executives who resign or are dismissed will forfeit all their unvested deferred awards (including cash and equity awards), unless the Board determines otherwise, and will generally not be entitled to a STI payment for that year. At the Board’s discretion, where an Executive’s exit is related to retrenchment, retirement or death, the Executive may be entitled to an STI payment and any outstanding LTI awards continue unchanged with performance measured at the end of the performance period related to each award. The Board has ultimate discretion over the amount of awards that may vest. Commonwealth Bank of Australia - Annual Report 2016 65 FairPerformanceExpectedExpectedRisk FreeGrantValuePeriodLifeVolatilityRateEquity PlanDate$End(Years)%%2015 GLRP Reward Rights (2)17/11/201535.15 30/06/20193.62202.352015 GLRP Reward Rights (3)17/11/201577.07 30/06/2019n/an/an/a2015 GLRP Reward Rights (2)10/11/201532.41 30/06/20193.64202.292015 GLRP Reward Rights (3)10/11/201574.76 30/06/2019n/an/an/a2015 GLRP Reward Rights (2)(4)17/11/201535.15 30/06/20193.62202.352015 GLRP Reward Rights (3)(4)17/11/201577.07 30/06/2019n/an/an/a2014 GLRP Reward Rights (2)(4)17/11/201523.17 30/06/20182.62202.182014 GLRP Reward Rights (3)(4)17/11/201577.07 30/06/2018n/an/an/a2013 GLRP Reward Rights (2)(4)17/11/201542.59 30/06/20171.62202.142013 GLRP Reward Rights (3)(4)17/11/201577.07 30/06/2017n/an/an/a2012 GLRP Reward Rights (2)(4)17/11/201548.96 30/06/20160.62202.142012 GLRP Reward Rights (3)(4)17/11/201577.07 30/06/2016n/an/an/aAssumptions (1)Contract Type (1)NoticeSeverance (2)Managing Director & CEOIan NarevPermanent12 monthsn/aGroup ExecutivesKelly Bayer RosmarinPermanent6 months6 monthsAdam BennettPermanent6 months6 monthsDavid CohenPermanent6 months6 monthsMatthew ComynPermanent6 months6 monthsDavid CraigPermanent6 months6 monthsRobert JesudasonPermanent6 months6 monthsMelanie LaingPermanent6 months6 monthsVittoria ShorttPermanent6 months6 monthsAnnabel SpringPermanent6 months6 monthsAlden ToevsPermanent6 monthsn/aDavid WhiteingPermanent6 months6 months Directors’ Report – Remuneration Report 4.7 Security Holdings of KMP Details of the shareholdings and other securities held by KMP (or close family members or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned hold significant voting power) are set out below. For details of Director and Executive equity plans refer to the Financial Statements Note 24 Share-Based Payments. (a) Shares and other securities held by Directors All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Director’s Share Plan. Other securities acquired by Directors were on normal terms and conditions. (1) Incorporates shares and other securities purchased during the year. Non-Executive Directors who hold less than 5,000 Commonwealth Bank shares are required to receive 20% of their total post-tax annual fees as Commonwealth Bank shares. These shares are subject to a 10 year trading restriction (the shares will be released earlier if the director leaves the Board). (2) Net Change Other incorporates changes resulting from sales of securities and appointment of Non-Executive Directors during the year. (3) Catherine Livingstone was appointed as a Non-Executive Director on 1 March 2016 and Mary Padbury was appointed as a Non-Executive Director on 14 June 2016. Their shareholdings have not been included in the opening balance as at 1 July 2015. (4) Jane Hemstritch retired from the Group on 31 March 2016 and her shareholdings are not included in the balance as at 30 June 2016. (5) (6) As at 31 March 2016 Jane Hemstritch held Colonial Sub notes (2015: Colonial Sub notes). Includes cumulative holdings of all PERLS securities issued by the Group. 66 Commonwealth Bank of Australia – Annual Report 2016 BalanceNet ChangeBalanceDirectorsClass1 July 2015Acquired (1)Other (2)30 June 2016Non-Executive DirectorsDavid TurnerOrdinary11,840428-12,268PERLS (5)3801,000-1,380John AndersonOrdinary18,186792-18,978Shirish ApteOrdinary7,500--7,500David HigginsOrdinary5,0235,323-10,346Launa InmanOrdinary3,580641-4,221Catherine Livingstone (3)Ordinaryn/a-5,1465,146Brian LongOrdinary12,4702,184-14,654PERLS (5)8006,050-6,850Andrew MohlOrdinary67,23020,316(5,312)82,234Mary Padbury (3)PERLS (5)n/a-1,6001,600Wendy StopsOrdinary13,0002,218-15,218Harrison Young Ordinary26,7643,236-30,000Former Non-Executive DirectorJane Hemstritch (4)Ordinary25,7751,122-n/aPERLS (5)11,8002,500(2,500)n/aOther securities (6)5,000--n/a Directors’ Report – Remuneration Report (b) Shares held by the CEO and Group Executives (1) Reward Rights represent rights granted under the GLRP which are subject to performance hurdles. Deferred Rights represent the deferred STI awarded (2) under Executive General Manager arrangements, sign-on and retention awards received as restricted rights. Includes the following additional rights granted as part of the Retail Entitlement Offer: Ian Narev 444 rights, Kelly Bayer Rosmarin 97 rights, Adam Bennett 39 rights, David Cohen 155 rights, Matthew Comyn 173 rights, David Craig 239 rights, Robert Jesudason 147 rights, Melanie Laing 142 rights, Vittoria Shortt 25 rights, Annabel Spring 173 rights, Alden Toevs 246 rights and David Whiteing 51 rights. (3) GLRP Reward Rights and Deferred Rights become ordinary shares upon vesting. A portion of Ian Narev’s vested equity award was delivered in the form of cash, which was paid to registered charities pursuant to an option that the Board made available in the current year. (4) Net Change Other incorporates changes resulting from purchases, sales, forfeitures and appointment or departure of Executives during the year. (5) David Craig holds 20,600 PERLS and 7,550 Colonial Sub Notes. Commonwealth Bank of Australia - Annual Report 2016 67 Acquired/Previous Years'BalanceGranted asAwards VestedNet ChangeBalanceClass (1)1 July 2015Remuneration (2)during 2016 (3)Other (4)30 June 2016Managing Director and CEOIan NarevOrdinary93,721 - - 36,248129,969GLRP Reward Rights281,398 54,493 (70,398)(11,222)254,271Group ExecutivesKelly Bayer RosmarinOrdinary14,018 - - 1,22415,242GLRP Reward Rights35,311 21,507 - -56,818Deferred Rights13,534 19 (5,201)-8,352Adam BennettOrdinary8,303 - - 4,38212,685GLRP Reward Rights10,013 20,010 - -30,023Deferred Rights11,505 2,073 (4,382)-9,196David Cohen Ordinary26,137 - - 24,99351,130GLRP Reward Rights97,029 18,512 (23,245)(3,705)88,591Matthew ComynOrdinary23,380 - - 7,13630,516GLRP Reward Rights77,892 21,707 - -99,599Deferred Rights6,119 - (6,119)--David Craig (5)Ordinary134,621 - - 36,179170,800GLRP Reward Rights148,772 28,385 (35,641)(5,681)135,835Robert JesudasonOrdinary23,323 - - 4,29527,618GLRP Reward Rights66,146 20,544 - -86,690Deferred Rights4,295 - (4,295)--Melanie LaingOrdinary11,936 - - 21,53133,467GLRP Reward Rights87,845 17,377 (20,661)(3,293)81,268Vittoria ShorttOrdinary3,561 - - 2,9376,498GLRP Reward Rights6,146 17,249 - -23,395Deferred Rights7,812 2,264 (2,937)-7,139Annabel SpringOrdinary15,506 - - 12,38527,891GLRP Reward Rights107,234 21,707 (25,308)(4,034)99,599Alden Toevs Ordinary88,012 - - 36,932124,944GLRP Reward Rights154,161 29,413 (36,932)(5,887)140,755David WhiteingOrdinary- - - --GLRP Reward Rights20,840 20,034 --40,874Deferred Rights1,941 5 --1,946 Directors’ Report – Remuneration Report 4.8 Loans to KMP All loans to KMP (including close family members or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned held significant voting power) have been made in the ordinary course of business on normal commercial terms and conditions no more favourable than those given to other employees and customers, including the term of the loan, security required and the interest rate (which may be fixed or variable). There has been no write down of loans during the period. 4.9 Total Loans to KMP 4.10 Loans to KMP Exceeding $100,000 in Aggregate (1) Represents the highest balance per individual of loans outstanding at any point during the year ended 30 June 2016. (2) Mary Padbury was appointed as a Director on 14 June 2016. As interest is paid in arrears no interest was disclosed for the year ended 30 June 2016. 4.11 Other Transactions of KMP Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed within this report) of KMP occur in the ordinary course of business on normal commercial terms and conditions no more favourable than those given to other employees and customers. Disclosure of financial instrument transactions regularly made as part of normal banking operations is limited to disclosure of such transactions with KMP and entities controlled or significantly influenced by them. All such financial instrument transactions that have occurred between entities within the Group and their KMP were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with KMP and their related entities and other related parties are conducted in the ordinary course of business on normal commercial terms and conditions no more favourable than those given to other employees and customers. These transactions principally involve the provision of financial and investment services by entities not controlled by the Group. A related party of an Executive is also employed by the Group, and is remunerated in a manner consistent with normal employee relationships. 68 Commonwealth Bank of Australia – Annual Report 2016 2016$Opening Balance10,130,233Closing Balance11,354,745Interest Charged456,842 HighestBalanceInterestInterest NotBalanceBalance1 July 2015ChargedChargedWrite-off30 June 2016in Period (1)$$$$$$Kelly Bayer Rosmarin2,744,78480,923--2,196,6632,744,784David Cohen522,50524,501--509,980544,940Matthew Comyn2,131,21293,390--2,324,8542,604,951Melanie Laing429,06110,897--279,955573,780Mary Padbury (2)N/A1,162--786,881792,512Vittoria Shortt2,261,178161,604--3,668,4553,904,563Annabel Spring8,3247,078--3,9119,533,534David Whiteing1,917,95977,265--1,425,7311,956,882Total 10,015,023456,820--11,196,43022,655,946 Directors’ Report – Remuneration Report Glossary of Key Terms To assist readers, key terms and abbreviations used in the remuneration report as they apply to the Group are set out below. Term Definition Base Remuneration Board Deferred Rights Cash and non-cash remuneration, including any salary sacrifice items, paid regularly with no performance conditions. The Board of Directors of the Group. Rights subject to forfeiture on resignation. These are used for deferred STI awarded under Executive General Manager arrangements, sign-on and retention awards. Executives The CEO and Group Executives are collectively referenced as ‘Executives’. Fixed Remuneration Consists of Base Remuneration plus employer contributions to superannuation. Group Commonwealth Bank of Australia and its subsidiaries. Group Executive Key Management Personnel who are also members of the Group’s Executive Committee. Group Leadership Reward The Group’s long-term incentive plan for the CEO and Group Executives. Plan (GLRP) Key Management Personnel (KMP) Long-Term Incentive (LTI) Persons having authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity. A remuneration arrangement which grants benefits to participating Executives that may vest over a period of four years if, and to the extent that, performance hurdles are met. The Group’s long-term incentive plan is the GLRP. NPAT Net profit after tax. Remuneration Received Retail Entitlement Offer Reward Rights Salary Sacrifice Represents all forms of consideration paid by the Group or on behalf of the Group during the current performance year ending 30 June 2016, in exchange for services previously rendered to the Group. During the period the Group undertook a capital raising through a rights issue to all share holders. An accelerated institutional offer closed on 13 August 2015, while the retail entitlement offer closed on 8 September 2015. Rights to ordinary shares in CBA granted under the GLRP and subject to performance hurdles. An arrangement where an employee agrees to forgo part of his or her cash component of Base Remuneration in return for non-cash benefits of a similar value. Short-Term Incentive (STI) Remuneration paid with direct reference to the Group’s and the individual’s performance over one financial year. Statutory Remuneration All forms of consideration paid, payable or provided by the Group, or on behalf of the Group, in exchange for services rendered to the Group. In reading this report, the term “remuneration” means the same as the term “compensation” for the purposes of the Corporations Act 2001 and the accounting standard AASB124. Total Shareholder Return (TSR) TSR measures a company’s share price movement, dividend yield and any return of capital over a specific period. Commonwealth Bank of Australia - Annual Report 2016 69 Directors’ Report Non-Audit Services Amounts paid or payable to PricewaterhouseCoopers (PwC) for audit and non-audit services provided during the year, as set out in Note 28 to the Financial Statements are as follows: Project assurance services Taxation services Risk management, compliance and controls related work Other Total non-audit services (1) Total audit and related services 2016 $’000 131 2,680 3,708 1,025 7,544 32,725 (1) An additional amount of $2,150,171 was paid to PwC for non-audit services provided to entities not consolidated into the Financial Statements. Auditor’s Independence Declaration 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 PwC during the year was compatible with the general standard of independence imposed by the Corporations Act 2001. The Directors are satisfied that the provision of the non-audit services during the year did not compromise the auditor independence requirements of the Corporations Act 2001. The reasons for this are as follows:   The operation of the Independent Auditor Services Policy during the year to restrict the nature of non-audit service engagements, to prohibit certain services and to for all such require Audit Committee pre-approval engagements; and The relative quantum of fees paid for non-audit services compared to the quantum for audit and audit related services. We have obtained an independence declaration from our external auditor as presented on the following page. The above Directors’ statements are in accordance with the advice received from the Audit Committee. Auditor Independence Incorporation of Additional Material The Bank has in place an Independent Auditor Services Policy, details of which are set out in the Corporate Governance Statement at that www.commbank.com.au/about-us/shareholders/corporate- profile/corporate-governance, independence of the Group’s external auditor. in ensuring to assist viewed can the be This Report incorporates the Chairman’s and Chief Executive Officer’s Statements (pages 2 to 8), Highlights (pages 9 to 12), Group Performance Analysis (pages 13 to 22), Group Operations and Business Settings (pages 23 to 32) and Shareholding Information (pages 185 to 188) sections of this Annual Report. The Audit Committee has considered the provision, during the year, of non-audit services by PwC and has concluded that the provision of those services did not compromise the auditor independence requirements of the Corporations Act 2001. Signed in accordance with a resolution of the Directors. David Turner Chairman 9 August 2016 Ian Narev Managing Director and Chief Executive Officer 9 August 2016 70 Commonwealth Bank of Australia – Annual Report 2016 Auditor’s Independence Declaration As lead auditor for the audit of Commonwealth Bank of Australia for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Commonwealth Bank of Australia and the entities it controlled during the period. Marcus Laithwaite Partner PricewaterhouseCoopers Sydney 9 August 2016 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Commonwealth Bank of Australia - Annual Report 2016 71 Five Year Financial Summary (1) Comparative information has been restated to reflect the changes in presentation disclosed in the prior half, and reclassification of fixed rate prepayment recoveries from Other banking income to Net interest income to align with the associated hedge costs. Includes investment experience. (2) 72 Commonwealth Bank of Australia – Annual Report 2016 20162015 (1)2014 (1)20132012$M$M$M$M$MNet interest income16,93515,82715,13113,94413,157Other operating income (2)7,8127,7517,2706,8776,319Total operating income24,74723,57822,40120,82119,476Operating expenses(10,429)(9,993)(9,499)(9,010)(8,627)Impairment expense(1,256)(988)(953)(1,082)(1,089)Net profit before tax13,06212,59711,94910,7299,760Corporate tax expense(3,592)(3,439)(3,250)(2,953)(2,705)Non-controlling interests(20)(21)(19)(16)(16)Net profit after tax "cash basis"9,4509,1378,6807,7607,039Treasury shares valuation adjustment4(28)(41)(53)(15)Hedging and IFRS volatility(200)6627124Gain/(loss) on disposal of controlled entities/investments--17--Bankwest non-cash items(27)(52)(56)(71)(89)Count Financial acquisition costs----(43)Bell Group litigation--25(45)-Net profit after income tax attributable to Equity holders of the Bank "statutory basis"9,2279,0638,6317,6187,016Contributions to profit (after tax)Retail Banking Services4,4363,9943,6783,0892,703Business and Private Banking1,5671,4951,3211,4741,513Institutional Banking and Markets1,1641,2851,2521,1951,098Wealth Management617653789679629New Zealand877882742621541Bankwest763795675561527IFS and Other263322314128Net profit after tax "cash basis"9,4509,1378,6807,7607,039Investment experience after tax(100)(150)(197)(105)(89)Net profit after tax "underlying basis"9,3508,9878,4837,6556,950Balance SheetLoans, bills discounted and other receivables695,398639,262597,781556,648525,682Total assets933,078873,446791,451753,857718,839Deposits and other public borrowings588,045543,231498,352459,429437,655Total liabilities 872,322820,453742,103708,320677,219Shareholders' Equity60,75652,99349,34845,53741,620Net tangible assets49,82241,52238,08033,63829,869Risk weighted assets - Basel III (APRA)394,667368,721337,715329,158n/aRisk weighted assets - Basel II (APRA)n/an/an/an/a302,787Average interest earning assets817,457755,872705,862653,637629,685Average interest bearing liabilities760,615713,084660,847609,557590,654Assets (on Balance Sheet) - Australia783,170741,249669,293644,043621,965Assets (on Balance Sheet) - New Zealand83,83272,29969,11061,57855,499Assets (on Balance Sheet) - Other66,07659,89853,04848,23641,375 Five Year Financial Summary (1) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted average number of ordinary shares. (2) As the Group commenced disclosure of its leverage ratio at 30 September 2015, no comparatives have been presented. (3) Comparative information has been restated for 2015 and 2014 to align to presentation in the current period. (4) The productivity metrics have been calculated on a cash basis. Commonwealth Bank of Australia - Annual Report 2016 73 201620152014 20132012Shareholder summaryDividends per share - fully franked (cents)420420401364334Dividend cover - statutory (times)1. 31. 31. 31. 31. 3Dividend cover - cash (times)1. 31. 31. 31. 31. 3Earnings per share (cents) (1)BasicStatutory542. 5553. 7530. 6474. 2444. 2Cash basis555. 1557. 5532. 7482. 1444. 7Fully dilutedStatutory529. 5539. 6518. 9461. 0428. 5Cash basis541. 5543. 2521. 0468. 6429. 0Dividend payout ratio (%)Statutory78. 375.775.577.476.0Cash basis76. 575.175.175.975.8Net tangible assets per share ($)29. 125. 523. 520. 918. 8Weighted average number of shares (statutory basic) (M) (1)1,6921,6271,6181,5981,570Weighted average number of shares (statutory fully diluted) (M) (1)1,7711,7111,6911,6861,674Weighted average number of shares (cash basic) (M) (1)1,6931,6301,6211,6011,573Weighted average number of shares (cash fully diluted) (M) (1)1,7721,7141,6941,6891,677Number of shareholders820,968787,969791,564786,437792,906Share prices for the year ($)Trading high88. 8896. 6982. 6874. 1853. 80Trading low69. 7973. 5767. 4953. 1842. 30End (closing price)74. 3785. 1380. 8869. 1853. 10Performance ratios (%)Return on average Shareholders' equityStatutory16. 218. 218. 718. 018. 5Cash basis16. 518. 218. 718. 218. 4Return on average total assetsStatutory1. 01. 11. 11. 01. 0Cash basis1. 01. 11. 11. 11. 0Capital adequacy - Common Equity Tier 1 - Basel III (APRA)10. 69. 19. 38. 2n/aCapital adequacy - Tier 1 - Basel III (APRA)12. 311. 211. 110. 3n/aCapital adequacy - Tier 2 - Basel III (APRA)2. 01. 50. 90. 9n/aCapital adequacy - Total - Basel III (APRA)14. 312. 712. 011. 2n/aCapital adequacy - Tier One - Basel IIn/an/an/an/a10. 0Capital adequacy - Tier Two - Basel IIn/an/an/an/a1. 0Capital adequacy - Total - Basel IIn/an/an/an/a11. 0Leverage Ratio Basel III (APRA) (%) (2)5. 0n/an/an/an/aLiquidity Coverage Ratio (%)120. 0120. 0n/an/an/aNet interest margin (3)2. 072. 092. 142. 132. 09Other information (numbers)Full-time equivalent employees45,12945,94844,32944,96944,844Branches/services centres (Australia)1,1311,1471,1501,1661,167Agencies (Australia)3,6543,6703,7173,7643,818ATMs4,3814,4404,3404,3044,213EFTPOS terminals (active)217,981208,202200,733181,227175,436Productivity (4)Total operating income per full-time (equivalent) employee ($)545,237508,578500,034459,583430,983Employee expense/Total operating income (%)25. 124. 925. 025. 326. 1Total operating expenses/Total income (%)42. 442. 842. 943. 644. 6 Financial Statements Income Statements Statements of Comprehensive Income Balance Sheets Statements of Changes in Equity 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 Accounting Policies Profit Average Balances and Related Interest Income Tax Dividends Earnings Per Share Cash and Liquid Assets Receivables Due from Other Financial Institutions Assets at Fair Value through Income Statement Derivative Financial Instruments Available-for-Sale Investments Loans, Bills Discounted and Other Receivables Provisions for Impairment Property, Plant and Equipment Intangible Assets Other Assets Deposits and Other Public Borrowings Liabilities at Fair Value through Income Statement Other Provisions Debt Issues Bills Payable and Other Liabilities Loan Capital Shareholders’ Equity Share-Based Payments Capital Adequacy Financial Reporting by Segments Life Insurance Remuneration of Auditors Lease Commitments Contingent Liabilities, Contingent Assets and Commitments Risk Management Credit Risk Market Risk Liquidity and Funding Risk Retirement Benefit Obligations Investments in Subsidiaries and Other Entities Key Management Personnel Related Party Disclosures Notes to the Statements of Cash Flows Disclosures about Fair Values Securitisation, Covered Bonds and Transferred Assets Collateral Arrangements Offsetting Financial Assets and Financial Liabilities Subsequent Events 74 Commonwealth Bank of Australia – Annual Report 2016 75 76 77 78 80 82 93 95 98 101 102 102 102 103 103 107 108 111 113 115 117 117 118 118 120 121 122 123 126 128 129 132 134 134 135 137 141 155 157 160 163 168 169 170 171 177 178 179 181 Income Statements For the year ended 30 June 2016 Financial Statements The above Income Statements should be read in conjunction with the accompanying notes. (1) Comparative information has been reclassified to conform to presentation in the current year. (2) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted average number of ordinary shares. Commonwealth Bank of Australia – Annual Report 2016 75 Group (1)Bank (1)20162015201420162015Note$M$M$M$M$MInterest income233,81734,14533,69134,66034,975Interest expense2(16,882)(18,322)(18,550)(19,545)(20,988)Net interest income16,93515,82315,14115,11513,987Other banking income4,5764,8284,2806,0356,791Net banking operating income21,51120,65119,42121,15020,778Funds management income2,3152,3962,356--Investment revenue283618840--Claims, policyholder liability and commission expense(537)(1,011)(1,162)--Net funds management operating income22,0612,0032,034--Premiums from insurance contracts2,9212,7972,604--Investment revenue467543547--Claims, policyholder liability and commission expense from insurance contracts(2,382)(2,326)(2,118)--Net insurance operating income21,0061,0141,033--Total net operating income before impairment and operating expenses224,57823,66822,48821,15020,778Loan impairment expense2,13(1,256)(988)(918)(1,153)(837)Operating expenses2(10,468)(10,068)(9,573)(8,538)(8,271)Net profit before income tax212,85412,61211,99711,45911,670Corporate income tax expense4(3,506)(3,429)(3,221)(2,820)(2,694)Policyholder tax expense4(101)(99)(126)--Net profit after income tax9,2479,0848,6508,6398,976Non-controlling interests(20)(21)(19)--Net profit attributable to Equity holders of the Bank9,2279,0638,6318,6398,976Group (2) 20162015 2014NoteEarnings per share: Basic6542.5553.7530.6 Fully diluted 6529.5539.6518.9Cents per share Financial Statements Statements of Comprehensive Income For the year ended 30 June 2016 The above Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 76 Commonwealth Bank of Australia – Annual Report 2016 Group Bank 20162015201420162015$M$M$M$M$MNet profit after income tax for the financial year9,2479,0848,6508,6398,976Other comprehensive income/(expense):Items that may be reclassified subsequently to profit/(loss):Foreign currency translation reserve net of tax38339838553171Gains and (losses) on cash flow hedging instruments net of tax21039(144)202106Gains and (losses) on available-for-sale investments net of tax(316)(45)338(331)(84)Total of items that may be reclassified277392579(76)193Items that will not be reclassified to profit/(loss):Actuarial gains and (losses) from defined benefit superannuation plans net of tax103114210311Gains and (losses) on liabilities at fair value due to changes in own credit risk net of tax(1)(3)6(1)(3)Revaluation of properties net of tax11526111Total of items that will not be reclassified103237410319Other comprehensive income/(expense) net of income tax287715653(66)512Total comprehensive income for the financial year9,5349,7999,3038,5739,488Total comprehensive income for the financial year is attributable to:Equity holders of the Bank9,5149,7789,2848,5739,488Non-controlling interests202119--Total comprehensive income net of income tax9,5349,7999,3038,5739,488Group 201620152014NoteDividends per share attributable to shareholders of the Bank:Ordinary shares5420420401Trust preferred securities7,9947,3876,498Cents per share Balance Sheets As at 30 June 2016 Financial Statements (1) Comparative information has been reclassified to conform to presentation in the current year. The above Balance Sheets should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia – Annual Report 2016 77 Group Bank 2016201520162015Note$M $M $M $M AssetsCash and liquid assets723,37233,11621,58231,683Receivables due from other financial institutions (1)811,59113,06310,18211,204Assets at fair value through Income Statement:9Trading34,06726,42432,98525,135Insurance13,54714,088--Other1,4801,2781,187989Derivative assets1046,56746,15446,52545,607Available-for-sale investments1180,89874,68476,36172,304Loans, bills discounted and other receivables12695,398639,262617,919573,435Bank acceptances of customers1,4311,9441,4131,908Shares in and loans to controlled entities38--145,953143,756Property, plant and equipment143,9402,8331,5031,509Investment in associates and joint ventures362,7762,6371,2311,245Intangible assets1510,3849,9704,7784,700Deferred tax assets 4345455793771Other assets (1)167,2827,5385,9975,921Total assets933,078873,446968,409920,167LiabilitiesDeposits and other public borrowings17588,045543,231536,086497,625Payables due to other financial institutions28,77136,41628,32835,516Liabilities at fair value through Income Statement1810,2928,4937,4417,323Derivative liabilities 1039,92135,21343,88439,636Bank acceptances1,4311,9441,4131,908Due to controlled entities--130,046126,496Current tax liabilities1,022661892578Deferred tax liabilities4340351--Other provisions 191,6561,7261,2491,254Insurance policy liabilities2712,63612,911--Debt issues20161,284154,429134,214130,359Managed funds units on issue1,6061,149--Bills payable and other liabilities219,77411,10511,64214,361856,778807,629895,195855,056Loan capital2215,54412,82415,13813,364Total liabilities872,322820,453910,333868,420Net assets60,75652,99358,07651,747Shareholders' EquityShare capital:Ordinary share capital2333,84527,61934,12527,894Other equity instruments23-9394061,895Reserves232,7342,3453,1153,195Retained profits2323,62721,52820,43018,763Shareholders' Equity attributable to Equity holders of the Bank60,20652,43158,07651,747Non-controlling interests36550562--Total Shareholders' Equity60,75652,99358,07651,747 Financial Statements Statements of Changes in Equity For the year ended 30 June 2016 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. 78 Commonwealth Bank of Australia – Annual Report 2016 GroupShareholders'EquityattributableOrdinaryOtherto EquityNon-Total shareequityRetainedholderscontrollingShareholders'capitalinstrumentsReservesprofitsof the Bank interests Equity$M$M$M$M$M$M$MAs at 30 June 201427,0369392,00918,82748,81153749,348Net profit after income tax ---9,0639,063219,084Net other comprehensive income--407308715-715Total comprehensive income for the financial year--4079,3719,778219,799Transactions with Equity holders in their capacity as Equity holders:Dividends paid on ordinary shares---(6,744)(6,744)-(6,744)Dividends paid on other equity instruments---(36)(36)-(36)Dividend reinvestment plan (net of issue costs)571---571-571Issue of shares (net of issue costs)-------Share-based payments--(3)-(3)-(3)Purchase of treasury shares(790)---(790)-(790)Sale and vesting of treasury shares802---802-802Redemptions-------Other changes--(68)11042446As at 30 June 201527,6199392,34521,52852,43156252,993Net profit after income tax---9,2279,227209,247Net other comprehensive income--2789287-287Total comprehensive income for the financial year--2789,2369,514209,534Transactions with Equity holders in their capacity as Equity holders:Dividends paid on ordinary shares---(6,994)(6,994)-(6,994)Dividends paid on other equity instruments---(50)(50)-(50)Dividend reinvestment plan (net of issue costs)1,209---1,209-1,209Issue of shares (net of issue costs)5,022---5,022-5,022Share-based payments--10-10-10Purchase of treasury shares(108)---(108)-(108)Sale and vesting of treasury shares103---103-103Redemptions-(939)--(939)-(939)Other changes--101(93)8(32)(24)As at 30 June 201633,845-2,73423,62760,20655060,756 Statements of Changes in Equity (continued) For the year ended 30 June 2016 Financial Statements The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia – Annual Report 2016 79 BankShareholders'EquityattributableOrdinaryOtherto Equity shareequityRetainedholderscapitalinstrumentsReservesprofitsof the Bank$M$M$M$M$MAs at 30 June 201427,3231,8953,01116,20648,435Net profit after income tax---8,9768,976Net other comprehensive income --204308512Total comprehensive income for the financial year--2049,2849,488Transactions with equity holders in their capacity as equity holders:Dividends paid on ordinary shares---(6,744)(6,744)Dividend reinvestment plan (net of issue costs)571---571Issue of shares (net of issue costs)----Share-based payments--(3)-(3)Redemptions-----Other changes--(17)17-As at 30 June 201527,8941,8953,19518,76351,747Net profit after income tax---8,6398,639Net other comprehensive income--(75)9(66)Total comprehensive income for the financial year--(75)8,6488,573Transactions with Equity holders in their capacity as Equity holders:Dividends paid on ordinary shares---(6,994)(6,994)Dividend reinvestment plan (net of issue costs)1,209---1,209Issue of shares (net of issue costs)5,022---5,022Share-based payments--10-10Redemptions-(1,489)--(1,489)Other changes--(15)13(2)As at 30 June 201634,1254063,11520,43058,076 Financial Statements Statements of Cash Flows (1) For the year ended 30 June 2016 It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions. (1) (2) Comparative information has been reclassified to conform to presentation in the current year. (3) Represents gross premiums and policy payments before splitting between policyholders and shareholders. (4) Amounts received from and paid to controlled entities are presented in line with how they are managed and settled. 80 Commonwealth Bank of Australia – Annual Report 2016 GroupBank20162015201420162015Note$M$M$M$M$MCash flows from operating activitiesInterest received (2)34,04734,11233,66934,90834,706Interest paid (2)(16,285)(17,442)(18,166)(18,935)(20,197)Other operating income received (2)5,6885,4395,0983,6743,659Expenses paid (9,981)(8,740)(8,377)(7,961)(7,368)Income taxes paid(3,071)(3,444)(3,763)(2,661)(3,093)Net (outflows)/inflows from assets at fair value through Income Statement (excluding life insurance)(2,642)1,4575,188(3,367)4,494Net inflows/(outflows) from liabilities at fair value through Income Statement:Insurance:Investment income(362)118394--Premiums received (3)3,1142,9102,899--Policy payments and commission expense (3)(3,301)(3,307)(3,080)--Other liabilities at fair value through Income Statement1,872738(1,619)2461,969Cash flows from operating activities beforechanges in operating assets and liabilities9,07911,84112,2435,90414,170Changes in operating assets and liabilities arising from cash flow movementsMovement in available-for-sale investments:Purchases(50,233)(60,967)(49,468)(48,759)(67,619)Proceeds46,15053,56944,13046,54153,052Net increase in loans, bills discounted and other receivables(52,825)(41,768)(36,795)(45,917)(35,870)Net decrease/(increase) in receivables due from other financial institutions and regulatory authorities (2)803(3,799)(207)238(2,684)Net decrease/(increase) in securities purchased under agreements to resell4,574(6,174)1,1194,467(6,483)Insurance business:Purchase of insurance assets at fair value through Income Statement(2,020)(2,741)(3,156)--Proceeds from sale/maturity of insurance assets at fair value through Income Statement4,2764,7893,804--Net (increase)/decrease in other assets (2)(108)39260(157)35Net increase in deposits and other public borrowings37,78341,22929,41935,05434,258Net (decrease)/increase in payables due to other financial institutions(6,323)8,598(1,812)(5,511)8,147Net increase in securities sold underagreements to repurchase4,1483,0154,3894,2573,090Net increase/(decrease) in other liabilities135(448)37(1,580)3,108Changes in operating assets and liabilities arising from cash flow movements(13,640)(4,658)(8,280)(11,367)(10,966)Net cash (used in)/provided by operating activities39 (a)(4,561)7,1833,963(5,463)3,204Cash flows from investing activitiesNet proceeds from disposal of controlled entities39 (d)--531--Payments for acquisition of controlled entities39 (e)(857)(29)--(29)Net proceeds from disposal of entities and businesses (net of cash disposals)11072481110-Dividends received7871701,4621,972Net amounts received from controlled entities (4)---1,3072,564Proceeds from sale of property, plant and equipment405696812267Purchases of property, plant and equipment(1,259)(578)(513)(426)(380)Payments for acquisitions of investments in associates/joint ventures-(270)(36)-(220)Net purchase of intangible assets(509)(550)(400)(450)(494)Net cash (used in)/provided by investing activities(2,032)(1,215)2012,1253,480 Statements of Cash Flows (1) (continued) For the year ended 30 June 2016 Financial Statements (1) It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions. The above Statements of Cash Flows should be read in conjunction with the accompanying notes. Commonwealth Bank of Australia – Annual Report 2016 81 GroupBank20162015201420162015Note$M$M$M$M$MCash flows from financing activitiesDividends paid (excluding Dividend Reinvestment Plan)(5,827)(6,200)(5,491)(5,777)(6,164)Redemption of other equity instruments (net of costs) (939)--(1,483)-Proceeds from issuance of debt securities98,95868,65587,55488,92061,142Redemption of issued debt securities(97,740)(73,377)(79,776)(90,149)(66,424)Purchase of treasury shares(108)(790)(813)--Sale of treasury shares50744760--Issue of loan capital3,9496,1843583,9436,164Redemption of loan capital(1,678)(2,971)(500)(2,645)(2,899)Proceeds from issuance of shares (net of issue costs)5,022--5,022-Other(67)(120)(157)179176Net cash provided by/(used in) financing activities1,620(7,875)1,935(1,990)(8,005)Net (decrease)/increase in cash and cash equivalents(4,973)(1,907)6,099(5,328)(1,321)Effect of foreign exchange rates on cash and cash equivalents 1502,049411722,008Cash and cash equivalents at beginning of year19,27019,12812,61818,16517,478Cash and cash equivalents at end of year39 (b)14,44719,27019,12812,90918,165 Notes to the Financial Statements Note 1 Accounting Policies 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 2016, were approved and the Board of Directors on authorised 9 August 2016. The Directors have the power to amend and reissue the Financial Statements. issue by for The Bank is a for-profit entity incorporated and domiciled in Australia. It is a company limited by shares that are publicly traded on the Australian Securities Exchange. The registered office is Ground Floor, Tower 1, 201 Sussex Street, Sydney, NSW 2000, Australia. The principal accounting policies adopted in the preparation of this financial report are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. The in Australian dollars. The assets and liabilities are presented in order of liquidity on the Balance Sheet. financial report is presented Basis of Preparation (a) Basis of Accounting This General Purpose Financial Report has been prepared in (the accordance with Australian Accounting Standards standards), Australian Interpretations, and the Corporations Act 2001. The Financial Statements comply with International Financial Reporting Standards (IFRS) and Interpretations as issued by the International Accounting Standards Board (IASB) and IFRS Interpretations Committee (IFRIC) respectively. (b) Historical Cost Convention This financial report has been prepared under the historical cost convention, except for certain assets and liabilities (including derivative instruments) measured at fair value. (c) Rounding of Amounts The amounts in this financial report have been rounded in accordance with ASIC Corporations Instrument 2016/191 to the nearest million dollars, unless otherwise indicated. (d) Segment Reporting and management Operating segments are reported based on the Group’s organisational structures. Senior management review the Group’s internal reporting based around these segments, in order to assess performance and allocate resources. All transactions between segments are conducted on an arm’s length basis, with inter-segment revenue and costs being eliminated in “Other”. (e) Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year. Comparatives Where necessary, comparative information has been restated to conform to changes in presentation in the current year. All comparative changes made have been footnoted throughout the the presentation of segment information, as disclosed in Note 26, the restatements are not considered to have a material impact on the financial statements. financial statements. Other than changes to 82 Commonwealth Bank of Australia – Annual Report 2016 (f) Principles of Consolidation Subsidiaries The consolidated financial report comprises the financial report of the Bank and its subsidiaries. Subsidiaries are entities (including structured entities) over which the Bank has control. The Bank controls another entity when it has:    power over the relevant activities of the entity, for example through voting or other rights; exposure to, or rights to, variable returns from the Bank’s involvement with the entity; and the ability to use its power over the entity to affect the Bank’s returns from the entity. Transactions between subsidiaries the Group are eliminated. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity, and Balance Sheet. in Subsidiaries are consolidated from the date on which control is transferred to the Group and de-consolidated when control ceases. Subsidiaries are accounted for at cost less accumulated impairments at the Bank level. Business Combinations Business combinations are accounted the acquisition method. Cost is measured as the aggregate of the fair values of assets given, equity instruments issued, or liabilities incurred or assumed at the date of exchange. for using Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is recorded as the excess of the total consideration transferred, the carrying amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the net identifiable assets acquired. If there is a deficit instead, this discount on acquisition is recognised directly in the consolidated Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. Investment in Associates and Joint Ventures financial the consolidated Associates and joint ventures are entities over which the Group has significant influence or joint control, but not control. they are equity In accounted. They are initially recorded at cost and adjusted for the Group’s share of the associates’ and joint ventures’ post- acquisition profits or losses and other comprehensive income (OCI), less any dividends received. At the Bank level, they are accounted for at cost less accumulated impairments. report, The Group assesses, at each Balance Sheet date, whether there is any objective evidence of impairment. The main indicators of impairment are as for equity securities classified as available-for-sale (Note 1(t)). If there is an indication that an investment may be impaired, then the entire carrying amount of the investment in associate or joint venture is tested for impairment by comparing the recoverable amount (higher of value in use and fair value less disposal costs) with its carrying amount. Impairment losses recognised in the Income Statement are subsequently reversed through the Income Statement if there has been a change in the estimates used to determine recoverable amount since the impairment loss was recognised. Notes to the Financial Statements Note 1 Accounting Policies (continued) (g) Foreign Currency Translation Functional and Presentation Currency The consolidated financial statements are presented in Australian dollars, which functional and is presentation currency. The functional currency of the Group’s foreign operations subsidiaries, branches, associates, and joint ventures) will vary based on the currency of the main economy to which it is exposed. the Bank’s (including Foreign Currency Transactions Foreign currency the functional currency, using the exchange rates prevailing at the date of each transaction. transactions are translated into Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date. Exchange differences arising upon settling or translating monetary items at different rates to those at which they were initially recognised or previously reported, are recognised in the Income Statement. Foreign Operations Where the Group’s foreign operations do not have an Australian dollar functional currency:    assets and liabilities are translated at the prevailing exchange rate at Balance Sheet date; revenue and expenses are translated at the average exchange rate for the period (or the prevailing rate at the transaction date where the average is not a reasonable approximation); and all resulting exchange differences are recognised in the foreign currency translation reserve. foreign operation When a is disposed of, exchange differences are recognised in the Income Statement as part of the gain or loss on disposal. No Group entities have a functional currency of a hyperinflationary economy. (h) Offsetting Income and expenses are only offset in the Income Statement if permitted under relevant accounting standard. Examples of offsetting include gains and losses from foreign exchange exposures and trading operations. the Financial assets and liabilities are offset and the net amount is presented in the Balance Sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts, and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. asking price adjustment is applied only to the net open position as appropriate. Non-market quoted financial instruments are mostly valued using valuation techniques based on observable inputs, except for a limited number of instances where observable market data is unavailable. In this instance, the financial instrument is initially recognised at the transaction price, which is generally the best indicator of fair value. This may differ from the value obtained from the valuation model. The timing of the recognition in the Income Statement of this initial difference in fair value depends on the individual facts and circumstances of each transaction, but is never later than when the market data becomes observable. The difference may be either amortised over the life of the transaction, recognised when the inputs become observable or on derecognition of the instrument, as appropriate. Income Statement (j) Interest Income Interest income is brought to account using the effective interest method. The effective interest method calculates the amortised cost of a financial instrument and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or liability. Fees and transaction costs associated with loans are capitalised and included in the effective interest rate and recognised in the Income Statement, over the expected life of the instrument. Interest income on finance leases is brought to account progressively over the life of the lease, consistent with income balance. investment and unearned the outstanding (k) Fee and Commission Income Fees and commissions that relate to the execution of a (for example, advisory or arrangement significant act services, placement fees) are recognised when the significant act has been completed. fees and underwriting Fees charged for providing ongoing services (for example, managing and administering existing facilities and funds) are recognised as income over the service period. Fees and commissions, which include commitment fees to originate a loan that is unlikely to be drawn down, are recognised as fee income as the facility is provided. (i) Fair Value Measurement (l) Other Income Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities at fair value through Income Statement, available-for-sale investments and all derivative recognised and subsequently instruments are measured at fair value. initially The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations, without any deduction for transaction costs. Assets and long positions are measured at a quoted bid price; liabilities and short positions are measured at a quoted asking price. Where the Group has positions with to offsetting market risks, mid-market prices are used measure the offsetting risk positions and a quoted bid or Trading income represents both realised and unrealised gains and losses from changes in the fair value of trading assets, liabilities and derivatives. Translation differences on non-monetary items, such as derivatives measured at fair value through the Income Statement, are reported as part of the fair value gain or loss on these items. Translation differences on non-monetary items measured at fair value through equity, such as equities classified as available-for-sale financial assets, are recognised in equity through OCI. Insurance income recognition is outlined in Note 1(dd). Commonwealth Bank of Australia – Annual Report 2016 83 Notes to the Financial Statements Note 1 Accounting Policies (continued) (m) Interest Expense Interest expense on financial liabilities measured at amortised cost is recognised in the Income Statement using the effective interest method. includes that are issue costs Interest expense initially recognised as part of the carrying value of the liability and amortised over the expected life using the effective interest method. These include fees and commissions payable to advisers and other expenses such as external legal costs, provided these are incremental costs that are directly related to the issue of a financial liability. It also includes payments made under a liquidity facility arrangement with the Reserve Bank of Australia and other financing charges. (n) Operating Expenses Operating expenses are recognised as the relevant service is rendered or once a liability is incurred. Staff expenses are recognised over the period the employee renders the service to receive the benefit. increase Staff expenses include share based payments which may be cash or equity settled. The fair value of equity settled remuneration is calculated at grant date and amortised to the the vesting period, with a Income Statement over corresponding the employee compensation reserve. Market vesting conditions, such as share price into account when performance conditions, are estimating the fair value. Non–market vesting conditions, such as service conditions, are taken into account by adjusting the number of the measurement of the expense. the equity instruments included taken in in Cash settled share-based remuneration is recognised as a liability and remeasured to fair value until settled, with changes in the fair value recognised as an expense. Occupancy and equipment expenses include the depreciation and lease rentals that are outlined in Note 1(w) and Note 1(u) respectively. IT expenses are recognised as incurred unless they qualify for capitalisation as an asset due to the related service generating probable future economic benefits. If capitalised the asset is subsequently amortised per Note 1(x). Taxation (o) Income Tax Expense Income tax is recognised in the Income Statement, except to the extent that it relates to items recognised directly in OCI, in which case the Statement of Comprehensive Income. Income tax on the profit or loss for the period comprises current and deferred tax. recognised in is it (p) Current Tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the Balance Sheet date, and any adjustment to tax payable in respect of previous years. (q) Deferred Tax Deferred tax is calculated using the Balance Sheet method where temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base are recognised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying 84 Commonwealth Bank of Australia – Annual Report 2016 amount of assets and liabilities (i.e. through use or through sale), using tax rates which are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. A deferred tax asset is only recognised to the extent that it is probable that future taxable profits will be available for it to be used against. Deferred tax assets and liabilities are set off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same taxable group. (r) The Tax Consolidated Group Tax consolidation legislation allows Australian resident entities to elect to consolidate and be treated as a single entity for Australian tax purposes. The Bank, as the head of the tax consolidated group, and its wholly-owned Australian subsidiaries, elected to be taxed as a single entity under this regime with effect from 1 July 2002. The members of the tax consolidated group have entered into tax funding and tax sharing agreements, which set out the funding obligations of members of the tax consolidated group in respect of tax amounts. from unused Any current tax liabilities/assets and deferred tax assets arising from subsidiaries are recognised in conjunction with any tax funding arrangement amounts by the Bank legal entity (as the head of the tax consolidated group). losses tax The measurement and disclosure of deferred tax assets and liabilities have been performed in accordance with the principles in AASB 112 ‘Income Taxes’, and on a modified ‘Tax Consolidation standalone basis under UIG 1052 Accounting’. Assets (s) Cash and Liquid Assets Cash and liquid assets include cash at branches, cash at banks, nostro balances, money at short call with an original maturity of three months or less and securities held under reverse repurchase agreements. They are measured at face value, or the gross value of the outstanding balance. Interest is recognised in the Income Statement using the effective interest method. For the purposes of the Statements of Cash Flows, cash and cash equivalents include cash and money at short call. (t) Financial Assets The Group classifies its financial assets in the following categories:     financial assets at Statement; derivative assets; fair value through the Income loans and receivables; and available-for-sale investments. The classification of financial instruments at initial recognition depends on their purpose, characteristics and management’s intention when acquiring them. Financial instruments, except for loans and receivables, are initially recognised by the Group on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of the instruments. Notes to the Financial Statements Note 1 Accounting Policies (continued) This applies to trades transacted in a regular way, i.e. purchases or sales of financial assets that require delivery of assets within frame generally established by regulation or convention in the market place. Loans and receivables are recognised on settlement date, when funding is advanced to the borrowers. time the Financial assets are initially recognised at their fair value plus directly attributable transaction costs, except in the case of financial assets recorded at fair value through Income Statement. Directly attributable transaction costs on these assets are expensed on subsequent fair value measurement. The Group has not classified any of its financial assets as held to maturity investments. Financial Assets at Fair Value through the Income Statement Assets classified at fair value through the Income Statement are further classified into three sub-categories: trading, insurance and other. Trading assets are those acquired or incurred principally for the purpose of selling or repurchasing in the near term, or if they are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Discounted bills that the Group intends to sell into the market immediately or in the near term also meet the definition of assets held for trading. Due to their nature, such assets are included in loans, bills discounted and other receivables in the Balance Sheet, while being measured at fair value. Insurance assets are investments that back life insurance contracts and life investment contracts. Refer to Note 1(ff). Other investments include financial assets, which the Group has designated at fair value through Income Statement at inception to: eliminate an accounting mismatch; reflect they are managed on a fair value basis; or where the asset is a contract which contains an embedded derivative. to initial Subsequent financial assets are recognition, measured at fair value with changes in fair value recognised in other operating income. Dividends earned are recorded in other operating income. Interest earned is recorded within net interest income using the effective interest method. (i) Fair Value Hedges Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the Income Statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The changes in the fair value of the hedged asset or liability shall be adjusted against their carrying value. If the hedge relationship no longer meets the criteria for hedge accounting, it is discontinued. For fair value hedges of interest rate risk, the fair value adjustment to the hedged item is amortised to the Income Statement over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the Income Statement. (ii) Cash Flow Hedges Changes in fair value associated with the effective portion of a derivative designated as a cash flow hedge are recognised through OCI in the Cash Flow Hedge Reserve within equity. Ineffective portions are recognised immediately in the Income Statement. Amounts deferred in equity are transferred to the Income Statement in the period in which the hedged forecast transaction takes place. When a hedging instrument expires or is sold, terminated or exercised, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is reclassified to profit or loss in the period in which the hedged item affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is recycled immediately to the Income Statement. (iii) Net Investment Hedges Gains and losses on derivative contracts relating to the effective portion of the net investment hedge are recognised in the foreign currency translation reserve in equity. Ineffective portions are recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign subsidiary or branch is disposed of. Derivative Financial Instruments (iv) Embedded Derivatives Derivative financial instruments are contracts whose value is derived from one or more underlying price, index or other variable. They include forward rate agreements, futures, options and interest rate, currency, equity and credit swaps. Derivatives are entered into for trading or hedging purposes. to initial recognition, gains or losses on Subsequent derivatives are recognised in the Income Statement, unless they are entered into for hedging purposes and designated into a cash flow hedge. The Group uses derivatives to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. Where derivatives are held for risk management purposes and when transactions meet the required criteria, the Group applies one of three hedge accounting models; fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation as appropriate to the risks being hedged. In certain instances, a derivative may be embedded within a host contract. It is accounted for separately as a stand-alone derivative at fair value, where:   the host contract is not carried at fair value through the Income Statement; and the economic characteristics and risks of the embedded derivative are not closely related to the host contract. Available-for-Sale Investments (AFS) Available-for-sale investments are non-derivative financial assets that are not classified at fair value through the Income Statement or as loans and receivables. They primarily include public debt securities held as part of the Group’s liquidity holdings. to Subsequent investments are initial recognition, AFS measured at fair value with unrealised gains and losses arising from changes in fair value recognised in the AFS investment reserve within equity, net of applicable income taxes until such investments are sold, collected, otherwise disposed of, or become impaired. Commonwealth Bank of Australia – Annual Report 2016 85 Notes to the Financial Statements provisions are made against individually significant, or which have been assessed as impaired. financial assets that are individually Individual provisions for impairment are recognised to reduce the carrying amount of non-performing facilities to the present value of Individually significant provisions are calculated based on discounted cash flows. their expected future 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 recognised in the Income Statement using the original effective interest rate. All loans and other receivables 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 the present value of their expected future cash flows at the Balance Sheet date. The expected future cash flows for portfolios of assets with similar credit 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 Income Statement. Derecognition of Financial Assets and Financial Liabilities The Group derecognises financial assets when the rights to receive cash flows from the asset have expired or when the Group transfers its rights to receive cash flows from the asset together with substantially all the risks and rewards of the asset. The Group enters into certain transactions where it transfers financial assets recognised on its Balance Sheet but retains either all or a majority of the risks and rewards of the transferred financial assets. If all or substantially all risks and rewards are retained, the transferred financial assets are not derecognised from the Balance Sheet. Transactions where transfers of financial assets result in the Group retaining all or substantially all risks and rewards include reverse repurchase transactions, and some of the Group’s securitisation and covered bonds programs. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Income Statement. Note 1 Accounting Policies (continued) Interest, premiums and dividends are recognised in the Income Statement when earned. Foreign exchange gains and losses on AFS equity instruments are recognised directly in equity. The Group assesses at each Balance Sheet date, whether there is any objective evidence of impairment as a result of one or more events which have an impact on the estimated future cash flows of the AFS investments that can be reliably estimated. For equity securities classified as an AFS investment, the main indicators of impairment are significant changes in the market, economic or legal environment and a significant or prolonged decline in fair value below cost. If any such evidence exists for AFS investments, cumulative losses are removed from equity and recognised in the Income Statement. If, in a subsequent period, the fair value of an AFS debt security increases and the increase can be linked objectively to an event occurring after the impairment event, the impairment is reversed through the Income Statement. Impairment losses on AFS equity securities are not reversed. Upon disposal, the accumulated change in fair value within the AFS investments reserve is transferred to the Income Statement and reported within other operating income. Financial assets initially designated as AFS investments, that would have otherwise met the definition of loans and other receivables, can be reclassified if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. Reclassifications are made at fair value as at the date of reclassification. Fair value becomes the new amortised cost and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Loans, Bills Discounted and Other Receivables Loans, bills discounted and other receivables are non- derivative fixed and determinable payments that are not quoted in an active market. financial assets, with receivables Loans, bills discounted and other include overdrafts, home loans, credit card and other personal lending, term loans, bill financing, redeemable preference shares, securities, finance leases, and receivables due from other financial institutions (including loans, deposits with regulatory authorities and settlement account balances due from other banks). Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method and are presented net of provisions for impairment. Discounted bills included in this category due to their nature meet the definition of trading asset. They are measured at fair value through Income Statement in line with the accounting policy for assets held for trading. The Group assesses at each Balance Sheet date whether there is any objective evidence of impairment. If there is objective evidence that an impairment loss on loans 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 estimated 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. Loans and other receivables are presented net of provisions for individually and Individually assessed collectively assessed provisions. impairment. The Group has loan 86 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 1 Accounting Policies (continued) Repurchase and Reverse Repurchase Agreements Securities sold under repurchase agreements are retained in the financial statements where substantially all the risks and rewards of ownership remain with the Group. A counterparty liability is recognised within deposits and public borrowings. The difference between the sale price and the repurchase price is accrued over the life of the repurchase agreement and charged to interest expense in the Income Statement. Securities purchased under agreements to resell, where the Group does not acquire the risks and rewards of ownership, are recorded as receivables in cash and liquid assets. The security is not included in the Balance Sheet as the Group is not exposed to substantially all its risks and rewards. Interest income is accrued on the underlying receivable amount. Provision for Off Balance Sheet Items Guarantees and other contingent liabilities are accounted for as off Balance Sheet items. Provisioning for these exposures is calculated under AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’. Loan assets under committed lending facilities are not recognised until the facilities are drawn upon. The Group has determined that it is appropriate to establish provisions in relation to such facilities where a customer has been downgraded. These provisions are disclosed as other liabilities in the Balance Sheet. (u) Lease Receivables Leases are classified as either finance or operating leases. Under a finance lease, substantially all the risks and rewards incidental to legal ownership are transferred to the lessee. Under an operating lease, these risks remain with the lessor. As a lessor, the assets the Group has leased out under finance leases are recognised as lease receivables on the Balance Sheet at an amount equal to the net investment in the lease. Finance lease income reflects a constant periodic return on this net investment and is recognised within interest income in the Income Statement. The assets the Group has leased out under operating leases continue to be recognised on the Balance Sheet as property, plant and equipment and are depreciated accordingly. Operating Income Statement on a straight line basis over the lease term. lease revenue is recognised the in As a lessee, rental expense is recognised on a straight line basis over the lease term. (v) Shares in and Loans to Controlled Entities Investments in controlled entities are initially recorded at cost and subsequently held at the lower of cost and recoverable amount. Loans to controlled entities are subsequently recorded at amortised cost less impairment. (w) Property, Plant and Equipment accumulated depreciation and required. Subsequent costs are capitalised where it enhances the asset. Depreciation is calculated using the straight line method over the asset’s estimated useful economic life. impairment if The useful lives of major depreciable asset categories are as follows: Land Buildings Equipment Leasehold improvements Assets under lease    Aircraft Rail Ships Indefinite (not depreciated) Up to 30 years 3 – 8 years Lesser of unexpired lease term or lives as above 25 years 35 – 40 years 25 – 40 years Other property, plant and equipment  Infrastructure assets 50 – 100 years The Group assesses at each Balance Sheet date useful lives and residual values and whether there is any objective evidence of impairment. If an asset’s carrying value is greater than its recoverable amount, the carrying amount is written down immediately to its recoverable amount. (x) Intangible Assets Intangible assets are identifiable non-monetary assets without physical substance. They are recognised only if it is probable the asset will generate future benefits for the Group. Those assets with an indefinite useful life are tested for impairment annually. All intangible assets must be tested for impairment when there is an indication that its carrying amount may be greater than its recoverable amount. Goodwill Goodwill arising from business combinations is included in intangible assets on the Balance Sheet and has an indefinite useful life. Goodwill is tested for impairment annually through allocation to a group of Cash Generating Units (CGUs). The CGUs’ recoverable amount is then compared to its carrying amount and an impairment is recognised for any excess carrying value. The CGUs and how their recoverable amount is calculated are listed in Note 15. Computer Software Costs Certain internal and external costs directly in acquiring and developing software, net of specific project related grants, are capitalised and amortised over the estimated useful life. The majority of software projects are amortised over five years. The Core Banking Modernisation software project is amortised over ten years. incurred two to Software maintenance is expensed as incurred. The Group measures its property assets (land and buildings) at fair value, based on annual independent market valuations. Core Deposits Revaluation adjustments are reflected in the asset revaluation reserve, except to the extent they reverse a revaluation decrease of the same asset previously recognised in the Income Statement. Upon disposal, realised amounts in the asset revaluation reserve are transferred to retained profits. Other property, plant and equipment assets are stated at cost, less including direct and incremental acquisition costs Core deposits were initially recognised at fair value following the acquisition of Bankwest and represent the value of the deposit base acquired. Core deposits are amortised over their estimated useful life of seven years. Commonwealth Bank of Australia – Annual Report 2016 87 Notes to the Financial Statements Note 1 Accounting Policies (continued) Brand Names Brand names are initially recognised at fair value when acquired in a business combination. Brand names are amortised over their useful life, which is considered to be similar to the period of the brand name’s existence at the time of purchase. Where the brand name is assessed to have an indefinite useful life, it is carried at cost less accumulated impairment. An indefinite useful life is considered appropriate when there is no foreseeable limit to the period over which the brand name is expected to generate cash flows. Other Intangibles Other intangibles predominantly comprise customer lists. Customer relationships acquired as part of a business combination are initially measured at fair value. They are subsequently measured at less accumulated amortisation and any impairment losses. Amortisation is calculated based on the timing of projected cash flows of the relationships over their estimated useful lives. cost Liabilities (y) Financial Liabilities The Group classifies its financial liabilities in the following categories:    liabilities at fair value through Income Statement; liabilities at amortised cost; and derivative liabilities (refer to Note 1(t)). Financial liabilities are initially recognised at their fair value less directly attributable transaction costs, except in the case of financial liabilities recorded at fair value through Income Statement. Directly attributable transaction costs on these liabilities are expensed on value measurement. subsequent fair Liabilities at Fair Value through Income Statement The Group designates certain liabilities at fair value through Income Statement on origination where those liabilities are managed on a fair value basis, where the liabilities eliminate an accounting mismatch, or where they contain embedded derivatives. to initial these Subsequent liabilities are recognition, measured at fair value. Changes in fair value relating to the in other risk are Group’s own credit fair value comprehensive movement recognised in other operating income. Interest incurred is recorded within net interest income using the effective interest method. recognised remaining income, with the Liabilities at Amortised Cost (i) Deposits From Customers Deposits from customers include certificates of deposit, term deposits, savings deposits, other demand deposits and they are debentures. Subsequent measured at amortised cost. Interest and yield related fees are recognised on an effective interest basis. initial recognition, to (ii) Payables Due to Other Financial Institutions Payables due to other financial institutions include deposits, vostro balances and settlement account balances due to other banks. Subsequent to initial recognition, they are measured at amortised cost. Interest and yield related fees are recognised using the effective interest method. 88 Commonwealth Bank of Australia – Annual Report 2016 (iii) Debt Issues 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 amortised cost using the effective interest method. Premiums, discounts and associated issue expenses are recognised in the Income Statement using the effective interest method from the date of issue, to ensure that securities attain their redemption values by maturity date. Interest is recognised in the Income Statement using the effective interest method. Any profits or losses arising from redemption prior Income Statement in the period in which they are realised. to maturity are taken to the The Group hedges interest rate and foreign currency risk on certain debt issues. When fair value 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 amortised cost. (iv) Loan Capital Loan capital is debt issued by the Group with terms and conditions that qualify for inclusion as capital, under APRA Prudential Standards. It is initially recorded at fair value, plus thereafter at directly attributable amortised cost using the effective interest method. transaction costs and (v) Bank Acceptances of Customers - Liability These are bills of exchange initially accepted and discounted by the Group and subsequently sold into the market. They are recognised at amortised cost. The market exposure is recognised as a liability. An asset of equal value is recognised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate interest and fee income that is recognised in the Income Statement when earned. (vi) Financial Guarantees and Credit Commitments In the ordinary course of business, the Group gives financial guarantees consisting of letters of credit, guarantees and acceptances. Financial guarantees are recognised within other liabilities initially at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the less cumulative amortisation amount recognised in the Income Statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the Income Statement. The premium received is recognised in the Income Statement in other operating income on a straight line basis over the life of the guarantee. initially recognised Loan commitments are defined amounts (unutilised credit lines or undrawn portions of credit lines) against which clients can borrow money under defined terms and conditions. Loan commitments that are cancellable by the Group are not recognised on the Balance Sheet. Upon a loan drawdown by the counterparty, the amount of the loan is accounted for in loans and accordance with accounting policies receivables. Irrevocable loan commitments are not recorded in the Balance Sheet, but a provision is recognised if it is probable that a loss has been incurred and a reliable estimate of the amount can be made. for Notes to the Financial Statements Note 1 Accounting Policies (continued) (z) Employee Benefits Annual Leave for annual The provision liability outstanding entitlements at Balance Sheet date. to employees leave represents the current leave for annual Long Service Leave The provision for long service leave is discounted to present value and is set based on actuarial assumptions. The assumptions and provision balance are subject to periodic review. Other Employee Benefits Other employee entitlements comprises to a registered health fund for subsidies with respect to retired and current employees, and employee incentives under employee share plans and bonus schemes. liabilities Defined Benefit Superannuation Plans The Group currently sponsors superannuation plans for its employees. two defined benefit The net defined benefit liability or asset recognised in the Balance Sheet is the present value of the defined benefit obligation as at the Balance Sheet date less the fair value of plan assets. The defined benefit obligation is calculated by independent fund actuaries. In each reporting period, the movement in the net defined benefit liability or asset is recognised as follows:     The net movement relating to the current period service cost, net interest cost (income), past service and other costs (such as the effects of any curtailments and settlements) is recognised as an employee expense in the Income Statement; Remeasurements relating to actuarial gains and losses and the difference between interest income and the return on plan assets are recognised directly in retained profits through OCI; Contributions made by the Group are recognised directly against the net defined benefit liability or asset; and Net interest cost (income) is determined by multiplying the rate of high quality corporate bonds by the net defined benefit obligation (asset) at the beginning of the reporting period and adjusted for changes in the net defined benefit liability (asset) due to contributions and benefit payments. Defined Contribution Superannuation Plans The Group sponsors a number of defined contribution superannuation plans. The Group recognises contributions due in respect of the accounting period in the Income Statement. Any contributions unpaid at the Balance Sheet date are included as a liability. (aa) Provisions Provisions are recognised when a probable obligation has arisen as a result of a past event that can be reliably measured. Note 19 Other Provisions contains a description of provisions held. Equity (bb) Shareholders’ Equity Ordinary shares are recognised at the amount paid up per ordinary share, net of directly attributable issue costs. Where the Bank or other members of the Group purchase shares in the Bank, the consideration paid is deducted from total Shareholders’ Equity and the shares are treated as treasury shares until they are subsequently sold, reissued or cancelled. Where such shares are sold or reissued, any consideration received is included in Shareholders’ Equity. (cc) Reserves General Reserve 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. Capital Reserve The capital reserve held by the Bank relates to historic internal Group restructuring performed at fair value. The capital reserve is eliminated on consolidation. Asset Revaluation Reserve The asset revaluation reserve is used to record revaluation adjustments on the Group’s property assets. Where an asset is sold or disposed of, any balance in the reserve in relation to the asset is transferred directly to retained profits. Foreign Currency Translation Reserve Exchange differences arising on translation of the Group’s foreign operations are accumulated in the foreign currency translation reserve. The cumulative amount is reclassified to profit or loss when the foreign investment is disposed of or wound up. Cash Flow Hedge Reserve The cash flow hedge reserve is used to record fair value gains or losses associated with the effective portion of designated cash flow hedging instruments. Amounts are reclassified to profit or loss when the hedged transaction impacts profit or loss. Employee Compensation Reserve The employee compensation reserve is used to recognise the fair value of shares and other equity instruments issued to employees under the employee share plans and bonus schemes. Available-for-Sale Investment Reserve The available-for-sale investment reserve includes changes in the fair value of available-for-sale financial assets. These changes are transferred to profit or loss when the asset is derecognised or impaired. Life and General Insurance Business The Group’s consolidated financial statements include the assets, liabilities, income and expenses of the life and general insurance businesses conducted by various subsidiaries of the Bank. Insurance contracts involve the acceptance of significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The insured benefit is either not linked or only partly linked to the market value of the investments held, and the financial risks are substantially borne by the insurer. General insurance contracts are insurance contracts that are not life insurance contracts. Commonwealth Bank of Australia – Annual Report 2016 89 Notes to the Financial Statements Note 1 Accounting Policies (continued) Life investment contracts involve the origination of one or more financial instruments and may involve the provision of management services. Life investment contracts do not meet the definition of insurance contracts as they do not involve an acceptance of significant insurance risk by the Group’s life insurers. The financial risks are substantially borne by the policyholder. Shareholders can only receive a distribution when the capital adequacy requirements of the Life Insurance Act 1995 (Life Act) are met. (dd) Revenue Life insurance 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 receivable basis. Premiums with no due date are recognised on a cash received basis. Life investment premiums comprise a management fee, which is recognised as revenue over the service period, and a deposit portion that increases investment contract liabilities. Premiums with no due date are recognised on a cash received basis. General insurance premium comprises amounts charged to policyholders, including fire service levies, but excludes taxes collected on behalf of third parties. The earned portion of premiums received and receivable is recognised as revenue. Premium revenue is earned from the date of attachment of risk and over the term of the policies written, based on actuarial assessment of the likely pattern in which risk will emerge. The portion not yet earned based on the pattern assessment is recognised as unearned premium liability. Returns on all investments controlled by life and general insurance businesses are recognised as revenue. (ee) Expenses Life and general insurance contract claims are recognised as an expense when a liability has been established. Acquisition costs (which include commission costs) are the costs associated with obtaining and recording insurance contracts. Acquisition costs are deferred when they relate to the acquisition of new business. These costs are amortised on the same basis as the earning pattern of the premium, over the life of the contract. The amount deferred is limited to the extent that they are deemed recoverable from the expected future profits. General insurance policy liabilities comprise two components: unearned premium liability and outstanding claims liability. The unearned premium liability is subject to a liability adequacy test. Any deficiency will be recognised as an expense in the Income Statement by first writing down any related deferred acquisition costs, with any excess being recorded on the Balance Sheet as an unexpired risk liability. The provision for outstanding claims is measured as the central estimate of the present value of expected future claims payments plus a risk margin. The expected future payments include those in relation to claims reported but not yet paid; claims incurred but not reported; claims incurred but not enough reported; and estimated claims handling costs. Other (hh) Managed Funds Units on Issue When a controlled unit trust is consolidated, any amounts due to external unit-holders remain as managed funds units on issue liabilities in the Group’s consolidated Balance Sheet. In the Income Statement, the net profit or loss of the controlled entities relating to external unit-holders is excluded from the Group’s net profit or loss. (ii) Asset Securitisation The Group packages and sells asset backed securities to investors through an asset securitisation program. 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. The Group also directs any decisions over relevant activities of the program and therefore controls the entities through which asset securitisation is conducted and so it consolidates these entities. Liabilities associated with 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 Group, resulting in their continued recognition by the Group. An imputed borrowing is recognised by the Bank inclusive of the derivative and any related fees. (ff) Investment Assets (jj) Fiduciary Activities Certain controlled entities within the Group act as Responsible Entity, Trustee and/or Manager for a number of wholesale, superannuation and investment funds, trusts and approved deposit funds. 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. Commissions and fees earned in respect of the activities are included in the Income Statement of the Group. Assets backing insurance liabilities are carried at fair value through Income Statement. Investments held in the life insurance funds are subject to the restrictions imposed under the Life Act. (gg) Policy Liabilities 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 linked to the asset performance), and are calculated in accordance with the principles of Margin on Services profit reporting as set out in Prudential Standard LPS 340 ‘Valuation of Policy Liabilities’ issued by APRA. Life investment contract liabilities are measured at fair value. The balance is no less than the contract surrender value. 90 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 1 Accounting Policies (continued) Critical Judgements and Estimates The application of the Group’s accounting policies requires the use of judgement, estimates and assumptions. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant, and are reviewed on an ongoing basis. Actual results may differ from these estimates, which could impact the Group’s net assets and profit. (kk) Provisions for Impairment of Financial Assets Provisions for impairment of financial assets are raised where there is objective evidence of impairment (where the Group does not expect to receive all of the cashflows contractually due) at an amount adequate to cover assessed credit related losses. Financial assets are either individually or collectively assessed. (mm) Life Insurance Policyholder Liabilities The determination of life insurance policyholder liabilities involves the following key actuarial assumptions:    Business assumptions including amount, timing and duration of claims/policy payments, policy lapse rates and acquisition and maintenance expense levels; Long-term economic assumptions for discount, interest, inflation and market earnings rates; and Determining whether the projection or accumulation method is appropriate. 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: Credit losses arise primarily from loans, but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments.   Recent results may be a statistical aberration; or There may be a commencement of a new paradigm requiring a change in long-term assumptions. Individually Assessed Provisions Individually assessed provisions are made against financial assets that are individually significant, or which have been individually assessed as impaired. The provisions are established based primarily on estimates of the realisable (fair) value of collateral taken and are measured as the difference between a financial 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. Collective Provisions Loans and receivables 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 receivables to their estimated recoverable amounts at the Balance Sheet date. The evaluation process is subject to a series of estimates and judgements. In the 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 borrowers are considered. Current developments in portfolios (industry, geographic and term) are reviewed. In the statistically managed (retail) segment, the history of defaults and losses, and the size, structure and diversity of portfolios are considered. Management also 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. (ll) Provisions (Other than Loan Impairment) Provisions are held in respect of a range of future obligations as outlined in Note 19. Some of the provisions involve significant judgement about the likely outcome of various events and estimated future cash flows. The measurement of these obligations involves the exercise of management judgements about the ultimate outcomes of the transactions. Payments which are expected to be incurred later than one year are discounted at a rate which reflects both current interest rates and the risks specific to that provision. The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement. Further detail on the financial position on performance of the Group’s Life Insurance operations is set out in Note 27. (nn) Consolidation of Structured Entities The Group exercises judgement at inception and periodically thereafter, to assess whether that structured entity should be consolidated based on the Bank’s power over the relevant activities of the entity and the significance of its exposure to variable returns of the structured entity. Such assessments are predominantly required for the Group’s securitisation program, structured involvement with investment funds. transactions and (oo) Financial Instruments at Fair Value A significant portion of financial instruments are carried at fair value on the Balance Sheet. The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, the Group establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable willing parties (if available), reference to the current fair value of substantially similar instruments’ discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated reliable estimates of prices obtained in actual market transactions, the Group uses that technique. to provide The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity specific inputs. It incorporates all factors that the Group believes market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Data inputs that the Group relies upon when valuing financial instruments relate to counterparty credit risk, volatility, correlation and extrapolation. Commonwealth Bank of Australia – Annual Report 2016 91 Notes to the Financial Statements Future Accounting Developments AASB 9 ‘Financial Instruments’ introduces changes in three areas:    Financial assets will be categorised according to a cash flow and business model test. The outcome of these tests will drive the measurement of financial assets at either amortised cost, fair value through profit or loss or fair value through other comprehensive income; Impairment of financial assets will be based on an expected loss rather than incurred loss model; and Simplifications to hedge accounting. AASB 9 is not mandatory until 1 July 2018 for the Group. Other than the own credit requirements of the standard, which were early adopted from 1 January 2014, the Group does not intend the standard. The Group has commenced an implementation program. to early adopt ‘Revenue from Contracts with Customers’ AASB 15 introduces a single model for the recognition of revenue based on when control of goods and services transfers to a customer. It does not apply to financial instruments. AASB 15 is not mandatory until 1 July 2018 for the Group. the accounting ‘Leases’ amends AASB 16 leases. Lessees will be required to bring all leases on Balance Sheet as the distinction between operating and finance leases has largely been eliminated. Lessor accounting unchanged. AASB 16 is not mandatory until 1 July 2019 for the Group. remains for The potential financial impacts of the above to the Group have not yet been determined. The Group does not intend to early adopt these standards. Other amendments to existing standards that are not yet effective are not expected to result in significant changes to the Group’s accounting policies. Note 1 Accounting Policies (continued) Periodically, the Group calibrates its valuation techniques and tests them for validity using prices from any observable current market transactions in the same instrument (i.e. without modification or repackaging) and any other available observable market data. Note 40 includes details of non- observable inputs used to fair value financial instruments. (pp) Goodwill for the purpose of Goodwill is allocated to CGUs whose recoverable amount is calculated testing. The recoverable amount calculation relies primarily on publicly available earnings multiples. Note 15 includes the details of the inputs used in recoverable amount calculations. impairment (qq) Taxation Provisions for taxation require significant judgement with respect that are uncertain. For such uncertainties, the Group has estimated its tax provisions based on its expected outcomes. to outcomes (rr) Superannuation Obligations The Group’s defined benefit plans are described in Note 35. Actuarial valuations of the plan’s obligations and fair value of the plan’s assets are performed semi-annually. The actuarial valuation of plan obligations is dependent upon a series of assumptions, including price inflation, discount rates, salary growth, mortality, morbidity and investment returns assumptions. Different assumptions could significantly alter the difference between plan assets and obligations, and the superannuation cost charged. 92 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 2 Profit Profit before income tax has been determined as follows: (1) Comparative information has been restated to conform to presentation in the current year. (2) Total interest income for financial assets that are not at fair value through profit or loss is $33,002 million (2015: $33,208 million, 2014: $33,127 million) for the Group and $33,868 million (2015: $34,088 million) for the Bank. (3) Total interest expense for financial liabilities that are not at fair value through profit or loss is $16,713 million (2015: $18,100 million, 2014: $18,320 million) (4) (5) for the Group and $19,435 million (2015: $20,875 million) for the Bank. Inclusive of non-trading derivatives that are held for risk management purposes. Includes depreciation of $107 million (30 June 2015: $80 million, 30 June 2014 $77 million) and impairment of $69 million (30 June 2015; $nil, 30 June 2014: $nil) in relation to assets held for lease by the Group. Includes depreciation of $26 million (30 June 2015: $18 million) in relation to assets held for lease by the Bank. Commonwealth Bank of Australia – Annual Report 2016 93 Group (1)Bank (1)20162015201420162015$M$M$M$M$MInterest IncomeLoans and bills discounted 30,96631,47631,20027,57627,705Other financial institutions 137736912260Cash and liquid assets 291268251246206Assets at fair value through Income Statement 576518447553468Available-for-sale investments 1,8471,8101,7241,7401,694Controlled entities---4,4234,842Total interest income (2)33,81734,14533,69134,66034,975Interest ExpenseDeposits11,68512,93613,32010,17611,397Other financial institutions277220228246186Liabilities at fair value through Income Statement211222230110113Debt issues 4,1254,3724,3433,3613,458Loan capital584572429563547Controlled entities---5,0895,287Total interest expense (3)16,88218,32218,55019,54520,988Net interest income16,93515,82315,14115,11513,987Other Operating IncomeLending fees 1,0101,0051,037927935Commissions2,2152,2092,1121,8381,842Trading income1,0871,039946975940Net gain/(loss) on non-trading financial instruments (4)(27)251(49)(90)254Net gain/(loss) on sale of property, plant and equipment(21)(8)(12)(15)(4)Net hedging ineffectiveness(72)(95)(21)(35)(67)Dividends - Controlled entities---1,4071,919Dividends - Other1216125553Net funds management operating income2,0612,0032,034--Insurance contracts income 1,0061,0141,033--Share of profit from associates and joint ventures net of impairment28928515021-Other (5)83126105952919Total other operating income7,6437,8457,3476,0356,791Total net operating income before impairment and operating expenses24,57823,66822,48821,15020,778Impairment ExpenseLoan impairment expense 1,2569889181,153837Total impairment expense (Note 13)1,2569889181,153837 Notes to the Financial Statements Note 2 Profit (continued) (1) Merger related amortisation relates to Bankwest core deposits and customer lists. 94 Commonwealth Bank of Australia – Annual Report 2016 GroupBank20162015201420162015$M$M$M$M$MStaff ExpensesSalaries and related on-costs5,6525,3215,0894,1283,918Share-based compensation10296999992Superannuation410399354316311Total staff expenses6,1645,8165,5424,5434,321Occupancy and Equipment ExpensesOperating lease rentals650620607564535Depreciation of property, plant and equipment 266253244221208Other occupancy expenses218213202171172Total occupancy and equipment expenses1,1341,0861,053956915Information Technology ServicesApplication maintenance and development 511430412450390Data processing197183175197182Desktop14311010113296Communications203190189180169Amortisation of software assets379308328333264Software write-offs11170-10IT equipment depreciation5160624756Total information technology services1,4851,2921,3371,3391,167Other ExpensesPostage and stationery192195188171170Transaction processing and market data179153156129116Fees and commissions:Professional fees 247390257209358Other939799353360Advertising, marketing and loyalty491522477392407Amortisation of intangible assets (excluding software and merger related amortisation)141619--Non-lending losses1031189774108Other 327308274333274Total other expenses1,6461,7991,5671,6611,793Total expenses10,4299,9939,4998,4998,196Investment and RestructuringMerger related amortisation (1)3975743975Total investment and restructuring3975743975Total operating expenses10,46810,0689,5738,5388,271Profit before income tax12,85412,61211,99711,45911,670Net hedging ineffectiveness comprises:Gain/(loss) on fair value hedges:Hedging instruments(709)(568)59(1,409)(731)Hedged items642493(71)1,369660Cash flow and net investment hedge ineffectiveness(5)(20)(9)54Net hedging ineffectiveness(72)(95)(21)(35)(67) Notes to the Financial Statements Note 3 Average Balances and Related Interest The following tables have been produced using statutory Balance Sheet and Income Statement categories. The tables list the major categories of interest earning assets and interest bearing liabilities of the Group together with the respective interest earned or paid and the average interest rate (predominantly daily averages). Interest is accounted for based on product yield. 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 are included in interest earning assets under Loans, bills discounted and other receivables. The official cash rate in Australia decreased by 25 basis points, while rates in New Zealand decreased 100 basis points during the year which is reflected in Overseas. (1) Comparative information has been restated to conform to presentation in the current year. (2) Loans, bills discounted and other receivables includes bank acceptances. (1) Comparative information has been restated to conform to presentation in the current year. Commonwealth Bank of Australia – Annual Report 2016 95 Group201620152014AverageAverageAverageAverageAverageAverageInterest earning BalanceInterestRateBalanceInterestRateBalanceInterestRateassets (1)$M$M%$M$M%$M$M%Cash and liquid assetsAustralia11,5361861. 68,9511741. 98,1791692. 1Overseas20,1831050. 521,500940. 417,840820. 5Receivables due from other financial institutionsAustralia3,387260. 83,418200. 65,070290. 6Overseas (1)8,9861111. 27,262530. 74,825400. 8Assets at fair value through Income Statement - Trading and OtherAustralia19,3545002. 617,3673962. 316,2593522. 2Overseas3,090762. 54,6181222. 66,053951. 6Available-for-sale investmentsAustralia66,5431,6622. 558,3381,6562. 854,0261,6353. 0Overseas12,7701851. 410,0941541. 57,702891. 2Loans, bills discounted and other receivables (2)Australia581,06726,6204. 6542,13827,1175. 0512,89427,4175. 3Overseas90,5414,3464. 882,1864,3595. 373,0143,7835. 2Total interest earning assets and interest income817,45733,8174. 1755,87234,1454. 5705,86233,6914. 8Group201620152014AverageAverageAverageBalanceBalanceBalanceNon-interest earning assets$M$M$MAssets at fair value through Income Statement - InsuranceAustralia 11,81912,53112,141Overseas2,5022,5742,413Property, plant and equipmentAustralia2,8272,5312,506Overseas266249237Other assetsAustralia70,20761,85551,448Overseas (1)14,93911,58010,333Provisions for impairmentAustralia(3,272)(3,524)(4,027)Overseas(375)(288)(269)Total non-interest earning assets98,91387,50874,782Total assets916,370843,380780,644Percentage of total assets applicable to overseas operations (%)16.716.615.6 Notes to the Financial Statements Note 3 Average Balances and Related Interest (continued) (1) Certain comparative information has been restated to conform to presentation in the current year. (2) During the period, following a change in terms, Interest bearing transaction deposits of $18,314 million became Non-interest bearing and have been disclosed accordingly. (3) Debt issues includes bank acceptances. (1) Comparative information has been restated to conform to presentation in the current year. (2) During the period, following a change in terms, Interest bearing transaction deposits of $18,314 million became Non-interest bearing and have been disclosed accordingly. 96 Commonwealth Bank of Australia – Annual Report 2016 Group201620152014Average AverageAverage AverageAverage AverageInterest bearing Balance Interest RateBalance Interest RateBalance InterestRateliabilities (1)$M $M % $M $M % $M $M%Time depositsAustralia200,3525,8472. 9209,8207,0633. 4211,5718,0143. 8Overseas41,5411,4173. 438,7061,0972. 836,5169312. 5Savings depositsAustralia (2)180,0402,8441. 6158,2323,0761. 9135,2762,9052. 1Overseas16,6882931. 814,8214393. 012,8973953. 1Other demand depositsAustralia94,9041,1561. 281,5341,1231. 471,0169801. 4Overseas7,2881281. 85,9161382. 35,024951. 9Payables due to other financialinstitutionsAustralia14,3671541. 111,6611391. 29,5201161. 2Overseas22,6641230. 520,030810. 416,8291120. 7Liabilities at fair value throughIncome StatementAustralia4,516952. 14,3981082. 54,3061022. 4Overseas2,3491164. 92,6961144. 24,1051283. 1Debt issues (3)Australia 136,4533,4692. 5132,7663,8232. 9129,1014,0003. 1Overseas25,5646562. 621,0235492. 615,1833432. 3Loan capitalAustralia9,4423884. 16,7153014. 55,9592594. 3Overseas4,4471964. 44,7662715. 73,5441704. 8Total interest bearing liabilities and interest expense760,61516,8822. 2713,08418,3222. 6660,84718,5502. 8Group201620152014AverageAverageAverageBalanceBalanceBalanceNon-interest bearing liabilities$M$M$MDeposits not bearing interestAustralia (1) (2)20,32111,2489,764Overseas3,0352,5892,328Insurance policy liabilitiesAustralia 11,48211,81111,648Overseas1,4061,4711,389Other liabilities Australia48,60440,07737,386Overseas13,04211,9299,975Total non-interest bearing liabilities97,89079,12572,490Total liabilities858,505792,209733,337Shareholders' Equity57,86551,17147,307Total liabilities and Shareholders' Equity916,370843,380780,644Total liabilities applicable to overseas operations (%)16.115.614.7 Notes to the Financial Statements Note 3 Average Balances and Related Interest (continued) Changes in Net Interest Income: Volume and Rate Analysis The following tables show the movement in interest income and expense due to changes in volume and interest rates. Volume variances reflect the change in interest from the prior year due to movement in the average balance. Rate variances reflect the change in interest from the prior year due to changes in interest rates. Volume and rate variance for total interest earning assets and interest bearing liabilities have been calculated separately (rather than being the sum of the individual categories). (1) Certain comparative information has been restated to conform to presentation in the current year. Commonwealth Bank of Australia – Annual Report 2016 97 Changes in net interest income:VolumeRateTotalVolumeRateTotalVolume and rate analysis$M$M$M$M$M$MInterest Earning Assets (1)Cash and liquid assetsAustralia46(34)1215(10)5Overseas(6)171116(4)12Receivables due from other financial institutionsAustralia-66(10)1(9)Overseas17415819(6)13Assets at fair value through Income Statement - Trading and OtherAustralia4856104251944Overseas(39)(7)(46)(30)5727Available-for-sale investmentsAustralia219(213)6126(105)21Overseas40(9)31323365Loans, bills discounted and other receivablesAustralia 1,865(2,362)(497)1,513(1,813)(300)Overseas 422(435)(13)48195576Changes in interest income2,665(2,993)(328)2,323(1,869)454Interest Bearing Liabilities and Loan Capital (1)Time depositsAustralia(298)(918)(1,216)(63)(888)(951)Overseas8923132059107166Savings depositsAustralia384(616)(232)470(299)171Overseas44(190)(146)58(14)44Other demand depositsAustralia174(141)33145(2)143Overseas28(38)(10)192443Payables due to other financial institutionsAustralia31(16)1526(3)23Overseas12304217(48)(31)Liabilities at fair value through Income StatementAustralia3(16)(13)246Overseas (16)182(52)38(14)Debt issuesAustralia 100(454)(354)110(287)(177)Overseas 118(11)10714264206Loan capitalAustralia 117(30)8733942Overseas(16)(59)(75)6437101Changes in interest expense1,138(2,578)(1,440)1,404(1,632)(228)Changes in net interest income1,283(171)1,1121,060(378)682June 2016 vs June 2015June 2015 vs June 2014 Notes to the Financial Statements Note 4 Income Tax The income tax expense for the year is determined from the profit before income tax as follows: (1) Policyholder tax is excluded from both profit before income tax and tax expense for the purpose of calculating the Group’s effective tax rate as it is not incurred directly by the Group. 98 Commonwealth Bank of Australia – Annual Report 2016 GroupBank20162015201420162015$M$M$M$M$MProfit before Income Tax 12,85412,61211,99711,45911,670Prima facie income tax at 30% 3,8563,7843,5993,4383,501Effect of amounts which are non-deductible/ (assessable) in calculating taxable income:Taxation offsets and other dividend adjustments(4)(6)(6)(426)(582)Tax adjustment referable to policyholder income716989--Tax losses not previously brought to account(5)(9)(21)(5)(6)Offshore tax rate differential(79)(116)(99)(32)(35)Offshore banking unit(33)(39)(30)(27)(39)Effect of changes in tax rates12311Income tax (over) provided in previous years (177)(163)(121)(171)(151)Other(23)6(67)425Total income tax expense3,6073,5283,3472,8202,694Corporate tax expense3,5063,4293,2212,8202,694Policyholder tax expense10199126--Total income tax expense3,6073,5283,3472,8202,694Effective tax rate (%) (1)27.527.427.124.623.1Group Bank Income tax expense attributable to 20162015201420162015profit from ordinary activities$M $M $M $M $M AustraliaCurrent tax expense2,9712,8652,4332,7082,591Deferred tax expense 84124389289Total Australia3,0552,9892,8222,7362,600OverseasCurrent tax expense50754767010378Deferred tax expense/(benefit)45(8)(145)(19)16Total overseas5525395258494Income Tax Expense attributable to profit from ordinary activities3,6073,5283,3472,8202,694 Notes to the Financial Statements Note 4 Income Tax (continued) (1) The following amounts are expected to be recovered within 12 months of the Balance Sheet date for the Group $1,324 million (2015: $1,220 million) and for the Bank $1,132 million (2015: $1,083 million). (2) The following amounts are expected to be settled within 12 months of the Balance Sheet date for the Group $438 million (2015: $552 million) and for the Bank $83 million (2015: $139 million). Commonwealth Bank of Australia – Annual Report 2016 99 GroupBank20162015201420162015$M$M$M$M$MDeferred tax asset balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Provision for employee benefits457453437385369Provisions for impairment on loans, bills discounted and other receivables1,0511,0081,044961944Other provisions not tax deductible until expense incurred216283160125234Financial instruments56369101Defined benefit superannuation plan 310293265310293Other227207233182184Total amount recognised in the Income Statement2,3172,2802,1481,9732,025Amounts recognised directly in Other Comprehensive Income:Cash flow hedge reserve1611559997Other reserves1662113Total amount recognised directly in Other Comprehensive Income1771611012010Total deferred tax assets (before set off) (1)2,4942,4412,2491,9932,035Set off to tax pursuant to set-off provisions in Note 1(q)(2,149)(1,986)(1,663)(1,200)(1,264)Net deferred tax assets345455586793771Deferred tax liability balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Lease financing282341381108170Intangible assets14912345146118Financial instruments1962351841311Insurance510425406--Investments in associates957862--Other233971564961Total amount recognised in the Income Statement1,4651,2991,234316360Amounts recognised directly in Other Comprehensive Income:Revaluation of properties7476857476Foreign currency translation reserve2640---Cash flow hedge reserve416293193329223Defined benefit superannuation plan 376365229376365Available-for-sale investments reserve132264288105240Total amount recognised directly in Other Comprehensive Income1,0241,038795884904Total deferred tax liabilities (before set off) (2)2,4892,3372,0291,2001,264Set off to tax pursuant to set-off provisions in Note 1(q)(2,149)(1,986)(1,663)(1,200)(1,264)Net deferred tax liabilities340351366--Deferred tax assets opening balance: 455586916771796Movement in temporary differences during the year:Provisions for employee benefits41623169Provisions for impairment on loans, bills discounted and other receivables43(36)(133)17(42)Other provisions not tax deductible until expense incurred(67)123(15)(109)100Financial instruments36871919(1)Defined benefit superannuation plan 1728661728Other20(26)1(2)(21)Set off to tax pursuant to set-off provisions in Note 1(q)(163)(323)(291)64(98)Deferred tax assets closing balance345455586793771 Notes to the Financial Statements Note 4 Income Tax (continued) Deferred tax assets have not been recognised in respect of the following items because it is not considered probable that future taxable profit will be available against which they can be realised: Tax Consolidation The Bank has recognised a tax consolidation contribution to the wholly-owned tax consolidated entity of $99 million (2015: $98 million). The amount receivable by the Bank under the tax funding agreement was $213 million as at 30 June 2016 (2015: $200 million receivable). This balance is included in ‘Other assets’ in the Bank’s separate Balance Sheet. Taxation of Financial Arrangements (TOFA) The tax regime for financial instruments TOFA began to apply to the Tax Consolidated Group from 1 July 2010. The regime allows a closer alignment of the tax and accounting recognition and measurement of financial arrangements and their related flows. Following adoption, deferred tax balances from financial arrangements progressively reverse over a four year period. 100 Commonwealth Bank of Australia – Annual Report 2016 Group Bank 20162015201420162015$M $M $M $M $M Deferred tax liabilities opening balance:351366471--Movement in temporary differences during the year:Impact of TOFA adoption--(11)--Lease financing(59)(40)11(62)(17)Defined benefit superannuation plan 111364911136Intangible assets2678(28)2881Financial instruments(62)167125(27)(4)Insurance 851957--Investments in associates171617--Other134(68)(34)(14)(98)Set off to tax pursuant to set-off provisions in Note 1(q)(163)(323)(291)64(98)Deferred tax liabilities closing balance340351366--Group Bank 20162015201420162015Deferred tax assets not taken to account$M $M $M $M $M Tax losses and other temporary differences on revenue account:Expire under current legislation 124835011762Do not expire under current legislation7-12--Total131836211762 Notes to the Financial Statements Note 5 Dividends (1) The 2016 final dividend will be satisfied in full by cash disbursements with the Dividend Reinvestment Plan (DRP) anticipated to be satisfied by the issue of shares of approximately $628 million. The 2015 final dividend was satisfied by cash disbursements of $2,958 million and $655 million being reinvested by the participants through the DRP. The 2014 final dividend was satisfied by cash disbursements of $3,534 million with the DRP satisfied in full by an on market purchase of shares. Final Dividend The Directors have declared a franked final dividend of 222 cents per share amounting to $3,808 million. The dividend will be payable on 29 September 2016 to shareholders on the register at 5pm AEST on 18 August 2016. The ex-dividend date is 17 August 2016. The Board determines the dividends based on the Group’s net profit after tax (“cash basis”) per share, having regard to a range of factors including:      Current and expected rates of business growth and the mix of business; Capital needs to support economic, regulatory and credit ratings requirements; Investments and/or divestments to support business development; Competitors comparison and market expectations; and Earnings per share growth. The Bank expects the DRP for the final dividend for the year 30 June 2016 will be satisfied by the issue of shares of approximately $628 million. Dividend Franking Account After fully franking the final dividend to be paid for the year, the amount of credits available, at the 30% tax rate as at 30 June 2016 to frank dividends for subsequent financial years, is $532 million (2015: $569 million). This figure is based on the franking accounts of the Bank at 30 June 2016, adjusted for franking credits that will arise from the payment of income tax payable on profits for the year, franking debits that will arise from the payment of dividends proposed, and franking credits that the Bank may be prevented from distributing in subsequent financial periods. The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue to fully frank future dividend payments. These calculations have been based on the taxation law as at 30 June 2016. Dividend History (1) Dividend Payout Ratio: dividends divided by statutory earnings (earnings are net of dividends on other equity instruments). (2) DRP Participation Rate: the percentage of total issued share capital participating in the DRP. Commonwealth Bank of Australia – Annual Report 2016 101 Group Bank 20162015201420162015$M $M $M $M $M Ordinary SharesInterim ordinary dividend (fully franked) (2016: 198 cents; 2015: 198 cents; 2014: 183 cents)Interim ordinary dividend paid - cash component only2,8292,6362,2432,8292,636Interim ordinary dividend paid - Dividend Reinvestment Plan552574707552574Total dividend paid3,3813,2102,9503,3813,210Other Equity InstrumentsDividend paid565245--Total dividend provided for, reserved or paid3,4373,2622,9953,3813,210Other provision carried9082739082Dividend proposed and not recognised as a liability (fully franked) (2016: 222 cents; 2015: 222 cents; 2014: 218 cents) (1)3,8083,6133,5343,8083,613Provision for dividendsOpening balance8273658273Provision made during the year6,9946,7446,1746,9946,744Provision used during the year(6,986)(6,735)(6,166)(6,986)(6,735)Closing balance (Note 19)9082739082Half-yearFull YearDRPPayoutPayoutDRPParticipationCents Per Ratio (1) Ratio (1)Price Rate (2)Half year endedSharePayment Date% % $ % 31 December 2013183 03/04/201470. 5-75. 2624. 030 June 2014218 02/10/201480. 375. 580. 3919. 931 December 2014198 02/04/201571. 2-91. 2617. 930 June 2015222 01/10/201580. 375. 774. 7518. 131 December 2015198 31/03/201673. 7-72. 6816. 330 June 2016222 29/09/201682. 978. 3-- Notes to the Financial Statements Note 6 Earnings Per Share (1) EPS calculations are based on actual amounts prior to rounding to the nearest million. (2) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted average number of ordinary shares. Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares on issue during the year, adjusted for any bonus element included in ordinary shares issued and excluding treasury shares held. Diluted earnings per share amounts are calculated by dividing net profit attributable to ordinary equity holders of the Bank (after deducting interest on the convertible redeemable loan capital instruments) by the weighted average number of ordinary shares issued during the year (as calculated under basic earnings per share adjusted for the effects of dilutive options and dilutive convertible non-cumulative redeemable loan capital instruments). (1) Comparative information has been restated to incorporate the bonus element of the rights issue in the weighted average number of ordinary shares. Note 7 Cash and Liquid Assets Note 8 Receivables Due from Other Financial Institutions (1) Comparative information has been reclassified to conform to presentation in the current year. (2) Required by law for the Group to operate in certain regions. The majority of the above amounts are expected to be recovered within 12 months of the Balance Sheet date. 102 Commonwealth Bank of Australia – Annual Report 2016 Group 20162015 (2)2014 (2)Earnings per ordinary share (1)Cents per ShareBasic 542. 5553. 7530. 6Fully diluted529. 5539. 6518. 9Group 201620152014Reconciliation of earnings used in calculation of earnings per share$M $M $M Profit after income tax9,2479,0848,650Less: Other equity instrument dividends(50)(52)(45)Less: Non-controlling interests(20)(21)(19)Earnings used in calculation of basic earnings per share9,1779,0118,586Add: Profit impact of assumed conversions of loan capital195225190Earnings used in calculation of fully diluted earnings per share9,3729,2368,776Number of Shares 20162015 (1)2014 (1)M M M Weighted average number of ordinary shares used in the calculationof basic earnings per share1,6921,6271,618Effect of dilutive securities - executive share plans and convertible loan capital instruments798473Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share1,7711,7111,691Group Bank 2016201520162015$M $M $M $M Notes, coins and cash at banks12,10315,68310,80914,821Money at short call2,2013,4782,0733,286Securities purchased under agreements to resell8,92513,8468,67313,518Bills received and remittances in transit1431092758Total cash and liquid assets23,37233,11621,58231,683GroupBank2016201520162015$M$M$M$MPlacements with and loans to other financial institutions (1)11,38412,85110,14011,171Deposits with regulatory authorities (2)2072124233Total receivables due from other financial institutions11,59113,06310,18211,204 Notes to the Financial Statements Note 9 Assets at Fair Value through Income Statement Investments held in the Australian statutory funds may only be used within the restrictions imposed under the Life Insurance Act 1995. (1) (2) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis or to eliminate an accounting mismatch. (3) Comparative information has been reclassified to conform to presentation in the current period. (4) In addition to the assets above, the Group also measures bills discounted that are intended to be sold into the market at fair value. These are classified within Loans, bills discounted and other receivables (refer to Note 12). Note 10 Derivative Financial Instruments Derivative Contracts Derivatives are classified as “Held for Trading” or “Held for Hedging”. Held for Trading derivatives are contracts entered into in order to meet customers’ needs, to undertake market making and positioning activities, or for risk management purposes that do not qualify for hedge accounting. Held for Hedging derivatives are instruments held for risk management purposes, which meet the criteria for hedge accounting. Derivatives Transacted for Hedging Purposes There are three types of allowable hedging relationships: fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. For details on the accounting treatment of each type of hedging relationship refer to Note 1(t). Fair Value Hedges Fair value hedges are used by the Group to manage exposure to changes in the fair value of an asset, liability or unrecognised firm commitment. Changes in fair values can arise from fluctuations in interest or foreign exchange rates. The Group principally uses interest rate swaps, cross currency swaps and futures to protect against such fluctuations. All gains and losses associated with the ineffective portion of fair value hedge relationships are recognised immediately as ‘Other operating income’ in the Income Statement. Cash Flow Hedges Cash flow hedges are used by the Group to manage exposure to variability in future cash flows, which could affect profit or loss and may result from fluctuations in interest and exchange rates or in commodity prices on financial assets, liabilities or highly probable forecast transactions. The Group principally uses derivative instruments to protect against such fluctuations. Commonwealth Bank of Australia – Annual Report 2016 103 GroupBank2016201520162015Assets at Fair Value through Income Statement$M $M $M $M TradingGovernment bonds, notes and securities17,65311,48617,44011,042Corporate/financial institution bonds, notes and securities5,3536,4444,8086,026Shares and equity investments2,4842,6232,1602,196Commodities8,5775,8718,5775,871Total trading assets34,06726,42432,98525,135Insurance (1)Investments backing life risk contractsEquity security investments855844--Debt security investments3,5633,135--Property investments82136--Other assets703555--Investments backing life investment contractsEquity security investments4,3564,670--Debt security investments2,4173,182--Property investments123297--Other assets1,4481,269--Total life insurance investment assets13,54714,088--Other (2)Government securities4395--Receivables due from other corporate/financial institutions (3)250293-99Other lending (3)1,1878901,187890Total other assets at fair value through Income Statement1,4801,2781,187989Total assets at fair value through Income Statement (4)49,09441,79034,17226,124Maturity Distribution of assets at fair value through income statementLess than twelve months25,84527,57724,35526,124More than twelve months23,24914,2139,817-Total assets at fair value through Income Statement49,09441,79034,17226,124 Notes to the Financial Statements Note 10 Derivative Financial Instruments (continued) Where it is appropriate, non-derivative financial assets and liabilities are also designated as hedging instruments in cash flow hedge relationships. Amounts accumulated in Other Comprehensive Income in respect of cash flow hedges are recycled to the Income Statement when the forecast transaction occurs. Underlying cash flows from cash flow hedges are discounted to calculate deferred gains and losses which are expected to occur in the following periods: Net Investment Hedges The Group uses foreign exchange forward transactions to minimise its exposure to the currency translation risk of certain net investments in foreign operations. In the current and prior year, there have been no material gains or losses as a result of ineffective net investment hedges. The fair value of derivative financial instruments is set out in the following tables: 104 Commonwealth Bank of Australia – Annual Report 2016 GroupBankTotalTotal2016201520162015$M$M$M$MWithin 6 months(46)(39)(9)(8)6 months - 1 year8(5)80281 - 2 years108971531742 - 5 years846591969690After 5 years(237)(267)(148)(128)Net deferred gains/(losses)6793771,045756Group20162015Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives assets and liabilities$M$M$M$MHeld for tradingExchange rate related contracts:Forward contracts9,055(8,656)7,019(6,472)Swaps6,646(9,762)7,299(7,808)Futures1-7-Options purchased and sold874(897)736(773)Total exchange rate related contracts16,576(19,315)15,061(15,053)Interest rate related contracts:Forward contracts--1(1)Swaps10,590(7,266)9,120(7,226)Futures15(42)5(2)Options purchased and sold1,120(1,261)824(844)Total interest rate related contracts11,725(8,569)9,950(8,073)Credit related swaps38(50)28(33)Equity related contracts:Swaps38(86)165(9)Options purchased and sold14(27)66(62)Total equity related contracts52(113)231(71)Commodity related contracts:Swaps593(510)291(359)Options purchased and sold40(43)59(55)Total commodity related contracts633(553)350(414)Identified embedded derivatives338(125)193(258)Total derivative assets/(liabilities) held for trading29,362(28,725)25,813(23,902) Notes to the Financial Statements Note 10 Derivative Financial Instruments (continued) Held for trading derivatives are expected to be recovered or due to be settled within 12 months of the Balance Sheet date. The majority of hedging derivatives are expected to be recovered or due to be settled more than 12 months after the Balance Sheet date. Commonwealth Bank of Australia – Annual Report 2016 105 Group20162015Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$MFair value hedgesExchange rate related contracts:Swaps8,631(4,612)12,238(5,393)Total exchange rate related contracts8,631(4,612)12,238(5,393)Interest rate related swaps881(2,930)932(3,182)Total fair value hedges9,512(7,542)13,170(8,575)Cash flow hedgesExchange rate related swaps5,002(2,150)4,329(1,080)Interest rate related swaps2,691(1,495)2,831(1,656)Total cash flow hedges7,693(3,645)7,160(2,736)Net investment hedgesExchange rate related forward contracts-(9)11-Total net investment hedges-(9)11-Total derivative assets/(liabilities) held for hedging17,205(11,196)20,341(11,311)Bank20162015Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives assets and liabilities$M$M$M$MHeld for tradingExchange rate related contracts:Forward contracts9,010(8,554)6,900(6,430)Swaps8,366(10,691)7,484(7,800)Futures1-7-Options purchased and sold873(894)730(772)Derivatives held with controlled entities915(3,083)850(3,647)Total exchange rate related contracts19,165(23,222)15,971(18,649)Interest rate related contracts:Forward contracts--1(1)Swaps10,166(6,868)8,898(6,896)Futures15(37)-(1)Options purchased and sold1,119(1,255)823(842)Derivatives held with controlled entities216(261)132(241)Total interest rate related contracts11,516(8,421)9,854(7,981)Credit related swaps38(50)28(33)Equity related contracts:Swaps38(86)165(9)Options purchased and sold14(27)66(62)Total equity related contracts52(113)231(71)Commodity related contracts:Swaps593(510)291(359)Options purchased and sold40(43)59(55)Total commodity related contracts633(553)350(414)Identified embedded derivatives338(125)193(258)Total derivative assets/(liabilities) held for trading31,742(32,484)26,627(27,406) Notes to the Financial Statements Note 10 Derivative Financial Instruments (continued) (1) Comparative information has been expanded to conform to presentation in the current year. Held for trading derivatives are expected to be recovered or due to be settled within 12 months of the Balance Sheet date. The majority of hedging derivatives are expected to be recovered or due to be settled more than 12 months after the Balance Sheet date. 106 Commonwealth Bank of Australia – Annual Report 2016 Bank20162015Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiability$M$M$M$MFair value hedgesExchange rate related contracts:Swaps6,856(3,815)11,717(5,210)Derivatives held with controlled entities52(1,934)47(1,367)Total exchange rate related contracts6,908(5,749)11,764(6,577)Interest rate related contracts:Swaps738(2,673)823(3,002)Derivatives held with controlled entities-(194)-(177)Total interest rate related contracts738(2,867)823(3,179)Total fair value hedges7,646(8,616)12,587(9,756)Cash flow hedges (1)Exchange rate related contracts:Swaps4,688(1,613)3,797(1,059)Derivatives held with controlled entities13(188)1(90)Total exchange rate related contracts4,701(1,801)3,798(1,149)Interest rate related contracts:Swaps2,433(969)2,583(1,320)Derivatives held with controlled entities3(5)1(5)Total interest rate related contracts2,436(974)2,584(1,325)Total cash flow hedges7,137(2,775)6,382(2,474)Net investment hedges (1)Exchange rate related forward contracts-(9)11-Total net investment hedges-(9)11-Total derivative assets/(liabilities) held for hedging14,783(11,400)18,980(12,230) Notes to the Financial Statements Note 11 Available-for-Sale Investments (1) Supranational, Sovereign and Agency Securities (SSA). (2) On 31 March 2015 internal residential mortgage backed securities (internal RMBS) issued to the Bank by controlled entities of $75,041 million were reclassified to Loans to controlled entities. They were reclassified prospectively at their fair value of $75,041 million. As at the date of reclassification the available for sale reserve was nil. The fair value of the internal RMBS as at 30 June 2015 was $74,959 million, as disclosed in Note 40. The following amounts expected to be recovered within 12 months of the Balance Sheet date for the Group are $16,324 million (2015: $20,350 million) and for Bank $15,660 million (2015: $20,812 million). Proceeds received from settlement at or close to maturity of Available-for-sale investments for the Group were $39,011 million (2015: $47,752 million) and for the Bank were $39,430 million (2015: $47,235 million). Proceeds from the sale of available-for-sale investments for the Group were $7,139 million (2015: $5,817 million) and for the Bank were $7,111 million (2015: $5,817 million). Maturity Distribution and Weighted Average Yield The maturity table is based on contractual terms. . Commonwealth Bank of Australia – Annual Report 2016 107 GroupBank2016201520162015$M$M$M$MGovernment bonds, notes and securities47,19036,10045,75435,708Corporate/financial institution bonds, notes and securities18,74022,27217,72422,027Shares and equity investments9591,155486726Covered bonds, mortgage backed securities and SSA (1) (2)14,00915,15712,39713,843Total available-for-sale investments80,89874,68476,36172,304GroupMaturity Period at 30 June 201610 orNon-0 to 1 Year1 to 5 Years5 to 10 Yearsmore YearsMaturingTotal$M%$M%$M%$M%$M$MGovernment bonds, notes and securities7,7430.4612,1721.6619,2111.958,0642.42-47,1906,1092.2112,5962.98254.00103.00-18,740Shares and equity investments--------9599597752.546,0602.886162.996,5582.82-14,009Total available-for-sale investments14,627-30,828-19,852-14,632-95980,898Covered bonds, mortgage backed securities and SSACorporate/financial institution bonds, notes and securities Notes to the Financial Statements Note 12 Loans, Bills Discounted and Other Receivables (1) Home loans balance includes residential mortgages that have been assigned to securitisation vehicles and covered bond trusts. Further detail on these residential mortgages is disclosed in Note 41. (2) The Group measures bills discounted intended to be sold into the market at fair value and includes these within loans, bills discounted and other receivables to reflect the nature of the lending arrangement. (3) Comparatives have been aggregated to align to presentation in the current year. The following amounts, based on behavioural terms and current market conditions, are expected to be recovered within 12 months of the Balance Sheet date for Group $206,157 million (2015: $187,536 million), and for Bank $191,962 million (2015: $159,429 million). The maturity tables below are based on contractual terms. Finance Lease Receivables The Group and the Bank provide finance leases to a broad range of clients to support financing needs in acquiring transportation assets such as trains, aircraft, ships and major production and manufacturing equipment. Finance lease receivables are included within loans, bills discounted and other receivables to customers. 108 Commonwealth Bank of Australia – Annual Report 2016 GroupBank2016201520162015$M$M$M$MAustraliaOverdrafts26,85722,35326,85722,353Home loans (1)409,452383,174404,352379,500Credit card outstandings12,12211,88712,12211,887Lease financing4,4124,4853,0733,053Bills discounted (2)10,50714,84710,50714,847Term loans and other lending (3)140,784124,312140,700124,186Total Australia604,134561,058597,611555,826OverseasOverdrafts1,5921,373318139Home loans (1)46,62239,677550522Credit card outstandings912816--Lease financing723352849Term loans and other lending (3)46,96740,96923,75421,325Total overseas96,16583,17024,65022,035Gross loans, bills discounted and other receivables700,299644,228622,261577,861LessProvisions for Loan Impairment (Note 13):Collective provision(2,783)(2,739)(2,510)(2,530)Individually assessed provisions (935)(879)(855)(824)Unearned income:Term loans(701)(756)(699)(753)Lease financing(482)(592)(278)(319)(4,901)(4,966)(4,342)(4,426)Net loans, bills discounted and other receivables695,398639,262617,919573,435Group 20162015GrossPresent Value GrossPresent Value Investment inof Minimum Investment inof Minimum Finance LeaseUnearnedLease Payment Finance LeaseUnearnedLease Payment ReceivableIncomeReceivable ReceivableIncomeReceivable $M$M$M $M$M$M Not later than one year1,247(161)1,0861,051(147)904One year to five years2,906(287)2,6193,138(353)2,785Over five years331(34)297631(92)5394,484(482)4,0024,820(592)4,228 Notes to the Financial Statements Note 12 Loans, Bills Discounted and Other Receivables (continued) Contractual Maturity Tables (1) The industry split has been prepared on an industry exposure basis. Commonwealth Bank of Australia – Annual Report 2016 109 Bank 20162015Gross Present Value Gross Present Value Investment in of Minimum Investment in of Minimum Finance Lease Unearned Lease Payment Finance Lease UnearnedLease Payment Receivable Income Receivable Receivable Income Receivable $M $M $M $M $M $M Not later than one year1,008(94)914759(65)694One year to five years1,856(155)1,7011,948(182)1,766Over five years237(29)208395(72)3233,101(278)2,8233,102(319)2,783GroupMaturity Period at 30 June 2016Maturing 1MaturingMaturingYearBetween 1Afteror Lessand 5 Years5 YearsTotalIndustry (1)$M$M$M$MAustraliaSovereign4,8143402265,380Agriculture2,7453,8376097,191Bank and other financial8,3866,08532314,794Home loans14,80840,454354,190409,452Construction1,4781,0425943,114Other personal8,97513,74180823,524Asset financing3,1405,2381658,543Other commercial and industrial50,22971,88610,021132,136Total Australia94,575142,623366,936604,134OverseasSovereign1,1905,9462,0289,164Agriculture1,7413,4013,6028,744Bank and other financial2,2241,6181,5175,359Home loans6,6354,70135,28646,622Construction16089103352Other personal1,6764211,719Asset financing852160220Other commercial and industrial14,2448,4661,27523,985Total overseas27,87824,31543,97296,165Gross loans, bills discounted and other receivables122,453166,938410,908700,299Maturing 1MaturingMaturingYearBetween 1Afteror Lessand 5 Years5 Years TotalInterest rate$M$M$M$MAustralia72,158113,467313,702499,327Overseas17,83214,57620,00552,413Total variable interest rates89,990128,043333,707551,740Australia22,41729,15653,234104,807Overseas10,0469,73923,96743,752Total fixed interest rates32,46338,89577,201148,559Gross loans, bills discounted and other receivables122,453166,938410,908700,299 Notes to the Financial Statements Note 12 Loans, Bills Discounted and Other Receivables (continued) (1) The industry split has been prepared on an industry exposure basis. 110 Commonwealth Bank of Australia – Annual Report 2016 GroupMaturity Period at 30 June 2015Maturing 1MaturingMaturingYearBetween 1Afteror Lessand 5 Years5 YearsTotalIndustry (1)$M$M$M$MAustraliaSovereign4,8154382685,521Agriculture2,2123,2248226,258Bank and other financial8,4776,31236815,157Home loans18,07036,111328,993383,174Construction1,1861,1164202,722Other personal7,73913,5251,04922,313Asset financing2,7815,4261498,356Other commercial and industrial40,56566,28110,711117,557Total Australia85,845132,433342,780561,058OverseasSovereign5,4966,51292112,929Agriculture1,4112,5983,9817,990Bank and other financial2,7292,6902,1537,572Home loans6,3824,13429,16139,677Construction174113120407Other personal1,0943311,128Asset financing1179468558Other commercial and industrial5,4474,3963,06612,909Total overseas22,74420,55539,87183,170Gross loans, bills discounted and other receivables108,589152,988382,651644,228Maturing 1MaturingMaturingYearBetween 1Afteror Lessand 5 Years5 YearsTotalInterest rate $M$M$M$MAustralia76,053112,989293,596482,638Overseas15,08213,27717,64946,008Total variable interest rates91,135126,266311,245528,646Australia9,79219,44449,18478,420Overseas7,6627,27822,22237,162Total fixed interest rates17,45426,72271,406115,582Gross loans, bills discounted and other receivables108,589152,988382,651644,228Notes to the Financial Statements Note 13 Provisions for Impairment Commonwealth Bank of Australia – Annual Report 2016 111 GroupBank20162015201420162015Provisions for impairment losses$M$M$M$M$MCollective provisionOpening balance2,7622,7792,8582,5532,587Net collective provision funding664589497566528Impairment losses written off(846)(770)(753)(782)(718)Impairment losses recovered225176165207155Other13(12)1211Closing balance2,8182,7622,7792,5452,553Individually assessed provisionsOpening balance8871,1271,6288321,087Net new and increased individual provisioning788659726760550Write-back of provisions no longer required(196)(260)(305)(173)(241)Discount unwind to interest income(27)(38)(51)(27)(38)Impairment losses written off(571)(709)(1,060)(590)(639)Other6310818962113Closing balance9448871,127864832Total provisions for impairment losses3,7623,6493,9063,4093,385Less: Provision for Off Balance Sheet exposures(44)(31)(40)(44)(31)Total provisions for loan impairment3,7183,6183,8663,3653,354GroupBank20162015201420162015Provision ratios%%%%%Total provisions for impaired assets as a % of gross impaired assets36. 1735. 9437. 6039. 5938. 85Total provisions for impairment losses as a % of gross loans and acceptances0. 540. 560. 640. 550. 58GroupBank20162015201420162015Loan impairment expense$M$M$M$M$MNet collective provision funding664589497566528Net new and increased individual provisioning788659726760550Write-back of individually assessed provisions(196)(260)(305)(173)(241)Total loan impairment expense1,2569889181,153837Notes to the Financial Statements Note 13 Provisions for Impairment (continued) 112 Commonwealth Bank of Australia – Annual Report 2016 Group Individually assessed provisions by20162015201420132012industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture4213312316889Bank and other financial293668217235Home loans193148151182256Construction25202989152Other personal710141411Asset financing2828302314Other commercial and industrial4834006208711,163Total Australia8077751,0351,5641,920OverseasSovereign-----Agriculture23143167Bank and other financial4-1556Home loans610111728Construction811--Other personal1----Asset financing1010---Other commercial and industrial8577622647Total overseas137112926488Total individually assessed provisions9448871,1271,6282,008Group 20162015201420132012Loans written off by industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture84651383032Bank and other financial10361227951Home loans827211321788Construction11145213945Other personal747686677622657Asset financing5445372538Other commercial and industrial249404568686884Total Australia1,2371,3221,7071,7981,795OverseasSovereign-----Agriculture73345Bank and other financial-69-101Home loans78132124Construction-----Other personal5442302519Asset financing-----Other commercial and industrial11235603133Total overseas1801571069182Gross loans written off1,4171,4791,8131,8891,877Recovery of amounts previously written offAustralia211165148144216Overseas1411171012Total amounts recovered225176165154228Net loans written off1,1921,3031,6481,7351,649 Notes to the Financial Statements Note 13 Provisions for Impairment (continued) Note 14 Property, Plant and Equipment (1) Had land and buildings been measured using the cost model rather than fair value, the carrying value would have been $270 million (2015: $210 million) for Group and $249 million (2015: $190 million) for Bank. (2) Relates to property, plant and equipment held via a partly owned fund within the Group’s life insurance business. The investment in the fund is used to back life insurance policy liabilities. As a result the underlying property, plant and equipment is not considered to be held for the use of the Bank. The majority of the above amounts have expected useful lives longer than 12 months after the Balance Sheet date. There are no significant items of property, plant and equipment that are currently under construction. Commonwealth Bank of Australia – Annual Report 2016 113 Group20162015201420132012Loans recovered by industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture1----Bank and other financial2796817Home loans33445Construction1----Other personal154125106113147Asset financing445617Other commercial and industrial2124271330Total Australia211165148144216OverseasSovereign-----Agriculture--3--Bank and other financial1-31-Home loans1111-Construction-----Other personal1010888Asset financing-----Other commercial and industrial2-2-4Total overseas1411171012Total loans recovered225176165154228GroupBank2016201520162015$M$M$M$MLand and Buildings (1)At 30 June valuation496463446416Total land and buildings 496463446416Leasehold ImprovementsAt cost1,5571,5131,3071,282Accumulated depreciation(952)(904)(817)(786)Closing balance605609490496EquipmentAt cost1,8911,6911,5021,336Accumulated depreciation(1,406)(1,313)(1,106)(1,032)Closing balance485378396304Total property, plant and equipment held for own use1,5861,4501,3321,216Assets Held for LeaseAt cost1,5581,662247373Accumulated depreciation(271)(279)(76)(80)Closing balance1,2871,383171293Other Property, Plant and Equipment (2)At cost1,067---Accumulated depreciation----Closing balance1,067---Total property, plant and equipment3,9402,8331,5031,509 Notes to the Financial Statements Note 14 Property, Plant and Equipment (continued) Land and buildings are carried at fair value based on independent valuations performed during the year; refer to Note 1(w). These fair values fall under the Level 3 category of the fair value hierarchy as defined in Note 40. Reconciliation of the carrying amounts of Property, Plant and Equipment is set out below: 114 Commonwealth Bank of Australia – Annual Report 2016 GroupBank2016201520162015$M$M$M$MLand and BuildingsCarrying amount at the beginning of the year463499416448Additions73137013Disposals(14)(35)(11)(30)Net revaluations219116Depreciation(31)(32)(30)(31)Foreign currency translation adjustment3(1)--Carrying amount at the end of the year496463446416Leasehold ImprovementsCarrying amount at the beginning of the year609589496487Additions148168130139Disposals(18)(6)(16)(6)Depreciation(137)(142)(118)(124)Foreign currency translation adjustment3-(2)-Carrying amount at the end of the year605609490496EquipmentCarrying amount at the beginning of the year378355304273Additions260174218149Disposals(8)(11)(6)(9)Depreciation(149)(139)(120)(109)Foreign currency translation adjustment4(1)--Carrying amount at the end of the year485378396304Assets Held for LeaseCarrying amount at the beginning of the year1,3831,373293259Additions448223880Disposals(385)(179)(104)(28)Impairment losses(69)---Depreciation(107)(80)(26)(18)Foreign currency translation adjustment1746--Carrying amount at the end of the year1,2871,383171293Other Property, Plant and EquipmentCarrying amount at the beginning of the year----Acquisitions attributed to business combinations693---Additions330---Depreciation----Foreign currency translation adjustment44---Carrying amount at the end of the year1,067--- Notes to the Financial Statements Note 15 Intangible Assets (1) Core deposits represent the value of the Bankwest deposit base compared to the avoided cost of alternative funding sources such as securitisation and wholesale funding. This asset was acquired on 19 December 2008 with a useful life of seven years based on the weighted average attrition rates of the Bankwest deposit portfolio. It was fully amortised during the 2016 financial year. (2) Brand names predominantly represent the value of royalty costs foregone by the Group through acquiring the Bankwest brand name. The royalty costs that would have been incurred by an entity using the Bankwest brand name are based on an annual percentage of income generated by Bankwest. The Bankwest brand name has an indefinite useful life. It is not subject to amortisation, but is subject to annual impairment testing. No impairment was required as a result of this test. The balance also includes Count Financial Limited brand name ($4 million) that is amortised over the estimated useful life of 20 years. (3) Other intangibles include the value of credit card relationships acquired from Bankwest and Count franchise relationships. This value represents future net income generated from the relationships that existed at Balance Sheet date. The assets have a useful life of 10 years based on the attrition rates of customers. Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives To assess whether goodwill and other assets with indefinite useful lives are impaired, the carrying amount of a cash-generating unit or a group of cash-generating units are compared to the recoverable amount. The recoverable amount is determined based on fair value less cost to sell, using an earnings multiple applicable to that type of business. The category of this fair value is Level 3 as defined in Note 40. Earnings multiples relating to the Group‘s Banking and Wealth Management cash-generating units are sourced from publicly available data associated with Australian businesses displaying similar characteristics to those cash-generating units, and are applied to current earnings. The key assumption is the Price-Earnings (P/E) multiple observed for these businesses, which for the Banking businesses (excluding IFS) were in the range of 10.4 – 12.4 (2015: 12.1 – 13.0), for the IFS businesses 6.2 – 16.4 (2015: 7.4 – 17.2) and for Wealth Management businesses were in the range of 11.6 – 15.1 (2015: 12.7 – 17.1). Commonwealth Bank of Australia – Annual Report 2016 115 GroupBank2016201520162015$M$M$M$MGoodwill Purchased goodwill at cost7,9257,5992,5222,522Closing balance 7,9257,5992,5222,522Computer Software CostsCost3,8233,3593,3612,982Accumulated amortisation(1,595)(1,270)(1,300)(1,038)Closing balance 2,2282,0892,0611,944Core Deposits (1)Cost495495495495Accumulated amortisation (495)(461)(495)(461)Closing balance -34-34Brand Names (2)Cost190190186186Accumulated amortisation(1)(1)--Closing balance 189189186186Other Intangibles (3)Cost1561623838Accumulated amortisation(114)(103)(29)(24)Closing balance 4259914Total Intangible assets10,3849,9704,7784,700 Notes to the Financial Statements Note 15 Intangible Assets (continued) Goodwill Allocation to Cash-Generating Units Reconciliation of the carrying amounts of Intangible Assets is set out below: (1) Includes foreign currency revaluation. 116 Commonwealth Bank of Australia – Annual Report 2016 Group 20162015$M $M Retail Banking Services 4,1494,149Business and Private Banking297297Wealth Management2,7322,410New Zealand698679IFS and Other4964Total7,9257,599GroupBank2016201520162015$M$M$M$MGoodwill Opening balance7,5997,5662,5222,522Additions30443--Transfers/disposals/other adjustments (1)22(10)--Closing balance 7,9257,5992,5222,522Computer Software CostsOpening balance2,0891,8541,9441,724Additions:From purchases167--From internal development503547450494Amortisation and write-offs(380)(319)(333)(274)Closing balance 2,2282,0892,0611,944Core DepositsOpening balance3410534106Amortisation(34)(71)(34)(72)Closing balance -34-34Brand NamesOpening balance189189186186Amortisation----Closing balance 189189186186Other IntangiblesOpening balance59781417Additions22--Disposals-(1)--Amortisation(19)(20)(5)(3)Closing balance 4259914 Notes to the Financial Statements Note 16 Other Assets (1) Comparative information has been reclassified to conform to presentation in the current year. Except for the defined benefits superannuation plan surplus, the above amounts are expected to be recovered within 12 months of the Balance Sheet date. Note 17 Deposits and Other Public Borrowings (1) Comparative information has been restated to conform to presentation in the current year. (2) During the period, following a change in terms, Interest bearing transaction deposits of $18,314 million became Non-interest bearing and have been disclosed accordingly. The majority of the amounts are due to be settled within 12 months of the Balance Sheet date. The contractual maturity profile of Certificates of deposit and Term deposits are shown in the table below: (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. Commonwealth Bank of Australia – Annual Report 2016 117 Group Bank 2016201520162015$M $M $M $M Accrued interest receivable2,3122,1643,1182,988Accrued fees/reimbursements receivable1,1101,247157147Securities sold not delivered2,1772,4831,7261,874Intragroup current tax receivable--213200Current tax assets1715--Prepayments (1)381206200164Life insurance other assets5374973937Defined benefit superannuation plan surplus261276261276Other487650283235Total other assets7,2827,5385,9975,921Group Bank 2016201520162015$M $M $M $M AustraliaCertificates of deposit43,76246,08345,63947,802Term deposits138,443143,285138,664143,481On-demand and short-term deposits (1) (2)281,648265,620281,059265,798Deposits not bearing interest (1) (2)35,16412,56835,14512,550Securities sold under agreements to repurchase17,12412,96417,30513,036Total Australia516,141480,520517,812482,667OverseasCertificates of deposit9,0987,0606,2544,980Term deposits32,06930,8129,3598,508On-demand and short term deposits27,32722,1592,5971,382Deposits not bearing interest3,4102,6686476Securities sold under agreements to repurchase-12-12Total overseas71,90462,71118,27414,958Total external deposits and other public borrowings588,045543,231536,086497,625GroupAt 30 June 2016MaturingMaturingMaturingMaturingThreeBetweenBetween SixafterMonths orThree andand TwelveTwelveLessSix MonthsMonthsMonthsTotal$M$M$M$M$MAustraliaCertificates of deposit (1)21,57111,37065310,16843,762Term deposits84,84820,85226,0126,731138,443Total Australia106,41932,22226,66516,899182,205OverseasCertificates of deposit (1)6,9061,4525322089,098Term deposits16,5347,8154,8512,86932,069Total overseas23,4409,2675,3833,07741,167Total certificates of deposits and term deposits129,85941,48932,04819,976223,372 Notes to the Financial Statements Note 17 Deposits and Other Public Borrowings (continued) (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. Note 18 Liabilities at Fair Value through Income Statement (1) These liabilities have been initially designated at fair value through the Income Statement. Refer to Note 1(y). Of the above amounts, trading liabilities are expected to be settled within 12 months of the Balance Sheet date for the Group and the Bank. For the Group, the majority of the other amounts are expected to be settled within 12 months of the Balance Sheet date. For the Bank, the majority of debt instruments are expected to be settled more than 12 months after the Balance Sheet date. The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at fair value through Income Statement for the Group is $10,094 million (2015: $8,448 million) and for the Bank is $7,250 million (2015: $7,279 million). Note 19 Other Provisions Maturity Distribution of Other Provisions 118 Commonwealth Bank of Australia – Annual Report 2016 GroupAt 30 June 2015MaturingMaturingMaturingMaturingThreeBetweenBetween SixafterMonths orThree andand TwelveTwelveLessSix MonthsMonthsMonthsTotal$M$M$M$M$MAustraliaCertificates of deposit (1)22,79711,920-11,36646,083Term deposits64,92031,18338,9038,279143,285Total Australia87,71743,10338,90319,645189,368OverseasCertificates of deposit (1)4,4946881,6791997,060Term deposits16,8296,6504,4732,86030,812Total overseas21,3237,3386,1523,05937,872Total certificates of deposits and term deposits109,04050,44145,05522,704227,240Group Bank 2016201520162015$M$M$M$MDeposits and other borrowings (1)5,6952,7894,4162,639Debt instruments (1)1,8481,266276256Trading liabilities2,7494,4382,7494,428Total liabilities at fair value through Income Statement10,2928,4937,4417,323GroupBank2016201520162015Note$M $M $M $M Employee entitlements823750730660General insurance claims260314--Self insurance and non-lending losses196198162181Dividends590829082Compliance, programs and regulation7819378193Restructuring costs28432741Other18114616297Total other provisions1,6561,7261,2491,254GroupBank2016201520162015$M $M $M $M Less than twelve months 1,3201,159968711More than twelve months336567281543Total other provisions1,6561,7261,2491,254 Notes to the Financial Statements Note 19 Other Provisions (continued) Provision Commentary General Insurance Claims This provision is to cover future claims on general insurance contracts that have been incurred but not reported. The provision will be realised upon settlement of claims whose maturities were uncertain at the reporting date. Self Insurance and Non-Lending Losses Self insurance provision relates to non-transferred insurance risks on lending products the Group originates. The self insurance provision is reassessed annually in accordance with actuarial advice. This provision covers certain non-lending losses, including customer remediation, and represents losses that have not arisen as a consequence of an impaired credit decision. Compliance, Programs and Regulation This provision relates to project and other administrative costs associated with certain compliance and regulatory programs of the Group. Restructuring Provisions are recognised for restructuring activities when a detailed plan has been developed and a valid expectation that the plan will be carried out is held by those affected by it. The majority of the provision is expected to be used within 12 months of the Balance Sheet date. Advice Review Programs Certain remediation programs are being undertaken in the Group’s advice business as follows:   The Open Advice Review program for customers of Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom Limited (FWL), who received advice between 1 September 2003 and 1 July 2012. Registrations for the program are now closed, with customer file assessments and remediation ongoing. Variations to CFPL’s and FWL’s licences has led to a review of six customer files from each of the 17 advisers identified by ASIC’s compliance expert. The review will confirm if the advice provided before 2012 was appropriate and whether further reviews are required. Commonwealth Bank of Australia – Annual Report 2016 119 GroupBank2016201520162015Reconciliation$M$M$M$MGeneral insurance claims:Opening balance314161--Additional provisions502615--Amounts utilised during the year (556)(462)--Closing balance260314--Self insurance and non-lending losses: Opening balance198112181109Additional provisions15901576Amounts utilised during the year(17)(4)(17)(4)Release of provision--(17)-Closing balance196198162181Compliance, programs and regulation:Opening balance1934919349Additional provisions-218-218Amounts utilised during the year(115)(74)(115)(74)Closing balance7819378193Restructuring:Opening balance43604157Additional provisions-3-3Amounts utilised during the year(15)(20)(14)(19)Closing balance28432741Other:Opening balance14618397154Additional provisions6022852Amounts utilised during the year(11)(21)(6)(21)Release of provision(14)(38)(14)(38)Closing balance18114616297 Notes to the Financial Statements Note 19 Other Provisions (continued) Advice Review Programs (continued)  A review of service delivery against past adviser service package offerings has commenced. In instances where the Group does not have evidence of service delivery the affected customers will be refunded. The Group has provided for the cost of running these programs, together with anticipated remediation costs. Key assumptions in determining the remediation and program cost provisions include customer registrations and responses, remediation rates and amounts, case complexity and program design. These have been developed considering historical evidence, current information available and the exercise of judgement. As the nature of these estimates and assumptions are uncertain, the provisions may change. The Group considers that provisions held are adequate and represent our best estimate of the anticipated future costs. The Group will re-evaluate the assumptions underpinning the provisions at each reporting date as more information becomes available. Note 20 Debt Issues (1) Long-term debt disclosed relates to debt issues which have a maturity at inception of greater than 12 months. (2) Represents the remaining contractual maturity of the underlying instrument. The Bank’s long-term debt issues include notes issued under the: USD70 billion Euro Medium Term Note Program; the USD50 billion US Medium Term Note Program; the USD30 billion Covered Bond Program; the USD25 billion CBA New York Branch Medium Term Note Program; and other applicable debt documentation. Notes issued under debt programs are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. 120 Commonwealth Bank of Australia – Annual Report 2016 GroupBank2016201520162015Note$M$M$M$MMedium-term notes88,34376,03979,24668,329Commercial paper29,03337,03227,10536,025Securitisation notes 4112,10612,603--Covered bonds4131,80228,75527,86326,005Total debt issues161,284154,429134,214130,359Short Term Debt Issues by currencyUSD29,00836,54327,08035,536AUD214267214267GBP6,7411696,741169Other currencies3125331253Total short term debt issues 36,27537,03234,34736,025Long Term Debt Issues by currency (1)USD43,47943,04943,01342,897EUR28,32926,24724,21023,795AUD27,22321,16713,1646,827GBP5,6049,1954,2837,295NZD4,8393,6701,1191,008JPY6,5476,4486,4536,395Other currencies8,4647,1697,1015,665Offshore loans (all JPY)524452524452Total long term debt issues125,009117,39799,86794,334Maturity Distribution of Debt Issues (2)Less than twelve months64,45959,53257,90154,644Greater than twelve months96,82594,89776,31375,715Total debt issues161,284154,429134,214130,359 Notes to the Financial Statements Note 20 Debt Issues (continued) (1) Short term borrowings include callable medium term notes of $7,242 million which have been excluded from the table above. (2) The amount outstanding at year end is measured at amortised cost. (1) End of day, Sydney time. Guarantee Arrangement Guarantee under the Commonwealth Bank Sale Act Historically, 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. With the sale of the Commonwealth’s shareholding in the Bank this guarantee has been progressively phased out under transitional arrangements found in the Commonwealth Bank Sale Act 1995. Demand deposits are no longer guaranteed by the Commonwealth under this guarantee. However, debt issues payable by the Bank under a contract entered into prior to 19 July 1996 and outstanding at 19 July 1999 remain guaranteed until maturity. Note 21 Bills Payable and Other Liabilities Other than the defined benefit superannuation plan deficit, the majority of the amounts are expected to be settled within 12 months of the Balance Sheet date. Commonwealth Bank of Australia – Annual Report 2016 121 Group201620152014Short term borrowings by Commercial paper program (1)TotalOutstanding at year-end (2)29,03337,03232,905Maximum amount outstanding at any month end41,45339,77433,174Average amount outstanding37,36835,62131,096US Commercial Paper ProgramOutstanding at year-end (2)27,11735,75431,158Maximum amount outstanding at any month end38,52838,14732,405Average amount outstanding 35,20834,01829,667Weighted average interest rate on:Average amount outstanding0.5%0.3%0.2%Outstanding at year end0.8%0.3%0.2%Euro Commercial Paper ProgramOutstanding at year-end (2)1,9161,2781,747Maximum amount outstanding at any month end2,9252,3271,983Average amount outstanding2,1601,6031,429Weighted average interest rate on:Average amount outstanding0.7%0.7%0.4%Outstanding at year end0.9%0.9%0.4% $M (except where indicated)As AtAs At30 June30 JuneCurrency20162015AUD 1.00 =USD0.74310.7681EUR0.66890.6880GBP0.55340.4893NZD1.04701.1283JPY76.244194.0578Exchange rates utilised (1)Group Bank 2016201520162015Note$M $M $M $M Bills payable948917891870Accrued interest payable2,6592,9711,9252,220Accrued fees and other items payable2,4532,7181,7551,822Defined benefit superannuation plan deficit3551575157Securities purchased not delivered1,4382,3579641,707Unearned income1,018913599531Life insurance other liabilities and claims payable2142368124Other9939365,3767,130Total bills payable and other liabilities9,77411,10511,64214,361 Notes to the Financial Statements Note 22 Loan Capital As at the reporting date, there are no securities of the Group or the Bank that are contractually due for redemption in the next 12 months (note the Group has the right to call some securities earlier than the contractual maturity date). (1) USD100 million Floating Rate Notes On 15 October 1986, the State Bank of Victoria issued USD125 million of floating rate notes current outstanding balance of USD100 million. The floating rate notes are perpetual but were able to be redeemed from October 1991. They were assigned to the Bank on 1 January 1991. The Bank entered into an agreement with the Commonwealth of Australia on 31 December 1991 which provides that, if certain events occur, the Bank may either issue CBA ordinary shares to the Commonwealth of Australia, or (with the consent of the Commonwealth of Australia) conduct a renounceable rights issue for CBA ordinary shares to all shareholders. The capital raised must be used to pay any amounts due and payable on the floating rate notes. The floating rate notes were issued into the international markets and are subject to English law. They qualify as Additional Tier 1 Capital of the Bank under the Basel III transitional arrangements instruments as implemented by APRA. for capital (2) PERLS III On 6 April 2006, a wholly owned entity of the Bank (Preferred Capital Limited or “PCL”) issued $1,166 million of Perpetual Exchangeable Repurchaseable Listed Shares (PERLS III). PERLS III are preference shares which were able to be exchanged for CBA ordinary shares or $200 cash each (or a combination of both) on 6 April 2016. All PERLS III were exchanged for cash on 6 April 2016 and subsequently cancelled. (3) PERLS VI, PERLS VII and PERLS VIII On 17 October 2012, the Bank issued $2,000 million of Perpetual Exchangeable Resaleable Listed Securities (PERLS VI). On 1 October 2014, issued $3,000 million of CommBank PERLS VII Capital Notes the Bank 122 Commonwealth Bank of Australia – Annual Report 2016 (PERLS VII). On 30 March 2016, issued $1,450 million of CommBank PERLS VIII Capital Notes (PERLS VIII). PERLS VI, PERLS VII and PERLS VIII are subordinated, unsecured notes. the Bank PERLS VI, PERLS VII and PERLS VIII are listed on the ASX and are subject to New South Wales law. They qualify as Additional Tier 1 Capital of the Bank under Basel III as implemented by APRA. (4) TPS 2006 On 15 March 2006, a wholly owned entity of the Bank (CBA Capital Trust II) issued USD700 million of Trust Preferred Securities (TPS 2006) which were able to be redeemed for cash, CBA Tier 1 Capital securities or CBA preference shares on 15 March 2016. All TPS 2006 were redeemed for cash on 15 March 2016. (5) AUD denominated Tier 2 Loan Capital issuances  $25 million subordinated floating rate notes, issued April 1999, due April 2029;   $1,000 million November 2014, due November 2024; and subordinated notes issued $750 million subordinated notes issued June 2016, due June 2026. (6) USD denominated Tier 2 Loan Capital issuances  USD350 million subordinated fixed rate notes, issued June 2003, due June 2018; and  USD1,250 million subordinated notes issued December 2015, due December 2025. (7) JPY denominated Tier 2 Loan Capital issuances  JPY20 billion perpetual subordinated EMTN Medium Term Notes), issued February 1999; JPY30 billion subordinated EMTN, issued October 1995, and redeemed in October 2015; and (Euro   JPY9 billion perpetual subordinated notes, May 1996, and redeemed in May 2016. issued Group BankCurrency 2016201520162015Amount (M)Footnotes$M $M $M $M Tier 1 Loan CapitalUndatedFRN USD 100 (1)135130135130UndatedPERLS III AUD 1,166 (2)-1,164-1,163UndatedPERLS VI AUD 2,000 (3)1,9901,9861,9901,986UndatedPERLS VII AUD 3,000 (3)2,9782,9612,9782,961UndatedPERLS VIII AUD 1,450 (3)1,437-1,437-UndatedTPS USD 700 (4)---908Total Tier 1 Loan Capital6,5406,2416,5407,148Tier 2 Loan CapitalAUD denominated(5)1,7721,0241,7721,024USD denominated(6)2,1454552,145455JPY denominated(7)262627262627GBP denominated(8)270306270306NZD denominated(9)378349--EUR denominated(10)3,3513,2563,3513,256Other currencies denominated(11)202209202209Total Tier 2 Loan Capital8,3806,2268,0025,877Fair value hedge adjustments624357596339Total Loan Capital15,54412,82415,13813,364 Notes to the Financial Statements Note 22 Loan Capital (continued) (8) GBP denominated Tier 2 Loan Capital issuances  GBP150 million subordinated EMTN, issued June 2003, due December 2023. (9) NZD denominated Tier 2 Loan Capital issuances  NZD400 million subordinated, unsecured notes, issued April 2014, due June 2024. Limited) On 17 April 2014, a wholly owned entity of the Bank (ASB subordinated, Bank unsecured notes (ASB Notes) with a face value of NZD1 each. issued NZD400 million ASB Notes are listed on the New Zealand Stock Exchange (NZX) debt market and are subject to New South Wales and New Zealand law. They qualify as Tier 2 Capital of the Bank and ASB under Basel III as implemented by APRA and the RBNZ. Note 23 Shareholders’ Equity Ordinary Share Capital (10) EUR denominated Tier 2 Loan Capital Issuances   EUR1,000 million subordinated August 2009, due August 2019; and notes, issued EUR1,250 million subordinated notes issued April 2015, due April 2027. (11) Other foreign currency denominated Tier 2 Loan Capital Issuances  CNY1,000 million March 2015, due March 2025. subordinated notes issued All Tier 2 Capital securities issued prior to 1 January 2013 qualify as Tier 2 Capital of the Bank under the Basel III transitional arrangements instruments as implemented by APRA. All Tier 2 Capital securities issued after 1 January 2013 qualify as Tier 2 Capital of the Bank under Basel III as implemented by APRA. for capital (1) During the year the Group undertook a capital raising through a rights issue to all shareholders. An accelerated institutional offer closed on 13 August 2015, while the retail entitlement offer closed on 8 September 2015, jointly raised $5,022 million net of issue costs. (2) The determined dividend includes an amount attributable to Dividend Reinvestment Plan (DRP) of $552 million (interim 2015/2016), $655 million (final 2014/2015) and $574 million (interim 2014/2015) with $552 million, $657 million and $571 million ordinary shares being issued under plan rules respectively which include the carry forward of DRP balance from previous dividends. (3) The DRP in respect of 2013/2014 final dividend was satisfied in full through the on-market purchase and transfer of 8,749,607 shares to participating shareholders. (4) The movement in treasury shares held within Life Insurance Statutory Funds, and 1,234,998 shares acquired at an average price of $74.76 for the purpose of satisfying the Company’s obligations under various equity settled share plans. Other than shares purchased as part of the Non-Executive Director fee sacrifice arrangements disclosed in Note 24, shares purchased were not on behalf of or initially allocated to a director. Ordinary Share Capital (continued) (1) During the period the Group undertook a capital raising through a rights issue to all shareholders. An accelerated institutional offer closed on 13 August 2015 resulting in the issue of 28,897,186 shares on 26 August 2015. The retail entitlement offer closed on 8 September 2015 resulting in the issue of 42,264,021 shares on 18 September 2015. (2) The DRP in respect of 2013/2014 final dividend was satisfied in full through the on market purchase and transfer of 8,749,607 shares to participating shareholders. (3) Relates to Treasury shares held within the Life Insurance statutory funds and the employees share scheme trust. Commonwealth Bank of Australia – Annual Report 2016 123 Group Bank 2016201520162015$M $M $M $M Ordinary Share CapitalShares on issue:Opening balance27,89827,32727,89427,323Issue of shares (net of issue costs) (1)5,022-5,022-Dividend reinvestment plan (net of issue costs)(2) (3)1,2095711,20957134,12927,89834,12527,894Less treasury shares: Opening balance(279)(291)--Purchase of treasury shares (4)(108)(790)--Sale and vesting of treasury shares (4)103802--(284)(279)--Closing balance33,84527,61934,12527,894Group Bank 2016201520162015Number of shares on issueShares Shares Shares Shares Opening balance (excluding treasury shares deduction)1,627,592,7131,621,319,1941,627,592,7131,621,319,194Issue of shares (1)71,161,207-71,161,207-Dividend reinvestment plan issues:2013/2014 Final dividend fully paid ordinary shares $80.39 (2)----2014/2015 Interim dividend fully paid ordinary shares $91.26-6,273,519-6,273,5192014/2015 Final dividend fully paid ordinary shares $74.758,790,794-8,790,794-2015/2016 Interim dividend fully paid ordinary shares $72.687,597,463-7,597,463-Closing balance (excluding treasury shares deduction)1,715,142,1771,627,592,7131,715,142,1771,627,592,713Less: treasury shares (3)(4,080,435)(4,654,277)--Closing balance1,711,061,7421,622,938,4361,715,142,1771,627,592,713 Notes to the Financial Statements Note 23 Shareholders’ Equity (continued) Ordinary shares have no par value and the Company does not have a limited amount of share capital. Ordinary shares entitle holders to receive dividends payable to ordinary shareholders and to participate in the proceeds available to ordinary shareholders on winding up of the Company in proportion to the number of fully paid ordinary shares held. On a show of hands every holder of fully paid ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll one vote for each share held. Other Equity Instruments On 15 March 2006, a wholly owned entity of the Bank (CBA Capital Trust II) issued USD700 million of Trust Preferred Securities (TPS 2006) into the US capital markets. All TPS 2006 were redeemed for cash on 15 March 2016. Shares issued by the Bank were partially redeemed on 15 March 2016. Retained Profits and Reserves Includes other equity instruments and non-controlling interests. (1) (2) Dividends relating to equity instruments on issue other than ordinary shares. 124 Commonwealth Bank of Australia – Annual Report 2016 Group Bank 2016201520162015Other equity instruments$M $M $M $M Issued and paid up-9394061,895Shares Shares Shares Shares Number of shares-700,000300,0001,400,000GroupBank2016201520162015Retained ProfitsNote$M$M$M$MOpening balance21,52818,82718,76316,206Actuarial gains and (losses) from defined benefit superannuation plans1031110311Gains and (losses) on liabilities at fair value due to changes in own credit risk(1)(3)(1)(3)Realised gains and dividend income on treasury shares2042--Operating profit attributable to Equity holders of the Bank9,2279,0638,6398,976Total available for appropriation30,78428,24027,41125,490Transfer on sale/redemption of other equity (1)(10)---Transfers (to)/from general reserve(120)47(4)(1)Transfers from asset revaluation reserve19211918Transfers from employee compensation reserve(2)-(2)-Interim dividend - cash component(2,829)(2,636)(2,829)(2,636)Interim dividend - Dividend Reinvestment Plan(552)(574)(552)(574)Final dividend - cash component(2,958)(3,534)(2,958)(3,534)Final dividend - Dividend Reinvestment Plan(655)-(655)-Other dividends (2)(50)(36)--Closing balance23,62721,52820,43018,763 Notes to the Financial Statements Note 23 Shareholders’ Equity (continued) Retained Profits and Reserves (continued) Commonwealth Bank of Australia – Annual Report 2016 125 Group Bank 2016201520162015Reserves$M$M$M$MGeneral ReserveOpening balance819866574573Appropriation from/(to) retained profits120(47)41Closing balance939819578574Capital ReserveOpening balance--1,2541,254Closing balance--1,2541,254Asset Revaluation ReserveOpening balance191197165172Revaluation of properties219116Transfer to retained profits(19)(21)(19)(18)Tax on revaluation of properties(1)(4)-(5)Closing balance173191147165Foreign Currency Translation ReserveOpening balance356(42)(7)(178)Currency translation adjustments of foreign operations38943962176Currency translation on net investment hedge(12)(3)(9)(5)Tax on translation adjustments6(38)--Closing balance73935646(7)Cash Flow Hedge ReserveOpening balance263224530424Gains and losses on cash flow hedging instruments:Recognised in other comprehensive income250706479802Transferred to Income Statement:Interest income(968)(1,135)(916)(1,125)Interest expense1,018488725475Tax on cash flow hedging instruments(90)(20)(86)(46)Closing balance473263732530Employee Compensation ReserveOpening balance122125122125Current period movement10(3)10(3)Closing balance132122132122Available-for-Sale Investments ReserveOpening balance594639557641Net gains and losses on revaluation of available-for-sale investments(236)140(248)82Net gains and losses on available-for-sale investments transferred toIncome Statement on disposal(222)(223)(222)(218)Tax on available-for-sale investments1423813952Closing balance278594226557Total Reserves2,7342,3453,1153,195 Notes to the Financial Statements Note 24 Share-Based Payments The Group operates a number of cash and equity settled share plans as detailed below. Group Leadership Reward Plan (GLRP) The GLRP is the Group’s long-term incentive plan for the CEO and Group Executives. The GLRP focuses on driving performance and shareholder alignment in the longer term. Participants are awarded a maximum number of Reward Rights, which may convert into CBA shares on a 1-for-1 basis. The Board has discretion to apply a cash equivalent. The Reward Rights may vest at the end of a performance period of up to four years subject to the satisfaction of performance hurdles as follows:   25% of the award is assessed against Customer Satisfaction compared to ANZ, NAB, Westpac and other key competitors for the Group’s wealth management business by reference to independent external surveys; and 75% of the award is assessed against TSR compared to the 20 largest companies listed on the ASX (by market capitalisation) at the beginning of each respective performance period, excluding resource companies and CBA. Each performance hurdle is independent, such that the total number of Reward Rights that vest will be the aggregate of rights that vest against the Customer Satisfaction and the TSR hurdles at the end of the performance period. A scale is applied to each performance hurdle, to determine the portion of each award that vests as follows: Hurdle Scale Customer satisfaction TSR   100% vests where the weighted average ranking for CBA over the performance period is 1st (i.e. 1.00), 50% where CBA’s weighted average ranking is 2nd (i.e. 2.00). If CBA’s weighted average ranking is between 1st and 2nd (i.e. between 1.00 and 2.00), vesting occurs on a sliding scale between 100% and 50% on a pro-rata straight line basis. If CBA’s weighted average ranking is lower than 2nd (i.e. greater than 2.00), none of this portion will vest. Full vesting applies where CBA is ranked in the top quartile of the peer group at the end of the performance period, 50% will vest if CBA is ranked at the median, with vesting on a sliding scale between the median and 75th percentile. If the Group’s TSR is ranked below the median of the peer group, none of this portion will vest. The 2012 financial year award reached the end of its performance period on 30 June 2015 and in line with the plan rules 86.25% of the awarded rights vested. The following table provides details of outstanding awards of performance rights granted under the GLRP. The average fair value at the grant date for TSR and Customer satisfaction Reward Rights issued during the year was $75.21 and $32.96 respectively per right (2015: $78.97 and $37.90 respectively). The fair value of TSR hurdled Reward Rights granted during the period has been independently calculated at grant date using a Monte-Carlo pricing model. The assumptions included in the valuation of the 2016 financial year award include a risk-free interest rate ranging from 2.14% to 2.35%, a nil dividend yield on the Bank’s ordinary shares and a volatility in the Bank share price of 20%. The fair value for customer satisfaction hurdled Reward Rights granted during the period is the closing price of CBA shares on the grant date. Group Rights Plan (GRP) The GRP facilitates mandatory short-term incentive deferral, sign-on incentives and retention awards. Participants are awarded rights to shares, that vest on a 1-for-1 basis, provided the participant remains in employment of the Group until vesting date. The Board has discretion to apply a cash equivalent. The following table provides details of outstanding awards of shares granted under the GRP. The weighted average fair value at grant date of the awards issued during the year was $74.11 (2015: $81.44). Employee Share Acquisition Plan (ESAP) Under the ESAP eligible employees have the opportunity to receive up to $1,000 worth of shares each year if the Group meets the required performance hurdle of growth in the Group’s net profit after tax (“cash basis”). If the hurdle is not met, the Board has discretion to determine whether a full award, a partial award or no award is made. 126 Commonwealth Bank of Australia – Annual Report 2016 OutstandingOutstandingExpensePeriod1 JulyGrantedVestedForfeited30 June($M)20161,265,446291,188(263,969)(42,076)1,250,5891320151,423,773283,410(338,512)(103,225)1,265,44610OutstandingOutstandingExpensePeriod1 JulyGrantedVestedForfeited30 June($M)20161,238,974825,705(181,138)(87,813)1,795,728532015654,116708,577(80,271)(43,448)1,238,97440 Notes to the Financial Statements Note 24 Share-Based Payments (continued) The number of shares a participant receives is calculated by dividing the award amount by the average price paid for CBA shares purchased during the purchase period preceding the grant date. Shares granted are restricted from sale until the earlier of three years or until such time as the participant ceases employment with the Group. Participants receive full dividend entitlements and voting rights attached to those shares. The Group achieved the performance target for 2015 resulting in shares being awarded to each eligible employee during the financial year ended 30 June 2016. The following table provides details of shares granted under the ESAP. It is estimated that approximately $34 million of CBA shares will be purchased on market at the prevailing market price for the 2016 grant. Other Employee Awards A number of other plans are operated by the Group, including:    The Employee Share (Performance Unit) Plan, which is the cash-based version of the GRP; The International Employee Share Acquisition Plan, which is the cash-based version of the ESAP; and The Employee Share Plan and Group Employee Rights Plan, which are predecessors to the GRP, and closed to new awards. The following table provides a summary of the movement in awards during the year. The average fair value at grant date of the awards issued during the year was $74.86 (2015: $81.46). Salary Sacrifice Arrangements The Group facilitates the purchase of CBA shares via salary sacrifice as follows: Type Arrangements Australian-based employees (ESSSP) Non-executive directors     Can elect to sacrifice between $2,000 and $5,000 p.a. of their fixed remuneration and/or annual STI Restricted from sale for a minimum of two years and a maximum of seven years or earlier, if the employee ceases employment with the Group. Required to defer 20% of post-tax fees until a minimum shareholding requirement of 5,000 shares is reached. Restricted from sale for ten years or when the Non-Executive Director retires from the Board earlier. Shares are purchased on market at the prevailing market price at that time and receive full dividend entitlements and voting rights. The following table provides details of shares granted under the ESSSP. During the year, one (2015: one) Non-Executive Director applied $28,994 in fees (2015: $28,502) to purchase 382 shares (2015: 341 shares). Commonwealth Bank of Australia – Annual Report 2016 127 Number of SharesTotal NumberTotalPeriodAllocation dateParticipants Allocated by Participant of Shares AllocatedIssue Price $Fair Value $201617 Sep 201532,33613420,36874.8831,477,156201519 Sep 201432,09212385,10480.3930,958,511OutstandingOutstandingExpensePeriod1 JulyGrantedVestedForfeited30 June($M)2016677,708209,170(573,959)(14,226)298,6931020151,423,891105,323(811,721)(39,785)677,70818Number ofAverage purchaseTotal purchasePeriodParticipantsshares purchasedprice $consideration $201677536,26475.662,743,646201555722,05984.531,864,604 Notes to the Financial Statements Capital adequacy is measured by means of a risk based capital ratio. The capital ratios reflect capital (CET1, Tier 1, Tier 2 or Total Capital) as a percentage of total Risk Weighted Assets (RWA). RWA represents an allocation of risks associated with the Group’s assets and other related exposures. The Group has a range of instruments and methodologies available to effectively manage capital including share issues and buybacks, dividend and Dividend Reinvestment Plan policies, hybrid capital raising and dated and undated subordinated loan capital issues. All major capital related initiatives require approval of the Board. reported monthly The Group’s capital position is monitored on a continuous basis and the Executive Committee and the Asset and Liability Committee (ALCO). Three-year capital forecasts are conducted on a quarterly basis with a detailed capital and strategic plan presented to the Board annually. to both The Group’s capital ratios throughout the 2015 and 2016 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved minimums. The Bank is required to inform APRA immediately of any breach or potential breach of its minimum prudential capital adequacy requirements, including details of remedial action taken or planned to be taken. Note 25 Capital Adequacy Capital Management The Bank is an Authorised Deposit-taking Institution (ADI) and is subject to regulation by APRA under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements the Basel Committee on Banking Supervision (BCBS) guidelines. for banks based on The Basel III measurement and monitoring of capital has been effective from 1 January 2013. APRA has adopted a more conservative approach than the minimum standards published by the BCBS and a more accelerated timetable. The requirements define what is acceptable as capital and provide methods of measuring the risks incurred by the Bank. The regulatory capital requirements are measured for the Extended Licence Entity Group (known as “Level One”, comprising the Bank and APRA approved subsidiaries) and for the Bank and all of its banking subsidiaries, which includes ASB Bank (known as “Level Two” or the “Group”). All entities which are consolidated for accounting purposes are included within the Group capital adequacy calculations except for:   insurance The operations; and and funds management The entities through which securitisation of Group assets are conducted. Regulatory capital is divided into Common Equity Tier 1 (CET1), Tier 1 and Tier 2 Capital. CET1 primarily consists of Shareholders’ Equity, less goodwill and other prescribed adjustments. Tier 1 Capital is comprised of CET1 plus other capital instruments acceptable to APRA. Tier 2 Capital is comprised primarily of hybrid and debt instruments acceptable to APRA. Total Capital is the aggregate of Tier 1 and Tier 2 Capital. The tangible component of the investment in the insurance and funds management operations are deducted 100% from CET1. 128 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 26 Financial Reporting by Segments The principal activities of the Group are carried out in the business segments below. These segments are based on the distribution channels through which the customer relationship is being managed. During the year, refinements have been made to the allocation of customer balances and associated revenue and expenses between business segments, including updated realignment between transfer pricing allocations and Institutional Banking and Markets and Group Treasury. Finally, ASB’s interest expense disclosure was changed to include the impact of hedging offshore debt. These changes have not impacted the Group’s net profit, but have resulted in changes to the presentation of the Income Statement and Balance Sheet of the Group and the affected segments. Comparative information has been restated to reflect these changes. The primary sources of revenue are interest and fee income (Retail Banking Services, Institutional Banking and Markets, Business and Private Banking, Bankwest, New Zealand, IFS and Other Divisions) and insurance premium and funds management income (Wealth Management, New Zealand, IFS and Other Divisions). Revenues and expenses occurring between segments are subject to transfer pricing arrangements. All intra-group profits are eliminated on consolidation. Business segments are managed on the basis of net profit after income tax (“cash basis”). Management uses “cash basis” to assess performance and it provides the basis for the determination of the Bank’s dividends. The “cash basis” presents a clear view of the Group’s underlying operating results, excluding a number of items that introduce volatility and/or one-off distortions of the Group’s current period performance. These items, such as hedging and IFRS volatility, are calculated consistently year on year and do not discriminate between positive and negative adjustments. (i) Retail Banking Services Retail Banking Services provides home loan, consumer finance and retail deposit products and servicing to all Retail bank customers and non-relationship managed small business customers. In addition, commission is received for the distribution of Wealth Management products through the retail distribution network. (ii) Business and Private Banking Business and Private Banking provides specialised banking services to relationship managed business and Agribusiness customers, private banking to high net worth individuals and margin lending and trading through CommSec. (iii) Institutional Banking and Markets insights. The client offering Institutional Banking and Markets services the Group’s major corporate, institutional and government clients using a relationship management model based on industry expertise and includes debt raising, financial and commodities price risk management and transactional banking capabilities. The institutional equities business ceased operations during the year. Institutional Banking and Markets has international operations in London, New York, Houston, Japan, Singapore, Malta, Hong Kong, New Zealand, Beijing and Shanghai. (iv) Wealth Management Wealth Management includes Global Asset Management (including operations in Asia and Europe), Platform Administration and Financial Advice and Life and General Insurance businesses of the Australian operations. (v) New Zealand New Zealand includes the Banking, Funds Management and Insurance businesses operating in New Zealand (excluding Institutional Banking and Markets). (vi) Bankwest Bankwest is active in all domestic market segments, with lending diversified between the business, rural, housing and personal markets, including a full range of deposit products. (vii) IFS and Other Divisions The following parts of the business are included in IFS and Other Divisions:   the joint venture Chinese International Financial Services incorporates the Asian retail and business banking operations (Indonesia, China, India and Vietnam), investments in Chinese and life Vietnamese banks, insurance business, the life insurance operations in Indonesia and a financial services technology business in South Africa. It does not include the Business and Private Banking, Institutional Banking and Markets and Colonial First State Global Asset Management businesses in Asia; Corporate Centre includes the results of unallocated Group support functions such as Investor Relations, Group Strategy, Marketing, Secretariat and Treasury; and  Group wide Eliminations/Unallocated intra- group elimination entries arising on consolidation, raised provisions and other unallocated centrally revenue and expenses. includes Commonwealth Bank of Australia – Annual Report 2016 129 Note 26 Financial Reporting by Segments (continued) Notes to the Financial Statements Investment experience is presented on a pre-tax basis. (1) (2) This balance excludes non-cash items, including unrealised gains and losses relating to hedging and IFRS volatility ($200 million expense), Bankwest non-cash items ($27 million expense) and treasury shares valuation adjustment ($4 million gain). 130 Commonwealth Bank of Australia – Annual Report 2016 2016RetailBusiness andInstitutionalBankingPrivateBanking andWealthNewIFS andServicesBankingMarketsManagementZealandBankwestOtherTotal$M$M$M$M$M$M$M$MNet interest income8,5993,0491,565-1,5751,63850916,935Other banking income1,7628591,288-2882174464,860Total banking income10,3613,9082,853-1,8631,85595521,795Funds management income---1,89180-452,016Insurance income---502242-51795Total operating income10,3613,9082,8532,3932,1851,8551,05124,606Investment experience (1)---12216-3141Total net operating income before impairment and operating expenses10,3613,9082,8532,5152,2011,8551,05424,747Operating expenses(3,373)(1,489)(1,081)(1,676)(889)(773)(1,148)(10,429)Loan impairment expense(660)(179)(252)-(120)10(55)(1,256)Net profit before income tax6,3282,2401,5208391,1921,092(149)13,062Corporate tax expense(1,892)(673)(356)(222)(315)(329)195(3,592)Non-controlling interests------(20)(20)Net profit after tax - "cash basis" (2)4,4361,5671,164617877763269,450Hedging and IFRS volatility----(139)-(61)(200)Other non-cash items---4-(27)-(23)Net profit after tax - "statutory basis"4,4361,5671,164621738736(35)9,227Additional informationAmortisation and depreciation(206)(86)(124)(39)(77)(60)(157)(749)Balance SheetTotal assets331,818104,211182,19921,08080,38682,880130,504933,078Total liabilities237,76576,690154,76926,11973,83151,100252,048872,322 Notes to the Financial Statements Note 26 Financial Reporting by Segments (continued) (1) Comparative information has been restated to conform to presentation in the current year. (2) (3) This balance excludes non-cash items, including unrealised gains and losses relating to hedging and IFRS volatility ($6 million gain), Bankwest non-cash items ($52 million expense) and treasury shares valuation adjustment ($28 million expense). Investment experience is presented on a pre-tax basis. Commonwealth Bank of Australia – Annual Report 2016 131 2015 (1)RetailBusiness andInstitutionalBankingPrivateBanking andWealthNewIFS andServicesBankingMarketsManagementZealandBankwestOtherTotal$M$M$M$M$M$M$M$MNet interest income7,8482,9251,442-1,5331,65842115,827Other banking income1,7547931,360-2802164084,811Total banking income9,6023,7182,802-1,8131,87482920,638Funds management income---1,84671-211,938Insurance income---503232-57792Total operating income9,6023,7182,8022,3492,1161,87490723,368Investment experience (2)---23112-(33)210Total net operating income before impairment and operating expenses9,6023,7182,8022,5802,1281,87487423,578Operating expenses(3,276)(1,428)(970)(1,726)(861)(787)(945)(9,993)Loan impairment expense(626)(152)(167)-(83)50(10)(988)Net profit before income tax5,7002,1381,6658541,1841,137(81)12,597Corporate tax expense(1,706)(643)(380)(201)(302)(342)135(3,439)Non-controlling interests------(21)(21)Net profit after tax - "cash basis" (3)3,9941,4951,285653882795339,137Hedging and IFRS volatility----43-(37)6Other non-cash items---(28)-(52)-(80)Net profit after tax - "statutory basis"3,9941,4951,285625925743(4)9,063Additional informationAmortisation and depreciation(185)(84)(65)(33)(78)(112)(155)(712)Balance SheetTotal assets309,54398,990164,96320,79269,60879,489130,061873,446Total liabilities221,95071,106143,16124,65562,48849,499247,594820,453 Notes to the Financial Statements Note 26 Financial Reporting by Segments (continued) Products and Services Information Revenue from external customers by product or service is disclosed in Note 2. No single customer amounted to greater than 10% of the Group’s revenue. Geographical Information (1) Comparative information has been restated to conform to presentation in the current year. (2) Other locations include: United Kingdom, United States, Japan, Singapore, Malta, Hong Kong, Indonesia, China, India, Vietnam and South Africa. (3) Non-current assets include Property, plant and equipment, Investments in associates and joint ventures and Intangibles. The geographical segment represents the location in which the transaction was recognised. Note 27 Life Insurance Life Insurance 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 support either life insurance or life investment contracts. Refer to Note 1(dd) – (gg). The insurance segment result is prepared on a business segment basis. 132 Commonwealth Bank of Australia – Annual Report 2016 Group (1)Year Ended 30 June201620152014Financial performance and position$M%$M%$M%Income Australia 36,72182. 737,65683. 137,58584. 8New Zealand 5,01511. 35,21511. 54,65710. 5Other locations (2)2,6436. 02,4565. 42,0764. 7Total Income44,379100. 045,327100. 044,318100. 0Non-Current AssetsAustralia15,68791. 714,14991. 713,19991. 3New Zealand1,0876. 49946. 41,0577. 3Other locations (2)3261. 92971. 91961. 4Total non-current assets (3)17,100100. 015,440100. 014,452100. 0Life InsuranceLife InvestmentContractsContractsGroup201620152016201520162015Summarised Income Statement$M$M$M$M$M$MNet premium income and related revenue2,0771,9672352432,3122,210Outward reinsurance premiums expense(291)(296)--(291)(296)Claims expense(1,437)(1,421)(82)(73)(1,519)(1,494)Reinsurance recoveries244256--244256Investment revenue (excluding investments in subsidiaries)4944883387778321,265Increase in contract liabilities(316)(151)(297)(718)(613)(869)Operating income7718431942299651,072Acquisition expenses(95)(95)(3)(1)(98)(96)Maintenance expenses(239)(204)(54)(57)(293)(261)Management expenses(11)(10)(13)(11)(24)(21)Net profit before income tax426534124160550694Corporate tax expense(72)(103)(32)(36)(104)(139)Policy holder tax expense(99)(83)(2)(16)(101)(99)Net profit after income tax25534890108345456 Notes to the Financial Statements Note 27 Life Insurance (continued) The disclosure of the components of net profit after income tax is 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. Capital Adequacy of The Group’s Life Insurance Company Under the Life Insurance Act 1995, life insurers are required to hold reserves in excess of the amount of policy liabilities. These additional reserves are necessary to support the life insurer's capital requirements under its business plan and to provide a cushion against adverse experience in managing long-term risks. APRA has issued Life Prudential Standard (LPS) 110 'Capital Adequacy' for determining the level of capital reserves. LPS110 prescribes the minimum capital requirement for each statutory fund and the minimum level of assets required to be held in each statutory fund. The table below shows the Capital Adequacy Multiple representing the ratio or assets available for capital over the capital reserve. Commonwealth Bank of Australia – Annual Report 2016 133 Life Insurance Life Investment Contracts Contracts Group 201620152016201520162015Sources of life insurance net profit$M $M $M $M $M $M The net profit after income tax is represented by:Emergence of planned profit margins26925794108363365Difference between actual and planned experience(43)(20)(3)-(46)(20)Effects of changes to underlying assumptions(2)1--(2)1Reversal of previously recognised losses or loss recognition on groups of related products(60)1(2)(1)(62)-Investment earnings on assets in excess of policyholder liabilities701071171108Other movements212--212Net profit after income tax25534890108345456Life insurance premiums received and receivable2,4602,3775014332,9612,810Life insurance claims paid and payable1,4801,4781,2431,2962,7232,774Life InsuranceLife InvestmentContractsContractsGroupReconciliation of movements in201620152016201520162015policy liabilities$M$M$M$M$M$MContract policy liabilitiesGross policy liabilities opening balance3,7523,6319,1599,53512,91113,166Movement in policy liabilities reflected in the Income Statement344183297718641901Contract contributions recognised in policy liabilities77216140223147Contract withdrawals recognised in policy liabilities(50)(55)(1,163)(1,224)(1,213)(1,279)Non-cash movements(17)(19)--(17)(19)FX translation adjustment18573(10)91(5)Gross policy liabilities closing balance4,0543,7528,5829,15912,63612,911Liabilities ceded under reinsuranceOpening balance(357)(325)--(357)(325)Increase in reinsurance assets(28)(32)--(28)(32)Closing balance(385)(357)--(385)(357)Net policy liabilitiesExpected to be realised within 12 months4795741,8721,5382,3512,112Expected to be realised in more than 12 months3,1902,8216,7107,6219,90010,442Total net insurance policy liabilities3,6693,3958,5829,15912,25112,55420162015Capital Adequacy MultipleTimesTimesThe Colonial Mutual Life Assurance Society Limited, Australia1. 441. 68 Notes to the Financial Statements Note 28 Remuneration of Auditors During the financial year, the following fees were paid or payable for services provided by the auditor of the Group and the Bank, and its network firms: (1) An additional amount of $9,429,368 (2015: $8,254,111) was paid to PricewaterhouseCoopers by way of fees for entities not consolidated into the Financial Statements. Of this amount, $7,279,197 (2015: $6,295,642) relates to audit and audit-related services. The Audit Committee has considered the non-audit services provided by PricewaterhouseCoopers and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence. All such services were approved by the Audit Committee in accordance with pre-approved policies and procedures. Audit related services principally includes assurance and attestation reviews of the Group’s foreign disclosures for overseas investors, services in relation to regulatory requirements, acquisition accounting advice as well as reviews of internal control systems and financial or regulatory information. Taxation services included assistance and training in relation to tax legislation and developments. Other services include project assurance, reviews of compliance with legal and regulatory frameworks, review of governance, risk and control frameworks as well as benchmarking reviews. Note 29 Lease Commitments Lease Arrangements Operating leases are entered into to meet the business needs of entities in the Group. Leases are primarily over commercial and retail premises and plant and equipment. Lease rentals are determined in accordance with market conditions when leases are entered into or on rental review dates. The total expected future sublease payments to be received are $110 million as at 30 June 2016 (2015: $114 million). 134 Commonwealth Bank of Australia – Annual Report 2016 GroupBank2016201520162015$'000$'000$'000$'000a) Audit and audit related servicesAudit servicesPricewaterhouseCoopers Australian firm15,77915,57511,27111,469Network firms of PricewaterhouseCoopers Australian firm4,8865,154703637Total remuneration for audit services20,66520,72911,97412,106Audit related servicesPricewaterhouseCoopers Australian firm3,4333,4032,5642,299Network firms of PricewaterhouseCoopers Australian firm1,08356937490Total remuneration for audit related services4,5163,9722,9382,389Total remuneration for audit and audit related services25,18124,70114,91214,495b) Non-audit servicesTaxation servicesPricewaterhouseCoopers Australian firm1,2151,8081,1611,721Network firms of PricewaterhouseCoopers Australian firm1,4651,363598732Total remuneration for tax related services2,6803,1711,7592,453Other ServicesPricewaterhouseCoopers Australian firm4,7416,4434,3945,508Network firms of PricewaterhouseCoopers Australian firm12390--Total remuneration for other services4,8646,5334,3945,508Total remuneration for non-audit services 7,5449,7046,1537,961Total remuneration for audit and non-audit services (1)32,72534,40521,06522,456Group Bank 2016201520162015$M $M $M $M Lease Commitments - Property, Plant and EquipmentDue within one year 606573550521Due after one year but not later than five years 1,8471,5701,6721,398Due after five years 2,4368812,212659Total lease commitments - property, plant and equipment4,8893,0244,4342,578 Notes to the Financial Statements Note 30 Contingent Liabilities, Contingent Assets and Commitments Details of contingent liabilities and off Balance Sheet business are presented below. The face (contract) value represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. The credit commitments shown in the table below also constitute contingent assets. These commitments would be classified as loans and other assets in the Balance Sheet on the occurrence of the contingent event. (1) Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. (2) Documentary letters of credit are undertakings by the Group and Bank to pay or accept drafts drawn by a supplier of goods against presentation of documents in the event of payment default by a customer. (3) Performance related contingents are undertakings that oblige the Group and Bank to pay third parties should a customer fail to fulfil a contractual non- monetary obligation. (4) Commitments to provide credit include all obligations on the part of the Group and Bank to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. (5) Other commitments include underwriting facilities, commitments with certain drawdowns, standby letters of credit and bill endorsements. Contingent Credit Liabilities The Group and Bank is party to a range of financial instruments that give rise to contingent and/or future liabilities. These transactions are a consequence of the Group’s normal course of business to meet the financing needs of its customers and in managing its own risk. These financial instruments include guarantees, letters of credit, bill endorsements and other commitments to provide credit. These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposures to any of these transactions (net of collateral) are not carried at a level that would have a material adverse effect on the financial condition of the Bank and its controlled entities. Commitments to provide credit include both fixed and variable facilities. Fixed rate or fixed spread commitments extended to customers that allow net settlement of the change in the value of the commitment are written options and are recorded at fair value. Other commitments include the Group’s and Bank’s obligations under sale and repurchase agreements, outright forward purchases, forward deposits and underwriting facilities. Other commitments also include obligations not otherwise disclosed above to extend credit, which are irrevocable because they cannot be withdrawn at the discretion of the Group or Bank without the risk of incurring significant penalty or expense. In addition, commitments to purchase or sell loans are included in other commitments. These transactions are categorised and credit equivalents calculated under APRA guidelines for the risk-based measurement of capital adequacy. The credit equivalent amounts are a measure of potential loss to the Group in the event of non-performance by the counterparty. Under the Basel III advanced internal ratings based approach for credit risk, the credit equivalent amount is the face value of the transaction, on the basis that at default the exposure is the amount fully advanced. Only when approved by APRA may an exposure less than that fully-advanced amount be used as the credit equivalent exposure amount. Commonwealth Bank of Australia – Annual Report 2016 135 Group Face Value Credit Equivalent 2016201520162015Credit risk related instruments$M $M $M $M Guarantees (1)6,2166,1816,2166,181Documentary letters of credit (2)1,3081,7641,1531,621Performance related contingents (3)2,5682,0072,5601,881Commitments to provide credit (4)170,742165,511162,967157,387Other commitments (5)1,6362,1131,3591,852Total credit risk related instruments182,470177,576174,255168,922Bank Face Value Credit Equivalent 2016201520162015Credit risk related instruments$M $M $M $M Guarantees (1)5,8735,7785,8735,778Documentary letters of credit (2) 1,2271,7041,0751,573Performance related contingents (3)2,5682,0072,5601,881Commitments to provide credit (4)155,446152,772149,272145,935Other commitments (5)1,0731,4681,0361,438Total credit risk related instruments166,187163,729159,816156,605 Notes to the Financial Statements Note 30 Contingent Liabilities, Contingent Assets and Commitments (continued) Contingent Credit Liabilities (continued) Exception Fee Class Actions In May 2011, Maurice Blackburn announced that it intended to sue various Australian banks with respect to exception fees. Proceedings were issued against Commonwealth Bank of Australia in December 2011 and against Bankwest in April 2012. Neither claim has been progressed and both have been stayed since issue, pending the outcome of similar proceedings against another bank where an appeal process to the High Court was commenced. On 27 July 2016 the High Court handed down its Judgment dismissing the appeal. The Proceedings against Commonwealth Bank of Australia and Bankwest are expected to be discontinued. Other Contingent Liabilities Services 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 2016 was $5.0 million (2015: $4.9 million). As the potential loss depends on counterparty performance, the Group utilises the same credit policies in making commitments and conditional obligations as it does for on Balance Sheet instruments. The Group and Bank takes collateral where it is considered necessary to support off Balance Sheet financial instruments with credit risk. If an event has occurred that gives rise to a present obligation and it is probable a loss will eventuate, then provisions are raised. Failure to Settle Risk The Group 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, The Bulk Electronic Clearing System, The Issuers and Acquirers Community and the High Value Clearing System (only if operating in “fallback mode”). This credit risk exposure is unquantifiable in advance, but is well understood, and is extinguished upon settlement following each exchange during the business day or at 9am next business day. Litigation related Contingent Liabilities The Group is not 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 Group. For all litigation exposure where some loss is probable and can be reliably estimated an appropriate provision has been made. Litigation liabilities at 30 June 2016 included: related contingent Storm Financial Class action proceedings were commenced in the Federal Court against the Group in relation to Storm Financial on 1 July 2010. The hearing of the proceedings concluded in November 2013 and judgment was reserved. The parties exchanged a Deed of Settlement in an attempt to resolve the class action on 27 February 2015, and the the proposed settlement on Federal Court approved 7 July 2015. The settlement of the Class action proceedings has now been implemented in accordance with the Deed of Settlement dated 27 February 2015 and the orders of the Court. 136 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 31 Risk Management Risk Management Framework The Group has an embedded Risk Management Framework (Framework) that enables the appropriate development and implementation of strategies, policies and procedures to manage its risks. The Framework incorporates the requirements of APRA’s prudential standard for risk management (CPS 220), and is supported by the three key documentary components:    The Group’s Risk Appetite Statement articulates the type and degree of risk the Board is prepared to accept (appetite) and the maximum level of risk that the institution must operate within (tolerances). The Group’s Business Plan (Plan) summarises the Group’s approach to the implementation of its strategic objectives. The Plan has a rolling three year duration which also takes into consideration material risks arising from its implementation. The Group’s Risk Management Strategy describes each material risk, the approach taken to managing these risks and how through governance, policies and procedures. is operationalised this This framework requires each business to plan and manage the outcome of its risk-taking activities including proactively managing its risk profile within risk appetite levels; using risk- adjusted outcomes and considerations as part of its day-to- day business decision-making processes; and establishing and maintaining appropriate risk controls. These documents, together with the key operational elements described below, offer the Board the opportunity to direct management in its risk taking activities and facilitate dialogue between Board and management about risk management practices. Risk Governance The Group is committed to ensuring that its risk management practices reflect a high standard of governance. This enables Management to undertake, in an effective manner, prudent risk-taking activities. The Board operates as the highest level of the Group’s risk governance as specified in its Charter. In addition, an annual declaration is made by the chair of the Board and Risk Committee to APRA on Risk Management requirements as set out in the prudential standard (CPS220). The Risk Committee oversees the Framework and helps formulate the Group’s risk appetite for consideration by the Board. In particular it:  Reviews regular reports from Management on the measurement of the adequacy and effectiveness of the Group’s risk management and internal controls systems; risk and  Monitors the health of the Group’s risk culture (via both formal reports and through its dialogues with the risk team and executive management) and leadership the Board; and reports any significant issues to  Forms a view on the independence of the risk function by meeting with the Group Chief Risk Officer (CRO) at the will of the Committee or the CRO. The Group risk management structure is a Three Lines of Defence (3LoD) model which supports the Framework by:    Reinforcing that risk is best owned and managed where it occurs – so the business (Line 1) is responsible for the management of risk; Having a separate group of experienced staff with specific risk management skills (Line 2) to facilitate the development of, and monitor / measure the effectiveness of the risk management process and systems used by Line 1; and Having an independent third group (Line 3) provide assurance regulators and other stakeholders on the appropriateness and effectiveness of the activities of Lines 1 and 2. the Board, to Risk Culture Risk Culture is the collection of values, ideas, skills and habits that equip Group employees and directors to see and talk about risks, and make sound judgments in the absence of definitive rules, regulations or market signals. The Group regards risk culture as an aspect of overall culture. As such, the Group’s risk culture flourishes within an organisational context that emphasises and rewards integrity, accountability, collaboration, service and excellence. This encourages employees at all levels to “speak up” if they believe the Group as a whole, their part of the organisation or specific colleagues are conspicuously failing to uphold those values, damaging risk culture or taking ill-considered risks. APRA requires the Group Board to form a view regarding the effectiveness of the institution’s risk culture in keeping risk- taking within appetite, and to take any corrective action that may be appropriate. Risk Policies & Procedures Risk Policies and Procedures provide guidance to the business on the management of each material risk. They support the Framework by:  Summarising the principles and practices to be used by the Group in identifying and assessing its material risks;  Outlining a process for monitoring, communicating and reporting risk issues, including escalation procedures for the reporting of material risks; and  Quantifying the limits (risk tolerances) for major risks and stating risk actions to which the Group is intolerant. Commonwealth Bank of Australia – Annual Report 2016 137 Notes to the Financial Statements Note 31 Risk Management (continued) Risk Management Infrastructure The Framework is supported by the following Group-wide processes:    A Management Information System to measure and aggregate material risks across the Group; A Risk-Adjusted-Performance Measurement (RAPM) process which is a means of assessing the performance Material Risks of a business after adjustment for its risks and is used as a basis for executive incentives; and in combination with other An Internal Capital Adequacy Assessment Process risk (ICAAP) used, management practices (including Stress testing), to understand, manage and quantify the Group’s risks; the outcomes of which are used to inform risk decisions, set capital buffers and assist strategic planning. A description of the major risk classes and the Group’s approach to managing them is summarised in the following table: Risk Type Description Governing Policies and Key Management Committees Key Limits, Standards and Measurement Approaches Credit Risk (refer to Note 32) Credit risk is the potential for loss arising from the failure of a customer or counterparty to meet their contractual obligations to the Group. At a portfolio level, credit risk includes concentration risk arising from interdependencies between customers, and concentrations of exposures to geographical regions, industry sectors and products/portfolio types. Governing Policies:  Group Credit Risk Principles, Frameworks and Governance (incl. Risk Appetite, principles, and frameworks; and Credit Risk governance); and  Credit Risk Policies (incl. Origination, Decisioning, Verification/Fulfilment, and Whole of Life Servicing). Key Management Committee: Executive Risk Committee Market Risk (including Equity Risk) (refer to Note 33) Market risk is the risk that market rates and prices will change and that this may have an adverse effect on the profitability and/or net worth of the Group. This includes changes in interest rates, foreign exchange rates, equity and commodity prices, credit spreads, and the resale value of assets underlying operating leases at maturity (lease residual value risk). Governing Policies:  The Group Market Risk Manual (including the Group Market Risk Policy and Trading Book Policy Statement) Key Management Committee: Asset and Liability Committee Liquidity and Funding Risk (refer to Note 34) Liquidity risk is the combined risks of not being able to meet financial obligations as they fall due (funding liquidity risk), and that liquidity in financial markets, such as the market for debt securities, may reduce significantly (market liquidity risk). Governing Policies:  Group Liquidity Risk Management Policy and Strategy Key Management Committee: Asset and Liability Committee The following key credit risk policies set credit portfolio concentration limits and standards:  Large Credit Exposure Policy;  Country Risk Exposure Policy;  Industry Sector Concentration Policy; and  Exposure to consumer credit products are managed within limits and standards set in the Group Level RAS, BU Level RAS and Credit Portfolio & Product Standards. The measurement of credit risk is primarily based on an APRA accredited Advanced Internal Ratings Based (AIRB) approach (albeit some exposures are subject to the standardised approach). The approach uses judgemental assessment on individuals or management, supported by analytical tools (including scorecards) to estimate expected and unexpected loss within the credit portfolio. The Group Market Risk Policy sets limits and standards with respect to the following:  Traded Market Risk;  Interest Rates Risk in the Banking Book (IRRBB);  Residual Value Risk;  Non-traded Equity Risk; and  Market Risk in Insurance Businesses. The respective measurement approaches for the underlying market risks noted above include:  Value at Risk (VaR), Stress Testing;  Market Value Sensitivity, Net Interest Earnings at Risk;  Profit & Loss Adjustment Account Balance, Aggregate Residual Value Risk Weighted Exposure, Aggregate Residual Value Risk Margin; and  Aggregate Portfolio Limit. The Group Liquidity Risk Management Policy and Strategy sets limits and standards with respect to the following:  The Liquidity Coverage Ratio, which requires liquid assets exceed modelled 30 day stress outflows;  Additional market and idiosyncratic stress test scenarios; and  Limits that set tolerances for the sources and tenor of funding. The measurement of liquidity risk uses scenario analysis, covering both:  “Stress” scenarios, which assess the behaviour of cash flows in adverse operating circumstances; and  “Going concern” scenarios, which assess behaviour of cash flows in ordinary operating circumstances. 138 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 31 Risk Management (continued) Material Risks (continued) Risk Type Description Governing Policies and Key Management Committees Key Limits, Standards and Measurement Approaches Operational Risk Operational risk is risk of economic loss arising from inadequate or failed internal processes, people, systems or external events. Governing Policies:  Group Operational Risk Management Framework Key Management Committees: Executive Committee, Data Governance Committee Compliance Risk Insurance Risk Governing Policies:  Group Operational Risk Management Framework  Compliance Risk Management Framework  Compliance Incident Management Group Policy Key Management Committees: Executive Committee, Data Governance Committee Governing Policies:  Product Management Policy, Underwriting Policy, Claims Management Policy and Reinsurance Management Policy (end-to-end policies of insurance writing businesses). Key Management Committees: Executive Committees of Insurance writing businesses Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss of reputation that the Group may incur as a result of its failure to comply with its Compliance Obligations. Compliance Obligations are formal requirements that may arise from various sources including but not limited to; laws; regulations; legislation; industry standards; rules; codes or guidelines. Insurance risk is the risk of loss due to increases in policy benefits arising from variations in the incidence or severity of insured events. In the life insurance business this arises primarily through mortality (death) or morbidity (illness or injury) claims being greater than expected. In the general insurance business, variability arises mainly through weather related incidents and similar events, as well as general variability in home, motor and travel insurance claim amounts. Insurance risk also covers inadequacy in product design, pricing, underwriting, claims management and reinsurance management as well as variations in policy lapses, servicing expenses, and option take up rates. The Group Operational Risk Management Framework sets limits and standards with respect to the following:  Investigation and reporting of loss, compliance and near miss incidents;  Comprehensive Risk and Control Self- Assessment, control assurance and issues management processes; and  Comprehensive Scenario Analysis assessment process (also called Quantitative Risk Assessments). The measurement of operational risk is based on an APRA accredited Advanced Measurement Approach (some exposures are subject to standardised). The approach combines internal and external loss experience and business judgements captured through Scenario Analysis. The key limits with respect to compliance risk are set via the Group Operational Risk Management Framework. The Group Compliance Risk Management Framework sets standards with respect to the understanding of obligations, establishing policies and procedures, managing non-compliance, monitoring and reporting. The measurement of compliance risk is undertaken within the operational risk approach. The key limits and standards with respect to insurance risk are set via the end-to-end policies of insurance writing businesses. The major methods include:  Sound product design and pricing, to ensure that customers understand the extent of their cover and that premiums are sufficient to cover the risk involved;  Regular review of insurance experience, so that product design, policy liabilities and pricing remains sound;  Claims management to ensure that claims are paid within the agreed policy terms and that genuine claims are paid as soon as possible after documentation is received and reasonable investigations are undertaken; and  Transferring a proportion of insurance risk to reinsurers to keep within risk appetite. Insurance risk is measured using actuarial techniques which are used to establish the likelihood and severity of possible insurance claims. Insurance risk is further monitored with key financial and performance metrics, such as loss ratios, new business volumes and lapse rates. Commonwealth Bank of Australia – Annual Report 2016 139 Notes to the Financial Statements Note 31 Risk Management (continued) Material Risks (continued) Risk Type Description Strategic Risk Reputational Risk Strategic Risk is the risk of economic loss arising from changes in the business environment (caused by macroeconomic conditions, competitive forces at work, technology, regulatory or social trends) or internal weaknesses, such as a poorly implemented or flawed strategy. Reputational risk arises from negative perception on the part of customers, counterparties, shareholders, investors, debt holders, market analysts, regulators and other relevant stakeholders of the Group. Governing Policies and Key Management Committees Key Limits, Standards and Measurement Approaches Governing Policies:  Group Risk Management Strategy (RMS) Key Management Committee: Executive Committee Governing Policies:  Group RMS  Group Risk Appetite Statement  Statement of Professional Practice  Environmental, Social and Governance Lending Policy Key Management Committee: Executive Committee The key limits and standards with respect to strategic risk are set via the Board’s consideration of Group and BU strategic plans and the most significant risks (current and emerging) arising from these. Strategic risk is measured using a combination of judgemental assessments captured through Scenario Analysis and an internal profit simulation model. Potential adverse Reputational impacts are managed as an outcome of all other material risks. In addition, the Group:  Sets clear behavioural standards (as set out in the Group’s Risk Appetite Statement) and Group-wide requirements of leadership that support the Group’s vision and values; and  Has a Sustainability framework which supports the Group in managing its Environmental, Social and Governance (ESG) risks. 140 Commonwealth Bank of Australia – Annual Report 2016 Notes to the Financial Statements Note 32 Credit Risk Credit Risk Management Principles and Portfolio Standards The Group has clearly defined credit policies for the approval and management of credit risk. Formal credit standards apply to all credit risks, with specific portfolio standards applying to all major lending areas. These set the minimum requirements in assessing the integrity and ability of debtors and/or counterparties to meet their contracted financial obligations for repayment, acceptable forms of collateral and security and the frequency of credit reviews. The principles and portfolio standards are designed to achieve portfolio outcomes that are consistent with the Group’s risk appetite and risk/return expectations. The Credit Portfolio Assurance unit, part of Group Audit and Assurance, reviews credit portfolios and business unit compliance with policies, portfolio standards, application of credit risk ratings and other key practices on a regular basis. The credit risk portfolio has two major segments: (i) Retail Managed Segment This segment has sub-segments covering housing loans, credit cards, personal loans, some leasing products, some unsecured commercial lending and most secured commercial lending up to $1 million. Auto-decisioning is used to approve credit applications for eligible customers in this segment. Auto-decisioning uses a the Group’s historical scorecard approach based on experience on similar applications, information from a credit reference bureau and/or from the Group’s existing knowledge of a customer’s behaviour. that do not meet scorecard Auto- Loan applications decisioning to a Risk Management Officer with a Personal Credit Approval Authority (PCAA) for manual decisioning. requirements may be referred After loan origination, these portfolios are managed using behavioural scoring systems and on a delinquency band approach, e.g. actions taken when loan payments are greater than 30 days past due differ from actions when payments are greater than 60 days past due, and are reviewed by the relevant Risk Management or Business Unit Credit Support Team. (ii) Risk-Rated Segment This segment comprises commercial exposures, including bank and sovereign exposures. Each exposure is assigned an internal Credit Risk-Rating (CRR) based on Probability of Default (PD) and Loss Given Default (LGD). For credit risk rated exposures either a PD Rating Tool or expert judgement is used to determine the PD. Expert judgement is used where the complexity of the transaction and/or the debtor is such that it is inappropriate to rely completely on a statistical model. External ratings may be used as inputs into the expert judgement assessment. The CRR is designed to:    Aid in assessing changes to the client quality of the Group's credit portfolio; Influence decisions on approval, management and pricing of individual credit facilities; and Provide the basis for reporting details of the Group's credit portfolio. Credit risk-rated exposures are generally reviewed on an individual basis, at least annually, although small transactions may be managed on a behavioural basis after their initial rating at origination. Credit risk-rated exposures fall within the following categories:   “Pass” – these credit facilities qualify for approval of new or increased exposure on normal commercial terms; and to “Troublesome or Impaired Assets (TIAs)” – these credit facilities are not eligible for new or increased exposure, unless it will protect or improve the Group’s position by facilitate recovery prospects or maximising rehabilitation. Where a client is in default but the facility is well secured, facility may be classed as troublesome but not impaired. Where a client’s facility is not well secured and a loss is expected, the facility is classed as impaired. Restructured facilities, where the original contractual arrangements have been modified to provide concessions financial difficulties, are rendered non-commercial to the Group and considered impaired. the customer’s the for Default is usually consistent with one or more of the following:   The customer is 90 days or more overdue on a scheduled credit obligation repayment; or The customer is unlikely to repay their credit obligation to the Group in full without taking action, such as realising on available security. Credit Risk Measurement The measurement of credit risk uses analytical tools to calculate both: (i) Expected, and (ii) Unexpected Loss probabilities for the credit portfolio. The use of analytical tools is governed by a Credit Rating Governance Committee. (i) Expected Loss Expected Loss (EL) is the product of:    PD; Exposure at Default (EAD); and LGD. The PD, expressed as a percentage, is the estimate of the probability that a client will default within the next 12 months. It reflects a client's ability to generate sufficient cash flows into the future to meet the terms of all their credit obligations with the Group. The dollar amount of EAD is the estimate of the amount of a facility that will be outstanding in the event of default. Estimates are based on downturn economic conditions. For defaulted facilities it is the actual amount outstanding at default. For non-defaulted committed facilities it is based on the actual amount outstanding, plus the undrawn amount multiplied by a credit conversion factor which represents the potential rate of conversion from undrawn 12 months prior to default to drawn at default. For most committed facilities, the Group applies a credit conversion factor of 100% to the undrawn amount. For uncommitted facilities the EAD will generally be the drawn balance only. For retail exposures, a modelling approach can be used based on factors including limit usage, arrears and loan type to segment accounts the calculation. into homogeneous pools for LGD expressed as a percentage, is the estimated proportion of a facility likely to be lost in the event of default. LGD is impacted by:  Type and level of any collateral held; Commonwealth Bank of Australia – Annual Report 2016 141 Notes to the Financial Statements Note 32 Credit Risk (continued) Credit Risk Measurement (continued)    Liquidity and volatility of collateral; Carrying costs (effectively the costs of providing a facility that is not generating an interest return); and Realisation costs. Various factors are considered when calculating PD, EAD and LGD. Considerations include the potential for default by a borrower due to economic, management, industry and other risks, and the mitigating benefits of any collateral or security. (ii) Unexpected Loss In addition to EL, a more stressed loss amount is calculated. This Unexpected Loss estimate directly affects the calculation of regulatory and internal economic capital requirements. Refer to the Group Operations and Business Settings section and Note 25 for information relating to regulatory capital. Credit Risk Mitigation, Collateral and Other Credit Enhancements The Group has policies and procedures in place setting out the circumstances where acceptable and appropriate collateral is to be taken to mitigate credit risk, including valuation parameters, review frequency and independence of valuation. The general nature of collateral that may be taken, and the balances held, are summarised below by financial asset classes. Cash and Liquid Assets Collateral is not usually sought on the majority of Cash and liquid asset balances as these types of exposures are generally considered low risk. However, securities purchased under agreement to resell are collateralised by highly liquid debt securities. The collateral related to agreements to resell has been legally transferred to the Group subject to an agreement to return them for a fixed price. included The Group’s cash and $11,629 million (2015: $16,028 million) deposited with central banks and is considered to carry less credit risk. liquid asset balance Receivables Due from Other Financial Institutions Collateral is usually not sought on these balances as exposures are generally considered to be of low risk. The exposures are mainly short term and to relatively low risk banks (Rated A+, AA- or better). Trading Assets at Fair Value through Income Statement and Available-for-Sale (AFS) Investments These assets are carried at fair value, which accounts for the credit risk. Collateral is not generally sought from the issuer or counterparty however collateral may be implicit in the terms of the instrument (e.g asset-backed security). Credit derivatives have been used to a limited extent to mitigate the exposure to credit risk. Insurance Assets These assets are carried at fair value, which accounts for the credit risk. Collateral is not generally sought or provided on these types of assets, other than a fixed charge over properties backing Australian mortgage investments. In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk. 142 Commonwealth Bank of Australia – Annual Report 2016 Other Assets at Fair Value through Income Statement These assets are carried at fair value, which accounts for the credit risk. Credit derivatives used to mitigate the exposure to credit risk are not significant. Derivative Assets The Group’s use of derivative contracts is outlined in Note 10. The Group is exposed to credit risk on derivative contracts, which arises as a result of counterparty credit risk. The Group’s exposure to counterparty credit risk is affected by the nature of the trades, the creditworthiness of the counterparty, netting, and collateral arrangements. for financial markets counterparties, but Credit risk from derivatives is mitigated where possible (typically less frequently for corporate or government counterparties) through netting agreements, whereby derivative assets and liabilities with the same counterparty can be offset and clearing of trades with Central Counterparties (CCPs). Group policy requires all netting arrangements legally documented. The International Swaps and Derivatives Association (ISDA) Master Agreement (or other derivative agreements) are used by the Group as an agreement for documenting Over-the-Counter (OTC) derivatives. to be Collateral is obtained against derivative assets, depending on the creditworthiness of the counterparty and/or nature of the transaction. The fair value of collateral held and the potential effect of offset obtained by applying master netting agreements are disclosed in Note 43. Due from Controlled Entities Collateral is not generally taken on these intergroup balances. Credit Commitments and Contingent Liabilities The Group applies fundamentally the same risk management policies for off Balance Sheet risks as it does for its on Balance Sheet risks. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction. Of the Group’s off Balance Sheet exposures, $96,111 million (2015: $93,047 million) are secured. Loans, Bills Discounted and Other Receivables The principal collateral types for balances are: loans and receivable  Mortgages over residential and commercial real estate;  Charges over business assets such as cash, stock or scrip, inventory, fixed assets and accounts receivables; and  Guarantees received from third parties. Collateral security, in the form of real estate or a charge over income or assets, is generally taken except for government, bank and corporate counterparties that are often externally risk-rated and of strong financial standing. Longer term consumer finance, such as housing loans, is generally secured against real estate, while short term revolving consumer credit is generally not secured by formal collateral. Specifically, the collateral mitigating credit risk of the key lending portfolios is addressed in the table ‘Collateral held against Loans, Bills Discounted and Other Receivables’ within this note. Notes to the Financial Statements Note 32 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements The tables below detail the concentration of credit exposure assets by significant geographical locations and counterparty types. Disclosures do not take into account collateral held and other credit enhancements. (1) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 12. (2) For the purpose of reconciling to the Balance Sheet, “Other assets” predominantly comprises assets which do not give rise to credit exposure, including Property, plant and equipment, Investment in Associates and Joint Ventures, Intangible assets, Deferred tax assets and Other assets. Commonwealth Bank of Australia – Annual Report 2016 143 GroupAt 30 June 2016BankAssetOtherAgri-and OtherHomeConstr-OtherFinanc-Comm andSovereigncultureFinancialLoansuctionPersonalingIndust.OtherTotal $M $M $M $M $M $M $M $M $M $MAustraliaCredit risk exposures relating to on Balance Sheet assets:Cash and liquid assets--10,971------10,971Receivables due from otherfinancial institutions--2,930------2,930Assets at fair value throughIncome Statement:Trading16,763-1,552----12,900-31,215Insurance 1,402-5,963----3,781-11,146Other43-532----905-1,480Derivative assets1,62211529,767-133--2,755-34,392Available-for-sale investments43,400-23,856----821-68,077Loans, bills discountedand other receivables (1)5,3807,19114,794409,4523,11423,5248,543132,136-604,134Bank acceptances270768-338--44-1,159Other assets (2)1,53143,84570838-36315,70322,165Total on Balance Sheet Australia70,1438,01794,278410,1603,58823,5328,543153,70515,703787,669Credit risk exposures relating to off Balance Sheet assets:Guarantees6318345585426-4,815-5,847Loan commitments8501,4066,20768,5772,22722,957-38,894-141,118Other commitments55241,105599861142,572-4,816Total Australia71,1119,465101,935478,8547,34346,4968,557199,98615,703939,450OverseasCredit risk exposures relating to on Balance Sheet assets:Cash and liquid assets--12,401------12,401Receivables due from otherfinancial institutions--8,661------8,661Assets at fair value throughIncome Statement:Trading890-1,559----403-2,852Insurance --2,401------2,401Other----------Derivative assets908334,620----6,614-12,175Available-for-sale investments9,507-3,166----148-12,821Loans, bills discountedand other receivables (1)9,1648,7445,35946,6223521,71922023,985-96,165Bank acceptances-------272-272Other assets (2)17-24770-65302,1872,562Total on Balance Sheet overseas20,4868,77738,41446,6923521,72522531,4522,187150,310Credit risk exposures relating to off Balance Sheet assets:Guarantees1457-53--254-369Loan commitments3138272,7687,3091941,940516,268-29,624Other commitments43---1--652-696Total overseas20,8439,60841,23954,0016003,66523048,6262,187180,999Total gross credit risk91,95419,073143,174532,8557,94350,1618,787248,61217,8901,120,449 Notes to the Financial Statements Note 32 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements (continued) (1) Comparative information has been reclassified to conform to presentation in the current year. (2) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 12. (3) For the purpose of reconciling to the Balance Sheet, “Other assets” predominantly comprises assets which do not give rise to credit exposure, including Property, plant and equipment, Investment in Associates and Joint Ventures, Intangible assets, Deferred tax assets and Other assets. 144 Commonwealth Bank of Australia – Annual Report 2016 GroupAt 30 June 2015BankAssetOtherAgri-and OtherHomeConstr-OtherFinanc-Comm andSovereigncultureFinancialLoansuctionPersonalingIndust.OtherTotal $M $M $M $M $M $M $M $M $M $MAustraliaCredit risk exposures relating to on Balance Sheet assets:Cash and liquid assets--15,939------15,939Receivables due from otherfinancial institutions (1)--4,141------4,141Assets at fair value throughIncome Statement:Trading10,477-2,087----10,267-22,831Insurance696-7,269----3,885-11,850Other95-470----615-1,180Derivative assets1,28211529,319-48--6,898-37,662Available-for-sale investments34,795-28,510----1,040-64,345Loans, bills discountedand other receivables (2)5,5216,25815,157383,1742,72222,3138,356117,557-561,058Bank acceptances21,29961-353----1,715Other assets (1) (3)786375,4556087051495912,83820,808Total on Balance Sheet Australia53,6547,709108,408383,7823,19322,3648,360141,22112,838741,529Credit risk exposures relating to off Balance Sheet assets:Guarantees10914149456797-4,759-5,762Loan commitments5771,5953,84566,4373,25322,605-40,482-138,794Other commitments 50131,7272487421642,263-5,117Total Australia54,3909,331114,129450,2887,99944,9788,524188,72512,838891,202OverseasCredit risk exposures relating to on Balance Sheet assets:Cash and liquid assets--17,177------17,177Receivables due from otherfinancial institutions (1)--8,922------8,922Assets at fair value throughIncome Statement:Trading1,010-1,358----1,225-3,593Insurance--2,238------2,238Other--98------98Derivative assets710245,848----1,910-8,492Available-for-sale investments7,092-3,133----114-10,339Loans, bills discountedand other receivables (2)12,9297,9907,57239,6774071,12855812,909-83,170Bank acceptances-------229-229Other assets (1) (3)45-743111954771,6852,625Total on Balance Sheet overseas21,7868,01447,08939,6784081,14761216,4641,685136,883Credit risk exposures relating to off Balance Sheet assets:Guarantees1360-69--286-419Loan commitments5129891,4015,8871541,711316,060-26,717Other commitments71---5--691-767Total overseas22,3709,00648,55045,5656362,85861533,5011,685164,786Total gross credit risk76,76018,337162,679495,8538,63547,8369,139222,22614,5231,055,988 Notes to the Financial Statements Note 32 Credit Risk (continued) Large Exposures Concentrations of exposure to any debtor or counterparty group are controlled by a large credit exposure policy, which defines a graduated limit framework that restricts credit limits based on the internally assessed risk of the client, the type of client, the security cover and facility tenor. All exposures outside the policy limits require approval by the Executive Risk Committee and are reported to the Risk Committee. The following table shows the aggregated number of the Group’s Corporate and Industrial aggregated counterparty exposures (including direct and contingent exposures), which individually were greater than 5% of the Group’s capital resources (Tier 1 and Tier 2 capital): The Group has a high quality, well diversified credit portfolio, with 58% of the gross loans and other receivables in domestic mortgage loans and a further 7% in overseas mortgage loans, primarily in New Zealand. Overseas loans account for 14% of loans and advances. Distribution of Financial Assets by Credit Classification When doubt arises as to the collectability of a credit facility, the financial instrument is classified and reported as impaired. Provisions for impairment are raised where there is objective evidence of impairment and for an amount adequate to cover assessed credit related losses. The Group regularly reviews its financial assets and monitors adherence to contractual terms. Credit risk-rated portfolios are assessed, at least at each Balance Sheet date, to determine whether the financial asset or portfolio of assets is impaired. Distribution of Financial Instruments by Credit Quality The table below segregates financial instruments into neither past due nor impaired, past due but not impaired and impaired. An asset is considered to be past due when a contracted amount, including principal or interest, has not been met when due or it is otherwise outside contracted arrangements. The amount included as past due is the entire contractual balance, rather than the overdue portion. The split in the tables below does not reflect the basis by which the Group manages credit risk. Commonwealth Bank of Australia – Annual Report 2016 145 Group20162015NumberNumber5% to less than 10% of the Group's capital resources-210% to less than 15% of the Group's capital resources--Group2016Neither PastPast dueTotal Provisions Due norbut notImpairedfor ImpairmentImpaired ImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets23,372--23,372-23,372Receivables due from other financial institutions11,591--11,591-11,591Assets at fair value through Income Statement:Trading34,067--34,067-34,067Insurance13,547--13,547-13,547Other1,480--1,480-1,480Derivative assets46,547-2046,567-46,567Available-for-sale investments80,898--80,898-80,898Loans, bills discounted and other receivables:Australia588,63413,1042,396604,134(3,318)600,816Overseas93,2452,33758396,165(400)95,765Bank acceptances1,431--1,431-1,431Credit related commitments182,353-117182,470(44)182,426Total1,077,16515,4413,1161,095,722(3,762)1,091,960 Notes to the Financial Statements Note 32 Credit Risk (continued) dfdgd (1) Comparative information has been reclassified to conform to presentation in the current year. ggggggfgfffffg 146 Commonwealth Bank of Australia – Annual Report 2016 Group 2015Neither PastPast DueTotal ProvisionsDue norbut notImpairedfor ImpairmentImpairedImpairedAssetsGrossLossesNet$M$M$M$M$M $MCash and liquid assets33,116--33,116-33,116Receivables due from other financial institutions (1)13,063--13,063-13,063Assets at fair value through Income Statement:Trading26,424--26,424-26,424Insurance14,088--14,088-14,088Other1,278--1,278-1,278Derivative assets46,154--46,154-46,154Available-for-sale investments74,684--74,684-74,684Loans, bills discounted and other receivables:Australia545,44813,4022,208561,058(3,322)557,736Overseas80,2902,39648483,170(296)82,874Bank acceptances1,944--1,944-1,944Credit related commitments177,413-163177,576(31)177,545Total1,013,90215,7982,8551,032,555(3,649)1,028,906Bank2016Neither PastPast DueTotal ProvisionsDue nor but notImpairedfor ImpairmentImpairedImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets21,582--21,582-21,582Receivables due from other financial institutions10,182--10,182-10,182Assets at fair value through Income Statement:Trading32,985--32,985-32,985Insurance------Other1,187--1,187-1,187Derivative assets46,505-2046,525-46,525Available-for-sale investments76,361--76,361-76,361Loans, bills discounted and other receivables:Australia582,15513,0982,358597,611(3,309)594,302Overseas24,5121911924,650(56)24,594Bank acceptances1,413--1,413-1,413Shares in and loans to controlled entities145,953--145,953-145,953Credit related commitments166,075-112166,187(44)166,143Total1,108,91013,1172,6091,124,636(3,409)1,121,227Bank2015Neither PastPast DueTotal ProvisionsDue norbut notImpairedfor ImpairmentImpairedImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets31,683--31,683-31,683Receivables due from other financial institutions (1)11,204--11,204-11,204Assets at fair value through Income Statement:Trading25,135--25,135-25,135Insurance------Other989--989-989Derivative assets45,607--45,607-45,607Available-for-sale investments72,304--72,304-72,304Loans, bills discounted and other receivables:Australia540,26413,3922,170555,826(3,298)552,528Overseas21,8761114822,035(56)21,979Bank acceptances1,908--1,908-1,908Shares in and loans to controlled entities143,756--143,756-143,756Credit related commitments163,571-158163,729(31)163,698Total1,058,29713,4032,4761,074,176(3,385)1,070,791 Notes to the Financial Statements Note 32 Credit Risk (continued) Credit Quality of Loans, Bills Discounted and Other Receivables which were Neither Past Due nor Impaired For the analysis below, financial assets that are neither past due nor impaired have been segmented into investment, pass and weak classifications. This segmentation of loans in retail and risk-rated portfolios is based on the mapping of a customer’s internally assessed PD to S&P Global ratings, reflecting a client’s ability to meet their credit obligations. In particular, retail PD pools have been aligned to the Group’s PD grades which are consistent with rating agency views of credit quality segmentation. Investment grade is representative of lower assessed default probabilities with other classifications reflecting progressively higher default risk. No consideration is given to LGD, the impact of any recoveries or the potential benefit of mortgage insurance. (1) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading. Commonwealth Bank of Australia – Annual Report 2016 147 Group2016OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalCredit grading$M$M$M$M$MAustraliaInvestment275,1864,454760101,136381,536Pass112,84014,2377,28657,976192,339Weak9,8613,66925797214,759Total Australia397,88722,3608,303160,084588,634Overseas (1)Investment15,218-830,39945,625Pass29,3401,39118215,87646,789Weak328--503831Total overseas44,8861,39119046,77893,245Total loans which were neither past due nor impaired 442,77323,7518,493206,862681,879Group2015OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalCredit grading$M $M$M$M$MAustraliaInvestment254,7044,24767493,362352,987Pass107,52013,0467,26050,068177,894Weak9,6253,7222011,01914,567Total Australia371,84921,0158,135144,449545,448Overseas (1)Investment9,501-27328,32738,101Pass28,01183624312,64341,733Weak337--119456Total overseas37,84983651641,08980,290Total loans which were neither past due nor impaired 409,69821,8518,651185,538625,738 Notes to the Financial Statements Note 32 Credit Risk (continued) Credit Quality of Loans, Bills Discounted and Other Financial Assets which were Neither Past Due nor Impaired (continued) 148 Commonwealth Bank of Australia – Annual Report 2016 Bank2016OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Credit grading$M$M$M$M$M AustraliaInvestment275,0334,461737100,285380,516Pass107,89914,1917,23057,617186,937Weak9,8583,65525793214,702Total Australia392,79022,3078,224158,834582,155OverseasInvestment115--20,69020,805Pass41716-3,0623,495Weak---212212Total overseas53216-23,96424,512Total loans which were neither past due nor impaired393,32222,3238,224182,798606,667Bank2015Other HomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Credit grading$M$M$M$M$M AustraliaInvestment256,7844,44363889,964351,829Pass101,79413,7177,21050,890173,611Weak9,6063,9422011,07514,824Total Australia368,18422,1028,049141,929540,264OverseasInvestment128-25818,65919,045Pass37819-2,4162,813Weak6--1218Total overseas5121925821,08721,876Total loans which were neither past due nor impaired368,69622,1218,307163,016562,140 Notes to the Financial Statements Note 32 Credit Risk (continued) Other Financial Assets which were Neither Past Due nor Impaired The majority of all other financial assets of the Group and the Bank that were neither past due nor impaired as of 30 June 2016 and 30 June 2015 were of investment grade. Age Analysis of Loans, Bills Discounted and Other Receivables that are Past Due but Not Impaired For the purposes of this analysis an asset is considered to be past due when any payment under the contractual terms has been missed. Past due loans are not classified as impaired if no loss to the Group is expected or if the loans are unsecured consumer loans and less than 90 days past due. (1) Included in these balances are credit card facilities and other unsecured portfolio managed facilities up to 90 days past due. At 90 days past due, the loans are classified as impaired. Commonwealth Bank of Australia – Annual Report 2016 149 Group 2016OtherHomeOtherAssetCommercialLoansPersonal (1)Financingand IndustrialTotal Loans which were past due but not impaired$M$M$M$M$M AustraliaPast due 1 - 29 days6,166592857677,610Past due 30 - 59 days1,755188451542,142Past due 60 - 89 days877124231021,126Past due 90 - 179 days1,027--1771,204Past due 180 days or more819521961,022Total Australia10,6449091551,39613,104OverseasPast due 1 - 29 days1,32823882771,851Past due 30 - 59 days18741240270Past due 60 - 89 days691511499Past due 90 - 179 days38161661Past due 180 days or more156-3556Total overseas1,637316123722,337Total loans which were past due but not impaired 12,2811,2251671,76815,441Group 2015Other HomeOtherAsset Commercial LoansPersonal (1)Financing and Industrial Total Loans which were past due but not impaired$M $M $M $M $M AustraliaPast due 1 - 29 days6,131691598787,759Past due 30 - 59 days1,835204432042,286Past due 60 - 89 days839129271561,151Past due 90 - 179 days956-12181,175Past due 180 days or more7298-2941,031Total Australia10,4901,0321301,75013,402OverseasPast due 1 - 29 days1,41021883241,960Past due 30 - 59 days17732312224Past due 60 - 89 days711211195Past due 90 - 179 days491212183Past due 180 days or more195-1034Total overseas1,726279133782,396Total loans which were past due but not impaired 12,2161,3111432,12815,798 Notes to the Financial Statements Note 32 Credit Risk (continued) Age Analysis of Loans, Bills Discounted and Other Receivables that are Past Due but Not Impaired (continued) (1) Included in these balances are credit card facilities and other unsecured portfolio managed facilities up to 90 days past due. At 90 days past due, the loans are classified as impaired. Impaired Assets by Classification Assets in credit risk rated portfolios and retail managed portfolios are assessed for objective evidence that the financial asset is impaired. Impaired assets are split into the following categories:    Non-Performing Facilities; Restructured Facilities; and Unsecured retail products 90 days or more past due. Non-performing facilities are facilities against which an individually assessed provision for impairment has been raised and facilities where loss of principal or interest is anticipated. 150 Commonwealth Bank of Australia – Annual Report 2016 Bank2016OtherHomeOtherAssetCommercialLoansPersonal (1)Financingand IndustrialTotal Loans which were past due but not impaired$M$M$M$M$M AustraliaPast due 1 - 29 days6,162592857677,606Past due 30 - 59 days1,754188451542,141Past due 60 - 89 days877124231021,126Past due 90 - 179 days1,026--1771,203Past due 180 days or more819521961,022Total Australia10,6389091551,39613,098OverseasPast due 1 - 29 days91-313Past due 30 - 59 days---22Past due 60 - 89 days---11Past due 90 - 179 days---22Past due 180 days or more1---1Total overseas101-819Total loans which were past due but not impaired 10,6489101551,40413,117Bank 2015OtherHome OtherAssetCommercialLoansPersonal (1)Financingand IndustrialTotal Loans which were past due but not impaired $M$M$M$M$M AustraliaPast due 1 - 29 days6,126691598787,754Past due 30 - 59 days1,834204432042,285Past due 60 - 89 days838129261561,149Past due 90 - 179 days955-12181,174Past due 180 days or more7288-2941,030Total Australia10,4811,0321291,75013,392OverseasPast due 1 - 29 days7--18Past due 30 - 59 days-----Past due 60 - 89 days-----Past due 90 - 179 days1--12Past due 180 days or more---11Total overseas8--311Total loans which were past due but not impaired 10,4891,0321291,75313,403 Notes to the Financial Statements Note 32 Credit Risk (continued) Impaired Assets by Classification (continued) Restructured facilities are facilities where the original contractual terms have been modified to non-commercial terms due to financial difficulties of the borrower. Interest on these facilities is taken to the Income Statement. Failure to comply fully with the modified terms will result in immediate reclassification to non-performing. Unsecured retail products 90 days or more past due are credit cards, personal loans and other unsecured retail products which are 90 days or more past due. These loans are collectively provided for. The Group does not manage credit risk based solely on arrears categorisation, but also uses credit risk rating principles as described earlier in this note. (1) Collective provisions are held for these portfolios. Impaired Assets by Size Commonwealth Bank of Australia – Annual Report 2016 151 Group20162015201420132012$M $M $M $M $M AustraliaNon-Performing assets:Gross balances2,0021,9402,1343,3163,966Less individual provisions for impairment(807)(775)(1,035)(1,564)(1,920)Net non-performing assets1,1951,1651,0991,7522,046Restructured assets:Gross balances22114436134693Less individual provisions for impairment-----Net restructured assets22114436134693Unsecured retail products 90 days or more past due:Gross balances252251236217204Less provisions for impairment (1)(169)(130)(131)(128)(120)Net unsecured retail products 90 days or more past due831211058984Net Australia impaired assets1,4991,4301,5652,1872,223OverseasNon-Performing assets:Gross balances560454377356344Less individual provisions for impairment(138)(112)(92)(64)(88)Net non-performing assets422342285292256Restructured assets:Gross balances67542488770Less individual provisions for impairment-----Net restructured assets67542488770Unsecured retail products 90 days or more past due:Gross balances141211810Less provisions for impairment (1)(13)(9)(8)(3)(3)Net unsecured retail products 90 days or more past due13357Net overseas impaired assets490399536384333Total net impaired assets1,9891,8292,1012,5712,556GroupAustraliaOverseasTotalAustraliaOverseasTotal201620162016201520152015Impaired assets by size $M$M$M$M$M$MLess than $1 million1,1701231,2931,2151181,333$1 million to $10 million661215876717126843Greater than $10 million644303947403276679Total2,4756413,1162,3355202,855 Notes to the Financial Statements Note 32 Credit Risk (continued) Movement in Impaired Assets Impaired Assets by Industry and Status (1) Write-offs, recoveries and net write-offs are not recognised against credit commitments or derivatives as these exposures are closed out and converted to loans and receivables on impairment. Write-offs and recoveries take place subsequent to this conversion. 152 Commonwealth Bank of Australia – Annual Report 2016 Group20162015201420132012Movement in gross impaired assets$M $M $M $M $M Gross impaired assets - opening balance2,8553,3674,3304,6875,502New and increased2,3702,0952,3933,0163,389Balances written off(1,328)(1,355)(1,697)(1,774)(1,687)Returned to performing or repaid(1,460)(1,903)(2,303)(2,165)(3,040)Portfolio managed - new/increased/return to performing/repaid679651644566523Gross impaired assets - closing balance3,1162,8553,3674,3304,687Group2016GrossTotal ProvisionsNetTotalImpairedfor ImpairedImpairedNet (1)BalanceAssetsAssetsAssetsWrite-offs (1)Recoveries (1)Write-offs Industry $M$M$M$M$M$M$M Loans - AustraliaSovereign5,380------Agriculture7,191136(42)9484(1)83Banks and other financial14,79418(29)(11)10(27)(17)Home loans409,452921(193)72882(3)79Construction3,11428(25)311(1)10Other personal23,524255(176)79747(154)593Asset financing8,54385(28)5754(4)50Other commercial and industrial132,136953(483)470249(21)228Total loans - Australia604,1342,396(976)1,4201,237(211)1,026Loans - OverseasSovereign9,164------Agriculture8,744277(23)2547-7Banks and other financial5,35910(4)6-(1)(1)Home loans46,62299(6)937(1)6Construction35214(8)6---Other personal1,71912(15)(3)54(10)44Asset financing22018(10)8---Other commercial and industrial23,985153(76)77112(2)110Total loans - overseas 96,165583(142)441180(14)166Total loans700,2992,979(1,118)1,8611,417(225)1,192Other balances - AustraliaCredit commitments151,78159-59---Derivatives34,39220-20---Total other balances - Australia186,17379-79---Other balances - OverseasCredit commitments30,68958(9)49---Derivatives12,175------Total other balances - overseas42,86458(9)49---Total other balances229,037137(9)128---Total929,3363,116(1,127)1,9891,417(225)1,192 Notes to the Financial Statements Note 32 Credit Risk (continued) Impaired Assets by Industry and Status (continued) (1) Write-offs, recoveries and net write-offs are not recognised against credit commitments or derivatives as these exposures are closed out and converted to loans and receivables on impairment. Write-offs and recoveries take place subsequent to this conversion. Collateral held against Loans, Bills Discounted and Other Receivables Commonwealth Bank of Australia – Annual Report 2016 153 Group2015GrossTotal ProvisionsNetTotalImpairedfor ImpairedImpairedNet (1)BalanceAssetsAssetsAssetsWrite-offs (1)Recoveries (1)Write-offs Industry $M$M$M$M$M$M$M Loans - AustraliaSovereign5,521------Agriculture6,258347(133)21465-65Bank and other financial15,15724(36)(12)36(9)27Home loans383,174835(148)68772(3)69Construction2,72230(20)1014-14Other personal22,313266(140)126686(125)561Asset financing8,35691(28)6345(4)41Other commercial and industrial117,557615(400)215404(24)380Total loans - Australia561,0582,208(905)1,3031,322(165)1,157Loans - OverseasSovereign12,929------Agriculture7,990146(14)1323-3Bank and other financial7,57210-1069-69Home loans39,677102(10)928(1)7Construction4075(1)4---Other personal1,12813(9)442(10)32Asset financing55829(10)19---Other commercial and industrial12,909179(69)11035-35Total loans - overseas 83,170484(113)371157(11)146Total loans644,2282,692(1,018)1,6741,479(176)1,303Other balances - AustraliaCredit commitments149,673127-127---Derivatives37,662------Total other balances - Australia187,335127-127---Other balances - OverseasCredit commitments27,90336(8)28---Derivatives8,492------Total other balances - overseas36,39536(8)28---Total other balances223,730163(8)155---Total867,9582,855(1,026)1,8291,479(176)1,303Group2016OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalMaximum exposure ($M)456,07425,2438,763210,219700,299Collateral classification:Secured (%)99. 313. 698. 741. 878. 9Partially secured (%)0. 7-1. 315. 45. 1Unsecured (%)-86. 4-42. 816. 0 Notes to the Financial Statements Note 32 Credit Risk (continued) Collateral held against Loans, Bills Discounted and Other Receivables (continued) A facility is determined to be secured where its ratio of exposure to the estimated value of collateral (adjusted for lending margins) is less than or equal to 100%. A facility is deemed to be partly secured when this ratio exceeds 100% but not more than 250%, and unsecured when either no security is held (e.g. can include credit cards, personal loans, small business loans, and exposures to highly rated corporate entities), or where the secured loan to estimated value of collateral exceeds 250%. Home Loans All home loans are secured by fixed charges over borrowers’ residential properties, other properties (including commercial and broad acre), or cash (usually in the form of a charge over a deposit). Further, with the exception of some relatively small portfolios, for loans with a Loan to Valuation (LVR) of higher than 80% either a Low Deposit Premium or margin is levied, or Lenders Mortgage Insurance (LMI) is taken out to cover 100% of the principal amount at default plus interest. Personal Lending Personal lending (such as credit cards), is predominantly unsecured. Asset Finance The Group leases assets to corporate and retail clients. When the title to the underlying assets is held by the Group as collateral, the balance is deemed fully secured. In other instances, a client’s facilities may be secured by collateral valued at less than the carrying amount of credit exposure. These facilities are deemed partly secured or unsecured. Other Commercial and Industrial Lending The Group’s main collateral types for other commercial and industrial lending consists of secured rights over specified assets of the borrower in the form of: commercial property; land rights; cash (usually in the form of a charge over a deposit); guarantees by company directors supporting commercial lending; a charge over a company’s assets (including debtors, inventory and work in progress); or a charge over stock or scrip. In other instances, a client’s facilities may be secured by collateral with value less than the carrying amount of the credit exposure. These facilities are deemed partly secured or unsecured. 154 Commonwealth Bank of Australia – Annual Report 2016 Group2015OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalMaximum exposure ($M)422,85123,4418,914189,022644,228Collateral classification:Secured (%)99. 314. 098. 740. 278. 7Partially secured (%)0. 7-1. 313. 74. 5Unsecured (%)-86. 0-46. 116. 8Bank2016OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Maximum exposure ($M)404,90223,4678,476185,416622,261Collateral classification:Secured (%)99. 214. 398. 840. 778. 5Partially secured (%)0. 8-1. 214. 64. 9Unsecured (%)-85. 7-44. 716. 6Bank2015OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Maximum exposure ($M)380,02223,4198,307166,113577,861Collateral classification:Secured (%)99. 214. 598. 439. 378. 7Partially secured (%)0. 8-1. 613. 14. 3Unsecured (%)-85. 5-47. 617. 0 Notes to the Financial Statements Note 33 Market Risk Market Risk Measurement The Group uses Value-at-Risk (VaR) as one of the measures of Traded and Non-traded market risk. VaR is a statistical measure of potential loss using historically observed market movements. VaR is modelled at a 97.5% confidence level. This means that there is a 97.5% probability that the loss will not exceed the VaR estimate on any given day. The VaR measured for Traded market risk uses two years of daily movement in market rates. The VaR measure for Non- traded Banking Book market risk uses six years of daily movement in market rates. A 1-day holding period is used for trading book positions. A 20-day holding period is used for Interest Rate Risk in the Banking Book, insurance business market risk and Non- traded equity risk. the maximum VaR is driven by historical observations and is not an estimate of the Group could experience from an extreme market event. As a result of this limitation, management also uses additional controls to measure and manage market risk including stress testing, risk sensitivity and position limits. loss that (1) Average VaR calculated for each 12 month period. (2) For the balance as at 30 June 2016, the increase in traded market risk VaR was mainly driven by a conservative measurement approach for longer term interest rates, particularly in currencies with negative or near zero rates. This approach is under review. (3) The increase in average VaR on the prior year relates to higher market volatility and the above conservative measurement approach. Non-Traded Market Risk Interest Rate Risk in the Banking Book Interest rate risk is the current and prospective impact to the Group’s financial condition due to adverse changes in interest rates to which the Group’s Balance Sheet is exposed. Maturity transformation activities of the Group result in mismatched assets and liabilities positions which direct that the propensity, rate movements have undesired outcomes over both the short- term and long-term. The Group’s objective is to manage interest rate risk to achieve stable and sustainable net interest income in the long-term. timing and quantum of interest (1) Average VaR calculated for each 12 month period. (2) For the balance as at 30 June 2016, the increase in traded market risk VaR was mainly driven by a conservative measurement approach for longer term interest rates, particularly in currencies with negative or near zero rates. This approach is under review. (3) The increase in average VaR on the prior year relates to higher market volatility and the above conservative measurement approach. (4) The risk of these exposures has been represented in this table using a one day holding period. In practice however, these ‘non-traded’ exposures are managed to a longer holding period. Traded Market Risk Traded Market Risk is generated through the Group’s participation in financial markets to service its customers. The Group trades and distributes interest rate, foreign exchange, debt, equity and commodity products, and provides treasury, capital markets and risk management services its customers globally. to The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of financial instruments, including a broad range of securities and derivatives. The Group measures and manages the impact of interest rate risk in two ways: (a) Next 12 months’ earnings Interest rate risk from an earnings perspective is the impact based on changes to the net interest income over the next 12 months. The risk to net interest income over the next 12 months from changes in interest rates is measured on a monthly basis. Earnings risk is measured through sensitivity analysis, which applies an instantaneous 100 basis point parallel shock in interest rates across the yield curve. The prospective change to the net interest income is measured by using an Asset and Liability Management simulation model which incorporates both existing and anticipated new business in its assessment. The change in the Balance Sheet product mix, growth, funding and pricing strategies is incorporated. Assets and liabilities that reprice directly from observable market rates are measured based on the full extent of the rate shock that is applied. Products that are priced based on Group administered or discretionary interest rates and that are impacted by customer behaviour are measured by taking into consideration the historic repricing strategy of the Group and repricing behaviours of customers. In addition to considering how the products have repriced in the past the expected change in price based on both the current and anticipated competitive market forces are also considered in the sensitivity analysis. Commonwealth Bank of Australia – Annual Report 2016 155 Average As at Average As atTotal Market RiskJuneJuneJuneJuneVaR (1-day 97.5% 2016 (1) 2016 2015 (1)2015confidence)$M$M$M$MTraded Market Risk (2) (3)10. 116. 98. 98. 9Non-Traded Interest Rate Risk (4)14. 717. 215. 116. 7Non-Traded Equity Risk (4)10. 27. 514. 312. 9Non-Traded Insurance Market Risk (4)4. 55. 05. 03. 7Average As atAverage As atTraded Market RiskJuneJuneJuneJuneVaR (1-day 97.5% 2016 (1)2016 2015 (1) 2015confidence)$M$M$M$MInterest rate risk (2) (3)7. 916. 75. 85. 2Foreign exchange risk 2. 41. 72. 01. 9Equities risk 0. 41. 10. 60. 3Commodities risk 2. 22. 31. 52. 3Credit spread risk3. 03. 22. 73. 2Diversification benefit (8. 3)(10. 4)(7. 3)(7. 8)Total general market risk 7. 614. 65. 35. 1Undiversified risk 2. 32. 13. 43. 7ASB Bank 0. 20. 20. 20. 1Total 10. 116. 98. 98. 9 Notes to the Financial Statements Note 33 Market Risk (continued) The figures in the following table represent the potential unfavourable change to the Group’s net interest earnings during the year based on a 100 basis point parallel rate shock. Non-Traded Market Risk (continued) (b) Economic Value Interest rate risk from the economic value perspective is based on a 20-day 97.5% VaR measure. Measuring the change in the economic value of equity is an assessment of the long-term impact to the earnings potential of the Group present valued to the current date. The Group assesses the potential change in its economic value of equity through the application of the VaR methodology. A 20-day 97.5% VaR measure is used to capture the net economic value impact over the long-term or total life of all Balance Sheet assets and liabilities to adverse changes in interest rates. The the contractual cash flows for fixed rate products is included in the calculation. Cash flows for discretionary priced products are behaviourally adjusted and repriced at the resultant profile. impact of customer prepayments on The figures in the following table represent the net present value of the expected change in the Group’s future earnings in all future periods for the remaining term of all existing assets and liabilities. (1) Average VaR calculated for each 12 month period. (2) VaR is only for entities that have material risk exposure. (3) ASB data (expressed in NZD) is for the month-end date. Non-Traded Equity Risk The Group retains Non-traded equity risk through business activities in divisions including Institutional Banking and Markets, and Wealth Management. A 20-day, 97.5% confidence VaR is used to measure the economic impact of adverse changes in value. 156 Commonwealth Bank of Australia – Annual Report 2016 Market Risk in Insurance Businesses There are two main sources of market risk in the Life Insurance businesses: (i) market risk arising from guarantees made to policyholders; and (ii) market risk arising from the investment of Shareholders’ capital. Guarantees (to Policyholders) All financial assets within the Life Insurance Statutory Funds directly support either the Group's life insurance or life investment contracts. Market risk arises for the Group on contracts where the liabilities to policyholders are guaranteed by the Group. The Group manages this risk by having an asset and liability management framework which includes the use of hedging instruments. The Group also monitors the risk on a monthly basis. Shareholders’ Capital A portion of financial assets held within the Insurance in the business, both within the Statutory Funds and Shareholder Funds of the Life Insurance company represents shareholder (Group) capital. Market risk also arises for the Group on the investment of this capital. Shareholders’ funds in the Australian Life Insurance businesses are invested 99% in income assets (cash and fixed interest) and 1% in growth assets as at 30 June 2016. A 20-day 97.5% VaR measure is used to capture the Non- traded market risk exposures. (1) Average VaR calculated for each 12 month period. (2) VaR in relation to the investment of shareholder funds. (3) VaR in relation to product portfolios where the Group has guaranteed liabilities to policyholders. Structural Foreign Exchange Risk Structural foreign exchange risk is the risk that movements in foreign exchange rates may have an adverse effect on the Group’s Australian dollar earnings and economic value when the Group’s foreign currency denominated earnings and capital are translated into Australian dollars. The Group’s only material exposure to this risk arises from its New Zealand banking and insurance and Asian operations. Lease Residual Value Risk The Group takes lease residual value risk on assets such as industrial, mining, rail, aircraft, marine, technology, healthcare and other equipment. A lease residual value guarantee exposes the Group to the movement in second-hand asset prices. Commonwealth Bank Group Super Fund The Commonwealth Bank Group Super Fund (the Fund) has a defined benefit portion that creates market risk for the Group. Wealth Risk Management and Human Resources provide oversight of the market risks of the Fund held and managed on behalf of the employees receiving defined benefit pension funds on behalf of the Group (refer to Note 35). JuneJuneNet Interest20162015Earnings at Risk$M$MAverage monthly exposureAUD316. 1244. 4NZD30. 226. 2High monthly exposureAUD408. 7360. 5NZD38. 935. 7Low monthly exposureAUD227. 1168. 9NZD16. 519. 4As at balance dateAUD308. 9168. 9NZD27. 635. 7Average Average JuneJuneNon-Traded Interest Rate VaR2016 (1)2015 (1)(20 day 97.5% confidence) (2)$M$MAUD Interest rate risk65. 567. 3NZD Interest rate risk (3)3. 63. 2As atAs atJuneJuneNon-Traded Equity VaR 20162015(20 day 97.5% confidence)$M$MVaR 34. 058. 0Average Average Non-Traded VaR in Australian JuneJuneLife Insurance Business 2016 (1)2015 (1)(20 day 97.5% confidence)$M$MShareholder funds (2)3. 913. 1Guarantees (to Policyholders) (3)19. 415. 1 Notes to the Financial Statements Note 34 Liquidity and Funding Risk Overview The Group’s liquidity and funding policies are designed to ensure it will meet its obligations as and when they fall due by ensuring it is able to borrow funds on an unsecured basis, has sufficient liquid assets to borrow against on a secured basis, or sell to raise immediate funds without adversely affecting the Group’s net asset value. The Group’s liquidity policies are designed to ensure it maintains sufficient cash balances and liquid asset holdings to meet its obligations to customers, in both ordinary market conditions and during periods of extreme stress. These policies are intended to protect the value of the Group’s operations during periods of unfavourable market conditions. The Group’s funding policies are designed to achieve diversified sources of funding by product, term, maturity date, investor type, investor location, jurisdiction, currency and concentration, on a cost effective basis. This objective applies funding activities. the Group’s wholesale and retail to Liquidity and Funding Risk Management Framework The Group’s liquidity and funding policies, structured under a formal Group Liquidity and Funding Risk Management Framework, are approved by the Board and agreed with APRA. The Group has an Asset and Liability Committee (ALCO) whose charter includes reviewing the management of assets and liabilities, reviewing liquidity and funding policies and strategies, as well as regularly monitoring compliance with those policies across the Group. Group funding Treasury manages positions in accordance with the Group’s liquidity policies and has ultimate authority to execute liquidity decisions should the Group Contingent Funding Plan be activated. Group Risk Management provides oversight of the Group’s liquidity and funding risks, compliance with Group policies and manages the Group’s relationship with prudential regulators. liquidity and the Group’s Subsidiaries within the Colonial Group apply their own liquidity and funding strategies to address their specific needs. The Group’s New Zealand banking subsidiary, ASB Bank, manages its own domestic liquidity and funding needs in accordance with its own liquidity policies and the policies of the Group. ASB’s liquidity policy is also overseen by the Reserve Bank of New Zealand. The Group also has a small banking subsidiary in Indonesia that manages its own liquidity and funding on a similar basis. The Group’s Board is ultimately responsible for the sound and prudent management of liquidity risk across the Group. Liquidity and Funding Policies and Management The Group’s liquidity and funding policies provide that:  An excess of liquid assets over the level prescribed (LCR) under APRA’s Liquidity Coverage Ratio requirement is maintained. Australian ADIs are required to meet a 100% LCR, calculated as the ratio of high quality liquid assets to 30 day net cash outflows projected under a prescribed stress scenario;  Group ‘going concern’ funding and liquidity metrics are also calculated and stress tests additional to the LCR are run;     Short and long-term wholesale funding limits are established, monitored and reviewed regularly. The Group’s market capacity is regularly assessed and used as a factor in funding strategies; Balance Sheet assets that cannot be liquidated quickly are funded with deposits or term borrowings that meet minimum maturity requirements with appropriate liquidity buffers; Liquid assets are held in Australian dollar and foreign currency denominated securities in accordance with expected requirements; The Group has three categories of liquid assets within its domestic liquid assets portfolio. The first includes cash, government and Australian semi-government securities. The second includes negotiable certificates of deposit, bank bills, bank term securities, supranational bonds and Australian Residential Mortgage-backed Securities (RMBS), securities that meet Reserve Bank of Australia (RBA) criteria for purchases under reverse repo. The final category is internal RMBS, being mortgages that have been securitised but retained by the Bank, that are repo- eligible with the RBA under stress; and  Offshore branches and subsidiaries adhere to liquidity policies and hold appropriate foreign currency liquid assets as required. All securities are central bank repo-eligible under normal market conditions. The Group’s key funding tools include:    Its consumer retail funding base, which includes a wide range of retail transaction accounts, savings accounts and term deposits for individual consumers; Its small business customer and institutional deposit base; and include international and domestic funding Its wholesale programs which its Australian dollar Negotiable Certificates of Deposit; Australian dollar bank bills; Asian Transferable Certificates of Deposit program; Australian, U.S. and Euro Commercial Paper programs; U.S. Extendible Notes programs; Australian dollar Domestic Debt Program; U.S.144a and 3a2 Medium-Term Note Programs; Euro Medium-Term Note Program, multi jurisdiction Covered Bond program, and its Medallion securitisation program. The Group’s key liquidity tools include:    A regulatory liquidity management reporting system delivering granular customer and product type information inform business decision making, in a greater product development and resulting awareness of the liquidity risk adjusted value of banking products; to A liquidity management model similar to a “maturity that allows “liquidity gap analysis”, ladder” or forecasting of liquidity needs on a daily basis; liquidity management model An additional that implements the agreed prudential liquidity policies. This model is calibrated with a series of “stress” liquidity crisis scenarios, incorporating both systemic and “name” crisis assumptions, such that the Group will have sufficient liquid assets available to ensure it meets all of its obligations as and when they fall due; Commonwealth Bank of Australia – Annual Report 2016 157 Notes to the Financial Statements Note 34 Liquidity and Funding Risk (continued) Liquidity and Funding Policies and Management (continued)   Central bank repurchase agreement facilities including the RBA’s open-ended Committed Liquidity Facility that provide the Group with the ability to borrow funds on a secured basis, even when normal funding markets are unavailable; and A robust Contingent Funding Plan that is regularly tested so that it can be activated in case of need due to a liquidity event. The Group’s wholesale funding costs were impacted by elevated levels of volatility over the course of the financial year as slowing growth in China, lower commodity prices, headline risk in European banks and equity price volatility combined to push credit spreads wider in domestic and international debt capital markets. The Group has managed its debt portfolio to avoid concentrations such as dependence on single sources of funding, by type or by investor, and continues to maintain a diversified funding base and significant funding capacity in the domestic and global unsecured and secured debt markets. Details of the Group’s regulatory capital management activities and processes are disclosed in Note 25. Maturity Analysis of Monetary Liabilities Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities. (1) Includes deposits that are contractually at call, customer savings and cheque accounts. Historical experience is that such accounts provide a stable source of long-term funding for the Group. (2) All off Balance Sheet items are included in the 0 to 3 months maturity band to reflect their earliest possible maturity. 158 Commonwealth Bank of Australia – Annual Report 2016 GroupMaturity Period as at 30 June 20160 to 33 to 121 to 5Over 5NotMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)492,83875,23620,773561-589,408Payables due to other financial institutions27,2471,5453--28,795Liabilities at fair value through Income Statement6,1281,7241,2471,209-10,308Derivative financial instruments:Held for trading 27,959----27,959Held for hedging purposes (net-settled) (510)5141,8892,729-4,622Held for hedging purposes (gross-settled): Outflows3,43122,45135,33622,289-83,507Inflows(3,271)(20,072)(32,938)(20,982)-(77,263)Bank acceptances1,37853---1,431Insurance policy liabilities----12,63612,636Debt issues and loan capital19,05946,35882,96932,358-180,744Managed funds units on issue----1,6061,606Other monetary liabilities4,6571,445884136,207Total monetary liabilities578,916129,254109,36738,16814,255869,960Guarantees (2)6,216----6,216Loan commitments (2)170,742----170,742Other commitments (2)5,512----5,512Total off Balance Sheet items182,470----182,470Total monetary liabilities and off Balance Sheet items761,386129,254109,36738,16814,2551,052,430 Notes to the Financial Statements Note 34 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities (continued) (1) Includes deposits that are contractually at call, customer savings and cheque accounts. Historical experience is that such accounts provide a stable source of long-term funding for the Group and Bank. (2) All off Balance Sheet items are included in the 0 to 3 months maturity band to reflect their earliest possible maturity. Commonwealth Bank of Australia – Annual Report 2016 159 Group Maturity Period as at 30 June 20150 to 33 to 121 to 5Over 5NotMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)441,29482,06823,334139-546,835Payables due to other financial institutions33,1423,297---36,439Liabilities at fair value through Income Statement3,0161,4042,1831,950-8,553Derivative financial instruments:Held for trading 22,765----22,765Held for hedging purposes (net-settled) 664102,4181,978-4,872Held for hedging purposes (gross-settled): Outflows2087,38230,76311,537-49,890Inflows(206)(5,962)(25,434)(10,025)-(41,627)Bank acceptances1,87074---1,944Insurance policy liabilities----12,91112,911Debt issues and loan capital22,21742,42179,05938,707-182,404Managed funds units on issue----1,1491,149Other monetary liabilities6,1761,320329-547,879Total monetary liabilities530,548132,414112,65244,28614,114834,014Guarantees (2)6,181----6,181Loan commitments (2)165,511----165,511Other commitments (2)5,884----5,884Total off Balance Sheet items177,576----177,576Total monetary liabilities and off Balance Sheet items708,124132,414112,65244,28614,1141,011,590BankMaturity Period as at 30 June 20160 to 33 to 121 to 5Over 5NotMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)456,30663,10117,641180-537,228Payables due to other financial institutions26,8041,5453--28,352Liabilities at fair value through Income Statement3,8441,1511,2471,210-7,452Derivative financial instruments:Held for trading27,672----27,672Held for hedging purposes (net-settled)(604)3271,6202,813-4,156Held for hedging purposes (gross-settled):Outflows3,14326,20940,62235,132-105,106Inflows(2,906)(22,059)(36,762)(31,333)-(93,060)Bank acceptances1,35954---1,413Debt issues and loan capital16,49541,22965,81627,965-151,505Due to controlled entities6,6816,36524,26692,735-130,047Other monetary liabilities4,4424,68856259,193Total monetary liabilities543,236122,610114,509128,7045909,064Guarantees (2)5,873----5,873Loan commitments (2)155,446----155,446Other commitments (2)4,868----4,868Total off Balance Sheet items166,187----166,187Total monetary liabilities and off Balance Sheet items709,423122,610114,509128,70451,075,251 Notes to the Financial Statements Note 34 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities (continued) (1) Includes deposits that are contractually at call, customer savings and cheque accounts. Historical experience is that such accounts provide a stable source of long-term funding for the Bank. (2) All off Balance Sheet items are included in the 0 to 3 months maturity band to reflect their earliest possible maturity. Note 35 Retirement Benefit Obligations Name of Plan Type Form of Benefit Date of Last Actuarial Assessment of the Fund Commonwealth Bank Group Super Defined Benefits (1) and Accumulation Indexed pension and lump sum 30 June 2015 Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA (UK) SBS) Defined Benefits (1) Indexed pension and lump sum 30 June 2013 (2) and Accumulation (1) The defined benefit formulae are generally comprised of final salary, or final average salary, and service. (2) An actuarial assessment of the Fund at 30 June 2016 is currently in progress. Regulatory Framework Both plans operate under trust law with the assets of the plans held separately in trust. The Trustee of Commonwealth Bank Group Super is Commonwealth Bank Officers Superannuation Corporation Pty Limited. The Trustee of CBA (UK) SBS is Commonwealth Bank of Australia (UK) Staff Benefits Scheme Trustee Company Limited. Both Trustees are wholly owned subsidiaries of the Group. The Trustees do not conduct any business other than trusteeship of the plans. The plans are managed and administered on behalf of the members in accordance with the terms of each trust deed and relevant legislation. The funding of the plans complies with regulations in Australia and the UK respectively. Funding and Contributions An actuarial assessment as at 30 June 2015 showed Commonwealth Bank Group Super remained in funding surplus. The Bank agreed to continue contributions of $20 million per month to the plan. Employer contributions paid to the plan are subject to tax at the rate of 15% in the plan. An actuarial assessment of the CBA (UK) SBS as at 30 June 2013 confirmed a funding deficit of GBP62 million ($112 million at the 30 June 2016 exchange rate). The Bank agreed to continue the deficit recovery contributions of GBP15 million per annum ($27 million at the 30 June 2016 exchange rate) until 31 December 2017 to CBA (UK) SBS in addition to the regular GBP3 million per annum ($6 million at the 30 June 2016 exchange rate) contributions for future defined benefit accruals. 160 Commonwealth Bank of Australia – Annual Report 2016 BankMaturity Period as at 30 June 20150 to 33 to 121 to 5Over 5NotMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)409,89270,02420,589139-500,644Payables due to other financial institutions32,3053,233---35,538Liabilities at fair value through Income Statement2,0151,2292,1701,950-7,364Derivative financial instruments:Held for trading22,527----22,527Held for hedging purposes (net-settled)272612,3392,036-4,663Held for hedging purposes (gross-settled):Outflows-6,72241,27220,695-68,689Inflows-(5,342)(33,776)(17,576)-(56,694)Bank acceptances1,84563---1,908Debt issues and loan capital20,10937,77762,33235,837-156,055Due to controlled entities6,5015,67823,36590,964-126,508Other monetary liabilities5,5356,58970-2112,215Total monetary liabilities500,756126,234118,361134,04521879,417Guarantees (2)5,778----5,778Loan commitments (2)152,772----152,772Other commitments (2)5,179----5,179Total off Balance Sheet items163,729----163,729Total monetary liabilities and off Balance Sheet items664,485126,234118,361134,045211,043,146 Notes to the Financial Statements Note 35 Retirement Benefit Obligations (continued) Funding and Contributions (continued) The Group’s expected contribution to the Commonwealth Bank Group Super and the CBA (UK) SBS for the year ended 30 June 2017 are $240 million and GBP18 million ($33 million at the 30 June 2016 exchange rate) respectively. Defined Benefit Superannuation Plans The amounts reported in the Balance Sheet are reconciled as follows: (1) Represents superannuation contributions required by the Bank to meet its obligations to members of the defined contribution division of Commonwealth Bank Group Super. Commonwealth Bank of Australia – Annual Report 2016 161 CBA(UK)SBSTotal201620152016201520162015$M$M$M$M$M$MPresent value of funded obligations(3,114)(3,184)(656)(672)(3,770)(3,856)Fair value of plan assets3,3753,4606056153,9804,075Net pension assets/(liabilities) as at 30 June261276(51)(57)210219Amounts in the Balance Sheet:Assets (Note 16)261276--261276Liabilities (Note 21)--(51)(57)(51)(57)Net assets/(liabilities)261276(51)(57)210219The amounts recognised in the Income Statement are as follows:Current service cost(34)(37)(6)(4)(40)(41)Net interest income/(expense)9(6)(2)(3)7(9)Employer financed benefits within accumulation division (1)(266)(251)--(266)(251)Total included in superannuation plan expense(291)(294)(8)(7)(299)(301)Changes in the present value of the defined benefit obligation are as follows:Opening defined benefit obligation(3,184)(3,510)(672)(544)(3,856)(4,054)Current service cost(34)(37)(6)(4)(40)(41)Interest cost (144)(140)(24)(24)(168)(164)Member contributions(7)(8)--(7)(8)Actuarial gains/(losses) from changes in demographic assumptions321---321-Actuarial gains/(losses) from changes in financial assumptions(268)232(57)(47)(325)185Actuarial gains/(losses) from changes in other assumptions(8)56(9)3(17)59Payments from the plan2102232720237243Exchange differences on foreign plans--85(76)85(76)Closing defined benefit obligation(3,114)(3,184)(656)(672)(3,770)(3,856)Changes in the fair value of plan assets are as follows:Opening fair value of plan assets3,4603,3886154754,0753,863Interest income1531342321176155Return on plan assets (excluding interest income)(9)164373628200Member contributions78--78Employer contributions2402403634276274Employer financed benefits within accumulation division(266)(251)--(266)(251)Payments from the plan(210)(223)(27)(20)(237)(243)Exchange differences on foreign plans--(79)69(79)69Closing fair value of plan assets3,3753,4606056153,9804,075Commonwealth Bank Group Super Notes to the Financial Statements Note 35 Retirement Benefit Obligations (continued) Economic Assumptions In addition to financial assumptions, the mortality assumptions for pensioners can materially impact the defined benefit obligations. These assumptions are age related and allowances are made for future improvement in mortality. The expected life expectancies (longevity) for pensioners are set out below: Sensitivity to Changes in Assumptions The table below sets out the sensitivities of the present value of defined benefit obligations at 30 June to a change in the principal actuarial assumptions: Average Duration The average duration of defined benefit obligation at 30 June is as follows: Risk Management The pension plans expose the Group to longevity risk, currency risk, interest rate risk, inflation risk and market risk. The Trustees perform Asset-Liability Matching (ALM) exercises to ensure the plan assets are well matched to the nature and maturities of the defined benefit obligations. The Commonwealth Bank Group Super’s investment strategy comprises 39% growth and 61% defensive assets. Inflation and interest rate risks are partly mitigated by investing in long dated fixed interest securities which better match the average duration of liabilities and entering into inflation and interest swaps. 162 Commonwealth Bank of Australia – Annual Report 2016 Commonwealth BankGroup SuperCBA(UK)SBS 2016201520162015Economic assumptions% % % % The above calculations were based on the following assumptions:Discount rate3. 404. 603. 003. 70Inflation rate1. 602. 253. 103. 50Rate of increases in salary2. 603. 504. 104. 50Commonwealth BankGroup SuperCBA(UK)SBS 2016201520162015Expected life expectancies for pensionersYears Years Years Years Male pensioners currently aged 6028. 629. 628. 728. 5Male pensioners currently aged 6523. 624. 723. 823. 7Female pensioners currently aged 6033. 034. 731. 231. 1Female pensioners currently aged 6527. 929. 526. 226. 1Commonwealth BankGroup SuperCBA(UK)SBS 20162016Impact of change in assumptions on liabilities% % 0.25% decrease in discount rate3. 444. 700.25% increase in inflation rate2. 672. 900.25% increase to the rate of increases in salary0. 480. 30Longevity increase of 1 year4. 373. 40Commonwealth BankGroup SuperCBA(UK)SBS 20162016YearsYearsAverage duration at balance date1219 Notes to the Financial Statements Note 35 Retirement Benefit Obligations (continued) Risk Management (continued) The allocation of assets backing the defined benefit portion of Commonwealth Bank Group Super is as follows: (1) Values based on prices or yields quoted in an active market. (2) Values based on non-quoted information. (3) 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 Australian equities fair value includes $111 million of Commonwealth Bank shares. The real estate fair value includes $6 million of property assets leased to the Bank. Note 36 Investments in Subsidiaries and Other Entities Subsidiaries The key subsidiaries of the Bank are: All the above subsidiaries are 100% owned and incorporated in Australia. Commonwealth Bank of Australia – Annual Report 2016 163 Commonwealth Bank Group Super20162015Fair value% of planFair value% of planAsset allocations($M)asset($M)assetCash1083. 21594. 6Equities - Australian (1)3119. 22898. 4Equities - Overseas (1)43112. 860817. 6Bonds - Commonwealth Government (1)67019. 959517. 2Bonds - Semi-Government (1)1,15034. 11,07131. 0Bonds - Corporate and other (1)1223. 6782. 2Real Estate (2)2146. 32055. 9Derivatives (2)(14)(0. 4)80. 2Other (3)38311. 344712. 9Total fair value of plan assets3,3751003,460100Entity NameEntity NameAustralia(a) BankingCBA Covered Bond TrustMedallion Trust Series 2014-1CBA International Finance Pty LimitedMedallion Trust Series 2014-2Commonwealth Securities LimitedMedallion Trust Series 2015-1Medallion Trust Series 2007-1GMedallion Trust Series 2015-2Medallion Trust Series 2008-1RMedallion Trust Series 2016-1Medallion Trust Series 2011-1Residential Mortgage Group Pty LtdMedallion Trust Series 2013-1Series 2008-1D SWAN TrustMedallion Trust Series 2013-2(b) Insurance and Funds ManagementCapital 121 Pty LimitedCommonwealth Insurance LimitedColonial Holding Company LimitedThe Colonial Mutual Life Assurance Society LimitedCommonwealth Insurance Holdings LimitedNotes to the Financial Statements Note 36 Investments in Subsidiaries and Other Entities (continued) Subsidiaries (continued) The Group also consolidates a number of unit trusts and other companies as part of the ongoing investment activities of the life insurance and wealth businesses. These investment vehicles are excluded from the above list. Significant Judgements and Assumptions Control and Voting Rights Holding more than 50% of an entity’s voting rights typically indicates that the Group has control over the entity. Significant judgement is involved where the Group either holds more than 50% of the voting rights but does not control an entity, which occurs in the case of AHL Holdings Pty Limited (AHL) as outlined below or where the Group is deemed to control an entity despite holding less than 50% of the voting rights. AHL Holdings Pty Limited (AHL) Management have determined that the Group does not control AHL despite owning 80% of the issued share capital of this entity. According to the Shareholders Deed agreed between the shareholders of AHL, unanimous consent is required from all parties to the Deed for all key decisions. This results in joint control and hence the Group accounts for its investment in AHL as a joint venture using the equity method. Agent or principal The Group is deemed to have power over an investment fund when it holds either the responsible entity (RE) and/or the manager function of that fund. Whether that power translates to control depends on whether the Group is deemed to act as an agent or a principal of that fund. Management have determined that the Group acts as a principal and controls a fund when it cannot be easily removed as a manager or RE by investors and when its economic interest in that fund is substantial compared to the economic interest of other investors. In all other cases the Group acts as agent and does not control the fund. Non-Controlling Interests The share capital above comprises predominantly New Zealand Perpetual Preference Shares (PPS) of AUD505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 million) of PPS. The PPS were issued into the New Zealand capital markets and are subject to New Zealand law. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly based on the New Zealand one year swap rate plus a margin of 1.3% and are non-cumulative. The payments of dividends are subject to a number of conditions including the satisfaction of solvency tests and the ability of the Board to cancel payments. On 22 December 2004, ASB Capital No.2 Limited, a New Zealand subsidiary, issued NZD350 million (AUD323 million) of PPS. The PPS were issued into the New Zealand capital markets and are subject to New Zealand law. Such shares are non- redeemable and carry limited voting rights. Dividends are payable quarterly on the New Zealand one year swap rate plus a margin of 1.0% and are non-cumulative. The payments of dividends are subject to a number of conditions including the satisfaction of solvency tests and the ability of the Board to cancel payments. 164 Commonwealth Bank of Australia – Annual Report 2016 Extent of BeneficialEntity NameInterest if not 100%Incorporated inNew Zealand and Other Overseas(a) BankingASB Bank LimitedNew Zealand ASB Covered Bond TrustNew Zealand ASB Finance LimitedNew Zealand ASB Holdings LimitedNew Zealand ASB Term FundNew Zealand CBA Funding (NZ) LimitedNew Zealand CommBank Europe LimitedMalta Medallion NZ Series Trust 2009-1RNew Zealand PT Bank Commonwealth99%Indonesia (b) Insurance and Funds ManagementASB Group (Life) LimitedNew Zealand PT Commonwealth Life80%Indonesia Sovereign Assurance Company LimitedNew Zealand Group20162015$M$MShareholders' Equity550562Total non-controlling interests550562Notes to the Financial Statements Note 36 Investments in Subsidiaries and Other Entities (continued) ASB Capital Limited and ASB Capital No.2 Limited have advanced proceeds from the above public issues to ASB Funding Limited, a New Zealand subsidiary. ASB Funding Limited in turn invested the proceeds in PPS issued by ASB Limited (ASB PPS), also a New Zealand subsidiary. In relation to ASB Capital No.2 Limited, if an APRA Event occurs, the loan to ASB Funding Limited will be repaid and ASB Capital No.2 Limited will become the holder of the corresponding ASB PPS. The PPS may be purchased by a Commonwealth Bank subsidiary exercising a buy-out right five years or more after issue, or on the occurrence of regulatory or tax events. Significant Restrictions There were no significant restrictions on the ability to transfer cash or other assets, pay dividends or other capital distributions, provide or repay loans and advances between the entities within the Group. There were also no significant restrictions on the Group's ability to access or use the assets and settle the liabilities of the Group resulting from protective rights of non-controlling interests. Associates and Joint Ventures There were no individually significant investments in associates or joint ventures held by the Group as at 30 June 2016 and 30 June 2015. In addition, there were no significant restrictions on the ability of associates or joint ventures to transfer funds to the Bank or its subsidiaries in the form of cash dividends or to repay loans or advances made. The Group’s investments in associates and joint ventures are shown in the table below. (1) The Group’s 80% interest in AHL Holdings Pty Limited (trading as Aussie Home Loans) is jointly controlled as the key financial and operating decisions require the unanimous consent of all directors. AHL Holdings Pty Limited is considered a structured entity. The Group’s maximum exposure to loss in relation to its investment is its carrying value and the total assets of Aussie Home Loans equals $280 million (2015: $329 million). In 2015, $96 million of this investment was carried as Held for Sale and measured at the lower of carrying amount and fair value less costs to sell. The component was subsequently sold in the 2016 financial year. (2) (1) This amount is recognised within Note 2 in the share of profits of associates and joint ventures net of impairment. Structured Entities A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities. Depending on the Group’s power over the activities of the entity and its exposure to and ability to influence its own returns, it may consolidate the entity. In other cases it may sponsor or have exposure to such an entity but not consolidate it. Consolidated Structured Entities The Group has the following contractual arrangements which require it to provide financial support to its structured entities. Securitisation Structured Entities The Group provides liquidity facilities to Medallion and Swan structured entities and a loan facility to SHIELD 50 entity. The liquidity facilities can only be drawn to cover cash flow shortages relating to mismatches in timing of cash inflows due from securitised asset pools and cash outflows due to note holders. These ‘timing mismatch’ facilities rank pari passu with other senior secured creditors. The facilities limit is $1,118 million. The Group has no contractual obligations to purchase assets from its securitisation structured entities. Commonwealth Bank of Australia – Annual Report 2016 165 Group2016201520162015OwnershipOwnershipPrincipalCountry ofBalance$M$MInterest %Interest % ActivitiesIncorporationDateAHL Holdings Pty Limited (1)2722678080Mortgage Broking Australia 30-JunBank of Hangzhou Co., Ltd1,4051,2822020Commercial Banking China 31-DecBoCommLife Insurance Company Limited1741593838InsuranceChina 31-DecFirst State European Diversified Infrastructure Fund FCP-SIF (2)11019849Funds Management Luxembourg 31-DecQilu Bank Co., Ltd4444202020Commercial Banking China 31-DecVietnam International Commercial Joint Stock Bank1921972020Financial Services Vietnam 31-DecOther 179114Various Various Various Various VariousCarrying amount of investments in associates and joint ventures2,7762,637Group20162015Share of Associates' and Joint Ventures profits$M $M Operating profits before income tax367336Income tax expense(78)(68)Operating profits after income tax (1)289268 Notes to the Financial Statements Note 36 Investments in Subsidiaries and Other Entities (continued) Consolidated Structured Entities (continued) Covered Bonds Trust The Group provides funding and support facilities to CBA Covered Bond Trust and ASB Covered Bond Trust (the ‘Trusts’). CBA Covered Bond Trust and ASB Covered Bond Trust are bankruptcy remote SPVs that guarantee any debt obligations owing under the US$30 billion CBA Covered Bond Programme and the EURO 7 billion ASB Covered Bond Programme, respectively. The funding facilities allow the Trusts to hold sufficient residential mortgage loans to support the guarantees provided to the Covered Bonds. The Group also provides various swaps to the Trusts to hedge any interest rate and currency mismatches. The Group, either directly or via its wholly owned subsidiaries, Securitisation Advisory Services Pty Limited and Securitisation Management Services Limited, provides various services to the Trusts including servicing and monitoring of the residential mortgages. Structured Asset Finance Structured Entities The Group has no contractual obligation to provide financial support to any of its Structured Asset Finance structured entities. During the year ended 30 June 2016, the Bank entered into a debt forgiveness arrangement with two wholly owned structured entities for the total of $69 million. The financial impact of the debt forgiveness was fully eliminated on consolidation. Unconsolidated Structured Entities The Group has exposure to various securitisation vehicles via Residential Mortgage-backed Securities (RMBS) and Asset-backed Securities (ABS). The Group may also provide derivatives and other commitments to these vehicles. The Group also has exposure to Investment Funds and other financing vehicles. Securitisations Securitisations involve transferring assets into an entity that sells beneficial interests to investors through the issue of debt and equity notes with varying levels of subordination. The notes are collateralised by the assets transferred to these vehicles and pay a return based on the returns of those assets, with residual returns paid to the most subordinated investor. The Group may trade or invest in Residential Mortgage-backed Securities and Asset-backed Securities which are backed by Commercial Properties, Consumer Receivables, Equipment and Auto Finance. The Group may also provide lending, derivatives, liquidity and commitments to these securitisation entities. Other Financing Asset-backed entities are used to provide tailored lending for the purchase or lease of assets transferred by the Group or its clients. The assets are normally pledged as collateral to the lenders. The Group engages in raising finance for assets such as aircraft, trains, vessels and other infrastructure. The Group may also provide lending, derivatives, liquidity and commitments to these entities. Investment Funds The Group conducts investment management and other fiduciary activities as responsible entity, trustee, custodian, advisor or manager for investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail trusts. The Group’s exposure to Investment Funds includes holding units in the investment funds and trusts, providing lending facilities, derivatives and receiving fees for services. The nature and extent of the Group’s interests in these entities are summarised below. Interests do not include plain vanilla derivatives (e.g. interest rate swaps and currency swaps) and positions where the Group creates rather than absorbs variability of the Structured Entity, for example deposits. These have been excluded from the below table. (1) Relates to undrawn facilities. (2) Size of the entities is generally the total assets of the entities, except for Real Estate Investment Trusts where the size is based on the Group’s credit exposure of $11.2 billion. 166 Commonwealth Bank of Australia – Annual Report 2016 2016OtherInvestmentExposures to unconsolidated RMBSABSFinancingFundsTotalstructured entities$M$M$M$M$MAssets at fair value through income statement - trading5--1,0781,083Available-for-sale investments7,123872-2058,200Loans, bills discounted and other receivables2,4321,6062,6279,86116,526Other assets---123123Total on Balance Sheet exposures9,5602,4782,62711,26725,932Total notional amounts of off Balance Sheet exposures (1)1,3385435013,9156,297Total maximum exposure to loss10,8983,0213,12815,18232,229Total assets of the entities (2)47,62615,0669,967290,261362,920 Notes to the Financial Statements Note 36 Investments in Subsidiaries and Other Entities (continued) Unconsolidated Structured Entities (continued) (1) Relates to undrawn facilities. (2) Size of the entities is generally the total assets of the entities, except for Real Estate Investment Trusts where the size is based on the Group’s credit exposure of $13.7 billion and newly established securisation vehicles that have no assets where the Group’s exposure is represented by undrawn credit facilities of $1,240 million. The Group’s exposure to loss depends on the level of subordination of the interest which indicates the extent to which other parties are obliged to absorb credit losses before the Group. An overview of the Group’s interests, relative ranking and external credit rating, for vehicles that have credit subordination in place, is summarised in the table below, and include securitisation vehicles and other financing. (1) $10,853 million of RMBS exposures, $3,008 million of ABS exposures and $1,522 million of other financing exposures are rated investment grade, the remaining $1,606 million exposures are rated sub-investment grade. (2) All RMBS and ABS exposures are rated investment grade. (3) All exposures are rated sub-investment grade. (1) $11,025 million of RMBS exposures, $2,406 million of ABS exposures and $1,506 million of other financing exposures are rated investment grade, the remaining $1,173 million exposures are rated sub-investment grade. (2) All RMBS and ABS exposures are rated investment grade, all other financing exposures are rated sub-investment grade. (3) All exposures are rated sub-investment grade. Sponsored Unconsolidated Structured Entities For the purposes of this disclosure, the Group sponsors an entity when it manages or advises the entity’s program, places securities into the market on behalf of the entity, provides liquidity and/or credit enhancements to the entity, or the Group’s name appears in the Structured Entity. During the year ended 30 June 2016, the Group has sponsored two unconsolidated structured entities being Security Holding Investment Entity Linking Deals Limited (SHIELD) and SHIELD Trust No. 2. A wholly owned subsidiary of the Group, Securitisation Advisory Services Pty Limited (SAS), is the manager of SHIELD and SHIELD is the trustee of SHIELD Trust No. 2. The Group continues to hold an interest in these structured entities. There has been no significant income earned or expense incurred directly from these entities during the year ended 30 June 2016. There also have been no assets transferred by all parties to the sponsored entities during the year ended 30 June 2016. Commonwealth Bank of Australia – Annual Report 2016 167 2015OtherInvestmentExposures to unconsolidatedRMBSABSFinancingFundsTotalstructured entities$M$M$M$M$MAssets at fair value through income statement - trading28--1,3741,402Available-for-sale investments7,6741,002-1868,862Loans, bills discounted and other receivables1,8093912,55510,49915,254Other assets---210210Total on Balance Sheet exposures9,5111,3932,55512,26925,728Total notional amounts of off Balance Sheet exposures (1)1,5711,0271576,1188,873Total maximum exposure to loss11,0822,4202,71218,38734,601Total assets of the entities (2)52,9797,37310,102293,509363,9632016OtherRanking and credit rating of exposuresRMBSABSFinancingTotalto unconsolidated structured entities$M$M$M$MSenior (1)10,8533,0083,12816,989Mezzanine (2)1813-31Subordinated (3)27--27Total maximum exposure to loss10,8983,0213,12817,0472015OtherRanking and credit rating of exposuresRMBSABSFinancingTotalto unconsolidated structured entities$M$M$M$MSenior (1)11,0252,4062,67916,110Mezzanine (2)28143375Subordinated (3)29--29Total maximum exposure to loss11,0822,4202,71216,214Notes to the Financial Statements Note 37 Key Management Personnel Detailed remuneration disclosures by Key Management Personnel are provided in the Remuneration Report of the Directors’ Report on pages 60 to 68 and have been audited. Shareholdings Details of the aggregate shareholdings of Key Management Personnel are set out below. (1) Reward Rights represent rights granted under the GLRP which are subject to performance hurdles. Deferred Shares/Rights represent the deferred STI awarded under Executive General Manager arrangements, sign-on and retention awards received as restricted shares/rights. PERLS include cumulative holdings of all PERLS securities issued by the Group. (2) Reward Rights and Deferred Shares/Rights become ordinary shares upon vesting. A portion of Ian Narev’s vested equity award was delivered in the form of cash, which was paid to registered charities pursuant to an option that the Board made available. (3) Net Change Other incorporates changes resulting from purchases, sales, forfeitures and retirement of Non-Executive Directors during the financial year. (4) 30 June 2016 balances represent aggregate shareholdings of all KMP at balance date. (5) Non-Executive Directors who hold less than 5,000 Commonwealth Bank shares are required to receive 20% of their total post-tax annual fees as Commonwealth Bank shares. These shares are subject to a 10 year trading restriction (the shares will be released earlier if the director leaves the Board). (6) Other securities: Jane Hemstritch retired effective 31 March 2016 (2015: held Colonial Sub notes). Loans to Key Management Personnel All loans to Key Management Personnel (or close family members or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned held significant voting power) have been provided on normal commercial terms and conditions no more favourable than those given to other employees and customers including the term of the loan, security required and the interest rate (which may be fixed or variable). Details of aggregate loans to Key Management Personnel are set out below: Other transactions of Key Management Personnel Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed within this report) of Key Management Personnel occur in the ordinary course of business on normal commercial terms and conditions no more favourable than those given to other employees and customers. Disclosure of financial instrument transactions regularly made as part of normal banking operations is limited to disclosure of such transactions with Key Management Personnel and entities controlled or significantly influenced by them. All such financial instrument transactions that have occurred between entities within the Group and their Key Management Personnel have been trivial or domestic in nature and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Key Management Personnel 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 Group. A related party of an Executive has also been employed by the Group, and is remunerated in a manner consistent with normal employee relationships. 168 Commonwealth Bank of Australia – Annual Report 2016 GroupBank2016201520162015Key management personnel compensation$'000$'000$'000$'000Short-term benefits34,70734,08634,70734,086Post-employment benefits457450457450Share-based payments12,2439,09012,2439,090Long-term benefits1,1341,3001,1341,300Total48,54144,92648,54144,926Reward/Acquired/DeferredNetBalanceGranted asShares ChangeBalanceClass1 July 2015RemunerationVested (1)(2)Other (3)30 June 2016 (4)Non-Executive DirectorsOrdinary (5)191,36836,260-(27,063)200,565PERLS 12,9809,550-(12,700)9,830Other securities (6)5,000--(5,000)-ExecutivesOrdinary 442,518--188,242630,760GLRP - Reward Shares/Rights1,092,787290,938(212,185)(33,822)1,137,718Deferred Shares/Rights45,2064,361(22,934)-26,63320162015KMP's$'000$'000Loans11,35510,130Interest Charged456501 Notes to the Financial Statements Note 38 Related Party Disclosures Commonwealth Bank of Australia, which is incorporated in Australia, is the ultimate parent of the Group. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or a separate party controls both. The definition includes subsidiaries, associates, joint ventures, pension plans as well as other persons. A number of banking transactions are entered into with related parties in the normal course of business on an arm’s length basis. These include loans, deposits and foreign currency transactions, upon which some fees and commissions may be earned. Details of amounts paid or received from related parties, in the form of dividends or interest, are set out in Note 2. The Bank’s aggregate investments in, and loans to controlled entities are disclosed in the table below. Amounts due to controlled entities are disclosed in the Balance Sheet of the Bank. (1) On 31 March 2015 internal RMBS issued to the Bank by controlled entities of $75,041 million were reclassified to Loans to controlled entities. Refer to Note 11 for further detail. The Group also receives fees on an arm’s length basis of $49 million (2015: $24 million) from funds classified as associates. The Bank provides letters of comfort to other entities within the Group on standard terms. Guarantees include a $40 million (2015: $40 million) guarantee to AFS license holders in respect of excess compensation claims and a $5 million bank guarantee provided to Colonial First State Investments Limited which expired on 30 June 2016 (2015: $5 million). The Bank is the head entity of the tax consolidated group and has entered into tax funding and tax sharing agreements with its eligible Australian resident subsidiaries. The terms and conditions of these agreements are set out in Note 1(r). The amount receivable by the Bank under the tax funding agreement with the tax consolidated entities is $213 million as at 30 June 2016 (2015: $200 million receivable). This balance is included in ‘Other assets’ in the Bank’s separate Balance Sheet. All transactions between Group entities are eliminated on consolidation. Commonwealth Bank of Australia – Annual Report 2016 169 Bank20162015$M$MShares in controlled entities11,72013,027Loans to controlled entities (1)134,233130,729Total shares in and loans to controlled entities145,953143,756 Notes to the Financial Statements Note 39 Notes to the Statements of Cash Flows (a) Reconciliation of Net Profit after Income Tax to Net Cash (used in)/provided by Operating Activities (b) Reconciliation of Cash For the purposes of the Statements of Cash Flows, cash includes cash and money at short call. (c) Non-cash Financing and Investing Activities (1) No part of the Dividend Reinvestment Plan paid out in the 2016 financial year was satisfied through the on-market purchase and transfer of shares to participating shareholders (2015: $704 million and 2014: $722 million). (d) Disposal of Controlled Entities - Fair Value of Asset Disposal The Group disposed of certain CFS GAM operations including Colonial First State Property Management Pty Limited, Commonwealth Management Investments Limited and Colonial First State Management Pty Limited during the 2014 financial year. 170 Commonwealth Bank of Australia – Annual Report 2016 GroupBank20162015201420162015$M$M$M$M$MNet profit after income tax9,2479,0848,6508,6398,976(Increase)/decrease in interest receivable(148)3(22)(130)(251)(Decrease)/increase in interest payable(312)14(295)(295)(70)Net increase in assets at fair value through Income Statement (excluding life insurance)(8,538)(5,490)(1,016)(8,787)(4,997)Net gain on sale of controlled entities and associates-(13)(60)(21)-Net gain on sale of investments--(2)--Net movement in derivative assets/liabilities 5,9886,1805,3756,2889,058Net loss on sale of property, plant and equipment 21812154Equity accounting profit(289)(268)(192)--Loan impairment expense1,2569889181,153837Depreciation and amortisation (including asset write downs)857803874666631Increase/(decrease) in liabilities at fair value through Income Statement (excluding life insurance)1,651975(1,674)1232,105(Decrease)/increase in other provisions (78)3547(13)161Increase/(decrease) in income taxes payable486(32)(617)181(423)Decrease in deferred tax liabilities(162)(15)(104)--Decrease/(increase) in deferred tax assets 110131363(22)25Decrease/(increase)in accrued fees/reimbursements receivable13766(158)(10)8(Decrease)/increase in accrued fees and other items payable(265)34994(67)230Decrease in life insurance contract policy liabilities(991)(1,133)(1,082)--Cash flow hedge ineffectiveness5209(5)(4)(Gain)/loss on changes in fair value of hedged items(642)(493)71(1,369)(660)Dividend received - controlled entities---(1,462)(1,972)Changes in operating assets and liabilities arising from cash flow movements(13,640)(4,658)(8,280)(11,367)(10,966)Other7463101,0921,020512Net cash (used in)/provided by operating activities(4,561)7,1833,963(5,463)3,204GroupBank20162015201420162015$M$M$M$M$MNotes, coins and cash at banks12,10315,68312,49010,80914,821Other short-term liquid assets2,3443,5876,6382,1003,344Cash and cash equivalents at end of year14,44719,27019,12812,90918,165Group201620152014$M$M$MShares issued under the Dividend Reinvestment Plan (1)1,209571707Group201620152014$M$M$MNet assets--440Cash consideration received--569Cash and cash equivalents held in disposed entities--38 Notes to the Financial Statements Note 39 Notes to the Statements of Cash Flows (continued) (e) Acquisition of Controlled Entities On 20 April 2016, 100% of the contributed equity of Vector Gas Limited was purchased for NZ$952.5 million and renamed to First Gas Limited (FGL). The acquisition occurred via the Global Diversified Infrastructure Fund (GDIF), which is partly owned by the Group’s life insurance business. The investment in GDIF is used to back life insurance policy liabilities, the majority of which are investment-linked contracts where the returns to policyholders are linked to GDIF’s overall returns. Notwithstanding this, GDIF and consequently FGL, have been consolidated due to the overall equity ownership in GDIF. FGL is the owner and operator of gas transmission and distribution networks within New Zealand. The determination of the fair value of identifiable assets acquired and liabilities assumed is ongoing. The provisional fair value of net tangible assets acquired was $553 million, resulting in provisional goodwill of $304 million. These figures will be revised upon completion of the purchase price allocation, in accordance with Australian Accounting Standards. The Group acquired 100% of the issued share capital of the TYME Group and gained control on 26 January 2015. TYME is a South African based global leader in designing, building and operating digital banking systems. This acquisition will support the Group in growing into emerging markets, as well as provide capability to enhance innovation in our core markets. The fair value of the identifiable assets acquired and liabilities assumed at the acquisition date are as follows: (1) As the purchase price allocation is ongoing, the provisional fair value of net identifiable assets has been disclosed in accordance with Australian Accounting Standards. Note 40 Disclosures about Fair Values (a) Valuation The best evidence of fair value is a quoted market price in an active market. Therefore, where possible, fair value is based on quoted market prices. Where no quoted market price for an instrument is available, the fair value is based on present value estimates or other valuation techniques based on current market conditions. 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. Determination of the fair value of Over-the-Counter (OTC) derivatives includes credit valuation adjustments (CVA) for derivative assets to reflect the credit worthiness of the counterparty. Fair value of uncollateralised derivative assets and uncollateralised derivative liabilities incorporate funding valuation adjustments (FVA) to reflect funding costs and benefits to the Group. These adjustments are applied after considering any relevant collateral or master netting arrangements. The Group utilises various valuation techniques and applies a hierarchy for valuation inputs that maximise the use of observable market data, if available. Under AASB 13 ‘Fair Value Measurement’ all financial and non-financial assets and liabilities measured or disclosed at fair value are categorised into one of the following three fair value hierarchy levels: Quoted Prices in Active Markets – Level 1 This category includes assets and liabilities for which the valuation is determined by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions on an arm’s length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. Financial instruments included in this category are liquid government bonds, financial institution and corporate bonds, certificates of deposit, bank bills, listed equities and exchange traded derivatives. Valuation Technique Using Observable Inputs – Level 2 This category includes assets and liabilities that have been valued using inputs other than quoted prices as described for Level 1, but which are observable for the asset or liability, either directly or indirectly. The valuation techniques include the use of discounted cash flow analysis, option pricing models and other market accepted valuation models. Financial instruments included in this category are commercial papers, mortgage-backed securities and OTC derivatives including interest rate swaps, cross currency swaps and FX options. Commonwealth Bank of Australia – Annual Report 2016 171 Group201620152014$M (1)$M$MNet identifiable assets at fair value553(2)-Add: Goodwill30443-Purchase consideration transferred85741-Less: Cash and cash equivalents acquired---85741-Less: Contingent consideration-(12)-Net cash outflow on acquisition85729- Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) Valuation Technique Using Significant Unobservable Inputs – Level 3 This category includes assets and liabilities where the valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Unobservable inputs are those not readily available in an active market due to market illiquidity or complexity of the product. These inputs are generally derived and extrapolated from observable inputs to match the risk profile of the financial instrument, and are calibrated against current market assumptions, historic transactions and economic models, where available. These inputs may include the timing and amount of future cash flows, rates of estimated credit losses, discount rates and volatility. Financial instruments included in this category for the Group and Bank are certain exotic OTC derivatives and certain asset- backed securities valued using unobservable inputs. (b) Fair Value Hierarchy for Financial Assets and Liabilities Measured at Fair Value The classification in the fair value hierarchy of the Group’s and the Bank’s financial assets and liabilities measured at fair value is presented in the tables below: 172 Commonwealth Bank of Australia – Annual Report 2016 GroupFair Value as at 30 June 2016Fair Value as at 30 June 2015Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total$M$M$M$M$M$M$M$MFinancial assets measured at fair value on a recurring basisAssets at fair value through Income Statement:Trading 23,18010,887-34,06718,6237,801-26,424Insurance4,0149,533-13,5475,3958,693-14,088Other431,437-1,480951,183-1,278Derivative assets1646,4916046,5671246,0628046,154Available-for-sale investments71,2449,35330180,89864,34110,22811574,684Bills Discounted10,507--10,50714,847--14,847Total financial assets measured at fair value109,00477,701361187,066103,31373,967195177,475Financial liabilities measured at fair value on a recurring basisLiabilities at fair value through Income Statement2,7497,543-10,2924,4374,056-8,493Derivative liabilities3839,8196439,921-35,1902335,213Life investment contracts-8,582-8,582-9,159-9,159Total financial liabilities measured at fair value2,78755,9446458,7954,43748,4052352,865BankFair Value as at 30 June 2016Fair Value as at 30 June 2015Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total$M$M$M$M$M$M$M$MFinancial assets measured at fair value on a recurring basisAssets at fair value through Income Statement:Trading22,73110,254-32,98518,2116,924-25,135Other-1,187-1,187-989-989Derivative assets1646,4496046,525745,5208045,607Available-for-sale investments68,1907,87030176,36162,4359,75411572,304Bills Discounted 10,507--10,50714,847--14,847Total financial assets measured at fair value101,44465,760361167,56595,50063,187195158,882Financial liabilities measured at fair value on a recurring basisLiabilities at fair value through Income Statement2,7494,692-7,4414,4282,895-7,323Derivative liabilities3343,7817043,884-39,6112539,636Total financial liabilities measured at fair value2,78248,4737051,3254,42842,5062546,959 Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) (c) Analysis of Movements between Fair Value Hierarchy Levels During the year ended 30 June 2016, the Group and the Bank reclassified $547 million of available-for-sale securities (30 June 2015: $1,379 million) from Level 2 to Level 1. The Group also had insurance security reclassifications of $628 million (30 June 2015: $nil) from Level 1 to Level 2. There were no trading security reclassifications (30 June 2015: $525 million) from Level 2 to Level 1, due to changes in the observability of inputs. The tables below summarise movements in Level 3 balance during the year. Transfers have been reflected as if they had taken place at the end of the reporting periods. Level 3 Movement Analysis for the year ended 30 June 2016 Commonwealth Bank of Australia – Annual Report 2016 173 GroupAvailableDerivativefor SaleDerivative AssetsInvestments LiabilitiesTotal$M$M$M$MAs at 1 July 201413597(14)218Purchases-8-8Sales/Settlements(122)(28)8(142)Gains/(losses) in the period:Recognised in the Income Statement703(13)60Recognised in the Statement of Comprehensive Income-1-1Transfers in934(7)36Transfers out(12)-3(9)As at 30 June 201580115(23)172Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 201570-(14)56As at 1 July 201580115(23)172Purchases134-17Sales/Settlements-(104)(46)(150)Gains/(losses) in the period:Recognised in the Income Statement(33)(2)5(30)Recognised in the Statement of Comprehensive Income----Transfers in-305-305Transfers out-(17)-(17)As at 30 June 201660301(64)297Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016-1-1 Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) Level 3 Movement Analysis for the year ended 30 June 2016 (continued) On 31 March 2015, internal residential mortgage backed securities issued to the Bank by controlled entities of $75,041 million were reclassified to loans to controlled entities. They were reclassified prospectively at their fair value of $75,041 million. As at the date of reclassification the available for sale reserve was $nil. All other transfers in and out of Level 3 were due to changes in the observability of the inputs. The Group’s exposure to financial instruments measured at fair value based in full or in part on non-market observable inputs is restricted to a small number of financial instruments, which comprise an insignificant component of the portfolios to which they belong. As such, the purchases, sales, as well as any change in the assumptions used to value the instruments to a reasonably possible alternative do not have a material effect on the portfolio balance of the Group’s results. 174 Commonwealth Bank of Australia – Annual Report 2016 BankAvailableDerivativefor SaleDerivative AssetsInvestments LiabilitiesTotal$M$M$M$MAs at 1 July 201424768,294(116)68,425Purchases-7,967-7,967Sales/Settlements(235)(337)110(462)Gains/(losses) in the period:Recognised in the Income Statement713(15)59Recognised in the Statement of Comprehensive Income-106-106Transfers in934(7)36Transfers out(12)(75,952)3(75,961)As at 30 June 201580115(25)170Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 201571-(16)55As at 1 July 201580115(25)170Purchases144-18Sales/Settlements-(104)(46)(150)Gains/(losses) in the period:Recognised in the Income Statement(34)(2)1(35)Recognised in the Statement of Comprehensive Income----Transfers in-305-305Transfers out-(17)-(17)As at 30 June 201660301(70)291Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016-1-1 Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) (d) Fair Value Information for Financial Instruments not measured at Fair Value The estimated fair values and fair value hierarchy of the Group’s and the Bank’s financial instruments not measured at fair value as at 30 June 2016 are presented below: (1) Comparative information has been restated to align to presentation in the current year. Commonwealth Bank of Australia – Annual Report 2016 175 GroupCarryingvalueFair valueTotalLevel 1Level 2Level 3Total$M$M $M$M$M Financial assets not measured at fair value on a recurring basisCash and liquid assets23,37214,4478,925-23,372Receivables due from other financial institutions11,591-11,591-11,591Loans and other receivables684,891--685,341685,341Bank acceptances of customers1,4311,431--1,431Other assets5,5992,1773,422-5,599Total financial assets 726,88418,05523,938685,341727,334Financial liabilities not measured at fair value on a recurring basisDeposits and other public borrowings588,045-588,405-588,405Payables due to other financial institutions28,771-28,771-28,771Bank acceptances1,4311,431--1,431Debt issues161,284-161,049-161,049Managed funds units on issue1,6061,400206-1,606Bills payable and other liabilities7,4981,4146,084-7,498Loan capital15,5446,1518,950-15,101Total financial liabilities 804,17910,396793,465-803,861Financial guarantees, loan commitmentsand other off Balance Sheet instruments179,902--179,902179,90230 June 2016GroupCarryingvalueFair valueTotalLevel 1Level 2Level 3Total$M$M $M$M$M Financial assets not measured at fair value on a recurring basisCash and liquid assets33,11619,27013,846-33,116Receivables due from other financial institutions (1)13,063-13,063-13,063Loans and other receivables624,415--625,265625,265Bank acceptances of customers1,944--1,9441,944Other assets5,8944995,395-5,894Total financial assets 678,43219,76932,304627,209679,282Financial liabilities not measured at fair value on a recurring basisDeposits and other public borrowings543,231-529,73814,819544,557Payables due to other financial institutions36,416-36,416-36,416Bank acceptances1,9441,944--1,944Debt issues154,4291,010154,278-155,288Managed funds units on issue1,1491,149--1,149Bills payable and other liabilities8,963-8,963-8,963Loan capital12,8242,8529,454-12,306Total financial liabilities 758,9566,955738,84914,819760,623Financial guarantees, loan commitmentsand other off Balance Sheet instruments175,569--175,569175,56930 June 2015 Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) (d) Fair Value Information for Financial Instruments not measured at Fair Value (continued) (1) Comparative information has been restated to align to presentation in the current year. 176 Commonwealth Bank of Australia – Annual Report 2016 BankCarryingvalueFair valueTotalLevel 1Level 2Level 3Total$M$M $M$M$M Financial assets not measured at fair value on a recurring basisCash and liquid assets21,58212,9098,673-21,582Receivables due from other financial institutions10,182-10,182-10,182Loans and other receivables607,412--607,899607,899Bank acceptances of customers1,4131,413--1,413Loans to controlled entities134,233--133,567133,567Other assets5,0011,7273,274-5,001Total financial assets 779,82316,04922,129741,466779,644Financial liabilities not measured at fair value on a recurring basisDeposits and other public borrowings536,086-536,331-536,331Payables due to other financial institutions28,328-28,328-28,328Bank acceptances1,4131,413--1,413Due to controlled entities130,046--130,046130,046Debt issues134,214-134,968-134,968Bills payable and other liabilities5,5359644,571-5,535Loan capital15,1386,1558,543-14,698Total financial liabilities 850,7608,532712,741130,046851,319Financial guarantees, loan commitmentsand other off Balance Sheet instruments163,619--163,619163,61930 June 2016BankCarryingvalueFair valueTotalLevel 1Level 2Level 3Total$M$M $M$M$M Financial assets not measured at fair value on a recurring basisCash and liquid assets31,68318,16613,517-31,683Receivables due from other financial institutions (1)11,204-11,204-11,204Loans and other receivables558,588--559,366559,366Bank acceptances of customers1,908--1,9081,908Loans to controlled entities130,729--130,441130,441Other assets5,0094884,521-5,009Total financial assets 739,12118,65429,242691,715739,611Financial liabilities not measured at fair value on a recurring basisDeposits and other public borrowings497,625-484,78113,660498,441Payables due to other financial institutions35,516-35,516-35,516Bank acceptances1,9081,908--1,908Due to controlled entities126,496-2,483124,013126,496Debt issues130,359-131,741-131,741Bills payable and other liabilities6,619-6,619-6,619Loan capital13,3641,70311,104-12,807Total financial liabilities 811,8873,611672,244137,673813,528Financial guarantees, loan commitmentsand other off Balance Sheet instruments161,722--161,722161,72230 June 2015 Notes to the Financial Statements Note 40 Disclosures about Fair Values (continued) (d) Fair Value Information for Financial Instruments not measured at Fair Value (continued) The fair values disclosed above represent estimates of prices at which these instruments could be sold or transferred in an orderly transaction between market participants. However, many of the instruments lack an available trading market and it is the intention to hold to maturity. Thus it is possible that realised amounts may differ to amounts disclosed above. Due to the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make a reasonable comparison of the fair value information disclosed here, against that disclosed by other financial institutions. The fair value estimates disclosed above have been derived as follows: Loans and Other Receivables The carrying value of loans and other receivables is net of accumulated collective and individually assessed provisions for impairment. Customer creditworthiness is regularly reviewed in line with the Group's credit policies and where necessary, pricing is adjusted in accordance with individual credit contracts. For the majority of variable rate loans, excluding impaired loans, the carrying amount is considered a reasonable estimate of fair value. For Institutional variable rate loans, the fair value is calculated using discounted cash flow models with a discount rate reflecting market rates offered on similar loans to customers with similar creditworthiness. The fair value of impaired loans is calculated by discounting estimated future cash flows using the loan's market interest rate. The fair value of fixed rate loans is calculated using discounted cash flow models where the discount rate reflects market rates offered for loans of similar remaining maturities and creditworthiness as the customer. Deposits and Other Public Borrowings Fair value of non-interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, approximate their carrying value as they are short-term in nature or payable on demand. Fair value of term deposits are estimated using discounted cash flows, applying market rates offered for deposits of similar remaining maturities. Debt Issues and Loan Capital The fair values are calculated using quoted market prices, where available. Where quoted market prices are not available, discounted cash flow and option pricing models are used. The discount rate applied reflects the terms of the instrument, the timing of the cash flows and is adjusted for any change in the Group's applicable credit rating. Other Financial Assets and Liabilities For all other financial assets and liabilities fair value approximates carrying value due to their short-term nature, frequent repricing or high credit rating. Note 41 Securitisation, Covered Bonds and Transferred Assets Transfer of Financial Assets In the normal course of business the Group enters into transactions by which it transfers financial assets to counterparties or directly to Special Purpose Vehicles (SPVs). These transfers do not give rise to derecognition of those financial assets for the Group. Repurchase Agreements Securities sold under agreement to repurchase are retained on the Balance Sheet when substantially all the risks and rewards of ownership remain with the Group, and the counterparty liability is included separately on the Balance Sheet when cash consideration is received. Securitisation Programs Residential mortgages securitised under the Group’s securitisation programs are equitably assigned to bankruptcy remote Special Purpose Vehicles (SPVs). The Group is entitled to any residual income of the securitisation program after all payments due to investors have been met. In addition, where derivatives are transacted between the SPV and the Bank, such that the Bank retains exposure to the variability in cash flows from the transferred residential mortgages, the mortgages will continue to be recognised on the Bank’s Balance Sheet. The investors have full recourse only to the residential mortgages segregated into an SPV. Covered Bonds Programs To complement the existing wholesale funding sources, the Group has established two global covered bond programs for the Bank and ASB. Certain residential mortgages have been assigned to a bankruptcy remote SPV associated with covered bond programs to provide security for the obligations payable on the covered bonds issued by the Group. Similarly to securitisation programs, the Group is entitled to any residual income after all payments due to covered bonds investors have been met. As the Bank retains substantially all of the risks and rewards associated with the mortgages through derivatives transacted with the SPV, the Bank and ASB continue to recognise the mortgages on its Balance Sheet. The covered bond holders have dual recourse to the Bank and the covered pool assets. Commonwealth Bank of Australia – Annual Report 2016 177 Notes to the Financial Statements Note 41 Securitisation, Covered Bonds and Transferred Assets (continued) At the Balance Sheet date, transferred financial assets that did not qualify for derecognition and their associated liabilities are as follows: (1) Securitisation liabilities of the Group include RMBS notes issued by securitisation SPVs and held by external investors. (2) Securities sold under agreements to repurchase include $56 million of equity securities lending arrangements reported under Bills Payable and Other Liabilities. (3) Securitisation liabilities of the Bank include borrowings from securitisation SPVs, including the SPVs that issue only internally held notes for repurchase with central banks, recognised on transfer of residential mortgages by the Bank. Note 42 Collateral Arrangements Collateral Accepted as Security for Assets The Group takes collateral where it is considered necessary to support both on and off Balance Sheet financial instruments. The Group evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral taken, if deemed necessary, is based on management’s credit evaluation of the counterparty. The Group has the right to sell, re-pledge, or otherwise use some of the collateral received. At Balance Sheet date the carrying value of cash accepted as collateral (and recognised on the Group’s and the Bank’s Balance Sheets) and the fair value of securities accepted as collateral (but not recognised on the Group’s or the Bank’s Balance Sheets) were as follows: Assets Pledged As part of standard terms of transactions with other banks, the Group has provided collateral to secure liabilities. At Balance Sheet date, the carrying value of assets pledged as collateral to secure liabilities is as follows: (1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 17. (2) Comparatives have been restated to align to the presentation in the current year. The Group and the Bank have pledged collateral as part of entering repurchase and derivative agreements. These transactions are governed by standard industry agreements. 178 Commonwealth Bank of Australia – Annual Report 2016 GroupRepurchaseAgreementsCovered BondsSecuritisation201620152016201520162015$M$M$M$M$M$MCarrying amount of transferred assets17,18012,97636,77032,31613,86314,264Carrying amount of associated liabilities (1) (2)17,18012,97631,80228,75512,10612,603For those liabilities that have recourse only to the transferred assets:Fair value of transferred assets13,87414,273Fair value of associated liabilities12,10612,603Net position1,7681,670BankRepurchaseAgreementsCovered BondsSecuritisation201620152016201520162015$M$M$M$M$M$MCarrying amount of transferred assets17,36113,04830,90729,01894,36993,198Carrying amount of associated liabilities (2) (3)17,36113,04827,86326,00594,36993,198For those liabilities that have recourse only to the transferred assets:Fair value of transferred assets94,43393,257Fair value of associated liabilities94,36993,198Net position6459GroupBank2016201520162015$M$M$M$MCash12,17214,24911,85613,543Securities8,92513,8468,67313,518Collateral held21,09728,09520,52927,061Collateral held which is re-pledged or sold-9--GroupBank2016201520162015$M$M$M$MCash7,8656,6877,0166,367Securities (1)17,22813,11317,41113,186Assets pledged25,09319,80024,42719,553Asset pledged which can be re-pledged or re-sold by counterparty (2)17,22813,11317,41113,186 Note 43 Offsetting Financial Assets and Financial Liabilities The table below identifies amounts that have been offset on the Balance Sheet and amounts covered by enforceable netting arrangements or similar agreements that do not qualify for set off. Cash settled derivatives that trade on an exchange are deemed to be economically settled and therefore outside the scope of these disclosures. Notes to the Financial Statements (1) For the purpose of this disclosure, the related amounts of financial instruments and financial collateral not set off on the Balance Sheet have been capped by relevant netting agreements so as not to exceed the net amounts of financial assets/ (liabilities) reported on the Balance Sheet, i.e. over-collateralisation, where it exists, is not reflected in the tables. As a result the above collateral balances will not correspond to the tables on page 178. (2) Securities sold under agreements to repurchase include $56 million of equity securities lending arrangements reported under Bills Payable and Other Liabilities. (3) Certain comparative information has been restated to align to presentation in the current year. Commonwealth Bank of Australia – Annual Report 2016 179 Group30 June 2016Amounts offset on the Balance SheetAmounts not offset on the Balance SheetGross BalanceReported on theFinancialFinancial CollateralNot subject toTotal BalanceSheet AmountAmount offsetBalance SheetInstruments (1)(Received)/ Pledged (1)Net Amount Netting AgreementsSheet amountFinancial Instruments$M$M$M$M$M$M$M$MDerivative assets48,681(7,795)40,886(23,077)(11,173)6,6365,68146,567Securities purchased under agreements to resell8,925-8,925(489)(8,427)9-8,925Equity securities sold not delivered 915(531)384--384-384Total financial assets58,521(8,326)50,195(23,566)(19,600)7,0295,68155,876Derivative liabilities(47,622)11,479(36,143)23,0777,421(5,645)(3,778)(39,921)Securities sold under agreements to repurchase (2)(17,180)-(17,180)48916,691--(17,180)Equity securities purchased not delivered (988)531(457)--(457)-(457)Total financial liabilities(65,790)12,010(53,780)23,56624,112(6,102)(3,778)(57,558)Subject to Enforceable Master Netting or Similar AgreementsGroup30 June 2015Amounts offset on the Balance SheetAmounts not offset on the Balance SheetGross BalanceReported on theFinancialFinancial CollateralNot subject toTotal BalanceSheet AmountAmount offsetBalance SheetInstruments (1)(Received)/ Pledged (1)Net Amount Netting AgreementsSheet amountFinancial Instruments (3)$M$M$M$M$M$M$M$MDerivative assets43,197(3,169)40,028(20,799)(14,016)5,2136,12646,154Securities purchased under agreements to resell13,846-13,846(264)(13,525)57-13,846Equity securities sold not delivered 1,969(710)1,259--1,259-1,259Total financial assets59,012(3,879)55,133(21,063)(27,541)6,5296,12661,259Derivative liabilities(35,931)4,832(31,099)20,7996,292(4,008)(4,114)(35,213)Securities sold under agreements to repurchase(12,976)-(12,976)26412,712--(12,976)Equity securities purchased not delivered (1,201)710(491)--(491)-(491)Total financial liabilities(50,108)5,542(44,566)21,06319,004(4,499)(4,114)(48,680)Subject to Enforceable Master Netting or Similar Agreements Notes to the Financial Statements (1) For the purpose of this disclosure, the related amounts of financial instruments and financial collateral not set off on the Balance Sheet have been capped by relevant netting agreements so as not to exceed the net amounts of financial assets/ (liabilities) reported on the Balance Sheet, i.e. over-collateralisation, where it exists, is not reflected in the tables. As a result the above collateral balances will not correspond to the tables on page 178. (2) Securities sold under agreements to repurchase include $56 million of equity securities lending arrangements reported under Bills Payable and Other Liabilities. (3) Certain comparative information has been restated to align to presentation in the current year. 180 Commonwealth Bank of Australia – Annual Report 2016 Bank30 June 2016Subject to Enforceable Master Netting or Similar AgreementsAmounts offset on the Balance SheetAmounts not offset on the Balance SheetGross BalanceReported on theFinancialFinancial CollateralNot subject toTotal BalanceSheet AmountAmount offsetBalance SheetInstruments (1)(Received)/ Pledged (1)Net Amount Netting AgreementsSheet amountFinancial Instruments$M$M$M$M$M$M$M$MDerivative assets48,975(7,795)41,180(23,653)(11,022)6,5055,34546,525Securities purchased under agreements to resell8,673-8,673(489)(8,175)9-8,673Total financial assets57,648(7,795)49,853(24,142)(19,197)6,5145,34555,198Derivative liabilities(51,578)11,479(40,099)23,6536,607(9,839)(3,785)(43,884)Securities sold under agreements to repurchase (2)(17,361)-(17,361)48916,872--(17,361)Total financial liabilities(68,939)11,479(57,460)24,14223,479(9,839)(3,785)(61,245)Bank30 June 2015Subject to Enforceable Master Netting or Similar AgreementsAmounts offset on the Balance SheetAmounts not offset on the Balance SheetGross BalanceReported on theFinancialFinancial CollateralNot subject toTotal BalanceSheet AmountAmount offsetBalance SheetInstruments (1)(Received)/ Pledged (1)Net Amount Netting AgreementsSheet amountFinancial Instruments (3)$M$M$M$M$M$M$M$MDerivative assets42,597(3,169)39,428(21,107)(13,316)5,0056,17945,607Securities purchased under agreements to resell13,518-13,518(264)(13,196)58-13,518Total financial assets56,115(3,169)52,946(21,371)(26,512)5,0636,17959,125Derivative liabilities(40,308)4,832(35,476)21,1075,979(8,390)(4,160)(39,636)Securities sold under agreements to repurchase(13,048)-(13,048)26412,784--(13,048)Total financial liabilities(53,356)4,832(48,524)21,37118,763(8,390)(4,160)(52,684) Notes to the Financial Statements Note 43 Offsetting Financial Assets and Financial Liabilities including Collateral Arrangements (continued) Related Amounts not Set Off on the Balance Sheet Derivative Assets and Liabilities The “Financial Instruments” column identifies financial assets and liabilities that are subject to set off under netting agreements, such as the ISDA Master Agreement. All outstanding transactions with the same counterparty can be offset and close-out netting applied if an event of default or other predetermined events occur. Financial collateral refers to cash and non-cash collateral obtained to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur. Repurchase and Reverse Repurchase Agreements and Security Lending Agreements The “Financial Instruments” column identifies financial assets and liabilities that are subject to set off under netting agreements, such as global master repurchase agreements and global master securities lending agreements. Under these netting agreements, all outstanding transactions with the same counterparty can be offset and close-out netting applied if an event of default or other predetermined events occur. Financial collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default. Note 44 Subsequent Events The Bank expects the DRP for the final dividend for the year ended 30 June 2016 will be satisfied by the issue of shares of approximately $628 million. 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. Commonwealth Bank of Australia – Annual Report 2016 181 Directors’ Declaration In accordance with a resolution of the Directors of the Commonwealth Bank of Australia (Bank), the Directors declare that: (a) the Financial Statements and the accompanying notes for the financial year ended 30 June 2016 in relation to the Bank and the consolidated entity (Group) are in accordance with the Corporations Act 2001, including: (i) s 296 (which requires the Financial Report, including the Financial Statements and the notes to the Financial Statements, to comply with the accounting standards); and (ii) s 297 (which requires the Financial Statements, and the notes to the Financial Statements, to give a true and fair view of the financial position and performance of the Group and the Bank); (b) in compliance with the accounting standards, the notes to the Financial Statements include an explicit and unreserved statement of compliance with international financial reporting standards (see Note 1(a)); and (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. The Directors have been given the declarations required by s 295A in respect of the financial year ended 30 June 2016. Signed in accordance with a resolution of the Directors. David Turner Chairman 9 August 2016 Ian Narev Managing Director and Chief Executive Officer 9 August 2016 182 Commonwealth Bank of Australia – Annual Report 2016 Independent auditor’s report to the members of Commonwealth Bank of Australia Report on the financial report We have audited the accompanying financial report of Commonwealth Bank of Australia (the Company), which comprises the balance sheets as at 30 June 2016, the income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for both Commonwealth Bank of Australia and the Group (the Consolidated Entity). The Consolidated Entity comprises the Company and the entities it controlled at year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1(a), the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Commonwealth Bank of Australia – Annual Report 2016 183 Independent auditor’s report to the members of Commonwealth Bank of Australia (continued) Auditor’s opinion In our opinion: (a) the financial report of Commonwealth Bank of Australia is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Consolidated Entity's financial position as at 30 June 2016 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1(a). Report on the Remuneration Report We have audited the remuneration report included in pages 47 to 69 of the directors’ report for the year ended 30 June 2016. The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Commonwealth Bank of Australia for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Marcus Laithwaite Partner Sydney 9 August 2016 184 Commonwealth Bank of Australia – Annual Report 2016 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 5 August 2016 Rank Name of Holder Number of Shares % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Limited Bond Street Custodians Limited RBC Dexia Investor Services Australia Nominees Pty Limited Australian Foundation Investment Company limited Navigator Australia Limited Argo Investments Limited Milton Corporation Limited Pacific Custodians Pty Limited UBS Nominees Pty Ltd Nulis Nominees (Australia) Limited Invia Custodian Pty Limited Netwealth Investments Limited IOOF Investment Management Limited Mr. Barry Martin Lambert McCusker Holdings Pty Ltd ANZ Executors & Trustee 295,339,382 182,660,882 100,493,201 100,457,862 55,488,308 22,950,957 16,932,163 7,900,000 3,920,319 3,203,731 3,111,148 2,865,992 2,419,038 2,258,286 1,938,770 1,765,984 1,689,445 1,643,613 1,451,000 1,411,899 17.22 10.65 5.86 5.86 3.24 1.34 0.99 0.46 0.23 0.19 0.18 0.17 0.14 0.13 0.11 0.10 0.10 0.10 0.08 0.08 The top 20 shareholders hold 809,901,980 shares which is equal to 47.22% of the total shares on issue. Substantial Shareholding As at 5 August 2016 there were no shareholders who had a ‘substantial holding’ of our shares within the meaning of the Corporation Act. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. The above table of the Top 20 ordinary shareholders includes shareholders that may hold shares for the benefit of third parties. Stock Exchange Listing The shares of the Commonwealth Bank of Australia (Bank) are listed on the Australian Securities Exchange under the trade symbol CBA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. The Bank is not currently in the market conducting an on market buy-back of its shares. Range of Shares (Fully Paid Ordinary Shares and Employee Shares) as at 5 August 2016 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 Voting Rights Number of Shareholders 599,302 192,068 19,645 8,410 188 819,613 15,120 Percentage of Shareholders 73.12 23.43 2.40 1.03 0.02 100.00 1.84 Number of Shares 191,078,177 397,721,422 133,255,192 158,786,770 834,300,616 1,715,142,177 44,968 Percentage of Issued Capital 11.14 23.19 7.77 9.26 48.64 100.00 0.00 Under the Bank’s Constitution, each person who is a voting Equity holder 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. Every voting Equity holder who casts a vote by direct vote, shall also have 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 Equity holder, on a show of hands the person is entitled to one vote even though he or she represents more than one Equity holder. If an Equity holder is present in person and votes on a resolution, any proxy or attorney of that Equity holder is not entitled to vote. If more than one official representative or attorney is present for an Equity holder:  None of them is entitled to vote on a show of hands; and Commonwealth Bank of Australia – Annual Report 2016 185 Shareholding Information  On a poll only one official representative may exercise the Equity holder’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 Equity holder’s voting rights, not exceeding in aggregate 100%. If an Equity holder appoints two proxies and both are present at the meeting:    If the appointment does not specify the proportion or number of the Equity holder’s votes each proxy may exercise, then each proxy may exercise one half of the Equity holder’s votes; Neither proxy shall be entitled to vote on a show of hands; and On a poll each proxy may only exercise votes in respect of those shares or voting rights the proxy represents. Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities VI (“PERLS VI”) as at 5 August 2016 Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited Bond Street Custodians Limited BNP Paribas Nominees Pty Limited IOOF Investment Management Limited – Superannuation J P Morgan Nominees Australia Limited Netwealth Investments Limited National Nominees Limited Australian Executor Trustees Limited Nulis Nominees (Australia) Limited Citicorp Nominees Pty Limited Dimbulu Pty Ltd Eastcote Pty Limited Navigator Australia Limited V S Access Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited Marento Pty Ltd Junax Capital Pty Ltd Pamdale Investments Pty Ltd Invia Custodian Pty Limited IOOF Investment Management Limited – Independent Number of Securities 840,273 401,213 266,000 257,524 177,903 172,473 154,205 136,855 134,893 103,367 100,000 100,000 88,428 80,000 68,006 52,916 47,000 46,860 46,812 37,423 % 4.20 2.01 1.33 1.29 0.89 0.86 0.77 0.68 0.67 0.52 0.50 0.50 0.44 0.40 0.34 0.26 0.24 0.23 0.23 0.19 The top 20 PERLS VI security holders hold 3,312,151 securities which is equal to 16.56% of the total securities on issue. Stock Exchange Listing PERLS VI are subordinated unsecured notes issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPC. Details of trading activity are published in most daily newspapers. Range of Securities (PERLS VI) as at 5 August 2016 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 Voting Rights Number of Security Holders 27,298 2,685 201 92 9 30,285 5 Percentage of Security Holders 90.14 8.87 0.66 0.30 0.03 100.00 0.02 Number of Securities 8,760,455 5,485,551 1,506,138 2,188,451 2,059,405 20,000,000 13 Percentage of Issued Capital 43.80 27.43 7.53 10.94 10.30 100.00 0.00 PERLS VI do not confer any voting rights in the Bank but if they are exchanged for ordinary shares of the Bank in accordance with their terms of issue, then the voting rights of the ordinary shares will be as set out on pages 185 and 186 for the Bank’s ordinary shares. 186 Commonwealth Bank of Australia – Annual Report 2016 Top 20 Holders of CommBank PERLS VII Capital Notes (“PERLS VII”) as at 5 August 2016 Shareholding Information Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited Bond Street Custodians Limited Pejr Pty Ltd J P Morgan Nominees Australia Limited National Nominees Limited IOOF Investment Management Netwealth Investments Limited BNP Paribas Nominees Pty Limited Citicorp Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Nulis Nominees (Australia) Limited Navigator Australia Limited Australian Executor Trustees Limited Dimbulu Pty Ltd Invia Custodian Pty Limited Simply Brilliant Pty Ltd Randazzo C & G Developments Pty Ltd Paul Lederer Pty Ltd Trend Equities Pty Ltd Tsco Pty Ltd Number of Securities 1,948,603 491,600 450,917 373,256 359,035 336,582 293,309 286,389 248,954 201,059 188,869 186,561 136,948 100,000 99,186 90,500 84,286 84,211 80,934 80,000 % 6.50 1.64 1.50 1.24 1.20 1.12 0.98 0.95 0.83 0.67 0.63 0.62 0.46 0.33 0.33 0.30 0.28 0.28 0.27 0.27 The top 20 PERLS VII security holders hold 6,121,199 securities which is equal to 20.40% of the total securities on issue. Stock Exchange Listing PERLS VII are subordinated unsecured notes issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPD. Details of trading activity are published in most daily newspapers. Range of Securities (PERLS VII) as at 5 August 2016 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 Voting Rights Number of Security holders 29,257 3,862 292 202 14 33,627 11 Percentage of Security holders 87.00 11.49 0.87 0.60 0.04 100.00 0.03 Number of Securities 10,114,784 8,104,784 2,156,146 4,891,716 4,732,570 30,000,000 42 Percentage of Issued Capital 33.72 27.02 7.19 16.31 15.78 100.00 0.00 PERLS VII do not confer any voting rights in the Bank but if they are exchanged for ordinary shares of the Bank in accordance with their terms of issue, then the voting rights of the ordinary shares will be as set out on pages 185 and 186 for the Bank’s ordinary shares. Commonwealth Bank of Australia – Annual Report 2016 187 Shareholding Information Top 20 Holders of CommBank PERLS VIII Capital Notes (“PERLS VIII”) as at 5 August 2016 Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 BNP Paribas Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Goodridge Nominees Pty Ltd J P Morgan Nominees Australia Limited Bond Street Custodians Limited G Harvey Nominees Pty Ltd Mr. Walter Lawton & Mr. Brett Lawton Piek Holdings Pty Ltd Snowside Pty Ltd Citicorp Nominees Pty Limited The Australian National University V S Access Pty Ltd Nulis Nominees (Australia) Limited Netwealth Investments Limited Dimbulu Pty Ltd Mifare Pty Ltd Randazzo C & G Developments Pty Ltd Skyport Pty Ltd Navigator Australia Limited Adirel Holdings Pty Ltd Number of Securities 2,951,095 668,623 264,827 253,142 106,259 100,000 93,228 93,000 77,500 61,737 59,361 57,140 53,637 51,578 50,000 50,000 50,000 50,000 49,038 47,000 % 20.35 4.61 1.83 1.75 0.73 0.69 0.64 0.64 0.53 0.43 0.41 0.39 0.37 0.36 0.34 0.34 0.34 0.34 0.34 0.32 The top 20 PERLS VIII security holders hold 5,187,165 securities which is equal to 35.77% of the total securities on issue. Stock Exchange Listing PERLS VIII are subordinated unsecured notes issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPE. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS VIII) as at 5 August 2016 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 Voting Rights Number of Shareholders 13,158 1,367 119 77 4 14,725 1 Percentage of Shareholders 84.36 9.28 0.81 0.52 0.03 100.00 0.01 Number of Shares 4,250,507 2,988,100 942,188 2,230,689 4,088,516 14,500,000 2 Percentage of Issued Capital 29.31 20.61 6.50 15.38 28.20 100.00 0.00 PERLS VIII do not confer any voting rights in the Bank but if they are exchanged for ordinary shares of the Bank in accordance with their terms of issue, then the voting rights of the ordinary shares will be as set out on pages 185 and 186 for the Bank’s ordinary shares. 188 Commonwealth Bank of Australia – Annual Report 2016 International Representation Australia Head Office Commonwealth Bank of Australia Ground Floor, Tower 1 201 Sussex Street Sydney NSW 2000 Telephone: +61 2 9378 2000 New Zealand ASB Bank Limited ASB North Wharf 12 Jellicoe Street Auckland Central Auckland 1010 Telephone: +64 9 377 8930 Chief Executive Officer Barbara Chapman CBA NZ Branch ASB North Wharf 12 Jellicoe Street Auckland Central Auckland 1010 Telephone: +64 9 337 4748 General Manager Andrew Woodward Sovereign Assurance Company Limited Level 4, Sovereign House 74 Taharoto Road, Takapuna, Auckland 0622 Telephone: + 64 9 487 9000 Chief Executive Officer Nicholas Stanhope First State Investments ASB North Wharf 12 Jellicoe Street Auckland Central Auckland 1010 Telephone: +64 2 195 1520 Head of Business Development, Australia & New Zealand Harry Moore Africa South Africa CBA South Africa, 2nd Floor, 30 Jellicoe Avenue, Rosebank Johannesburg 2196 Telephone: + 27 87 286 8833 Executive General Manager, South Africa Rowan Munchenberg Americas United States CBA Branch Office Level 17, 599 Lexington Avenue New York NY 10022 Telephone: +1 212 848 9200 Facsimile: +1 212 336 7758 Managing Director, Americas Leon Allen First State Investments Level 17, 599 Lexington Avenue New York NY 10022 Telephone: +1 212 848 9293 Facsimile: +1 212 336 7725 Managing Director, Americas James Twiss Asia China CMG, Beijing Representative Office Unit 2908, Level 29 China World Tower 1, 1 Jianguomenwai Avenue, Beijing 100004 Telephone: +86 10 6505 5023 Facsimile: +86 10 6505 5004 China Chief Representative James Gao CBA Beijing Branch Office Room 4606 China World Tower, 1 Jianguomenwai Avenue, Beijing 100004 Telephone: +86 10 5680 3000 Facsimile: +86 10 5961 1916 Branch Manager Beijing Tony Zhang CBA Shanghai Branch Office Level 11 Azia Centre 1233 Lujiazui Ring Road Pudong Shanghai 200120 Telephone: +86 21 6123 8900 Facsimile: +86 21 6165 0285 Branch Manager Shanghai Vivienne Yu CommBank Management Consulting (Shanghai) Co. Ltd 11F Azia Centre 1233 Lujiazui Ring Road, Pudong Shanghai 200120 Telephone: +86 21 6058 0100 Facsimile: +86 21 6168 3298 Executive General Manager China Vivienne Yu Additional Chinese representation The Group has established 15 County Banks in China in Henan Province (County: Jiyuan, Dengfeng, Lankao, Mianchi, Yichuan, Yongcheng, Wenxian) and Hebei Province (County: Xinji, Yongnian, Cixian, Luancheng, Cheng’an, Weixian, Shexian, Handan). Telephone: +86 216058 0100 First State Investments 24th Floor, China Merchants Bank Building 7088, Shen Nan Road, Shenzhen China 518040 Telephone: +86 755 8317 2666 Facsimile: +86 755 8319 6151 Managing Partner, First State Stewart Michael Stapleton Hong Kong CBA Hong Kong Branch, Level 13, One Exchange Square, 8 Connaught Place, Central, Hong Kong Telephone: +852 2844 7500 Managing Director, Hong Kong Maaike Steinebach CBA International Financial Services Limited Level 14, One Exchange Square 8 Connaught Place, Central, Hong Kong Telephone: +852 2844 7500 Facsimile: +852 2845 9194 Group Executive International Financial Services Robert Jesudason First State Investments Level 25, One Exchange Square 8 Connaught Place, Central, Hong Kong Telephone: +852 2846 7566 Facsimile: +852 2868 4036 Regional Managing Director, Asia Joe Fernandes India CBA Mumbai Branch Level 2, Hoechst House Nariman Point Mumbai 400021 Telephone: +91 22 6139 0100 Facsimile: +91 22 6139 0200 Chief Executive Officer Ravi Kushan Commonwealth Bank of Australia – Annual Report 2016 189 United Kingdom England CBA Branch Office 1 New Ludgate 60 Ludgate Hill London EC4V 4HA Telephone: +44 20 7710 3999 Facsimile: +44 20 7710 3939 Managing Director, Europe Paul Orchart First State Investments Finsbury Circus House 15 Finsbury Circus London EC2M 7EB Telephone: +44 0 20 7332 6500 Facsimile: +44 0 20 7332 6501 Managing Director, EMEA Chris Turpin Scotland First State Investments 23 St Andrew Square Edinburgh EH2 1BB Telephone: +44 0 131 473 2200 Facsimile: +44 0 131 473 2222 Managing Director, EMEA Chris Turpin International Representation Indonesia PT Bank Commonwealth World Trade Centre 6, 3A Floor Jl. Jendral Sudirman Kav. 29-31 Jakarta 12920 Telephone: +62 21 5296 1222 Facsimile: +62 21 5296 2293 President Director Lauren Sulistiawati PT Commonwealth Life World Trade Centre 6, 8th Floor, JI. Jendral Sudirman Kav. 29-31 Jakarta 12920 Telephone: +62 21 570 5000 Facsimile: +62 21 520 5353 President Director Simon Bennett First State Investments 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 Managing Director, Asia Joe Fernandes Japan CBA Branch Office 8th Floor, Toranomon Waiko Building 12-1 Toranomon 5-chome Minato-ku, Tokyo 105-0001 Telephone: +81 3 5400 7280 Facsimile: +81 3 5400 7288 Branch Head Tokyo Martin Spann First State Investments 8th Floor, Toranomon Waiko Building 12-1 Toranomon 5-chome Minato-ku, Tokyo 105-0001 Telephone: +81 3 5402 4831 Facsimile: +81 3 5402 4839 Regional Managing Director, Asia Joe Fernandes Singapore CBA Branch Office 38 Beach Road 06-11 South Beach Tower Singapore 189767 Telephone: +65 6349 7000 Facsimile: +65 6224 5812 Managing Director, Singapore Scott Speedie First State Investments 38 Beach Road 06-11 South Beach Tower Singapore 189767 Telephone: +65 6538 1390 Facsimile: +65 6538 1421 Regional Managing Director, Asia Joe Fernandes UAE First State Investments Level 14, The Gate Building P.O Box 74777, Dubai Telephone: +971 14 4019340 Managing Director, EMEA Chris Turpin Vietnam CBA Representative Office Suite 603-604 Central Building 31 Hai Ba Trung, Hanoi Telephone: +84 4 3824 3213 Facsimile: +84 4 3824 3961 Chief Representative and Director of Investment and Banking Hanh Nguyen CBA Ho Chi Minh City Branch Hoa Lam Building 4B Ton Duc Thang, Dist. 1 Ho Chi Minh City Telephone: +84 8 3824 1525 Facsimile: +84 8 3824 2703 General Director Shane O’Connor Europe France First State Investments 14, Avenue d’Eylau 75016 Paris Telephone: +33 1 7302 4674 Managing Director, EMEA Chris Turpin Germany First State Investments Westhafen Tower Westhafenplatz 1 60327 Frankfurt a.M. Telephone: +49 0 69 710456 - 302 Managing Director, EMEA Chris Turpin Malta CommBank Europe Limited Level 3 Strand Towers 36 The Strand Sliema SLM07 Telephone: +356 2132 0812 Facsimile: +356 2132 0811 Chief Financial Officer Brett Smith 190 Commonwealth Bank of Australia – Annual Report 2016 132 221 General Enquiries For your everyday banking including paying bills using BPAY® our automated service is available 24 hours a day, 7 days a week. 132 221 Lost, Stolen or Damaged Cards To report a lost or stolen card 24 hours a day, 7 days a week. From overseas call +61 2 9999 3283. Operator assistance is available 24 hours a day, 7 days a week. ® Registered to BPAY Pty Ltd ABN 69 079 137 518 132 224 Home Loans and Investment Home Loans To apply for a new home loan or investment home loan or to maintain an existing loan. Available from 8am to 8pm, 7 days a week. 131 431 Personal Loan Sales To apply for a new personal loan. Available from 8am to 8pm, 7 days a week. 1800 805 605 Customer Relations If you would like to pay us a compliment or are dissatisfied with any aspect of the service you have received. 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, 7 days a week. Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 7 days a week. To apply for access to NetBank, call 132 221. Available 24 hours a day, 7 days a week. Do your business banking on our Business Internet Banking Service CommBiz at www.commbank.com.au/CommBiz available 24 hours a day, 7 days a week. To apply for access to CommBiz, call 132 339. Available 24 hours a day, 7 days a week. Special Telephony Services Customers who are hearing or speech impaired can contact us via the National Relay Service (www.relayservice.com.au) available 24 hours a day, 7 days a week.  Telephone Typewriter (TTY) service users can be connected to any of our telephone numbers via 133 677.   Speak and Listen (speech-to-speech relay) users can also connect to any of our telephone numbers by calling 1300 555 727. Internet relay users can be connected to our telephone numbers via National Relay Service. 131 519 CommSec (Commonwealth Securities) For enquiries about CommSec products and services visit www.commsec.com.au. Corporate Directory Available from 8am to 7pm (Sydney Time), Monday to Friday, for share trading and stock market enquiries, and 8am to 7pm 7 days a week for Commsec Cash Management. A 24 hour lost and stolen card line is available 24 hours, 7 days a week. 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 131 709 8am to 6pm (Sydney Time) Monday to Friday or visit www.commsec.com.au. 1800 019 910 Corporate Financial Services For a full range of financial solutions for medium-size and larger companies. Available from 8am to 6pm (Sydney Time), Monday to Friday. 131 998 Local Business Banking A dedicated team of Business Banking Specialists, supporting a network of branch business bankers, will help you with your financial needs. Available 24 hours a day, 7 days a week or visit www.commbank.com.au/lbb. 1300 772 968 (1300 AGLINE) AgriLine A dedicated team of Agribusiness Specialists will help you with your financial needs. With our Business Banking team living in regional and rural Australia, they understand the challenges you face. Available 24 hours a day, 7 days a week. Colonial First State Existing investors can call 131 336 from 8am to 7pm (Sydney Time) Monday to Friday. New investors without a financial adviser can call 1300 360 645. Financial advisers can call 131 836. Alternatively, visit www.colonialfirststate.com.au. 1300 362 081 Commonwealth Private Commonwealth Private offers clients with significant financial resources a comprehensive range of services, advice and opportunities to meet their specific needs. For a confidential discussion about how Commonwealth Private can help you, call 1300 362 081 between 8am to 5:30pm (Sydney time), Monday to Friday or visit www.commbank.com.au/commonwealthprivate 132 015 Commonwealth Financial Services For enquiries on retirement and superannuation products, or to 6pm investments. Available managed (Sydney Time), Monday to Friday. from 8.30am Unit prices are available 24 hours a day, 7 days a week. CommInsure For all your general insurance needs call 132 423 8am to 8pm (Sydney Time), Monday to Friday and 8am to 5pm (Sydney Time) on Saturday. For all your life insurance needs call 131 056 8am to 8pm (Sydney Time), Monday to Friday. Alternatively, visit www.comminsure.com.au. Commonwealth Bank of Australia – Annual Report 2016 191 Contact Us Registered Office Ground Floor, Tower 1 201 Sussex Street Sydney NSW 2000 Telephone +61 2 9378 2000 Facsimile +61 2 9118 7192 Company Secretary Taryn Morton Shareholder Information www.commbank.com.au/shareholder Share Registrar Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Telephone: 1800 022 440 Facsimile: +61 2 9287 0303 Internet: www.linkmarketservices.com.au Email: cba@linkmarketservices.com.au Telephone numbers for overseas shareholders New Zealand 0800 442 845 United Kingdom 0845 640 6130 Fiji 008 002 054 Other International +61 2 8280 7199 Australian Securities Exchange Listing CBA Annual Report To request a copy of the Annual Report, please call Link Market Services Limited on 1800 022 440 or by email at cba@linkmarketservices.com.au. Electronic versions of Commonwealth Bank’s past and current Annual Reports are available on www.commbank.com.au/shareholder/annualreports. 192 Commonwealth Bank of Australia – Annual Report 2016 ANNUAL REPORT 2016 C o m m o n w e a l t h B a n k o f A u s t r a l i a A N N U A L R E P O R T 2 0 1 6 WHEN WE BELIEVE WE CAN , . CBA1421 011016 COMMONWEALTH BANK OF AUSTRALIA | ACN 123 123 124 

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