Commonwealth Bank of Australia
Annual Report 2017

Plain-text annual report

Annual Report 2017 Commonwealth Bank of Australia | ACN 123 123 124 Contents Our business Who we are 2017 highlights Where our income and profits go Chairman and CEO statement Our strategy Business risks Performance overview Corporate responsibility Corporate governance Our board Our senior management team Our governance Directors’ report Financial report 2 2 3 4 6 12 22 25 39 49 50 52 55 59 84 Other information 202 1 Our vision is to excel at securing and enhancing the financial wellbeing of people, businesses and communities. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information72 Who we are Commonwealth Bank is a leading provider of integrated financial services. We provide retail, business and institutional banking and wealth management products and services. 1 in 3 Australians call us their main financial institution. CBA Group g n i k n a B e c n a r u s n I s e i t i r u c e S t n e m t s e v n I Our vision Our vision is to excel at securing and enhancing the financial wellbeing of people, businesses and communities. Our values We are guided by our values in every interaction with our customers, colleagues and the broader community. • Integrity • Accountability • Collaboration • Excellence • Service Our strategy Customer focus is the overarching priority of our strategy. To support our customers we invest in four capabilities: People Vibrant customer-focused culture and people Technology Application of world-leading technology to financial services Productivity Productivity and efficiency for better customer service Financial strength Strength and flexibility of our balance sheet This strategy enables us to create long-term value for customers, shareholders, our people and the broader community. 2017 highlights 3 Customers, shareholders, our people and the community all benefit from our performance. Our customers 16.6m customers 6.2m customers using digital channels 1 #1 customer satisfaction Retail, internet Equal #1 in business Our shareholders 800,000+ shareholders plus millions more hold CBA shares through their superannuation funds Our people 51,800 employees across 11 countries Our community $3.9bn in taxes Australia’s largest taxpayer $9,881m net profit after tax (cash), up 5% 10.1% Common Equity Tier 1 capital ratio (APRA basis) 44% management roles held by women 40% of Board Directors are women $272m total community investment 574,246 students enrolled in Start Smart 326,146 School Banking students Launched Teaching Awards 330,000 new home loans 30,000 loans for Australian first home buyers $4.29 dividend per share, fully franked 16.0% return on equity 69% staff working flexibly 39.1 hours of training per employee $2.8bn lending to renewable energy projects 48.5% reduction in direct emissions since 2009 Committed to playing our part in limiting climate change to well below 2o Celsius Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information74 4 Where our income and profits go In 2017, Commonwealth Bank earned income of $26bn $16.1bn was spent on: $6.3bn Salaries • we employ 51,800 people in 11 countries • 41,600 are employed in Australia • we employ 1 in every 10 people working in the Australian financial services sector $4.8bn Expenses • includes payments to more than 5,000 SME partners and suppliers • 90% of our suppliers are Australian businesses • 1,350 branches $3.9bn Tax • we are Australia’s largest taxpayer • our Australian tax expense in FY17 represents around 5% of Australia’s total company tax • we have signed the Voluntary Tax Transparency Code $1.1bn Loan impairment • the cost of lending across the economy 24% 18% 15% 4% In 2017, Commonwealth Bank earned income of $26bn 5 From profit of $9.9bn three quarters goes to shareholders and the rest is reinvested: $7.4bn Dividends • 75% of profits returned to shareholders • the average retail shareholder will receive approximately $3,820 in dividends this year • almost 800,000 retail shareholders hold CBA shares directly, millions more hold CBA shares through their superannuation funds 29% 10% $2.5bn Reinvested • we invest profit back into the business to make it better for our customers Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information76 6 Chairman and CEO statement Commonwealth Bank has again delivered strong financial performance, guided by our vision to excel at securing and enhancing the financial wellbeing of customers, shareholders, our people, and the broader community. 7 Ownership of Commonwealth Bank is first and foremost with the people of Australia, so when we do well as a company, millions of Australians also prosper. For the 2017 financial year, cash net profit was $9,881 million, up 5% on the prior year. Your Board determined a final dividend of $2.30 per share, taking the total dividend to $4.29 per share, up 9 cents on 2016. In total, $7.4bn of your company’s profits is being returned to shareholders as dividends. Return on equity for the year was 16%. Operating income increased by 4%, excluding the sale of our remaining investment in Visa Inc. This was driven by 4% higher net interest income from our lending activities and 5% higher other banking income which includes commissions, lending fees and trading. Funds management and insurance income was flat. Costs were kept under control, with expenses increasing by 2%, excluding the accelerated amortisation taken as a one-off expense this year. The Group’s cost-to-income ratio on an underlying basis was reduced by a further 60 basis points, to 41.8%. The credit quality of our loan portfolio was sound and loan impairment expense remained low, with the ratio of loan impairment expense to average gross loans and acceptances at 15 basis points. In 2017, your bank served 16.6 million customers, returned 75% of cash profits to our shareholders, employed 51,800 people, and paid $3.9 billion in tax. We provided $197 billion in new lending to businesses and individual customers to help them grow their businesses and buy a home, insured more than 6 million customers, and helped 1.8 million customers invest for the future. We sourced goods and services worth $4.8 billion, including from more than 5,000 SME partners and suppliers. Remaining profits were invested back into the business, to fund innovation and growth. Commonwealth Bank also continued to play its role in helping secure a strong economy – as an enabler of employment, business opportunity, financial security, innovation and growth. Delivering for our shareholders This year we have especially appreciated the ongoing support of our shareholders: the almost 800,000 retail shareholders who own CBA shares directly, and the millions more who own CBA shares through their superannuation funds. We understand that many shareholders depend on the income they receive from their investment in Commonwealth Bank, so our aim is to deliver sector- leading earnings growth and returns, and a stable dividend stream. Capital and funding In 2017 we maintained our commitment to financial strength across all capital, funding and liquidity metrics. From 1 July 2016, the Australian Prudential Regulation Authority (APRA) requirement to hold additional capital for Australian residential mortgages came into effect. This regulatory change was the driver of our capital raising during the 2016 financial year. The mortgage risk weight change ultimately had a 114 basis point negative impact on our Common Equity Tier 1 (CET1) ratio in 2017. We continued to strengthen our capital position during the year through organic capital growth, resulting in a CET1 ratio of 10.1% on an APRA basis as at 30 June 2017. Our CET1 ratio on an internationally comparable basis was 15.6%, so we have maintained our position in the top quartile of international peer bank capital rankings. After the financial year end, in July 2017, APRA provided clarity on the additional capital required for the Australian banking sector to have capital ratios that are considered ‘unquestionably strong’. APRA’s expectation is that the major Australian banks will operate with a CET1 ratio average benchmark of 10.5% or more by 1 January 2020. Our strong organic capital generation and commitment to financial strength give us confidence that we will meet APRA’s benchmark. As at year end, the Group’s Liquidity Coverage Ratio was 129%, our Net Stable Funding Ratio was 107%, customer deposits provided 67% of funding, and the tenor of our long-term wholesale funding was 4.1 years. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information78 Chairman and CEO statement continued Our performance at a glance Total shareholder return Source: Bloomberg 5 years 104.8% 3 years 20.3% 1 year 17.4% Dividends Fully franked, per share Earnings Cash basic earnings per share 2017 2% $4.29 2016 $4.20 2015 $4.20 2014 $4.01 Efficiency ratio Cost-to-income 2017* 41.8% 2016 42.4% 2015 42.8% 2014 42.9% *underlying basis 2017 4% 574.4C 2016 554.8c 2015 556.9c 2014 532.7c Margins Net interest margin 2017 2.11% 2016 2.14% 2015 2.15% 2014 2.19% Capital ratio Common Equity Tier 1 (APRA) Returns Cash return on equity 2017 10.1% 2016 10.6% 2015 9.1% 2014 9.3% 2017 16.0% 2016* 16.5% 2015 18.2% 2014 18.7% *Impacted by $5.1bn capital raising Further detail on financial performance at a Group and business unit level can be found in the Performance Overview section. Delivering for our customers These sound financial outcomes are the result of continued execution of our long-term strategy. The overarching priority of our strategy is customer focus, so we are pleased that we ranked number one for retail customer satisfaction and equal first for business customer satisfaction as at 30 June 2017.1 Customer satisfaction is achieved by providing customers with the best possible products and services. We believe this is underpinned by four capabilities – technology, people, productivity and strength. Through consistent focus and investment we have built these capabilities over many years, making them our sources of competitive advantage, as we deploy them to drive growth over the long-term. Our industry-leading technology position is a critical competitive advantage. This lead was further strengthened in 2017 with the release of innovative digital products and services for our retail customers, and the application of data and analytics for our business customers. 6.2 million customers are now active users of NetBank, our online banking service, and CommBank, our mobile banking app. We have won Canstar’s Bank of the Year-Online Banking award for eight years in a row. Our online channels also provide us with new opportunities to secure and enhance our customers’ financial wellbeing. Research undertaken by the retail bank shows that one in three Australian households would struggle to access $500 in an emergency, and more than a third of Australians are spending more than they earn each month. While we help millions of Australians to save, spend and invest, there are millions more who feel uncertain and anxious about their financial future. We have been working to use our resources to improve community financial wellbeing more broadly. (1) Roy Morgan Research Main Financial Institution Customer Satisfaction Survey, DBM Business Financial Services Monitor. Retail bank customer satisfaction 9 Satisfied customers Dissatisfied customers 82.7% 9.8% 70.5% Jun 07 Jun 09 Jun 11 Jun 13 Jun 15 Jun 17 Jun 07 Jun 09 Jun 11 Jun 13 Jun 15 Jun 17 3.8% Source: Roy Morgan Research Retail Main Financial Institution Customer Satisfaction. Excludes neutral responses, “can’t say” and “n/a”. This has led to the launch of new digital tools including Savings Jar, Savings Challenge, Spend Tracker and Transactions Notifications which encourage good financial habits and help people manage their everyday finances. The new tools have already been used by over 1 million customers and we are now sending out more than 420,000 transaction notifications each day. To help our younger customers develop good saving and spending habits at an early age, we have launched a Youth app. The app teaches children the value of money in an increasingly digital and cashless society, and has been downloaded more than 22,000 times since it was launched earlier this year. Business and Private Banking (BPB) is also using our technology advantage to help our business customers. Earlier this year BPB launched an update to Daily IQ, an insights and analytics dashboard that helps our customers manage and grow their businesses by providing them with insights into their cash flow, performance and customers. 230,000 clients have access to Daily IQ. We have used our scale to give small businesses access to insights that used to be available only to big businesses. Our commitment to our customers Despite our commitment to always do our best for every customer, there have been times when we have let our customers down, and we have not met the community’s expectations. During the past year we have continued our focus on learning from these cases. We have listened to the experiences of our customers, thoroughly investigated what happened in each instance, put things right when mistakes were made and changed our policies, processes and practices to make sure such mistakes are not made again. Following media allegations of misconduct at CommInsure in 2016, CommInsure commissioned independent experts, Deloitte, DLA Piper and EY, to investigate the concerns. Having regard to all of the work that was completed, including the independent expert reviews, the CommInsure Board concluded there is no evidence to support the concerns of wilful or widespread misconduct. These reviews and reports were provided to APRA and ASIC. APRA said the investigations were robust, complete and independent. In March, ASIC released the findings of its investigations into CommInsure. ASIC also found no evidence of wilful or widespread misconduct relating to key allegations, and no breaches of the law in respect of claims handling. Nevertheless, at CommInsure’s request, Deloitte analysed and identified opportunities to improve elements of the claims process to improve the customer experience, and we are now implementing the recommendations. We have updated and backdated our heart attack definitions and established a Claims Review Panel that includes independent members to review complex claims. In June 2017, the seventh and final report on the Open Advice Review program was released. The report confirmed that the program to assess advice provided to customers of Commonwealth Financial Planning and Financial Wisdom between 2003 and 2012 is nearly complete. Around 8,600 advice assessments were issued to customers and more than 90 per cent have been finalised; and approximately $31 million (including interest) has been offered or paid to customers to date. The program has provided reassurance to the large majority of customers who received appropriate advice and we have since made improvements to the way we run our advice businesses, including raising the skills and qualification requirements for advisers and their managers. In June 2017, we also completed our review of customers potentially entitled to a refund in connection with ongoing service packages. The vast majority of reviews sought to identify customers of Commonwealth Financial Planning and BW Financial Advice who may not have received an annual review as part of their ongoing service package with their adviser. All assessments have now been completed and all affected customers have now been contacted to provide full refunds with interest. Measures have also been taken to improve our processes to prevent similar issues from occurring in the future. On 3 August 2017, the Australian Transaction Reports and Analysis Centre (AUSTRAC) brought civil proceedings against the bank. The proceedings focus on the use of the bank’s Intelligent Deposit Machines. We have been in discussions with AUSTRAC for an extended period and have cooperated fully with their requests. We have invested more than $230 million in our anti-money laundering compliance and reporting processes and systems, and all of our people are required to complete mandatory training on the Anti-Money Laundering and Counter-Terrorism Financing Act. We take our regulatory obligations extremely seriously. We remain committed to continuously improve our compliance with the AML/ CTF Act and will continue to keep AUSTRAC abreast of those efforts. We are also committed to ensuring that industry standards are raised, to restore community trust in the banking sector generally. To this end, we strongly support the Australian Bankers’ Association Better Banking initiatives and have committed to implementing all 21 recommendations from the ABA initiated Sedgwick Review into retail bank staff remuneration. Furthermore, we have both signed the Banking and Finance Oath as a mark of our personal commitment to doing everything we can to ensure that the banking profession earns and preserves society’s trust and confidence. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information710 Chairman and CEO statement continued Delivering for our people Ultimately, our people are the key driver of customer satisfaction, and of your company’s performance. Our people’s dedication to our customers and to our vision and values gives us tremendous confidence in the Group’s future. To ensure that our people remain engaged and realise their potential we supported ongoing skills development and training throughout the year. We also continued to emphasise the importance of a customer-centric culture, including through the launch of Our Commitments in 2017. Our Commitments summarises our values and the behaviours we expect of our people, simply and clearly. This will enable us to strengthen trust with customers, shareholders, regulators, suppliers, colleagues and the communities in which we operate. In 2017 we also continued to enhance the diversity of our workforce, having regard to gender, culture, age, sexual orientation and disability. We believe that a workforce that mirrors the communities we serve will improve the quality of our decisions, and improve our engagement with customers. Board and key executive changes Your Board and Group Executive team have a common goal – achieving sustainable performance for all of our stakeholders. In December 2016, we farewelled David Turner who retired after six years in the role of Chairman and 10 years’ service as a Director. We would like to thank him for his tremendous contribution over this time. His tenure was marked by decisive leadership, but also compassion and humility. His commitment to long-term investment and passion for driving diversity continues to stand us in good stead. Sir John Anderson KBE retired from the Board in November 2016 after serving over nine years as a Director, during which time he brought expansive business knowledge and sound judgement to Board deliberations. At the end of June 2017, our long- serving Group Executive, Financial Services and Chief Financial Officer, David Craig, retired after 11 years of unswerving dedication to the best interests of Commonwealth Bank. Rob Jesudason, who previously ran the Group’s International Financial Services (IFS) and Strategy divisions, assumed the role of Chief Executive, Financial Services and CFO on 1 July 2017. Coen Jonker, the co-founder and CEO of TYME, and most recently responsible for IFS’ digital transformation, has been appointed to the role of Group Executive, IFS. Further details of the Board and Group Executive team’s skills and experience are provided on pages 50-56. Changes to executive remuneration At our 2016 Annual General Meeting the resolution to adopt the Group’s FY16 Remuneration Report was not passed by shareholders. Your Board has listened intently to and discussed at length the concerns raised by shareholders which contributed to this “first strike”. In response, your Board has undertaken a comprehensive review of the Group’s Executive remuneration strategy, framework and governance, with the objective of providing more transparency, greater accountability, and better clarity of alignment with shareholder goals and value creation, and business strategy. For more information on the new proposed remuneration framework, please see the Remuneration report on page 70. Environmental stewardship We actively consider the environmental impacts of our activities, and are committed to operating sustainably and making a positive contribution beyond our core business. We recognise that climate change is both a risk and opportunity for our business, for our customers and for the community. This month we released our Climate Policy Position Statement. It outlines our commitment to playing our part in limiting climate change to well below two degrees in line with the Paris Agreement, and how we will support the responsible global transition to net zero emissions by 2050. In addition to having the necessary policies, we have embedded climate considerations firmly into our lending, investing, and property decision- making. Mandatory environmental, social and governance (ESG) risk assessments are applied to all Institutional Banking lending as well as larger loans across the Group, and there is compulsory ESG lending training for all relevant business bankers and risk executives. Additional sustainable and ethical investment options have been added to our product range. We also have a Sustainable Property Strategy with targets for energy use and carbon emission reductions. 11 At Commonwealth Bank we are determined to drive better customer outcomes, and so have built reputation into the Group’s new remuneration structure. If passed at our 2017 AGM, reputation will be an important benchmark against which we judge our performance. Your Board and management team are committed to evolving your company to ensure it is future-fit and can continue to deliver outperformance for customers, shareholders, our people and the community. We are also committed to doing all that we can to secure a strong and stable banking system for Australia. We thank you for your ongoing support. Catherine Livingstone AO Chairman 8 August 2017 Ian Narev Chief Executive Officer 8 August 2017 As at June 2017, our total lending exposure to the renewable energy sector was $2.8 billion. This year we have arranged $1.02 billion of climate bonds. In March we issued the largest Australian dollar climate bond from an Australian bank, raising $650 million. The bond is backed by Australian renewable and low-carbon assets. We also recognise the importance of transparency and disclosure on climate risk. We currently measure and disclose the emissions intensity of our entire business lending portfolio, and in the coming year will be undertaking scenario analysis to more fully understand the implications of climate change for our business. Importantly, the Board has oversight of climate change driven risks as part of the Risk Management Framework. An overview of our new Climate Policy Position Statement and related activities are provided in the Corporate responsibility section on pages 39-48. Looking ahead This year, after 26 years of economic growth without recession, Australia became the economy with the longest-running economic expansion on record. This is the result of many factors, including our natural and human resources and our proximity to centres of global growth. It has also been supported by sound public policies, designed to encourage free enterprise and to promote innovation and employment. Companies like Commonwealth Bank have also played our part in helping secure Australia’s stability, growth and prosperity. Australia remains a country rich in potential, with strong foundations, and the economy shows continued flexibility in adapting to new circumstances. We believe Commonwealth Bank is similarly positioned. We have a consistent strategy based on customer focus, we are evolving our capabilities in anticipation of changes in customer preferences, competition and the external environment, and we are creating new growth opportunities through technology and innovation. What the Australian economy and Commonwealth Bank also have in common, especially given the nation’s dependence on foreign capital, is the need for a policy environment that provides certainty to investors and that reduces sovereign risk. Australia’s economy is heavily reliant on the strength of the banks, because the capital and credit that enables growth is mostly extended through the domestic banking system. Our relatively small population and the capital intensity of many of our industries also mean that the demand for investment exceeds local savings, so we need overseas capital. The banks are the most critical intermediaries of this capital. We have therefore been disappointed by the introduction of government policy which creates uncertainty and which singles out Australia’s largest banks for discriminatory tax treatment through a bank levy. To fulfil our role in the economy, Commonwealth Bank must be a healthy and profitable organisation, with the necessary certainty to source funding and capacity to invest. We also need to operate as part of a strong and stable banking system. Ultimately, our reputation and our customers’ and the community’s trust are our greatest assets. We, and the broader banking industry, recognise that we need to rebuild trust, and this is now a critical focus. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information712 Our strategy focuses on creating long-term value for our customers, shareholders and people. Our strategy 13 Our strategy focuses on creating long-term value for our customers, shareholders and people. It is firmly anchored to our vision to ‘excel at securing and enhancing the financial wellbeing of people, businesses and communities’. Customer focus Putting our customers first is our strategic priority, serving and satisfying them so that they continue to turn to us as their bank of choice. To support our focus on the customer, we invest in four key capabilities: people, technology, productivity, and financial strength. People Our people are central to our success. They are engaged, customer-focused and operate in a culture that emphasises integrity. It is our people who set us apart from our peers. • Our 1,350 branches are evolving to serve the changing needs of our 16.6 million customers; • Thanks to the commitments of our diverse workforce of 51,800 people, we have maintained our position as: − First in retail customer satisfaction; − Equal first in business customer satisfaction; − First in wealth for platform satisfaction; and • We are an employer of choice for gender equality, with women in 44% of management roles. Technology We apply world-class technologies to meet the ever-evolving needs of our customers and our people. • Our real-time core banking system makes us one of the first banks in the world – and the first bank in Australia – to go real-time; • We have the #1 free financial app in Australia, with 30 million logons a week; • We have 6.2 million active online customers; • Our customers can open a new savings or transaction account online in less than 3 minutes; • We use our extensive data and analytics capabilities to enhance the customer experience; and • We have made significant investments in cyber security to protect our customers’ financial interests. Productivity We continuously simplify and standardise the way we do things, to achieve better outcomes for our customers and our people and to give us the ability to invest in the future. • Our cost-to-income ratio was 41.8% on an underlying basis, reflecting our focus on cost management and efficiency; • We consistently invest in productivity and growth initiatives, with $681 million invested in the financial year; and • We are improving customer convenience and reducing our cost to serve by providing more self-service options. Financial strength Our strength lies in our consistent performance, deep expertise in financial and risk management, and long-term operational stability. That’s why people, businesses and communities trust us to look after their financial wellbeing. • We are Australia’s largest company by market capitalisation, with total assets of $976 billion; • We have over 800,000 shareholders, and have paid out on average 76% of annual profits as dividends since 2001; • Common Equity Tier 1 ratio 10.1% APRA basis, 15.6% international basis; • 67% deposit funded; and • Solid credit ratings: AA- / Aa3 / AA- (S&P, Moody’s and Fitch). Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information714 Our strategy continued Customer focus Our ongoing commitment to enhance financial wellbeing, provide exceptional service, and deliver iconic experiences remains the heart of our strategy. We strive to meet our customers’ needs by providing solutions they value and trust. Making banking simple With the consistent application of simple and innovative technology and services, we are making banking fast, easy, and secure, no matter how customers choose to bank with us. Delivering unique digital experiences • The CommBank app and NetBank are continuing to evolve, with customers experiencing many first- to-market innovations that make banking with us easier. From opening accounts on the go, and getting instant receipts when they make a payment, we are delivering an engaging and simple experience for customers wherever, and however they choose to bank; • Bankwest launched real-time mortgage application tracking, which allows customers to track home loan applications from lodgement through to the first repayment. This includes proactive customer notifications about changes to the status of loan applications; and • ASB launched a new mobile-first digital banking experience, making use of real-time information and advanced personalisation capabilities for our customers in New Zealand. Making share trading more accessible Our leading online broking service, CommSec, has made it easier and more affordable to trade shares, with the cost of trades under $1,000 now halved to $10. We also provide free tutorials, teaching the basics of selecting and managing investments, and the benefits of investment quality and diversification. Enabling Agribusinesses to grow Our agribusiness customers trust us to continually support them as their businesses go through change. Our Agribusiness Relationship Executives are valued for the industry expertise and ideas they provide, helping customers simplify operations, boost productivity, and grow their businesses. 15 Making retirement easy We made understanding retirement easier for our customers, with the launch of new superannuation statements that offer more personalised and action-oriented content. We also refreshed FirstNet, our secure online and mobile service, to ensure our customers can access investment information and statements when they need it. Providing new self-service options for businesses We launched the BetterBusiness Loan online redraw facility, enabling our business customers to redraw funds whenever, and wherever they choose. Our customers have embraced the capability, with more than 85% of redraws now being completed online. We also launched online facilities for the Market Rate Loan product, allowing business customers to manage their finances digitally, and transact with convenience. Offering self-service banking in emerging markets With our South African fintech company, TYME, and our new self-service kiosks, we are addressing the needs of communities in emerging markets by creating low-cost access to basic financial services. Customers can now securely open an account and begin transferring money within four minutes. Providing personalised guidance Every day, our dedicated specialists help guide our customers to make the right decisions to enhance their financial futures. The improvements we have implemented are making each conversation more meaningful and personalised. Revising our approach to quality conversations We seek a deeper understanding of our customers’ goals through Financial Health Checks (FHCs) that help us better identify and meet their needs. We provided over 1.7 million free FHCs to customers during the year, and our enhanced conversation tools provide us with information to help more customers achieve their financial goals. We provided over 1.7 million free Financial Health Checks to customers during the year. Having more relevant interactions Our new customer data analysis system (the Customer Engagement Engine) helps us understand our customers, supporting us to have over 10 million meaningful and relevant interactions. The more we understand our customers, the better we can help them meet their financial goals. Giving Australian businesses access to analytics to enhance their success In April 2017 we released Daily IQ 2.0, a world-leading business insights toolkit, which provides business clients with customised insights to enhance their success. Daily IQ enables our clients to identify opportunities to optimise their cash flow, compare their key performance metrics to their industry, identify business risks and discover more about their customers, including demographics, customer loyalty and spending patterns. Designing new toolkits for financial advisors In 2017 we made the shift to objectives based financial planning, which focuses on our customer’s lifestyle aspirations. We help our customers achieve their personal objectives, with goals that can be tracked and adjusted over time. Innovating for our agribusiness customers In partnership with software developer Figured, we are bringing farmers, accountants, advisors and our bankers together for a more collaborative approach to agricultural financial management. Our pilot with agribusiness clients is trialling the use of industry- specific, cloud-based accounting software. With richer and more up-to- date data that is shared by all parties, we are helping farmers plan ahead in the face of uncertainty, to respond quickly when conditions change. The home buying experience We deliver home buying experiences that help Australians achieve their property dream. Customers value us for the expertise, support and personalised guidance we offer them through every step of their home buying journey. Delivering service excellence We strive to make our customers the centre of everything that we do, by delivering excellent service, and making them feel recognised, respected and valued with each interaction. Our customers trust us to do the right thing by them, ensuring their money, personal information and privacy are always safe. Protecting customer information We are constantly upgrading our customer-facing and back-end technology platforms to ensure our customers’ information remains safe. During the year we officially launched the Cyber Security Centre, a global, next generation cyber defence capability, to defend the Group through the detection, prevention and management of sophisticated cyber threats. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information716 Our strategy continued Recognition of our efforts in delivering exceptional service Our efforts to deliver exceptional customer service were consistently recognised over the financial year: • We ranked first or equal first among the major banks for retail customer satisfaction, a position we’ve held for 11 out of the past 12 months; • We were also number one for internet banking, and maintained first or equal first position for business customer satisfaction in most key segments; • We were first in wealth for overall adviser satisfaction. Commonwealth Financial Planning was also recognised for exceptional service, receiving the CoreData/Professional Planner Institutionally Branded Licensee Award for 2017; We make tracking and paying bills easy New features in the CommBank App and NetBank mean our customers can easily capture bills and automate payments, giving them greater visibility, flexibility, and control. Great customer experiences with the power of Albert Utilising Albert across their 72-strong fleet of commuter and leisure vessels, SeaLink can now do everything with the one device – ticket selection, printing and payments. SeaLink customers receive a better, more flexible experience, leading to greater customer satisfaction. • Our prioritised and continued Strengthening our accountability focus on clients led our Institutional Banking & Markets division to achieve leading positions for overall satisfaction, industry analysis, and creative ideas and solutions, in a survey by Peter Lee Associates; and • In the KangaNews Fixed-Income Research Poll 2017, institutional investors confirmed we provide the best overall fixed-income research, and ranked first in nine out of eleven categories overall, highlighting the value our unique insights and depth of expertise brings to our clients. • Colonial First State Global Asset Management achieved A+ ratings in five of eight categories in the Responsible Investment Association Australasia’s 2016 benchmark of investment managers. We were also awarded the ‘Best Responsible Investor, Asset Manager’ at the 2016 Asia Asset Management Best of the Best Awards; and • Our Indonesian subsidiary, PT Bank Commonwealth, was recognized as the ‘The Best Reputation’ bank and ‘The Most Reliable’ bank for joint venture category at the Indonesia Best Banking Brand Award 2016, held by Warta Ekonomi Magazine. In August 2016 we established an independent Customer Advocate function, to champion fairness for all customers and provide independent complaint reviews. Specialising in helping those who are disadvantaged or face challenging circumstances, the Advocate’s work to date includes: i) research and analysis to improve outcomes for customers in vulnerable situations, ii) community engagement, and iii) improving product design and distribution, and remediation processes. 1 2 3 We ranked first or equal first among the major banks for retail customer satisfaction for 11 out of the past 12 months. 1 We also ranked first or equal first for business customer satisfaction in all key segments, and FirstChoice was ranked number one for overall satisfaction by financial advisers. 17 People Our people are an important asset to us and are essential to secure the trust of our stakeholders at all times. We strive to be an employer of choice, and are fully committed to improving the diversity and safety of our people. Our vision recognises the important role that we have in the economies and communities in which we operate. To achieve our vision we must earn and retain the trust of our stakeholders, which relies on our honesty, capabilities and genuine concern for their financial wellbeing. Our values, and the common principles set out in ‘Our Commitments’, form the framework that guides our people’s conduct, decisions and actions. Embracing these standards enables all of our people to enhance our stakeholder’s trust, and live up to our vision. Commitment to our people initiatives We continue to make progress on initiatives that will positively impact our people, and the customers, businesses and communities that we serve. Our focus in these areas has meant that: 40% of our people come from a cultural background other than Australian 44% of management roles are held by women 39.1 hours of training on average per employee Our People Capabilities Our People Capabilities are the skills that support our people in their development, to help them reach their full potential. Customer focus Creating value in each customer interaction and focusing on the total customer experience. Team and culture Inspiring others to demonstrate the Group’s values and working together to create a passionate, high performing culture. Continuous improvement Continuously improving and innovating what we do to make things simple and easy for our customers and each other. Effective communication Communicating clearly and with impact to ensure understanding, engagement and commitment to action. Judgement Making sound decisions based on understanding business, analysing data and applying common sense. Drive results Initiating action and committing to achieving business outcomes by taking accountability for goals. Recognised as an employer of choice Providing greater workplace flexibility To support our people’s need for greater flexibility, our iCAN Flex approach ensures we are able to accommodate the diverse needs of employees, so they can be mobile, agile and accessible, whilst focusing on what is important to them. In the financial year, 69% of our workforce worked flexibly. Creating indigenous opportunities We provide career opportunities for Aboriginal and Torres Strait Islander people, including school-based traineeships, university student internships and partnerships with community groups. During the year we recruited 54 Aboriginal or Torres Strait Islander people into direct employment placements, taking Indigenous employment to 0.8% of our workforce. We have implemented a range of policies and programs that have laid the foundations for an inclusive workplace, making significant progress by ensuring diversity and inclusion is part of our approach to talent practices, and by encouraging our people to develop and lead diversity and inclusion initiatives. As a result, we received the 2016 Employer of Choice for Gender Equality citation by the Workplace Gender Equality Agency. Commonwealth Bank and Bankwest were also named Gold employers in the Australian Workplace Equality Index Awards, recognising our efforts to include employees identifying as LGBTI. ASB also received the ‘MBIE Diversity Leadership Award’ for its efforts by Deloitte in December 2016. Enhancing our performance review process Our performance review process has been enhanced to recognise our employees delivering on our vision. We have incorporated an assessment of how we demonstrate our values, manage risk in our roles and measure achievement using a balanced performance scorecard. We provide our people with guidance and clear expectations on what living our values means, and encourage regular coaching conversations throughout the year to support their achievements, behaviours, development and career aspirations. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information718 Our strategy continued Through the financial year, we invested in our technology to create new ways for our customers to interact with us, generate efficiencies, and protect ourselves and stakeholders from risk. Investing in the next generation of banking In partnership with 40 global banks, we have continued our investment in R3, a US-based technology company leading the world’s largest financial institutions in research and development into distributed ledger technology. It promises to help cut costs, keep things secure, and improve the customer experience, while supporting a robust, safe and trusted financial services system. Technology We continue to focus on the use of technology for the benefit of our customers, communities and our people, delivering what matters to provide the best value. Bringing innovation to life Our Innovation Labs have been working alongside clients, technology companies and universities to turn ideas into innovative solutions and providing industry thought leadership. We were awarded ‘Best Innovation Centre by Financial Institutions in Australia’ under The Asian Banker Annual Technology Innovation Awards Program 2017. Building sophisticated analytics for tomorrow We have built a sophisticated analytics and big data capability, to deliver more customer value and support better risk management. We also appointed a Chief Analytics Officer to oversee the development of our information and analytics capability. Supporting the development of leading-edge technologies We have investigated over 39 use cases for blockchain technology with our partners since 2016. In the financial year we launched a cyber security engineering lab, and created new PhD scholarships in partnership with the University of New South Wales, to uplift the number of cyber security graduates and professionals in Australia. We have also collaborated with leading universities on a number of research initiatives, to develop: • The world’s first silicon-based quantum computer with the University of New South Wales; • Predictive machine learning to understand and predict customer behaviour, with the University of Technology, Sydney; and • New ways to enhance our customers’ financial wellbeing with Harvard University’s STAR Lab. Leading with world-class data management We invested in our data management technology to ensure that our customer information is secure, that services such as NetBank are continuously available, and that we continue to meet our customers’ future needs and expectations. Our recent data centre modernisation has led to greater levels of security, efficiency and a reduced environmental footprint. 19 Innovation in digital banking services A number of standout features were delivered across our digital ecosystem through the financial year: • Camera Pay, Photo-a-bill, Instant Receipts, and Spend Tracker were all made available on the CommBank app; • Youth app – helping children under 14 learn how to earn, save and spend money responsibly, with simple controls for parents in the CommBank app; • Skype a Lender – an Australian first, customers can chat face to face with expert lenders from a smartphone, computer or tablet; and • Clever Kash, ASB’s digital moneybox for children, won the Canstar ‘Innovation Excellence Award’ in 2017. Expanding our innovation network Facilitating new trade flows We extended our Innovation Labs outside of our existing network of Sydney and Hong Kong, and opened our doors in London. The Labs provide a home for collaboration with our business customers, partners, and researchers, leveraging our innovation assets to rapidly explore ideas, solve problems, and develop innovative products and services. Building Australia’s technology ecosystem We invested in Australia’s Internet of Things (IoT) ecosystem. In October, we were the main sponsor for the Everything IoT Global Leadership Summit, a conference that hosted 500 industry, government, universities and entrepreneurial attendees. Promoting national cyber resilience We continue to support efforts to make the Australian digital economy safer and more resilient. During the year we participated in the Prime Minister’s cyber security roundtable and continue to be an active advisor to government. We were also a founding participant and steering committee member of the Government’s inaugural Joint Cyber Security Centre, launched in Brisbane in 2017. We partnered with Wells Fargo and Brighann Cotton to successfully complete the first trade smart contract between two independent banks, combining the emerging technologies of blockchain, smart contracts and Internet of Things. Partnering with leading technology providers We recently partnered with Alipay, the world’s largest mobile and online payment platform, to deliver payment solutions that benefit Australian and Chinese consumers and retailers. This will give inbound Chinese travellers frictionless payment experiences. We have also piloted a new way for our customers to securely verify their identity and enhance their digital reputation on AirTasker, adding a ‘CommBank Identified’ badge to user’s profiles once their details have been authenticated. Hosting technology hackathons During the year we ran hackathons with Australian universities, our partners, and local communities to test and learn Quantum Computing simulator technologies, and to design innovative customer solutions for real agribusiness challenges. Participants from across industries and the community were mentored by our experts, and received innovation masterclasses to design, validate, prototype and pitch their ideas. Australia’s leading technology bank #1 #1 #1 #1 #1 Online banking, 8 years in a row Mobile banking, 2 years in a row Internet banking (NetBank) 6.2 million of our customers use digital channels to bank with us 54% of all transactions by value occur digitally 29,000 video conferencing and ‘Skype a Lender’ discussions Business banking platform (CommBiz) 85,000 Albert devices have been rolled out Best feature packed broker (CommSec), 10 years in a row 150,000 pension customers are able to view their new statements online with enhanced security Source: Canstar, Finder Innovation, Peter Lee Associates, Money Magazine Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information7 20 Our strategy continued Financial strength Our expertise in financial and risk management ensures we continue to support individuals, businesses, our shareholders, and the communities in which we operate. We strive to build and defend a strong and dependable franchise, and closely manage the business for superior financial and operational outcomes. As at 30 June 2017 we are the largest company on the Australian Securities Exchange (ASX), and are listed on the MSCI ACWI Index. Our financial strength We aim to provide shareholders with stable returns, which are achieved through a resilient balance sheet and rigorous management of capital, funding and liquidity levels. As one of Australia’s largest employers and corporate taxpayers, and with more than 800,000 shareholders who directly own Commonwealth Bank shares, and the millions more who own shares through superannuation funds, we are proud of the contribution we make to the Australian economy. Productivity Productivity remains critical to our long-term success. We constantly analyse our businesses, to unlock efficiencies, and find new ways to reduce turnaround times, minimise errors, and lower unit costs. Delivering end-to-end digital property settlement experiences We were the first bank to integrate with the Property Exchange Australia (PEXA) settlement platform, giving our customers the certainty of completing property settlements digitally, and removing the need for bank cheques. Commonwealth Bank and Bankwest now process over 25% of settlements through PEXA, with over $15 billion of property transactions completed on the platform to date. Innovating with efficiency We have developed a more cost efficient way to innovate through the CommBank Labs app. The app is a place where our people’s ideas can come to life, where customers can try new features and share their experiences with us. Having our customers collaborate with us in an efficient and engaging way means we can shape the future of banking together. Embedding agile ways of working In striving to deliver products and services that matter most for our customers, we are increasing the adoption of agile ways of working across our businesses. During the year we introduced a new agile delivery framework, which is enabling our teams to drive greater business speed and innovation. Recognition for productivity excellence • We accepted the CEO of the Year Award at the 12th annual Process Excellence Week conference, by the International Quality and Productivity Centre in July 2016. This is the second time in 12 years the award has been presented to a bank; • We were awarded the ‘Platinum Award of Excellence in Facilities Management’ by Global Facilities Management; and • Our efforts to improve efficiency in our Indonesian subsidiary PT Bank Commonwealth, were rewarded when we were named ‘The Most Efficient Bank’ for the category of banks in BUKU 2, at the Bisnis Indonesia Banking Award 2016 in October 2016. 2% underlying expense growth in FY17 41.8% cost-to-income ratio down 60 bps on an underlying basis, through a focus on efficiency and cost management 53% of our investment spend was on productivity and growth initiatives 21 Our competitive advantages are complementary to sustaining this performance, and include: • One in every two retail trades are completed through CommSec (non-advised); and Our franchise We have a strong franchise that supports the largest customer base in the Australian financial services sector, with leading market share in many segments. We: • Support 13.8 million customers in Australia; • Are the Main Financial Institution for one in three Australians; • Have the largest market share of earlier stage segments in Australia, including youth, young adults and migrants, and the largest share of the Australian home loan market; and • Meet an average of over three retail product needs per customer, a leading position amongst our peer group. Our brands With some of Australia’s most recognised and valued brands, we are consistently the organisation that customers and communities turn to as their bank of choice. Our collection of brands have helped identify us for over 100 years, reinforcing our position in ensuring individuals and businesses can meet their goals, now and into the future. • The Commonwealth Bank is Australia’s most valuable banking brand, according to the BrandZ Top 100 Most Valuable Global Brands 2017 rankings. Globally, we ranked 60th most valuable across all industries; • Bankwest was named ‘Bank of the Year’ in Money Magazine’s annual Consumer Finance Awards; • Colonial First State is trusted with over $100bn of Australia’s savings and investments, and FirstChoice was recognised as Australia’s most popular investment platform; • One in every four new Commonwealth Bank home loan customers are insured through CommInsure. Our distribution capabilities We operate the largest financial services distribution network in Australia, supporting millions of customers whenever, wherever and however they wish to interact with us. With award-winning digital offerings, we also have the largest physical distribution network in Australia. • We have 1,121 branches, and 4,398 ATMs in Australia. We also operate 123 branches and 427 ATMs in New Zealand (through ASB), and 106 branches and 166 ATMs elsewhere in the world; • We support Australian businesses and institutions across Australia, leveraging our relationship excellence and leading products and services; and • Our shift to the digital revolution has meant NetBank and the CommBank App now handles 54% of total transactions by value. Our information and analytical capabilities Our unique position enables us to employ a wide range of information management and data analytics capabilities to develop insights that empower our customers. • Our real-time information capability, developed under the Core Banking Modernisation program, continues to deliver tangible benefits for our customers; • As Australia’s largest financial services provider, in order to make sense of our extensive data assets, we employ dedicated data engineers and scientists who continuously help improve customer experiences and business performance; We operate Australia’s largest financial services distribution network. • The Customer Engagement Engine looks at over 15 million customer interactions a day across channels, ensuring we remain highly responsive to our customers’ needs, and each week, we generate over 100,000 unique insights; and • Over 230,000 NetBank and CommBiz users have 24/7 access to insights about their business through Daily IQ. Our risk management We constantly monitor our environment to assess the risks in our businesses, and use our expertise to manage these risks and prepare for the potential impacts on our stakeholders. Our approach to risk management seeks to balance risk, returns and growth for the benefit of our customers and stakeholders, by: • Establishing frameworks to manage material risk types, which are consistent with our business objectives and responsibilities to customers and stakeholders; • Optimising risk and return outcomes within our risk appetite, as approved by the Board; • Assessing the impact of proposed changes to laws, regulations and industry codes; and • Reporting risks to the Board, Risk and Audit Committees, the Executive Committee and within each of our business areas. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information722 Business risks This section describes the risks that could materially impact our ability to serve our customers and/or deliver our strategy, and the actions we are taking to mitigate these risks. These risks are not listed in order of materiality and the section should be read in conjunction with the Notes to the Financial Statements relevant to Risk Management. Competition and industry disruption Business resilience The risk and its impact Meeting customer needs with innovative solutions and superior experiences is critical to maintaining high-quality relationships with our customers. As customer expectations continue to evolve, competitors are finding alternative ways to deliver financial services, and emerging technologies present new sources of competitive advantage. A failure to recognise and adapt to changing competitive forces in a timely manner could erode our earnings and our market position over the long term. The risk and its impact The resilience and continuity of our operations is critical to providing our customers with the products, services and experiences that they expect. Events driven by our external environment, including cyber- attacks, extreme weather conditions, natural disasters, war, political instability, pandemics or critical failures with our third-party suppliers can significantly disrupt the systems and processes that enable us to serve and protect our customers. Such disruptions can affect our trusted relationships with customers, our reputation, and our operating costs. How we are responding • We actively monitor changes in customer preferences, products, technologies and distribution channels and continuously improve customer experiences with market leading innovation. • We invest in people and key areas of technology capability that are critical to our value proposition to customers, including cyber-security, digital channels, data and analytics. • We are investing in emerging technologies such as Quantum Computing, Blockchain, and Artificial Intelligence to ensure that the way we operate and the solutions we provide to our customers are industry leading. • We invest in productivity to optimise our cost base and continue to remain competitive for our customers. How we are responding • We monitor the health of all systems and perform contingency planning for disruptions to critical systems and processes. • We are implementing a number of process and system simplification initiatives through investments in agile capability, automation and systems resilience. • We are investing in our technology, processes and people capabilities to mitigate the impact of cyber-security risks on our businesses and customers. • Group policies and standards on supplier governance, selection and management and on outsourcing/offshoring are applied to mitigate the risk and impact of third-party disruptions. • We are improving partnership arrangements to drive greater alignment between our business and technology partners to ensure we remain agile in the face of change. 23 Data management 10101010010101 00010101010100 People capability Housing market The risk and its impact As Australia’s largest financial institution, we manage a significant volume of sensitive customer data and value the trusted relationship we have with our customers. As technology continues to evolve, the threat of cyber-attacks is becoming more sophisticated and greater numbers of third-parties seek to access our customers’ data and remove it from the safety of our systems and firewalls. A failure to ensure this information is kept safe and used in a way that regulators and customers expect, may significantly impact relationships with these stakeholders and the broader community. The risk and its impact Our people are critical to the success of our strategy and ensuring we are able to continuously find better ways to operate and meet customer needs. A shortage of key skills, a failure to help our people continuously update their capabilities, the emergence of new technologies, and/or a fall in our attractiveness relative to other leading employers, could impact our ability to deliver on our strategy and vision. The risk and its impact The domestic mortgage market is a key focus area for our business, and we continue to maintain a high- quality portfolio. As the largest home loan provider in Australia we are exposed to changes in the home lending market and in house prices. A significant or sustained downturn in the housing market could result in a material increase in mortgage defaults. How we are responding • We have, and continue to invest significantly in our data, analytics and cyber-security capabilities to better meet evolving customer needs and expectations, and to reduce the potential for data breaches. • We actively engage with regulators to ensure that there is appropriate governance in place and that evolution in regulation appropriately balances the value of giving customers control of their data, with our duty to protect customers’ privacy and security. • We continuously invest in IT system security and identity and access management controls to secure the confidentiality, integrity and availability of our data. • Our people undergo mandatory training modules to ensure they understand the importance of data security and their obligations in relation to the data they have access to. How we are responding • We are investing in our value proposition as an employer, through new ways of working (including flexibility and mobility), competitive benefits and a focus on culture and diversity. • We focus on developing and retaining our people, including senior management, through targeted training programs and skill upgrading. • We are creating flexible and innovative workspaces to enable stronger collaboration and foster an innovative culture. • We are building partnerships with leading universities to further develop top talent and are investing in community awareness of potential future skills shortages such as mathematics. • We are assessing how new technologies will impact the future workforce for the Australian economy and our businesses. We are building these changes into our long-term people development and capability roadmaps. How we are responding • Our trusted brand and balance sheet strength provide a buffer in times of economic stress and uncertainty. We are strong in the measures of capital, funding and liquidity which enables us to continue to lend to our customers. • We closely manage the credit quality of our home loan portfolio at origination and on an ongoing basis. As a responsible lender, loan serviceability is important and we apply strong criteria when providing home loans. We constantly review and monitor our lending standards to ensure we maintain prudent lending practices and continue to meet our customers’ financial needs now and in the future. • We invest in our risk management capabilities and closely monitor market conditions and competitive dynamics. • We undertake regular stress tests to ensure that we understand the dynamics of the retail home loan portfolio and how we would expect it to perform under a range of scenarios. • Our growth in other lines of business are sources of diversification to earnings and risk exposures from our retail home loan portfolio. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6 Our businessPerformance overview 21Corporate responsibility3 Corporate governance4Directors’ report5Other information724 Business risks continued Regulatory and policy environment Climate change Reputation The risk and its impact Regulatory compliance and involvement in evolving policy discussions are critical to how we continue to run our business, and interact with customers. The banking industry remains subject to ongoing regulatory and policy changes. If we are unable to foresee, advocate for, plan for, and adapt to regulatory change, this could negatively impact our ability to serve customers, and/or our earnings. The risk and its impact We actively consider the environmental impacts of our activities and are committed to operating sustainably and making a positive contribution beyond our core businesses. We consider climate change to be a significant long term driver of both financial and non-financial risks. Addressing that risk is core to our business strategy as climate change has the potential to impact our relationships with customers as they adjust their preferences and behaviours, our systems and processes, our costs, and the value of our loans to affected industries. How we are responding • We allocate a material proportion of our investment budget to regulatory compliance and risk prevention initiatives, and engage with policy makers and communities to advocate for appropriate regulatory reform. • We maintain constructive and proactive relationships with key regulators. How we are responding • Under our Corporate Responsibility programs and initiatives, we take a long term view to ensure that we do business in a sustainable and efficient way, and appropriately use our influence to enhance environmental outcomes. • We have implemented frameworks for considering Environmental, Social and Governance (ESG) issues in assessing our relationships with customers and suppliers. We continue to track our progress against a range of ESG commitments. • Our Group Environment Policy outlines our objectives of safeguarding the environment, whilst supporting economic growth and development. • Our Climate Policy Position Statement outlines our commitment to playing our part in limiting climate change to well below two degrees in line with the Paris Agreement and how we will support the responsible global transition to net zero emissions by 2050. We are undertaking a scenario analysis to inform our long term climate strategy across our lending, investing, insuring and procuring activities. • We are reducing our own direct impact by monitoring and reducing greenhouse gas emissions and energy use through our Sustainable Property Strategy. The risk and its impact Our reputation is of critical importance to us and is directly related to how we run our businesses, make decisions, and communicate with customers and the communities in which we operate. A negative shift in any stakeholder’s perception of the Group may materially undermine our ability to advocate for positive outcomes that align to our vision and values, and our ability to drive long-term performance. It may also affect the cost and availability of funding necessary for the sustainable management of our business. How we are responding • We actively focus on improving the transparency of our business decisions and engage with our customers, employees and the communities in which we operate to understand their concerns and balance their needs. • We have embedded the ‘Our Commitments’ framework, which communicates what we expect of our people in applying our vision and values as a guide for business management and decision-making. • We continue to drive deeper engagement with customers, government and industry groups to ensure we deliver better and consistently fair outcomes, and remediate issues when we are made aware of them. • We engage with external rating agencies to assist them in forming an opinion on our general creditworthiness, with mechanisms to adjust business settings as appropriate. Performance overview 25 25 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345726 Performance overview Group Financial Performance Statutory net profit after tax for the year ended 30 June 2017 increased 8% on the prior year to $9,928 million. Statutory return on equity was 16.1% and statutory earnings per share was 577.6 cents, an increase of 7% on the prior year. We report our results on a statutory and cash basis. The statutory basis is prepared and audited in accordance with the Corporation Act 2001 and Australian Accounting Standards, which comply with International Financial Reporting Standards (IFRS). The cash basis is used by management to present a clear view of the Group’s underlying operating results, excluding certain items listed on page 34 that introduce volatility and/or one-off distortions of the Group’s current period performance. Cash net profit after tax (“cash basis”) increased 5% on the prior year to $9,881 million. The key components of our result were: • Net interest income increased 4% to $17,600 million, reflecting 6% growth in average interest earning assets, partly offset by a three basis point decrease in net interest margin. Net interest margin excluding Treasury and Markets decreased four basis points to 2.09%; • Other banking income increased 14% to $5,520 million, including a $397 million gain on sale of the Group’s remaining investment in Visa Inc. Underlying income increased 5% driven by strong growth in fees and commissions; • Loan impairment expense decreased 13% to $1,095 million, due to lower provisioning primarily in Institutional Banking and Markets and Business and Private Banking partly offset by an increase in Bankwest. • Funds management income increased 1% to $2,034 million, including a 3% unfavourable impact from the higher Australian dollar. This reflects a 6% increase in average Funds Under Administration (FUA) and 4% increase in average Assets Under Management (AUM), partly offset by lower FUA and AUM margins; • Insurance income decreased 1% to $786 million with higher claims resulting in loss recognition of $143 million, $78 million higher than the prior year, partly offset by 1% growth in average inforce premiums; • Operating expenses increased 6% to $11,078 million, including a $393 million one-off expense for acceleration of amortisation on certain software assets. Underlying expense growth of 2% was driven by staff, technology and investment spend, partly offset by the continued realisation of incremental benefits from productivity initiatives; and Dividends This performance has allowed us to declare a final dividend of $2.30 per share, bringing the total dividend for the year ended 30 June 2017 to $4.29 per share, an increase of 9 cents or 2% on the prior year. This represents a dividend payout ratio (cash basis) of 75%. The final dividend payment will be fully franked and will be paid on 29 September 2017 to owners of ordinary shares at the close of business on 17 August 2017 (record date). Shares will be quoted ex-dividend on 16 August 2017. The dividend reinvestment plan will continue to be offered to shareholders and this period a 1.5% discount will be applied to shares allocated under the plan for the final dividend. Group Net Profit after Tax NPAT – Cash ($M) 8,680 7,760 6,835 7,039 9,127 9,445 9,881 Full Year Dividend History (cents per share) DPS (cents) Payout Ratio (“cash basis”) 401 364 320 334 420 420 429 73.2% 75.8% 75.9% 75.1% 75.2% 76.5% 75.0% 80% Target Range 70% 2011 2012 2013 2014 2015(1) 2016(1) 2017 2011 2012 2013 2014 2015(1) 2016(1) 2017 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 of the Financial Statements. 27 27 Full Year Ended (1) FY17 $M FY16 $M Change % 17,600 16,935 5,520 4,860 23,120 21,795 2,034 786 2,016 795 25,940 24,606 65 26,005 (11,078) (1,095) 141 24,747 (10,434) (1,256) 13,832 13,057 (3,927) (3,592) (24) (20) 9,881 9,445 73 (26) (199) (23) 9,928 9,223 4 14 6 1 (1) 5 (54) 5 6 (13) 6 9 20 5 large 13 8 16.0 574.4 429 16.5 (50)bpts 554.8 420 4 2 Group Financial Performance Net interest income Other banking income (2) Total banking income Funds management income Insurance income Total operating income Investment experience Total income Operating expenses (3) Loan impairment expense Net profit before tax Corporate tax expense (4) Non-controlling interests (5) Net profit after tax (“cash basis”) Hedging and IFRS volatility (6) Other non-cash items (6) Net profit after tax (“statutory basis”) Return on equity (%) (7) Earnings per share – basic (cents) (7) Dividends per share (cents) (7) (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 of the Financial Statements. (2) FY17 includes a $397 million gain on sale of the Group’s remaining investment in Visa Inc. (3) FY17 includes a $393 million one-off expense for acceleration of amortisation on certain software assets. (4) For the purposes of presentation of Net profit after tax (“cash basis”), policyholder tax benefit/(expense) components of corporate tax expense are shown on a net basis (30 June 2017: $32 million expense and 30 June 2016: $101 million expense). (5) Non-controlling interests include preference dividends paid to holders of preference shares in ASB Capital Limited and ASB Capital No.2 Limited. (6) Refer to page 34 for details. (7) Ratios prepared on a cash basis. Group Return on Equity RoE – Cash (%) 19.5% 18.4% 18.2% 18.7% 18.2% Earnings Per Share (cents per share) EPS – Cash (cents) 16.5% 16.0% 438.7 444.7 556.9 554.8 574.4 532.7 482.1 2011 2012 2013 2014 2015(1) 2016(1) 2017 2011 2012 2013 2014 2015(1) 2016(1) 2017 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 of the Financial Statements. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 28 Performance overview continued Divisional Performance Summary Full Year Ended (1) (“cash basis”) Retail Banking Services Business and Private Banking Institutional Banking and Markets Wealth Management New Zealand Bankwest IFS and Other Net profit after tax (“cash basis”) Investment experience after tax Net profit after tax (“underlying basis”) FY17 $M 4,964 1,639 1,306 553 973 702 (256) FY16 $M 4,540 1,522 1,190 612 881 778 (78) 9,881 9,445 (44) (100) 9,837 9,345 Change % 9 8 10 (10) 10 (10) large 5 (56) 5 (1) Comparative information has been restated to reflect refinements to the allocation of customer balances, revenue and expense methodology including updated transfer pricing allocations, and changes in accounting policy detailed in Note 1 of the Financial Statements. 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. Cash net profit after tax was $4,964 million, an increase of 9% on the prior year. This was driven by strong growth in total banking income, partly offset by higher expenses and increased loan impairment expense. 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 our online brokerage service, CommSec. Cash net profit after tax was $1,639 million, an increase of 8% on the prior year. This was driven by growth in total banking income and lower loan impairment expense, partly offset by higher expenses. Institutional Banking and Markets manages our global relationships with corporate, government and institutional clients, and provides financial services solutions across financial and capital markets, transaction banking, working capital and risk management. Cash net profit after tax was $1,306 million, an increase of 10% on the prior year. This was driven by strong growth in deposit volumes, active management of the lending portfolio, lower losses from derivative valuation adjustments, and lower loan impairment expense. Divisional Contribution to Group NPAT Jun-17 Divisional NPAT – Cash ($M) 50% Wealth Management encompasses the Group’s funds management, superannuation, insurance and financial planning businesses, operating under the brands of Colonial First State, Colonial First State Global Asset Management, CommInsure, Commonwealth Financial Planning, Financial Wisdom and Count. Colonial First State administers more than $146bn of FUA, Colonial First State Global Asset Management manages more than $219bn of AUM and CommInsure manages more than $2.3bn of inforce premiums. Cash net profit after tax was $553 million, a decrease of 10% on the prior year. This was driven by lower insurance income and lower investment experience, partly offset by lower operating expenses. Insurance income declined 13%, with growth in general insurance offset by a lower income protection result in life insurance. 17% 13% 10% 7% 6% RBS BPB IB&M Wealth NZ Bankwest -3% IFS & Other 29 29 Divisional Performance Summary (continued) New Zealand includes the banking, funds management and insurance businesses operating in New Zealand under the ASB and Sovereign brands. Cash net profit after tax was NZD1,069 million, an increase of 9% on the prior year, driven by a strong performance from ASB, partly offset by lower profit in Sovereign. Bankwest operates in the domestic market, providing lending to retail, business and rural customers as well as a full range of deposit products. More than half of Bankwest’s customers are based in Western Australia. Cash net profit after tax was $702 million, a decrease of 10% on the prior year. This result was driven by a higher loan impairment expense and a one-off cost for the integration of Bankwest’s east coast business banking operation into Business and Private Banking, partly offset by higher total banking income. Excluding the one-off integration costs, underlying cash net profit after tax decreased 7%. IFS oversees our retail and business banking operations in Indonesia, China, Vietnam and India, as well as associate investments in China and Vietnam, life insurance operations in Indonesia and a financial services technology business in South Africa. Cash net profit after tax was $93 million, an increase of 79% on the prior year, including a 35% decrease from the higher Australian dollar. The result was driven by lower operating expenses and a one off tax benefit, partly offset by lower operating income. Other divisions includes the results of Group support functions such as Group Strategy, Marketing, Group Corporate Affairs and Treasury, as well as intra-group elimination entries arising on consolidation. Other divisions cash net profit after tax reduced $219 million on the prior year to a loss of $349 million. This was primarily driven by a one-off expense for acceleration of amortisation on certain software assets, higher corporate technology costs, an increase in the centrally held loan impairment provisions, and the timing of recognition of unallocated revenue items and eliminations, partly offset by a gain on sale of the Group’s remaining investment in Visa Inc. Net Interest Income Net interest income – “cash basis” Average interest earning assets Home loans (2) Consumer Finance Business and corporate loans Total average lending interest earning assets Non-lending interest earning assets Total average interest earning assets Net interest margin (%) Net interest margin excluding Treasury and Markets (%) Full Year Ended (1) FY17 $M FY16 $M Change % 17,600 16,935 435,448 409,669 23,518 23,722 221,188 211,356 680,154 644,747 154,587 145,849 834,741 790,596 4 6 (1) 5 5 6 6 2.11 2.09 2.14 2.13 (3)bpts (4)bpts (1) (2) Comparative information has been reclassified to conform to presentation in the current period. Net of average mortgage offset balances. Gross average home loan balance, excluding mortgage offset account is $470,773 million (30 June 2016: $436,530 million). Net interest income increased 4% on the prior year to $17,600 million. This was driven by growth in average interest earning assets of 6%, partly offset by a three basis point decrease in net interest margin. Average Interest Earning Assets Average interest earning assets increased $44 billion on the prior year to $835 billion, driven by: • Home loan average balances increased $26 billion or 6% on the prior year to $435 billion. The growth in home loan balances was largely driven by domestic banking growth; • Average balances for business and corporate loans increased $10 billion or 5% on the prior year to $221 billion, driven by growth in business banking lending balances; and • Average non-lending interest earning assets increased $8 billion or 6% on the prior year to $155 billion due to higher liquid assets as a result of a reduction in the Committed Liquidity Facility (CLF). Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 30 Performance overview continued Basis risk: Basis risk arises from funding assets which are priced relative to the cash rate with liabilities priced relative to the bank bill swap rate. The impact on margin was flat as a result of minimal change in the spread between the cash rate and the bank bill swap rate during the year. Capital and Other: Decreased margin of five basis points driven by the impact of the falling cash rate environment on free equity funding and a two basis point reduction in the contribution from New Zealand, partly offset by the positive impact from higher capital. Treasury and Markets: Increased margin of one basis point driven by a higher contribution from Treasury and Markets, partly offset by increased holdings of liquid assets. Net Interest Income (continued) Net Interest Margin Net interest margin decreased three basis points on the prior year to 2.11%. The key drivers of the movement were: Asset pricing: Increased margin of five basis points with the benefit from home loan repricing, partly offset by the impact of competition on home and business lending. Funding costs: Decreased margin of four basis points reflecting an increase in wholesale funding costs due to lengthening the mix and tenor of wholesale funding to assist the Group in preparing for the Net Stable Funding Ratio which applies from 1 January 2018. Deposit costs were flat with the negative impact from the lower cash rate, offset by repricing. Portfolio mix: Flat with a favourable change in funding mix from proportionally higher levels of transaction deposits, offset by unfavourable change in lending mix. NIM movement since June 2016 (1) Group NIM (1) Group NIM Group NIM excluding Treasury and Markets Group NIM Group NIM excluding Treasury and Markets 2.14% 0.05% (0.04%) – – (0.05%) 0.01% 2.11% 2.15% 2.14% 2.11% 2.13% Group NIM excluding Treasury and Markets decreased four basis points 2.09% 2.12% 2.13% 2.09% Jun16 Asset pricing Funding costs Portfolio mix Basis risk Capital and Other Treasury and Markets Jun17 Jun 15 Jun 16 Jun 17 (1) Comparative information has been reclassified to conform to presentation in the current period. 31 31 Other Banking Income Commissions Lending fees Trading income Other income (1) Other banking income – “cash basis” (1) (1) FY17 includes a $397 million gain on sale of Group’s remaining investment in Visa Inc. Full Year Ended FY16 $M 2,215 1,010 1,087 548 4,860 Change % 12 7 6 48 14 FY17 $M 2,482 1,078 1,149 811 5,520 Other banking income increased 14% on the prior year to $5,520 million. Excluding the one-off impact of a gain on sale of the Group’s remaining investment in Visa Inc., other banking income increased 5%. The key drivers were: Commissions increased 12% on the prior year to $2,482 million due to higher consumer finance income driven by higher purchases and lower loyalty costs, and volume driven deposit fee income; Lending fees increased 7% on the prior year to $1,078 million with volume driven growth, partly offset by lower Institutional fees due to competitive pressures; Net Trading Income ($M) Sales Trading Derivative valuation adjustment Trading income increased 6% on the prior year to $1,149 million driven by favourable derivative valuation adjustments, partly offset by lower Markets sales; and Other income increased 48% on the prior year to $811 million, driven by a gain on sale of the Group’s remaining investment in Visa Inc., partly offset by a higher realised loss on the hedge of New Zealand earnings. 1,087 378 1,149 11 404 1,039 424 654 783 734 (39) Jun 15 (74) Jun 16 Jun 17 Funds Management Income Full Year Ended Colonial First State (CFS) (1) CFS Global Asset Management (CFSGAM) CommInsure New Zealand Other FY17 $M 928 837 121 92 56 FY16 $M 929 842 120 80 45 Funds management income – “cash basis” 2,034 2,016 (1) Colonial First State incorporates the results of all Wealth Management Financial Planning businesses. Change % – (1) 1 15 24 1 Funds management income increased 1% on the prior year to $2,034 million, driven by: • A 6% increase in average FUA reflecting strong investment markets across the Australian and New Zealand businesses and positive net flows in Australia; and • A 4% increase in average AUM as a result of positive net flows and strong investment markets in the Australian and New Zealand businesses; partly offset by • A 3% unfavourable impact from the higher Australian dollar; • A decline in FUA margins as a result of increased customer remediation costs in CFS Advice; and • A decline in AUM margins as a result of a change in investment mix in the Australian business. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 32 Performance overview continued Insurance Income CommInsure New Zealand IFS Other Insurance income – “cash basis” Full Year Ended FY16 $M 502 242 46 5 795 Change % (13) 15 9 large (1) FY17 $M 438 278 50 20 786 Insurance income decreased 1% on the prior year to $786 million, driven by: • Higher premiums in New Zealand and IFS; • A decline in CommInsure Retail life income due to higher claims resulting in loss recognition of $143 million in income protection during the year, an increase of $78 million on the prior year; partly offset by • Lower claims in IFS and CommInsure Wholesale life; and • A 1% increase in average inforce premiums. Operating Expenses Staff expenses (1) Occupancy and equipment expenses Information technology services expenses (2) Other expenses Full Year Ended FY17 $M 6,268 1,139 1,941 1,730 FY16 $M 6,169 1,134 1,485 1,646 Operating expenses – “cash basis” (2) 11,078 10,434 Change % 2 – 31 5 6 Operating expenses to total operating income (%) (1) (3) Banking expenses to total banking income (%) (3) 42.7 39.4 42.4 38.2 30 bpts 120 bpts (1) (2) (3) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 of the Financial Statements. The current year includes a $393 million one-off expense for acceleration of amortisation on certain software assets. Excluding a $397 million gain on sale of the Group’s remaining investment in Visa Inc. and a $393 million one-off expense for acceleration of amortisation on certain software assets, operating expenses to total operating income is 41.8% for the current year and banking expenses to total banking income is 38.4% for the current year. Operating expenses increased 6% on the prior year to $11,078 million. Excluding the one-off impact of accelerated software amortisation, operating expenses increased 2%. The key drivers were: Staff expenses increased 2% to $6,268 million driven by salary increases and employee entitlements, partly offset by productivity initiatives; Occupancy and equipment expenses were flat at $1,139 million, due to increased rental reviews and depreciation, offset by lower relocation feasibility costs; Information technology services expenses increased 31% to $1,941 million, primarily driven by a $393 million one-off expense for acceleration of amortisation on certain software assets. Underlying expenses increased 4% due to higher licensing expenses, lease costs, and investment spend; Other expenses increased 5% to $1,730 million, due to higher professional fees, partly offset by reduced marketing costs; Group expense to income ratio increased 30 basis points on the prior year to 42.7%, primarily driven by a gain on sale of the Group’s remaining investment in Visa Inc. and the one-off expense for acceleration of amortisation on certain software assets. The underlying ratio was 41.8%, a reduction of 60 basis points. 33 33 Operating expenses – Investment Spend Full Year Ended Expensed investment spend (1) Capitalised investment spend Investment spend Comprising: Productivity and growth Risk and compliance Branch refurbishment and other Investment spend (1) Included within the Operating Expenses disclosure on page 32. FY17 $M 650 629 FY16 $M 604 769 1,279 1,373 681 470 128 701 505 167 1,279 1,373 Change % 8 (18) (7) (3) (7) (23) (7) We continued to invest to deliver on the strategic priorities of the business with $1,279 million incurred in the full year to 30 June 2017, a decrease of 7% on the prior year. The decrease is due to the timing and completion of key phases of risk and compliance projects in the prior year (including Future of Financial Advice (FOFA)), significant progress made with branch transformation, and the roll-out of refreshed ATMs in the prior year, and the timing of spend on productivity and growth initiatives. Spend on productivity and growth continued to focus on delivering further enhancements to the Group’s sales management capabilities, digital channels and customer data insights. Significant spend on risk and compliance projects has continued as systems are implemented to assist in satisfying new regulatory obligations, including Stronger Super and Common Reporting Standard requirements. In addition, the Group continues to invest in safeguarding information security to mitigate risks and provide greater stability for customers. Loan Impairment Expense Retail Banking Services Business and Private Banking Institutional Banking and Markets New Zealand Bankwest IFS and Other Loan impairment expense – “cash basis” Full Year Ended (1) FY16 $M 663 176 252 120 (10) 55 1,256 Change % 5 (58) (75) (46) large 89 (13) FY17 $M 699 74 64 65 89 104 1,095 (1) Comparative information has been restated to conform to presentation in the current period. Impairment Expense (Annualised) as a % of Average GLAAs (bpts) 19 16 16 15 Jun 14(1) Jun 15 Jun 16 Jun 17 (1) 16 basis points, including the Bell group write-back (non-cash item). Loan impairment expense decreased 13% on the prior year to $1,095 million. Loan impairment expense annualised as a percentage of Average Gross Loans and Acceptances (GLAAs) decreased 4 basis points to 15 basis points. The decrease was driven by: • Reduced individual provisions and lower collective provisions in Business and Private Banking; • Lower collective provisions and fewer large individual provisions in Institutional Banking and Markets; and • Lower collective provisioning in the New Zealand dairy sector; partly offset by • An increase in Retail Banking Services as a result of higher arrears and losses for home loans and consumer finance, predominantly in Western Australia and Queensland; and • An increase in Bankwest due to slower run-off of the business troublesome book and higher home loan losses, predominantly in Western Australia. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 34 Performance overview continued Taxation Expense Corporate tax expense ($M) Effective tax rate – “cash basis” (%) Full Year Ended FY17 $M 3,927 28.4 FY16 $M 3,592 Change % 9 27.5 90 bpts Corporate tax expense for the year ended 30 June 2017 increased 9% on the prior year representing a 28.4% effective tax rate. This increase is primarily as a result of a change in business mix, including the run-off of specialised financing transactions. 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. Non-Cash Items Included in Statutory Profit Full Year Ended (1) Hedging and IFRS volatility Bankwest non-cash items Treasury shares valuation adjustment Other non-cash items Total non-cash items (after tax) FY17 $M 73 (3) (23) (26) 47 FY16 $M (199) (27) 4 (23) (222) Change % large (89) large 13 large (1) Comparative information has been restated to conform to presentation in the current year. 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 the prior financial year. Refer to the Other Information page 213 to 214 for the detailed profit reconciliation. 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; • Cross currency interest rate swaps hedging foreign currency denominated debt issues; • Foreign exchange hedges relating to future New Zealand earnings; and • The ineffective portion of economic Policyholder tax hedges that qualify for hedge accounting under IFRS. This amount is excluded from cash profit as it does not affect the Group’s performance over the life of the hedge. A $73 million after tax gain was recognised in statutory profit for the year ended 30 June 2017 (30 June 2016: $199 million after tax loss). Treasury shares valuation adjustment Under IFRS, Commonwealth Bank of Australia shares held by the Group in the life insurance businesses are defined as treasury shares and are required to be held at cost. These shares are fair valued in cash profit with the difference between cost and fair value reversed as a non-cash item. A $23 million after tax loss was included in statutory profit in the year ended 30 June 2017 (30 June 2016: $4 million after tax gain). Policyholder tax is disclosed separately in the Wealth Management and New Zealand business results for statutory reporting purposes. The gross up is excluded from cash profit, as it does not reflect the underlying performance of the business, which is measured on a net of policyholder tax basis. Investment experience Investment experience includes returns on shareholder capital invested and revaluations in the wealth management businesses. It also includes changes in economic assumptions impacting the insurance businesses and investment profits on the annuity portfolio. This item is classified separately within cash profit. 35 35 Review of Group Assets and Liabilities FY17 $M As at FY16 $M Change % Interest earning assets Home loans (1) Consumer finance Business and corporate loans Loans, bills discounted and other receivables (2) Non-lending interest earning assets Total interest earning assets Other assets (2) (3) Total assets Interest bearing liabilities Transaction deposits (4) Savings deposits (4) Investment deposits Other demand deposits Total interest bearing deposits Debt issues Other interest bearing liabilities Total interest bearing liabilities Non-interest bearing transaction deposits Other non-interest bearing liabilities (3) Total liabilities (1) Gross of mortgage offset balances. 485,857 456,074 23,577 23,862 226,484 220,611 735,918 700,547 163,665 137,838 899,583 838,385 76,791 94,616 976,374 933,001 98,884 89,780 191,245 191,313 220,530 197,085 70,313 71,293 580,972 549,471 168,034 162,716 57,531 54,101 806,537 766,288 44,032 37,000 62,089 69,149 912,658 872,437 7 (1) 3 5 19 7 (19) 5 10 – 12 (1) 6 3 6 5 19 (10) 5 (2) Loans, bills discounted and other receivables exclude provisions for impairment which are included in Other assets. (3) (4) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 of the Financial Statements. Includes mortgage offset balances. Asset growth of $43 billion or 5% on the prior year was driven by increased home lending, business and corporate lending, and higher liquid asset balances. The Group continued to satisfy a significant portion of lending growth from customer deposits. Customer deposits represent 67% of total funding (30 June 2016: 66%). Home loans Home loan balances increased $30 billion to $486 billion, reflecting a 7% increase on the prior year, driven by strong growth in Retail Banking Services, New Zealand and Bankwest. Consumer finance Consumer finance, which includes personal loans, credit cards and margin lending decreased 1% on the prior year to $24 billion, broadly in line with system. Business and corporate loans Business and corporate loans increased $6 billion to $226 billion, a 3% increase on the prior year. This was driven by strong growth in business lending in Business and Private Banking and New Zealand, partly offset by institutional lending due to active portfolio management. Non-lending interest earning assets Non-lending interest earning assets increased $26 billion to $164 billion, reflecting a 19% increase on the prior year. The increase was driven by higher liquid asset balances held as a result of Balance Sheet growth and a reduction in Committed Liquidity Facility (CLF) effective 1 January 2017. Other assets Other assets, including derivative assets, insurance assets and intangibles, decreased $18 billion to $77 billion, a 19% decrease on the prior year, reflecting lower derivative asset balances impacted by the higher Australian dollar. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 36 Performance overview continued Non-interest bearing transaction deposits Non-interest bearing transaction deposits, including business and personal transaction accounts, increased $7 billion to $44 billion, driven by strong growth in Retail Banking Services. Other non-interest bearing liabilities Other non-interest bearing liabilities, including derivative liabilities and insurance policy liabilities, decreased $7 billion to $62 billion, a 10% decrease on the prior year, reflecting lower derivative liability balances impacted by the higher Australian dollar. FY17 $M 2,747 980 3,727 (34) As at FY16 $M 2,818 944 3,762 (44) 3,693 3,718 Change % (3) 4 (1) (23) (1) • An increase in consumer collective provisions in home loans and credit cards in Retail Banking Services; • Higher consumer individually assessed provisions predominantly due to home loan impairments in Western Australia; and • Economic overlays remain unchanged. Review of Group Assets and Liabilities (continued) requirements, strong access was maintained to both domestic and international wholesale debt markets. Interest bearing deposits Interest bearing deposits increased $32 billion to $581 billion, a 6% increase on the prior year. This was driven by strong growth of $23 billion in investment deposits and an $9 billion increase in transaction deposits. Debt issues Debt issues increased $5 billion to $168 billion, a 3% increase on the prior year. While deposits satisfied the majority of the Group’s funding Refer to page 131 for further information on debt programs and issuance for the year ended 30 June 2017. Other interest bearing liabilities Other interest bearing liabilities, including loan capital, liabilities at fair value through income statement and amounts due to other financial institutions, increased $3 billion to $58 billion, a 6% increase on the prior year. Loan Impairment Provisions and Credit Quality Provisions for impairment losses Collective provision Individually assessed provisions Total provisions for impairment losses Less: Provision for Off Balance Sheet exposures Total provisions for loan impairment Provisions for Impairment • Lower commercial collective Total provisions for impairment losses decreased 1% on the prior year to $3,727 million. The movement in the level of provisioning reflects: provisions, mainly in Institutional Banking and Markets; and • A reduction in Bankwest individually assessed provisions; partly offset by Collective Provisions ($M) Individually Assessed Provisions ($M) 2,818 695 187 2,747 711 184 1,077 1,112 Overlay Bankwest Consumer Commercial Bankwest Consumer Commercial 944 209 169 980 198 211 859 740 566 571 Jun 16 Jun 17 Jun 16 Jun 17 37 37 Full Year Ended FY17 $M FY16 $M Change % 737,002 701,730 437,063 394,667 377,259 344,030 3,116 1,989 5 11 10 2 2 3,187 2,038 0.73 0.99 36.05 0.51 0.43 0.36 0.15 0.82 1.09 (9)bpts (10)bpts 36.17 (12)bpts 0.54 (3)bpts 0.44 0.33 0.19 (1)bpt 3 bpts (4)bpts Credit Quality Metrics Gross loans and acceptances (GLAA) ($M) Risk weighted assets (RWA) ($M) – Basel III Credit RWA ($M) – Basel III Gross impaired assets ($M) Net impaired assets ($M) Provision Ratios Collective provision as a % of credit RWA – Basel III Total provisions as a % of credit RWA – Basel III Total provisions for impaired assets as a % of gross impaired assets Total provisions for impairment losses as a % of GLAAs Asset Quality Ratios Gross impaired assets as a % of GLAAs Loans 90+ days past due but not impaired as a % of GLAAs Loan impairment expense (“cash basis”) as a % of average GLAAs Credit Quality Provision Ratios Provision coverage ratios remain prudent. The impaired asset portfolio remains well provisioned with provision coverage of 36.05%. Asset Quality The asset quality ratios show improvement in the quality of the book with the level of commercial troublesome and impaired assets reducing over the year. The arrears for the home loan and credit card portfolios remain relatively low, however personal loan arrears continues to be elevated, primarily in Western Australia. Retail Portfolios – Arrears Rates Home loan arrears increased over the year, with 30+ day arrears increasing from 1.21% to 1.22%, and 90+ day arrears increasing from 0.54% to 0.60%. Personal loan arrears improved over the year with 30+ day arrears falling from 3.46% to 3.35%, and 90+ day arrears reducing from 1.46% to 1.41%. Credit card arrears deteriorated with 30+ day arrears increasing from 2.41% to 2.52%, and 90+ day arrears increasing from 0.99% to 1.03%. 30+ Days Arrears Ratios (%) (1) 90+ Days Arrears Ratios (%) (1) 4.0% 3.0% 2.0% 1.0% Personal Loans 2.0% 1.0% 0.0% Personal Loans Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 (1) Includes retail portfolios of Retail Banking Services, Bankwest and New Zealand. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457Credit CardsHome LoansCredit CardsHome Loans 38 Performance overview continued Credit Quality Metrics (continued) Troublesome and Impaired Assets Commercial troublesome assets decreased 5% during the year to $3,313 million. Gross impaired assets increased 2% on the prior year to $3,187 million. Gross impaired assets as a proportion of GLAAs of 0.43% decreased one basis point on the prior year. Capital After allowing for the APRA requirement to hold additional capital with respect to Australian residential mortgages, the Group continued to strengthen its capital position during the year. The Group’s CET1 ratio as measured on an APRA basis was 10.1% at 30 June 2017 and 10.6% at 30 June 2016. The capital ratios were maintained well in excess of regulatory minimum requirements at all times throughout the year. Internationally Comparable Capital Position The Group’s CET1 ratio as measured on an internationally comparable basis was 15.6% as at 30 June 2017, placing it amongst the top quartile of international peer banks. Troublesome and Impaired Assets ($B) Gross Impaired Commercial Troublesome 6.6 3.1 6.5 3.2 3.5 3.3 6.0 2.9 3.1 FY 15 FY 16 FY 17 Capital Ratios CET1 Ratio (APRA) CET1 Ratio (Internationally Comparable) 15.6% 10.6% 10.1% 9.1% Jun 15 Basel III Jun 16 Basel III Jun 17 Basel III Jun 17(1) Basel III (1) Analysis aligns with the APRA study titled “International capital comparison study” (13 July 2015). Corporate responsibility 39 Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2 Corporate governance4Directors’ report5Other information7 Our business1Corporate responsibility340 Corporate responsibility Our Approach With our corporate responsibility programs and initiatives we assist our customers, support our communities, engage our people and minimise our environmental impact all founded on a principle of good business practice. We play an important role in enabling economic and social development, supporting jobs, driving innovation and creating opportunities. We actively look for ways to use our unique capabilities and resources to make a positive contribution beyond our core activities. We do this as part of our everyday business as well as through Opportunity Initiatives which is our corporate responsibility plan to drive positive, long term value and change for all our stakeholders. Opportunity Initiatives is focused on three pillars: education, innovation and good business practice. Full details of our progress and performance are available in the 2017 Corporate Responsibility Report, available on our website. Improving our customers’ experience Increasing emphasis is being placed on the banking sector’s social licence to operate and we are fully committed to implementing the Australian Bankers’ Association’s Better Banking Program to protect customer interests and build trust and confidence in the industry. We are making good progress and will continue to implement more reforms that deliver real and practical benefits to our customers. Customer Advocacy In August 2016 we appointed an independent Customer Advocate and established the Group Customer Advocacy team. The team is focused on making processes faster, simpler and fairer for customers. There is a particular focus on helping customers who are disadvantaged, experiencing hardship, have language difficulties or face other special circumstances. Helping customers secure their financial wellbeing Research has shown that almost half of all Australians spend more than they would like to; one in five report having zero savings; and almost half feel as though they are not progressing towards their financial goals. We are responding by collaborating with community organisations, leading academics, regulators and social service agencies to help tackle the most pressing financial wellbeing challenges in Australia. training on reponsible lending... indigenous suppliers savings challenge spend tracker savings jar suppliers transaction notifications waste water transport food culture green star rated health We have a unique ability to use our technology and innovation capabilities to directly support good financial habits, and better financial decisions. For example, new CommBank app features are giving people more visibility and insight into their spending so they can take more control: General Management Exposure to International Operations Non-Executive Director of at least 2 listed Companies emissions emissions • Transaction Notifications – real time credit card transaction notifications that give customers immediate awareness and insights into their daily spend so they can better manage their finances and improve their savings. Disclosing and managing conflicts of interest Maintaining confidentiality Honesty Upholding the guiding frame- work of our vision and values • Spend Tracker – a month-to-date summary of credit card activity that automatically categorises transactions and shows customers where their money is going so they can make better decisions on where to spend. Understanding and fulfilling all aspects of their role Operating in a safe and inclu- sive manner Maintaining personal standards Using technology and com- munications In an Australian first, Commonwealth Bank credit card customers are now able to close their credit card account online in real time giving them even greater control over their financial wellbeing. The fully digital experience enables customers to close their credit card using the CommBank app or online without the need to go into branch or speak to our contact centre. competition+industry distribution data management housing market climate change reputation corporate responsibility In April 2017, a Customer Advocate Community Council was established, comprised of 20 representatives covering social policy, community welfare, and issues advocacy. The Council is a forum to listen and respond to concerns from the community, demonstrating our commitment to addressing the needs of vulnerable and disadvantaged customers and supporting community relationships. Innovation We continue to prioritise investment in technology and innovation as a way to better support and empower businesses to operate more efficiently, keep things secure and improve the customer experience. This will help to transform industries and aspects of the broader community. We are actively experimenting with blockchain and this year, together with Wells Fargo and Brighann Cotton, we completed the first physical trade transaction between two banks using the emerging technologies of blockchain, smart contracts and the internet of things. The transaction involved a shipment of cotton from Texas, USA to Qingdao, China. We also became the first non-university institution in Asia-Pacific to develop a quantum computer simulator which will allow quantum ready applications to be developed in parallel to the hardware. Enhancing innovation in business can drive value through revenue and productivity gains. Our inaugural CommBank Business Insights Report ‘Unlocking Everyday Innovation’ measures the innovation performance of Australian businesses across a range of categories. The report quantifies the value that businesses generate from innovation and outlines the pathways to enhance innovation. Our national report has been followed by the rollout of a regional versus metro report as well as location and industry-specific reports. 41 Empowering and supporting our communities Education As a leading Australian employer, we are committed to helping improve education outcomes, including financial education, and investing in the skills of the workforce of the future. 574,246 students Our award-winning Start Smart classes have reached more than half a million students. Start Smart is our free financial education program for primary, secondary and Vocational Education and Training students. 229 youth-focused organisations Received Community Grants of up to $10,000 to support programs on education, health and social inclusion. branches We are investing $50 million dollars in education over three years (2015- 2018). This goes to funding a range of education programs including Start Smart, the Commonwealth Bank Teaching Awards and Evidence for Learning. business banking specialist ATMs eftpos online customers self-service digital deposit machines StartSmart Employees/Indigenous emploees operations net revenue renewable energy project emissions female executives community investments volunteering customers/indige- nous customers reconciliation tax transparency school students education investment research projects customer experience survey fund academic project MathsPASS Credit limit slider Camera pay CommBank youth app click to call storm warning supermatch product organisation process Teaching real-life money skills to under 14s. ESG lending slavery teachers loan impairment To support the financial wellbeing of children and youth we provide schools with both a financial education program, Start Smart, and School Banking. Our award-winning financial education program Start Smart reached 574,246 students nationwide – that’s an average of 2,000 students receiving financial education every school day, making Start Smart the largest program of its kind anywhere in the world. We have also refreshed our program with gender equality and unconscious bias principles. Our School Banking program started in 1931 and currently has 326,146 active students participating. The program is designed to provide young children with a basic understanding of core financial values and money management skills, to help them take their first steps towards good money management and regular savings behaviour. mobile international money transfer thrive portal marketing drone teaching award training employees cyber security curriculum Youth Bank App JumpStart App Black Card Training Pay Equality Staff Flexibility This year we have released the CommBank Youth app which gives under 14s hands-on money management experience that’s fun and secure. It’s an innovative app that will help young customers develop their skills in an increasingly cashless and digital society. financial counsellors customer advocacy SACE spent on training hosted the experince This year our efforts to support the financial education of Australia’s youth were recognised with multiple awards, including the Child and Youth Friendly Banking Award in the 2017 Global Inclusion Awards and the Canstar Youth Banking Award for the seventh time. It is the second year in a row that we have won the Canstar Junior Banking Award. High-quality teaching is the greatest in-school influence on student engagement and outcomes. To acknowledge this we have created the Commonwealth Bank Teaching Awards in partnership with Australian Schools Plus to recognise and reward excellent teaching and school leadership. In March 2017, the new Commonwealth Bank Teaching Awards rewarded 12 Australian teachers with a Teaching Fellowship, valued at $45,000 each. Evidence for Learning continues to support improved practice by teachers, school leaders and education systems across two offerings: • The Australian Teaching & Learning Toolkit is an online educator resource and has had more than 10,000 regular users visit the website. • The Learning Impact Fund has distributed $571,000 across three different research trials to support the development of education evidence. Volunteering and giving Our people are more involved in our communities than ever, through a wide range of volunteering programs and our Staff Community Fund, which celebrates its 100th anniversary in 2017. With more than $1.2 million in-kind volunteering provided to community organisations this year, we provide a focused and relevant benefit for the community while offering personal development opportunities for our people and a link to their community. Our Staff Community Fund distributed more than $2 million in Community Grants to 229 community organisations nationally to support the wellbeing of kids and youth. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2 Corporate governance4Directors’ report5Other information7 Our business1Corporate responsibility342 Corporate responsibility continued Financial inclusion As one of Australia’s largest companies and employers, we are committed to the financial wellbeing of our customers and staff. We launched our first ever Financial Inclusion Action Plan (FIAP) which includes a range of initiatives aimed at helping customers experiencing financial difficulty and building the economic security of women. A key FIAP action we have delivered this year is new Domestic and Family Violence Awareness training to help employees better understand and respond to those who may be experiencing domestic or family violence. We are also supporting Financial Counselling Australia through a commitment of $400,000 to train financial counsellors across Australia to assist people affected by domestic and family violence and $500,000 to the Jan Pentland Foundation to fund 10 scholarships annually for the next 10 years for people to study financial counselling. We have also been raising awareness of our financial hardship program, Financial Assist, which offers customers assistance if they are having difficulty making a repayment. This might include offering flexibility with instalments due, a review of financial commitments, or more detailed financial rehabilitation support. International financial inclusion Since its launch in Pick n’ Pay stores in South Africa, delivering a cost effective money remittance solution nationally, Money Transfer has grown to include self-service kiosks that have allowed more than 150,000 customers to be registered, performing more than 350,000 transactions. The digital kiosk has now evolved to create a customer on-boarding solution for our business in Indonesia. We are able to on-board a new customer via the Money Transfer kiosk and they are able to open an account, obtain a debit card, and use it at an ATM in around 10 minutes. $900,000 Committed to financial counselling scholarships and training on domestic and family violence. 0.8% Of our workforce that identifies as Aboriginal or Torres Strait Islander. We are working towards a target of 1.5% by 2020. Clown doctors We have been proud supporters of Clown Doctors since 1999. This year they provided support to one of our employees and Staff Community Fund member, Alison Graham, and her son Jack who was diagnosed with acute lymphoblastic leukaemia and had to undergo intensive chemotherapy. Clown Doctors are specially trained performers who visit Australian children’s hospitals and wards and help to lift the spirits of sick children and their families, including Alison and her son Jack. Money Transfer In South Africa, more than 150,000 customers have registered with our Money Transfer kiosks, savings challenge spend tracker savings jar transaction notifications training on reponsible lending... performing more than 350,000 transactions. We are delivering a scalable digital bank that increases access to financial services for our customers. transport waste water food culture emissions Non-Executive Director of at least 2 listed Companies General Management Exposure to International Operations The South African Reserve Bank has formally granted the Commonwealth Bank a full Bank Licence in South Africa. This is a critical milestone, not only towards launching our digital bank in South Africa but as part of our overall strategy to deliver financial inclusion across the emerging markets we serve. Operating in a safe and inclu- sive manner Honesty Using technology and com- munications Upholding the guiding frame- work of our vision and values Maintaining personal standards Maintaining confidentiality suppliers indigenous suppliers green star rated health emissions Disclosing and managing conflicts of interest Understanding and fulfilling all aspects of their role Following on from their success in South Africa, we have introduced Money Transfer kiosks in Indonesia. Indonesia’s Financial Services Authority has formally approved the rollout of Money Transfer kiosks in both Commonwealth Bank branches and key retail locations. competition+industry distribution data management housing market climate change In Indonesia we continue to grow and develop our WISE (Women Investment Series) initiative. WISE was refreshed to build on the success of the existing program with some new additions including broadening our target audience to include women entrepreneurs. reputation corporate responsibility 43 Diversity in leadership 40% Female directors on Board 37% women in Executive Manager and above roles 44% women in Manager and above roles We have put in place a number of targeted solutions to achieve gender pay equity, including: • Reporting pay equity metrics to both the Board and Executive Committee; • Education in removing unconscious bias in pay and other management decisions; • Mandatory pay reviews for employees on parental leave; and • Use of data and metrics to inform objective decisions and actions for managers who make pay decisions. Reconciliation We aim to increase employment of Aboriginal and Torres Strait Islander peoples to be at parity with the Australian population (3%) by 2026 with a midpoint target of 1.5% by 2020. The percentage of our domestic workforce who identify as Aboriginal or Torres Strait Islander has increased from 0.3% to 0.8% in the last 12 months. To help grow the Indigenous business sector, we launched JumpStart in partnership with Supply Nation. JumpStart is an app which connects Indigenous businesses with skilled volunteers from Supply Nation’s corporate, government and not for profit members. To date, 90 Indigenous businesses are in the process of signing up. Support for cricket We are passionate about the game of cricket – it is the country’s national summer sport and a game that every Australian can enjoy in their own way. • In October 2016 we announced the next phase of our partnership with Cricket Australia, which focuses on strengthening the foundations of cricket for women, Indigenous players, players with disabilities and the local clubs around the country that are the lifeblood of the game. This is the largest investment in Australian women’s cricket and diversity initiatives, with more than $5 million per year over three years. • Through our club sponsorship program, we are providing 65 clubs with two-year sponsorships including financial assistance of $2,000 per year (over two years) for much needed cricket gear and merchandise to use on game days. A healthy and engaged workforce The Group employs 51,800 dedicated people across 1,350 branches and offices. This diverse group of people serve 16.6 million customers and is integral to achieving our vision. A diverse and inclusive team Creating an inclusive workplace that reflects the communities where Commonwealth Bank operates is essential to listening and responding to the needs of customers in order to deliver on our vision to excel at securing and enhancing the financial wellbeing of people, businesses and communities. The aim of our Diversity and Inclusion strategy is to leverage diversity and foster inclusion in order that all our people feel valued and respected. It has five focus areas – Building an Inclusive Culture (overarching goal); Diversity in Leadership; You Can Be You; Flexibility; and Reputation and Engagement. Inclusive culture We continue to build a diverse and inclusive workforce that at all levels, mirrors the communities where we operate. Diversity in Leadership Gender diversity – Women represent 58% of our workforce. We are tracking well towards our diversity in leadership gender goal as measured by our targets – 40% of Executive Manager and above roles and 45% of Manager and above roles to be occupied by women by 2020. Currently, representation of women in Executive Manager and above roles is 37% and Manager and above roles is 44%. Women represent 40% of the Commonwealth Bank Board and the Chairman is a woman. Gender pay equity – In the most recent Workplace Gender Equality Agency Report there has been a closing of the gender pay gap (Group-wide) with a 1.1% decrease for base remuneration and 3% for total remuneration. Similar to the previous year, this gap is comparable with the Group’s direct peer group of Australian banking organisations with 5,000+ employees, and slightly higher than the average gender pay gap for the Finance and Insurance Industry. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2 Corporate governance4Directors’ report5Other information7 Our business1Corporate responsibility344 Corporate responsibility continued Whistleblowing We encourage all staff to speak up about issues or conduct that concerns them. The SpeakUP Program comprises the SpeakUP Hotline and the Group Whistleblower Policy. As part of the Better Banking Program, we have worked with the ABA to develop industry guiding principles for whistleblowers. This has led to an update of our Whistleblower Policy to align with the guidelines. Under the Policy, we have a designated Whistleblower Protection Officer at an Executive General Manager level with direct access to the CEO, as well as a Misconduct Governance Committee, including four of the CEO’s direct reports who are also ‘Executive Champions’ and oversee the Program’s effectiveness. We have had 171 cases reported under the SpeakUP Program, of which 44 were whistleblower reports. The training completion rate on mandatory learning, including fraud, workplace conduct, conflicts of interest, and security and privacy, is 97%. Environmental stewardship The Group recognises climate change as one of the greatest challenges posed to our environment, our economy and our society and considers climate change to be a significant long term driver of both financial and non-financial risks. We will continue to measure and reduce our own environmental impact, as well as help our customers transition to a net zero emissions economy. Our influence extends to the businesses that we lend to, invest in and buy from and we endeavour to make a socially and environmentally positive impact through our decision making. Employees who work flexibly 69% 43% FY16 FY17 Cultural diversity – In 2015, the Executive Committee endorsed a target to match the cultural diversity of our senior leaders to the cultural diversity of the Australian population by 2020. A Cultural Diversity Index (CDI) was developed to measure the cultural diversity of its leadership using a modified Herfindahl-Hirschman Index methodology. Due to the late release of the Australian Census, our progress against the CDI will be published in next year’s reporting. This year, 50% of our workforce identified as Australian, 40% identified as non-Australian and 10% chose not to respond. You Can Be You – Our six employee networks continue to drive awareness, engagement and behavioural change across the Group. They include: Women CAN – gender; Unity - sexual orientation and gender identity; Enable – accessibility and disability; Advantage – age and life stage; Mosaic – cultural diversity and Yana Budjari – lead reconciliation actions within our Reconciliation Action Plan. Flexibility – 69% of our people work flexibly, an increase from 43% in FY16(1). In the past 12 months, we have implemented several actions including our enhanced parental leave for both primary and secondary carers to help parents share the responsibilities of childcare. (1) Note the question in FY16 varied slightly: ‘My manager allows me the flexibility I need to meet my work goals and personal needs’. Reputation and engagement – Commonwealth Bank and Bankwest are compliant with the Workplace Gender Equality Act 2012, following the submission of the annual compliance report for 2017. We have also received the 2016 Employer of Choice for Gender Equality citation by the Workplace Gender Equality Agency. Commonwealth Bank and Bankwest were proudly named Gold employers in the Australian Workplace Equality Index Awards, and Unity was named network of the year for a second consecutive year. Supporting this achievement was recognition of Commonwealth Bank as a Gold Standard employer in the Hong Kong LGBT+ Workplace Inclusion Index. Employee wellbeing The health and wellbeing of our people is paramount to the success of our organisation. The Thrive portal was launched to employees, providing a source of mental and physical health and wellbeing information and resources. The portal aims to assist our staff to better understand their mental and physical health, encourage appropriate conversations and help support others. The portal also provides access to information on physical wellbeing, nutrition, work/life balance and has easy access to confidential counselling advice through our Employee Assist Chat. Conduct and culture In January 2017, we released ‘Our Commitments’ which includes a personal commitment to our vision and values emphasising, among other things, the importance of honesty, maintaining confidentiality and operating in a safe and inclusive manner. Our Commitments exist to ensure everyone is clear on what is expected of them. The launch of Our Commitments has been supported by an e-learning module. The training completion rate for Our Commitments is 98%. In light of our offshore operations, Our Commitments are also available in Chinese, Vietnamese and Bahasa Indonesia. We treat any deviation from, or breach of, Our Commitments as misconduct. This year we have closed 1,022 substantiated misconduct cases. Outcomes from these misconduct cases ranged from verbal warning to dismissal. 45 Responsible lending We are committed to our nine ESG Lending Commitments which embed ESG considerations into our business- lending decisions. We continually look for ways to make a positive societal impact and help to support the transition to a low carbon economy. This year we grew our renewables lending portfolio to $2.8 billion. This reflects our continued commitment to find new ways to support a rapidly changing renewables sector. Renewables projects we lent to include three new solar farms in Queensland and Victoria, and Australia’s largest solar project in South Australia, Bungala solar project, where we were a mandated lead arranger. Bungala will provide power for approximately 100,000 households. The Bungala solar project was the largest equity and debt finance arrangement for a new solar project in Australia to date, as well as the first major Australian renewable project delivered without government funding assistance. We continue our industry-leading disclosure on the emissions intensity of our business lending, and have just completed our third report which shows our business lending portfolio’s emissions intensity is 0.29 kgCO2-e/ AUD expenditure in FY16, up from 0.28 kgCO2-e/AUD expenditure in FY15. This increase is driven by changes in the Electricity, Gas and Water Supply sector which includes significant new lending to a recently privatised Australian electricity transmission network. The full results are on our website. We have continued to embed our ESG lending commitments with risk and frontline staff undergoing refresher training and a number of enhancements to our processes and systems including annual review process, hindsight review checks, update of the industry ESG assessments, sector specific workshops and ESG portfolio reporting to Board. As a major provider of lending services globally, assessing potential transactions for ESG risks is a key step in our due diligence process. Project finance transactions that qualify under the Equator Principles III follow its detailed process to assess, mitigate, manage and monitor ESG risk. 48.5% reduction in our direct emissions in Australia since 2009 Renewable energy Our lending exposure to renewable electricity generation continues to increase. $2.8bn $2.2bn $1.4bn FY15 FY16 FY17 Other loans are assessed under our ESG policies, systems and processes. Loans are escalated for senior assessment depending on the level of ESG risk. Our pricing platform for all Institutional Banking, Business Banking and ASB loans includes a compulsory ESG risk assessment process for all Institutional Bank loans, and for larger loans in the other business units. The process includes an initial ESG risk assessment based on country of operations and over 500 industry sectors. Additional ESG due diligence is required for transactions which have medium or high ESG risks identified in the initial assessment. Teams are required to: • Describe any ESG risks for each of the seven focus areas of biodiversity, water, carbon and energy, pollution, health and safety, labour and human rights, and anti-corruption and governance; • Detail any client mitigation strategies for each risk identified; • Assess the likelihood and consequence of these risks; and • Assess the client capability and motivation to mitigate these risks. Further information on the ESG risk assessment process is available in the 2017 Corporate Responsibility Report. Solar panels on branches We are the first Australian bank to rollout an onsite renewable program for our retail branch network. We now have solar panels on 34 locations across Australia, with more than 500kW of capacity. To date, solar panels have saved more than 450 tonnes CO2-e, which is the equivalent of planting 11,600 trees. Our employees, customers and the wider community can view the performance of this network through our real-time public portal cbasolarpower.com.au. Sustainable Property Strategy We continue to implement our Sustainable Property Strategy through to 2020, with key targets to reduce our own energy use and carbon emissions, waste generation and water use. Our long term target of reducing our direct emissions to 2.0 tCO2-e per FTE continues to be on track, having reduced these emissions from 2.9 tCO2-e per FTE last year to 2.6 tCO2-e per FTE this year which is a reduction of 10% over the past 12 months. Climate Policy Position Statement We have developed a Climate Policy Position Statement which outlines our role in limiting climate change to well below two degrees and the way in which we will support the transition to a net zero emissions economy by 2050. This includes undertaking a climate scenario analysis and setting a $15 billion target for financing low carbon projects by 2025. The full Climate Policy Position Statement is available on our website. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2 Corporate governance4Directors’ report5Other information7 Our business1Corporate responsibility346 Corporate responsibility continued Climate bond sector exposures Responsible investing Guided by our Responsible Investing Framework, we are integrating ESG considerations into investment processes, consistent with the pursuit of sustainable long-term investment outcomes for our customers. We have expanded the FirstChoice, FirstWrap investment menus and Commonwealth Financial Planning Approved Product List to include five new sustainable, ethical and responsible investment options. This year, Colonial First State joined Colonial First State Global Asset Management (CFSGAM) and CommInsure as signatories to the United Nations-supported Principles for Responsible Investment. digital self-service CFSGAM released their tenth annual Responsible Investment and Stewardship Report. CFSGAM believe that their approach to responsible investment has contributed to over 75% of funds outperforming their respective benchmarks. deposit machines renewable energy project net revenue Building a strong and responsible business ESG training volunteering community investments customers/indige- nous customers school students research projects education investment To support our employees’ understanding of environmental, social and governance (ESG) considerations and enhance the outcomes of our lending, investing and procurement due diligence and decision making, we have a number of tailored training modules. 2,768 employees undertook training via these modules covering: ESG Fundamentals, ESG Tool, Responsible Investing, Responsible Procurement Fundamentals and Equator Principles III. Credit limit slider Camera pay MathsPASS Responsible procurement supermatch product organisation process Pay Equality Staff Flexibility The Group spent $4.8 billion with more than 5,000 suppliers putting us in a position to make a positive impact by supporting suppliers that reflect diversity and a wide range of perspectives and capabilities. We spent approximately $1.5 million with 17 unique Indigenous suppliers. Our Supplier Code of Conduct sets our minimum standards for human rights, labour conditions, health and safety, diversity and the environment. The Supplier Code of Conduct has been embedded into the procurement process for establishing new suppliers. financial counsellors customer advocacy Low carbon buildings Energy – wind power Low carbon transport branches ATMs eftpos online customers $1.02 billion of climate bonds arranged business banking specialist StartSmart Employees/Indigenous emploees operations ESG lending This year we have arranged $1.02 billion of climate bonds. In March 2017, we issued the largest Australian dollar climate bond from an Australian bank at $650 million, demonstrating active leadership and best practice in the climate and green bond market. female executives tax transparency reconciliation emissions slavery loan impairment fund academic project teachers teaching award customer experience survey The bond is backed by Australian renewable and low-carbon assets including wind power generation, green buildings and low carbon transport projects. We have become a partner of the Climate Bonds Initiative and will continue to work towards increasing large- scale investment in climate bonds to deliver a global low-carbon economy. cyber security curriculum storm warning click to call mobile international money transfer marketing drone Youth Bank App JumpStart App thrive portal training employees spent on training SACE Black Card Training hosted the experince In May 2017, we signed up to the Australian Supplier Payment Code, a voluntary, industry-led initiative that enshrines the importance of prompt and on-time payment for small business suppliers through compliance with a set of best-practice standards. Human rights We issued our first Slavery and Human Trafficking Statement, in compliance with the UK Modern Slavery Act, highlighting the development of our Human Rights Position Statement. Our second statement is now published and is available on our website. We updated our Supplier Code of Conduct to improve recognition of human rights and supplier compliance with international human rights laws. We also ran an education session for key procurement staff on supporting human rights and the abolition of modern slavery and have developed responsible procurement training. Tax transparency The Commonwealth Bank is Australia’s largest taxpayer(1) and this contribution continues to grow in line with profits. Our global tax expense was more than $3.9 billion, which contributes to government investment in the community in many forms including schools, hospitals, roads and social welfare payments. We are committed to being a responsible corporate taxpayer and to acting with the highest integrity in complying with all prevailing tax laws. As a signatory to the Voluntary Tax Transparency Code, we will continue to provide transparency on our approach to tax risk, governance and tax paid in Australia. A copy of the most recent Tax Transparency Code can be found on our website. (1) Source: Bloomberg 47 ESG performance data (1) ENVIRONMENT Energy (2) Units 2017 2016 2015 Renewable energy lending exposure $M 2,800 2,200 1,400 Business lending emissions intensity (3) Climate bond arrangement Greenhouse Gas Emissions – Group(5) Total greenhouse gas emissions Scope 1 emissions Scope 2 emissions Scope 3 emissions Emissions per FTE (Scope 1 & 2) SOCIAL Employees Employee Engagement Index – CBA Employee Turnover (voluntary) Diversity Women in Manager and above roles Women in Executive Manager and above roles Gender pay equity Executive General Manager General Manager Executive Manager Manager / Professional Team Member Training Employees participating in ESG Training Training hours per employee (5) Safety and Wellbeing Lost Time Injury Frequency Rate (LTIFR) (7) Absenteeism Community Investment Total Community Investment – Cash contributions – Time volunteering – Foregone revenue – Program implementation costs – % of pre-tax profit (kgCO2-e/AUD) $M Dependent on client FY17 data (4) 1,018 0.29 50 0.28 – tCO2-e tCO2-e tCO2-e tCO2-e tCO2-e % % % % Ratio Ratio Ratio Ratio Ratio # Hours Rate Rate $M $M $M $M $M % 204,317 (6) 164,111 179,276 9,694 9,063 9,729 96,595 107,762 115,580 98,028 (6) 47,286 53,967 2.3 2.6 2.7 78 10.1 44.4 36.7 0.95 1.03 1.00 0.98 1.00 77 11.3 43.6 35.2 0.96 0.99 1.00 0.99 0.99 2,768 39.1 1,786 34.3 1.1 5.9 272 37.2 1.2 222 11.7 2.0 1.5 6.0 262 37.8 1.4 212 11.6 2.0 81 10.2 43.2 33.9 – – – – – – 31.1 2.0 6.0 243 31.3 1.8 204 6.8 1.9 For definitions and notes, please refer to the Corporate Responsibility Performance data table at www.commbank.com.au/investors/corporate-responsibility.html. For methodology and further details, please refer to www.commbank.com.au/about-us/opportunity-initiatives/performance-reporting.html. (1) (2) Energy metrics are not audited by PwC. (3) (4) Our financed emissions method relies on client-specific data which limits the timing we can undertake and release the analysis. (5) Comparative information has been changed to align to presentation in the current year. (6) In 2017 for the first time we have included data centres outside of our operational control. If they were not included, our scope 3 emissions would otherwise have reduced. Prior year data is updated due to late reporting of incidents that occurred during the year, or the subsequent acceptance or rejection of claims made in the year. (7) Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2 Corporate governance4Directors’ report5Other information7 Our business1Corporate responsibility348 Corporate responsibility continued ESG performance data (1) continued SOCIAL continued Financial Literacy Programs School Banking Students (active) Start Smart Students (booked) Customer Satisfaction CBA – Roy Morgan Research Main Financial Institution (rank) CBA – DBM Business Financial Services Monitor (score out of 10) (rank) Wealth Insights Platform Service Level Survey (score out of 10) (rank) CBA – Roy Morgan Research Online Customer Satisfaction (rank) GOVERNANCE Female directors on Board Training completion rates on ‘Our Commitments’ SpeakUP Program cases – Whistleblower cases (2) Units 2017 2016 2015 # # % # # % % % # # 326,146 330,874 310,474 574,246 557,475 298,505 82.7 (1st) 82.8 (1st) 84.2 (1st) 7.2 (=1st) 7.2 (=1st) 7.5 (=1st) 8.0 (1st) 8.1 (1st) 7.8 (2nd) 94.0 (1st) 93.3 (1st) 93.7 (1st) 40 97.6 171 44 33 – – – 27 – – – (1) (2) For definitions and notes, please refer to the Corporate Responsibility Performance data table at www.commbank.com.au/investors/corporate-responsibility.html. Whistleblower cases are a subset of SpeakUP Program cases. Corporate governance 49 Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2Corporate responsibility3 Corporate governance4Directors’ report5Other information7 Our business150 Our board Catherine Livingstone AO Chairman Ms Livingstone is a resident of New South Wales. Age 61. Ian Narev Managing Director and Chief Executive Officer Mr Narev is a resident of New South Wales. Age 50. Shirish Apte Non-Executive Director Mr Apte is a resident of Singapore. Age 64. Sir David Higgins Non-Executive Director Sir David is a resident of London, United Kingdom. Age 62. Launa Inman Non-Executive Director Ms Inman is a resident of Victoria. Age 60. Catherine has been a Director since March 2016 and was appointed Chairman on 1 January 2017. Catherine is Chairman of the Nominations Committee, a member of the Risk Committee, the Audit Committee and the Remuneration Committee. She is a former Chairman of Telstra and of the CSIRO, and was Managing Director and Chief Executive Officer of Cochlear Limited. 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. She is a former President of the Business Council of Australia. 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, University of Technology Sydney (Chancellor) and Australian Museum Trust (President). Qualifications: BA (Accounting) (Hons), FCA, FTSE, FAICD, FAA. Ian has been a Director since December 2011 and was appointed Managing Director and Chief Executive Officer on 1 December 2011. He joined the Bank in May 2007 as Group Head of Strategy, responsible for corporate strategy development, mergers and acquisitions and major cross business strategic initiatives. In January 2009 he was appointed as Group Executive, Business and Private Banking. Prior to joining the Bank, Ian was a partner of McKinsey’s New York, Sydney and Auckland offices. 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, Ian was a lawyer specialising in mergers and acquisitions. Other Directorships and Interests: Sydney Theatre Company Ltd (Chairman), Business Council of Australia, The Financial Markets Foundation for Children and Institute of International Finance. Qualifications: BA LLB (Hons) (Auck), LLM (Cantab), LLM (NYU). Shirish has been a Director since June 2014. He is Chairman of the Risk Committee and a member of the Audit Committee. Shirish has more than 32 years’ experience with Citi having held various senior roles, including Co-Chairman of Citi Asia Pacific Banking, Chief Executive Officer of Citi Asia Pacific, Chief Executive Officer of Central & Eastern Europe, Middle East & Africa and Country Manager and Deputy President of Citi Handlowy, where he is now Vice Chairman of the Supervisory Board. Shirish is a former Director of Crompton Greaves Ltd. Other Directorships and Interests: IHH Healthcare Bhd (including two of its subsidiaries), AIG Asia Pacific Pte Ltd, Clifford Capital Pte Ltd, Pierfront Capital Mezzanine Fund Pte Ltd (Chairman) and Supervisory Board of Citi Handlowy (Vice Chairman). Qualifications: CA, BCom (Calc), MBA (LondBus). Sir David has been a Director since September 2014. He is Chairman of the Remuneration Committee and a member of the Risk Committee. Sir David is Chairman of Gatwick Airport Ltd, which operates Gatwick Airport in the UK and Chairman of High Speed Two (HS2) Ltd, the company responsible for developing and promoting the UK’s new high speed rail network. Sir David is a senior advisor to Global Infrastructure Partners in the US and to Lone Star Funds. Previously he was Chief Executive Officer of Network Rail Infrastructure Ltd, Chief Executive Officer of the Olympic Delivery Authority for the London 2012 Olympic Games, Chief Executive Officer of English Partnerships and Managing Director and Chief Executive Officer of Lend Lease. Other Directorships and Interests: Gatwick Airport Ltd (Chairman) and High Speed Two (HS2) Ltd (Chairman). Qualifications: BE (Civil) (USyd), Diploma (Securities Institute of Australia). Launa has been a Director since March 2011. She is a member of the Audit Committee and the Remuneration Committee. She was Managing Director and Chief Executive Officer of Billabong International Limited from May 2012 until August 2013. Prior to this, she was Managing Director of Target Australia Pty Limited and Managing Director of Officeworks Ltd. 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. Launa is a former Director of Bellamy’s Australia Ltd. Other Directorships and Interests: Super Retail Group Ltd, Precinct Properties New Zealand Ltd, Melbourne Fashion Festival Ltd and The Alannah and Madeline Foundation Ltd. Qualifications: MCom (UNISA), BCom (Hons) (UNISA), BCom (Economics and Accounting) (UNISA), MAICD. 51 Brian has been a Director since September 2010. He is Chairman of the Audit Committee, a member of the Risk Committee and the Nominations Committee. He retired as a partner of Ernst & Young on 30 June 2010. Until that time he was the Chairman of both the Ernst & Young 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. Other Directorships and Interests: Brambles Limited, Cantarella Bros Pty Ltd, University of New South Wales (Council Member) and Centennial Park and Moore Park Trust (Trustee). Qualifications: FCA. Andrew has been a Director since July 2008. He is a member of the Risk Committee and the Remuneration Committee. Andrew has over 40 years’ financial services experience. He was Managing Director and Chief Executive Officer of AMP Limited from October 2002 until December 2007. Andrew’s previous roles at AMP included Managing Director, AMP Financial Services and Managing Director and Chief Investment Officer, AMP Asset Management. Previously, he was the Group Chief Economist, Chief Manager, Retail Banking and Managing Director, ANZ Funds Management at ANZ Banking Group. Andrew commenced his career at the Reserve Bank of Australia where his roles included Senior Economist and Deputy Head of Research. Other Directorships and Interests: ASIC External Advisory Panel (Member) and CEDA Board of Governors (Member). Qualifications: BEc (Hons) (Monash). Mary has been a Director since June 2016. She is a member of the Remuneration Committee and the Nominations Committee. Mary is a pre-eminent intellectual property lawyer with over 30 years’ experience. 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 in 2013. Mary spent a number of years in the UK 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), Trans-Tasman IP Attorneys Board (Chairman), The Macfarlane Burnet Institute for Medical Research and Public Health Ltd, Chief Executive Women (Member), Melbourne University Law School Foundation (Member) and Victorian Legal Admissions Board (Member). Qualifications: BA LLB (Hons) (Melb), GAICD. Wendy has been a Director since March 2015. She is a member of the Remuneration Committee. Wendy was Senior Managing Director, Technology – Asia Pacific for Accenture Limited from 2012 until June 2014. Her career at Accenture spanned some 32 years in which she held various senior positions, including Global Managing Director, Technology Quality & Risk Management, Global Managing Director, Outsourcing Quality & Risk Management and Director of Operations, Asia Pacific. She also served on Accenture’s Global Leadership Council from 2008 until her retirement. Other Directorships and Interests: Fitted For Work Ltd, University of Melbourne (Council Member) and Chief Executive Women (Member), serving on the Scholarships and Marketing & Communications Committees. Qualifications: BAppSc (Information Technology), GAICD. Harrison has been a Director since February 2007. He is a member of the Risk Committee, the Audit Committee and the Nominations 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, Chairman of Morgan Stanley Australia and Vice Chairman of Morgan Stanley Asia. Harrison also spent two years in Beijing as Chief Executive Officer of China International Capital Corporation and from 1991 until 1994, he was a senior officer of the Federal Deposit Insurance Corporation in Washington. Other Directorships and Interests: The Conversation Media Group Ltd (Chairman). Qualifications: A.B. (Cum Laude) (Harvard), LLD (Honoris Causa) (Monash). Brian Long Non-Executive Director Mr Long is a resident of New South Wales. Age 71. Andrew Mohl Non-Executive Director Mr Mohl is a resident of New South Wales. Age 61. Mary Padbury Non-Executive Director Ms Padbury is a resident of Victoria. Age 58. Wendy Stops Non-Executive Director Ms Stops is a resident of Victoria. Age 56. Harrison Young Non-Executive Director Mr Young is a resident of Victoria. Age 72. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2Corporate responsibility3 Corporate governance4Directors’ report5Other information7 Our business152 Our senior management team Kelly was appointed Group Executive for Institutional Banking and Markets in December 2013 and has been with the Group since 2004. The Institutional Banking and Markets division is responsible for global relationships with corporate, government and institutional clients, and provides a full range of financial services solutions across financial and capital markets, transaction banking, working capital and risk management. Previously Kelly held a variety of senior roles across the Group’s Institutional and Business Banking divisions, was a management consultant with the Boston Consulting Group, and spent time in Silicon Valley in both start-up and established software companies. Kelly is a board member of the Football Federation of Australia and serves on the Australian Government’s FinTech Advisory Group and NSW Government Digital Advisory Panel. She is also a member of Chief Executive Women. Adam was appointed Group Executive, Business and Private Banking in January 2015. He has responsibility for Business Banking, Private Banking, CommSec and Bankwest. He joined the Group in 2004 and was the Chief Information Officer for the Retail Banking and Business Banking divisions during the Core Banking Modernisation project. He joined the Business and Private Banking Leadership Team in 2009, serving as Executive General Manager of Local Business Banking from 2012 to 2014. Prior to joining the Group, Adam was Principal at strategic consulting practice A.T. Kearney, working across industries in Australia, New Zealand, Asia, and Europe. He also previously worked as a consultant at Ernst & Young. Kelly Bayer Rosmarin Group Executive, Institutional Banking and Markets Adam Bennett Group Executive, Business and Private Banking Barbara Chapman Chief Executive and Managing Director, ASB Barbara was appointed Chief Executive and Managing Director of the Group’s New Zealand subsidiary ASB in April 2011. Barbara started her career with the Group in 1994 as Chief Manager Marketing at ASB. In 2001, she assumed the role of Head of Retail Banking and Marketing for ASB. In 2004 she moved into the role of Managing Director and Chief Executive Officer of Sovereign Assurance. She joined Commonwealth Bank in 2006 as Group Executive, Human Resources and Group Services. David Cohen Group Chief Risk Officer David commenced as Group Chief Risk Officer in July 2016. In this role he provides leadership to ensure effective risk management and risk governance across the Group. David joined the Group in June 2008 as Group General Counsel and took on the role of leading Group Corporate Affairs in early 2012 with responsibility for advising the CEO and Board on legal matters and leading the Group’s legal team, 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. 53 Matt Comyn Group Executive, Retail Banking Services David Craig Group Executive, Financial Services and Chief Financial Officer Rob Jesudason Group Executive, International Financial Services Melanie Laing Group Executive, Human Resources Matt was appointed Group Executive, Retail Banking Services in August 2012. He is responsible for the Group’s retail banking operations which serves a customer base of over 10 million Australians. Matt joined Commonwealth Bank in 1999 and has held a variety of senior leadership roles in business and institutional banking, including Managing Director of CommSec. He is a non-executive Director and the shareholder representative of Aussie Home Loans. He is also a Director of Unicef Australia and a member of MasterCard’s Global Advisory Board. David commenced as Group Executive, Financial Services and Chief Financial Officer in September 2006. He retired from his position on 30 June 2017. He was responsible for the overall financial functions of the Group. He has over 40 years’ experience in finance, accounting, audit, risk management, strategy and mergers and acquisitions. Prior to joining the Group, David was CFO for Australand, Global CFO of PwC Consulting, COO for PricewaterhouseCoopers Australasia and a Director of the Australian Gas Light Company. David currently serves as a Director of Lendlease Corporation Ltd and the Victor Chang Cardiac Research Institute, and as President of the Financial Executives Institute. Rob was appointed Group Executive, International Financial Services (IFS) in November 2014. From 1 July 2017 he has assumed the role of Group Executive, Financial Services and Chief Financial Officer of the Group. While leading IFS he was responsible for managing the Group’s offshore growth in retail and commercial banking, digital banking and life insurance in China, India, Indonesia, Vietnam and South Africa. Rob joined the Group in December 2011 as Group Executive, Group Strategic Development. Previously he held positions at Credit Suisse, JP Morgan, Barclays PLC, GE Capital and McKinsey & Company. Melanie joined Commonwealth Bank in February 2012 as Group Executive, Human Resources with responsibility for all of the Group’s HR functions. She has a strong and diverse background leading HR functions for large companies, and has headed global and regional HR functions for several multinational and ASX listed organisations. Prior to joining the Group, Melanie was Executive General Manager, People & Culture at Origin Energy and held executive HR leadership roles with Unisys Asia Pacific, Vodafone Asia Pacific and the General Re Corporation. She is a Fellow of the Australian Institute of Company Directors and the Australian Human Resources Institute, and a member of Chief Executive Women. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2Corporate responsibility3 Corporate governance4Directors’ report5Other information7 Our business154 Our senior management team continued Anna Lenahan Group General Counsel and Group Executive, Group Corporate Affairs Vittoria Shortt Group Executive, Marketing and Strategy Annabel Spring Group Executive, Wealth Management David Whiteing Group Executive, Enterprise Services and Chief Information Officer Anna joined Commonwealth Bank in November 2016 as Group General Counsel and Group Executive, Group Corporate Affairs. She leads the Group’s Legal, Secretariat and Corporate Affairs teams. She advises the CEO and the Board on legal matters and is also responsible for delivering an integrated and consistent approach to the Group’s external and internal affairs, communications, sustainability and corporate governance. Prior to joining the Group, Anna was the Chief Risk and Legal Officer at Suncorp Group, having joined Suncorp in 2011 as Group General Counsel and Company Secretary. Previously she was a Corporate Partner at Allens Arthur Robinson (now Allens Linklaters) and a crown prosecutor with the Department of Public Prosecutions in Perth. Anna is a member of the GC100 (Australia) and Chief Executive Women. Vittoria was appointed Group Executive, Marketing and Strategy in March 2015. She is responsible for Corporate Strategy, Mergers and Acquisitions, cross-business strategic initiatives and Marketing. She is also a Director of ASB Bank Limited in New Zealand. Prior to her appointment as Group Executive, Vittoria was Commonwealth Bank’s Chief Marketing Officer. She joined the Group in 2002 and has held a number of roles in the retail banking businesses of both Commonwealth Bank and Bankwest, including customer-facing, operations and strategy leadership roles. Previously she worked in Corporate Finance and Mergers and Acquisitions with Deloitte and Carter Holt Harvey in New Zealand. Vittoria is also a member of Chief Executive Women. Annabel was appointed Group Executive, Wealth Management in October 2011. She is responsible for Colonial First State, Colonial First State Global Asset Management, Wealth Management Advice and Commlnsure. She is also a Director of The Colonial Mutual Life Assurance Society Limited. Annabel joined the Group in 2009 as Group Head of Strategy where she was responsible for strategy, mergers and acquisitions and government relations. Previously she was Managing Director and Global Head of Firm Strategy and Execution at Morgan Stanley in New York. Annabel currently serves as Deputy Co-Chair of the Financial Services Council and as a Director of the Victor Chang Cardiac Research Institute. She is also a member of Chief Executive Women. David was appointed Group Executive, Enterprise Services and Chief Information Officer in July 2014. In this role he leads the technology and operations teams of the Group and is responsible for delivering the Group’s strategic pillar of the ‘world- leading application of operations and technology.’ Previously he was Executive General Manager Architecture and Planning for Enterprise Services. He is a highly experienced business and IT executive with a track record of delivering technology transformation in many industries both in Australia and overseas. Prior to joining the Group in 2013 David was Vice President of Enterprise Systems at BP in the UK. He is a former Accenture partner with extensive SAP experience. Our governance 55 Introduction We are committed to high standards of corporate governance and have a corporate governance framework which supports our long-term performance and sustainability and protects and enhances shareholder and other stakeholder interests. We regularly review our corporate governance arrangements and practices to ensure they reflect developments in regulation, market practice and stakeholder expectations. Our Corporate Governance Statement can be viewed at commbank.com.au/ corporategovernance. Shareholder engagement We recognise our shareholders as our owners and value our communication with them. As a result, we seek to provide shareholders with information that is timely, of high quality and relevant to their investment, and to listen and respond to their feedback. We have an investor relations program to facilitate two-way communication with shareholders and to foster participation at shareholder meetings. The program incorporates a number of ways in which shareholders can access information and provide feedback. Communications and periodic and continuous disclosure: Key shareholder communications include our Annual Report, Corporate Responsibility Report, full-year and half-year financial results and quarterly trading updates. In addition, we release all material information to the Australian Securities Exchange (ASX) in compliance with our continuous disclosure obligations under the Australian Corporations Act 2001 and the ASX Listing Rules. We also have a written policy for complying with those obligations. It is summarised in our “Guidelines for Communications between Commonwealth Bank of Australia and Shareholders”. In addition, we post all material information released to the ASX on our website and regularly webcast important market briefings via our website. Annual General Meetings: We encourage shareholders to attend and participate in our Annual General Meetings (AGMs) and rotate the location of our AGMs between capital cities to facilitate shareholder attendance. We also encourage questions from shareholders ahead of our AGMs. Approximately 600 shareholder questions in advance were received for our 2016 AGM, providing us with useful insights into shareholder concerns and enabling us to provide relevant feedback. In addition, our AGM proceedings are webcast for shareholders unable to attend and those shareholders may cast a direct vote or appoint a proxy to attend and vote on their behalf. Electronic communications: With the increasing use of technology, we encourage shareholders to provide their email addresses so that we may communicate with them electronically about relevant matters, including our AGMs, Annual Reports and dividend payments. Shareholders may also send communications electronically to our share registry. Board composition, performance and committees Our Board seeks to ensure that it is independent and has an appropriate mix of skills, experience and diversity to effectively discharge its role and responsibilities. It also plans and reviews its Board program, has established a number of board standing committees and seeks to enhance its performance. Independence: As at the date of this report, our Board comprised nine non- executive directors, all of whom were considered to be independent, and the CEO. Skills matrix: Our directors possess a range of skills, experience and diversity which, as a group, ensures our Board is able to discharge its responsibilities, including by determining our strategic objectives and operational framework. Our Board has a board skills matrix which, together with the Board’s director appointment criteria, documents the requisite skills, experience, expertise and diversity it needs to ensure: a good understanding of our business and operating environment; effective challenge of management; and insightful contribution to strategic debate. Our Board uses this matrix to ensure an ongoing appropriate mix of skills, expertise and experience as it implements its ongoing renewal process. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2Corporate responsibility3 Corporate governance4Directors’ report5Other information7 Our business156 Our governance continued The graph below identifies the Board’s current skills, expertise and experience. Board Skills Matrix Financial Regulation / Legal Expertise Held CEO or Similar Position General management Exposure to International Operations New Media / Technology Experience as a Non-Executive Director of at least two other Listed Entities Financial Acumen Retail & Corporate Banking / Investment Banking / Financial Institutions 0 1 2 3 4 5 6 7 8 9 10 Number of Directors as at 30 June 2017 Board program: During FY17, our Board focused on planning its forward Board program to ensure adequate allocation of time was made for strategic and operational priorities. The Board Committees generally operate in a review capacity, except in cases where our Board specifically delegates one of its powers to the committee. The broad areas of focus were on our corporate strategy, performance against business plans, material risk review and prioritisation, technology resilience and remuneration governance. Performance review: Our Board reviews its performance and that of the Board Committees and individual directors annually. Every third year, the review is facilitated by an external consultant. Our Board reviews its program on an ongoing basis and adjusts it to reflect our strategic and operational needs. Board Committees: From time to time, our Board establishes standing committees. Those committees focus on specific issues and areas of our operations, thereby strengthening our Board’s oversight. As at the date of this report, our Board has four substantive standing committees (Board Committees): • the Nominations Committee; • the Audit Committee; • the Risk Committee; and • the Remuneration Committee. In FY17, the review was facilitated by an external consultant. The outcome of the review was that the Board will increase its strategic focus, given the challenges ahead, including in competition, technology and regulation. Risk management We recognise that risk is inherent in business and that effective risk management is essential in delivering on our business objectives and is a key component of sound corporate governance. Our Risk Management function is responsible for developing our Risk Management Framework (RMF) to allow us to manage risks within our Board- approved risk appetite. Our RMF covers all our systems, structures, policies, processes and people that or who identify, measure, evaluate, monitor, report and control or mitigate both internal and external sources of material risk. Our RMF is founded on three key components: • our Risk Appetite Statement; • our Business Plan; and • our Risk Management Strategy. Our Risk Appetite Statement articulates the type and degree of risk our Board is prepared to accept and the maximum level of risk within which we must operate for each risk type. Our Business Plan summarises our approach to implementing our strategic objectives. The Plan has a rolling three year duration and takes into consideration material risks arising from its implementation. Our Risk Management Strategy describes each material risk, our approach to managing those risks and how risk management is embedded through our governance, policies and procedures. 57 During FY17, our Board undertook its annual review of our RMF. As in previous years, our Board discussed key areas of focus for RMF improvement. There are a number of material risks, including economic, environmental and social sustainability risks, that could adversely affect us and the achievement of our objectives. Those risks and how we seek to manage them are described in Notes 31 to 34 to the Financial Statements on pages 148 to 171 of this report. In addition, our environmental, social and governance performance data is set out in the Corporate Responsibility section appearing on pages 47 to 48 of this report. Our RMF is accompanied by internal and external audit processes, which also assist in managing risk. Acting ethically and responsibly Our commitments: The “Our Commitments” document is our foundational code of conduct policy and sets our expectations of our people, including our directors, senior executives and employees, when engaging with, and balancing the interests of, our stakeholders. The policy is critical in achieving our vision of excelling at securing and enhancing the financial wellbeing of people, businesses and communities and living our values of integrity, accountability, collaboration, excellence and service. It contains eight commitments to be made by all of our people: • “I commit to upholding the guiding framework of our vision and values”; • “I commit to honesty”; • “I commit to maintaining confidentiality”; • “I commit to disclosing and managing conflicts of interest”; • “I commit to appropriate use of technology and communications”; • “I commit to operating in a safe and inclusive manner”; • “I commit to maintaining personal standards that support our vision and values”; and • “I commit to understanding and fulfilling all aspects of my role”. In addition, the document includes “Values Guidelines” to assist our people to understand, practice and demonstrate our vision and values. Conflicts of interest: Our Conflicts of Interest Framework comprises a number of components, including our Conflicts of Interest Policy, our Gifts and Entertainment Policy and various supporting business unit level policies and procedures. Those procedures include conflicts of interest registers and gifts and entertainment registers. The framework seeks to ensure that all actual, perceived or potential conflicts of interest are identified and recorded, and then avoided or managed, as appropriate. Anti-bribery and corruption: We are committed to embedding a policy of zero tolerance for bribery, corruption and facilitation payments across our business. We have an Anti-Bribery and Corruption Policy under which all parts of our business are required: • to consider, identify and understand the bribery and corruption risks arising within their operations; • to apply risk controls to those risks and to monitor key risk indicators; and • to implement an assurance program to test the control environment’s ongoing effectiveness under the Anti- Bribery and Corruption Policy. Securities trading: Under our Securities Trading Policy, our people are prohibited from dealing in securities when they possess inside information. They are also prohibited from hedging, or otherwise limiting their economic risk, in relation to unvested rights or shares acquired under any of our employee incentive plans. Further, our directors and our CEO’s direct reports are prohibited from hedging their existing holdings of securities issued by us or any of our subsidiaries. In addition, the policy prohibits our directors, senior executives and certain specified employees and contractors from dealing in securities issued by us or any of our subsidiaries, except during limited “trading windows”. Whistleblower protection: We place great importance on fostering a culture that encourages our people to speak up about issues and conduct that cause them concern. Our Whistleblower Policy is designed to encourage and support individuals in reporting such matters, knowing that it is safe to do so, they will receive support and they will not be subject to retaliation or victimisation in response. The policy is aligned with the Australian Bankers’ Association’s “Guiding Principles – Improving Protections for Whistleblowers”. Commonwealth Bank of AustraliaAnnual Report 2017Financial report6Performance overview 2Corporate responsibility3 Corporate governance4Directors’ report5Other information7 Our business158 Our governance continued Under the policy, we have a Whistleblower Protection Officer, whose role includes overseeing the protection of whistleblowers. We also have a Misconduct Governance Committee, which includes four of the CEO’s direct reports, who are also “Executive Champions” under the policy, and oversee the whistleblower program’s effectiveness. Further, our SpeakUP Hotline offers a trusted avenue for our people and external partners to report issues and concerns. In addition, our people are free to make disclosures directly to a regulator at any time. Slavery and Human Trafficking: During FY17 we published a Slavery and Human Trafficking Statement, in compliance with the UK Modern Slavery Act, and updated our Supplier Code of Conduct to improve our recognition of human rights and supplier compliance with international human rights laws. Further information on these matters is set out in the Corporate Responsibility section on page 46 of this report and in our Corporate Responsibility Report. Diversity and Inclusion Creating an inclusive workplace that reflects the communities in which we operate is essential to listening and responding to stakeholder needs and thereby enabling us to deliver on our vision. Our Diversity and Inclusion Strategy aims to leverage diversity and foster inclusion so that all our people feel valued and respected. Women represent 58% of our workforce(1) and 50% of our Executive Committee, our most senior management committee. Additionally, 40% of our Board and 44% of our non-executive directors are women. We are progressing towards achieving our measureable objectives for gender diversity at management levels and have achieved our measurable objective at Board level. Further details of our policy on diversity and inclusion are set out in the Corporate Responsibility section of this report and in our Corporate Responsibility Report. (1) Based on total head count (permanent employees and fixed term contractors) as at 30 June 2017, but excluding employees of the Bank’s New Zealand bank, ASB or the Bank’s New Zealand insurer, Sovereign. Directors’ report 59 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345760 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 2017. Principal Activities We are one of Australia’s 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. Our operations are conducted primarily in Australia, New Zealand and the Asia Pacific region. In addition, we also operate in a number of other countries including the United Kingdom, the United States, China, Japan, Singapore, Hong Kong, Indonesia and South Africa. There have been no significant changes in the nature of the principal activities during the financial year. Consolidated Profit Our net profit after income tax and non-controlling interests for the year ended 30 June 2017 was $9,928 million (2016: $9,223 million). Our 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. Excluding a $397 million gain on sale of the Group’s remaining investment in Visa Inc., underlying operating income increased due to solid growth in banking income. Operating expenses increased, including a $393 million one-off expense for acceleration of amortisation on certain software assets. Underlying expenses increased due to higher staff and technology costs, and increased investment spend partly offset by the incremental benefit generated from productivity initiatives. Loan impairment expense decreased primarily due to lower provisioning levels in Institutional Banking and Markets and Business and Private Banking, partly offset by an increase in Bankwest. Provisioning levels remain prudent and there has been no change to the economic overlay. Dividends The Directors have determined a fully franked (at 30%) final dividend of 230 cents per share amounting to $3,979 million. The dividend will be payable on 29 September 2017 to shareholders on the register at 5pm AEST on 17 August 2017. Dividends paid in the year ended 30 June 2017 were as follows: • In respect of the year to 30 June 2016, a fully franked final dividend of 222 cents per share amounting to $3,808 million was paid on 29 September 2016. The payment comprised direct cash disbursements of $3,222 million with $586 million being reinvested by participants through the Dividend Reinvestment Plan (DRP); and • In respect of the year to 30 June 2017, a fully franked interim dividend of 199 cents per share amounting to $3,429 million was paid on 4 April 2017. The payment comprised direct cash disbursements of $2,871 million with $558 million being reinvested by participants through the DRP. Review of Operations An analysis of operations for the financial year is set out in the Performance Overview sections. Changes in State of Affairs We continue 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 during the financial year. Events Subsequent to Balance Sheet Date We expect the DRP for the final dividend for the year ended 30 June 2017 will be satisfied by the issue of shares of approximately $1.4 billion. AUSTRAC Civil Proceedings On 3 August 2017, Australian Transaction Reports and Analysis Centre (AUSTRAC) commenced civil penalty proceedings against CBA. CBA takes the allegations made by AUSTRAC very seriously and will file a defence in relation to this matter, which will take significant time to prepare. The actual outcome in this matter will be determined by a Court in accordance with established legal principles. The AUSTRAC statement of claims relates to alleged past and ongoing contraventions of four provisions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). To the extent that contraventions may be established, a Court will ordinarily take into account a range of factors in setting penalties. One factor is the extent to which any contraventions arise from a single course of conduct. For example, AUSTRAC alleges that approximately 53,000 threshold transaction reports were lodged late. Late lodgement carries a penalty of up to $18 million. However, these alleged contraventions could be considered to arise from a single course of conduct to the extent that they emanated from the same systems error. Ultimately, a Court will seek to ensure that, overall, any civil penalties are just and appropriate and do not exceed what is proper having regard to the totality of established contraventions. Under the Act, the only mechanism available to AUSTRAC to secure a pecuniary penalty from CBA is by taking court action. What we can say about these proceedings is limited until they have run their course. CBA is reviewing the allegations in the 580 page statement of claim and at this time it is not possible to reliably estimate the possible financial effect on the Group. It is not appropriate to disclose any detailed information about the subject matter of the claims as court proceedings are on foot and such information would be highly likely to be prejudicial to our position. Aussie Home Loan Acquisition On 4 August 2017, John Symond exercised his put option, which will require the Group to acquire a 20% interest in AHL. The purchase price for the remaining 20% interest will be determined in accordance with the terms agreed in 2012. The purchase consideration will be paid in the issue of CBA shares. The Group will consolidate AHL from completion of the acquisition which is currently expected to be in late August 2017. Strategic Corporate Actions We are committed to securing and enhancing the financial wellbeing of people, businesses and communities, and the provision of insurance products to our customers remains core to that vision. CommInsure and Sovereign are strong businesses with scale, expertise, competitive products and access to attractive distribution channels. We are in discussions with third parties in relation to their potential interest in our life insurance businesses in Australia and New Zealand. The outcome of those discussions is uncertain. While the discussions may lead to the divestment of those businesses, we will also consider a full range of alternatives, including retaining the businesses, reinsurance arrangements or other strategic options. 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 business strategy and future developments are included in the strategy and performance section on pages 12 to 21. The material business risks are set out in the Business Risks section on pages 22 to 24. These should be read in conjunction with Notes 31 to 34 to the Financial Statements on pages 148 to 171. Environmental Reporting We are 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. We are not subject to any other significant environmental reporting regulation under any law of the Commonwealth or of a State or Territory. The Environment Policy is updated to ensure risks are managed appropriately. Directors The names of the Directors holding office at any time during or since the end of the financial year are: • Catherine Livingstone AO (appointed Chairman 1 January 2017) • Ian Narev • Shirish Apte • Sir David Higgins • Launa Inman • Brian Long • Andrew Mohl • Mary Padbury • Wendy Stops • Harrison Young • Sir John Anderson KBE (retired 9 November 2016) • David Turner (retired 31 December 2016) Details of current Directors, their experience, qualifications, and any special responsibilities, including Committee memberships are set out on pages 50 and 51. 61 Other Directorships The Directors held the following directorships in other listed companies in the three years prior to the end of the 2017 financial year. Director Company Catherine Livingstone WorleyParsons Limited Telstra Corporation Limited Sir John Anderson APN News & Media Limited Launa Inman Bellamy’s Australia Limited Super Retail Group Limited Brian Long Ten Network Holdings Limited Brambles Limited Date Appointed Date of Ceasing (if applicable) 01/07/2007 17/11/2000 26/03/2015 18/02/2015 21/10/2015 01/07/2010 01/07/2014 27/04/2016 30/06/2017 28/02/2017 25/07/2016 Directors’ Meetings 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 Catherine Livingstone (2) Ian Narev Sir John Anderson (3) Shirish Apte Sir David Higgins Launa Inman Brian Long Andrew Mohl Mary Padbury Wendy Stops David Turner (4) Harrison Young No. of Meetings Held (1) No. of Meetings Attended 11 11 5 11 11 11 11 11 11 11 6 11 11 11 3 11 11 11 10 11 11 11 6 11 (1) The number of scheduled and unscheduled meetings held during the time the Director was a member of the Board and was eligible to attend. (2) Catherine Livingstone was appointed Chairman of the Board effective 1 January 2017. (3) Sir John Anderson retired effective 9 November 2016. (4) David Turner retired effective 31 December 2016. Committee Meetings Director Catherine Livingstone (3) Ian Narev (4) Sir John Anderson (5) Shirish Apte (6) Sir David Higgins Launa Inman Brian Long Andrew Mohl Mary Padbury (7) Wendy Stops David Turner (8) Harrison Young (9) Risk Committee Audit Committee Remuneration Committee Nominations Committee (1) No. of Meetings Held (2) No. of Meetings Attended No. of Meetings Held (2) No. of Meetings Attended No. of Meetings Held (2) No. of Meetings Attended No. of Meetings Held (2) No. of Meetings Attended 1 – 3 8 8 – 8 8 – – 4 8 1 – 2 8 8 – 8 8 – – 4 8 8 – 3 8 – 8 8 – – – – 8 8 – 2 8 – 8 8 – – – – 8 1 – – – 10 10 – 10 10 10 5 – 1 – – – 10 10 – 10 10 10 5 – 3 – 3 – – – 7 – 5 – 4 7 3 – 2 – – – 7 – 5 – 4 7 (1) Formerly named the Board Performance & Renewal Committee. (2) The number of scheduled and unscheduled meetings held during the time the Director was a member of the relevant committee. (3) Catherine Livingstone was appointed Chairman of the Nominations Committee effective 1 January 2017 and appointed as a member of the Remuneration Committee effective 4 June 2017. Ian Narev attends committee meetings in an ex-officio capacity. (4) (5) Sir John Anderson retired effective 9 November 2016. (6) Shirish Apte was appointed Chairman of the Risk Committee effective 30 September 2016. (7) Mary Padbury was appointed as a member of the Nominations Committee effective 8 September 2016. (8) David Turner retired effective 31 December 2016. (9) Harrison Young ceased as Chairman of the Risk Committee effective 30 September 2016 and remains as a member of the Risk Committee. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345762 Directors’ report continued Directors’ Shareholdings and Options Particulars of shares held by Directors and the Chief Executive Officer in the 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 3,300,826 share rights outstanding in relation to Bank ordinary shares. 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 page 60 of this report, and the Company Secretaries of the Bank, referred to below, are indemnified under the Constitution of Commonwealth Bank of Australia (the Constitution), as are all senior managers of the Bank. 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 Company 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, consistent with the Constitution which also includes indemnification in substantially the same terms to that provided in the Constitution, in favour of each: • company 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 Bank, acts as a member of the compliance 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, company secretary or senior manager of that entity is a nominee of an entity which is not a related 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, company 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. 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 to the nearest million dollars in accordance with ASIC Corporations Instrument 2016/191. 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. 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 18 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. Clare McManus was appointed a Company Secretary of the Bank in February 2017. She was previously the Deputy Company Secretary and Corporate Counsel at WorleyParsons and prior to that an Associate Director of Macquarie Group and a Senior Associate at Minter Ellison. She holds a Bachelor of Laws (Hons), Bachelor of Commerce, Diploma of Modern Languages (Mandarin) and Graduate Diploma in Applied Corporate Governance. Carla Collingwood was a Company Secretary of the Bank from July 2005 until January 2017. 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 in Applied Corporate Governance from the Governance Institute of Australia. She is a Graduate of the Australian Institute of Company Directors. 63 Message from the Remuneration Committee Chairman Dear Shareholder, On behalf of the Remuneration Committee, I present the CBA Remuneration Report for the 2017 financial year (FY17). You will note from the Remuneration Report the Board’s heightened focus on risk and reputation matters. This is an area of paramount importance to the Board and we take these matters very seriously. During FY17 an enhanced framework was developed to support the ongoing consideration of risk and reputation matters in the determination of CEO and Group Executive accountability and remuneration outcomes. Although the Group has delivered strong results for shareholders in FY17, the Board recognises the significant damage caused to the Group’s trust and reputation as a result of risk matters, most notably the recent civil penalty proceedings initiated by the Australian Transaction Reports and Analysis Centre (AUSTRAC) on 3 August 2017. In determining Executive remuneration outcomes for FY17, the overriding consideration has been to the collective accountability of the Executives for the overall reputation of the Group and risk matters. Accordingly, the Short-Term Variable Remuneration (STVR) outcomes for the CEO and Group Executives were adjusted downwards to zero for FY17. For the CEO this STVR reduction results in an FY17 remuneration outcome $2.73 million below what the Group’s FY17 performance would have otherwise delivered. You will also note that the Realised Remuneration for Executives in FY17 is significantly lower in comparison to the previous year (55% lower for the CEO and 45% lower on average for Group Executives). In assessing risk and reputation matters, the Board considered the timing of relevant matters to determine the appropriate element of remuneration to adjust, including deferred remuneration. For a number of former Group Executives, deferred remuneration vesting outcomes were also significantly reduced including 100% forfeiture of deferred STVR and Long-Term Variable Remuneration (LTVR) vesting reductions of approximately 40% – 70%. The Board will continue to review these matters and consider any further impacts on Executive remuneration outcomes. The Board has also recognised that we have a shared accountability for the overall reputation of the Group and risk matters and therefore has decided to reduce Non-Executive Director base and committee fees for the 2018 financial year (FY18) by an amount equivalent to 20% of our individual FY17 fees. Looking ahead, we have made significant changes to our Executive remuneration approach. We have done this as a direct response to the vote against the Remuneration Report at the 2016 Annual General Meeting (AGM). Prior to the 2016 AGM, the Board withdrew the proposed resolution relating to the CEO’s FY17 LTVR award. We then consulted widely with stakeholders and identified the following key concerns: Opaque application of board discretion: Executive remuneration outcomes were perceived as being out of line with CBA’s performance and our shareholders’ experience. STVR was of particular concern due to the perceived lack of variability among Executives and not adequately reflecting Executive accountability through consequence for risk and reputation matters. The People and Community hurdle for the originally proposed FY17 LTVR was seen to lack transparency and to be overly reliant on Board discretion to determine vesting outcomes. Excessive use of non-financial measures: Non-financial measures were considered too highly weighted in the remuneration framework, with insufficient clarity of how objective and stretching performance hurdles would be set. The duplication of measures across the STVR and LTVR plans was also of concern. Use of fair value allocation approach: There were concerns that the discounted fair-value methodology used to determine the number of Reward Rights granted under the LTVR could be seen to understate the potential award value. Lack of transparency in the Remuneration Report: The Remuneration Report for the 2016 financial year (FY16) was viewed as complex and lacking transparency, making it difficult to navigate and understand details of the Group’s remuneration framework and the basis for Executive remuneration outcomes. The Board has undertaken a comprehensive review of our Executive remuneration strategy, framework and governance, which has responded to these concerns in full. We have substantially revised this year’s Remuneration Report to specifically address the key concerns and improve the transparency of our decisions. We have clarified our core remuneration beliefs. Executive remuneration outcomes must reflect a strong linkage to performance outcomes, with financial performance being a core component of this. However, we also continue to support the use of a range of non-financial measures to reinforce the importance of balancing the needs of our shareholders and customers and also the expectations of the broader community. It is through this balanced approach that sustainable outperformance and long- term shareholder value creation can be achieved. Subject to shareholder support, for FY18 we will adopt a new Executive remuneration approach that delivers: • Increased weighting of financial measures in STVR and use of quantitative performance targets that are measurable and disclosed each year; • Non-financial measures in the LTVR relating to the areas of Trust and Reputation and Employee Engagement, which are strategic imperatives for the Group and strongly aligned to long-term value creation for our shareholders, limited to 25% of the total LTVR; • Transparency of LTVR awards through the use of a face value methodology; • No duplication of performance measures across the STVR and LTVR plans; and • Enhanced consideration of risk in remuneration structures, with STVR deferral periods increased to two years and deferred into equity. These and other changes relating to FY17 and FY18 are detailed in the table on the following page. During FY17 CBA committed to implementing all of the recommendations from Stephen Sedgwick’s independent review of product sales commissions and product based payments in FY18. With the Board’s oversight we have already made significant progress on this important reform agenda and will continue to update you on our progress. Although the past year has seen significant focus and change across the sector, CBA remains steadfastly committed to delivering the right outcomes for customers and increasing the level of trust and engagement from our shareholders, our people and the community. We appreciate the feedback provided during the year and your involvement as owners of CBA. I invite you to review the full report, and thank you for your interest. Sir David Higgins Committee Chairman 8 August 2017 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345764 Remuneration report Board response to concerns raised in relation to the FY16 Remuneration Report In direct response to the concerns raised in relation to the FY16 Remuneration Report, we have undertaken a comprehensive review of our Executive remuneration strategy, framework and governance and have made changes to support our business strategy and ensure shareholder alignment. The FY17 Remuneration Report has been substantially revised to enhance transparency and clarity regarding Key Management Personnel (KMP) remuneration outcomes. Changes in STVR arrangements for FY18 will enable further disclosure of performance measures and outcomes in the FY18 Remuneration Report. Issue STVR Opaque Application of Board Discretion Excessive Use of Non-Financial Measures Changes we have made FY17 STVR outcomes demonstrate clear remuneration and performance linkage • FY17 STVR outcomes clearly demonstrate accountability for risk and reputation matters, with Executive performance assessments also reflecting improved rigour in the process. • The FY17 STVR outcomes for the CEO and all Group Executives were adjusted downwards to zero, reflecting collective accountability of Executives for the overall reputation of the Group and risk matters. When it is effective FY17 Increased weighting of financial and quantitative measures in STVR • Financial measures in Executive STVR performance scorecards will remain FY18 unchanged, however there will be an increased weighting on these measures. The CEO financial measures will increase from 40% to 60%. • The Group Chief Risk Officer STVR performance scorecard will have a stronger weighting towards risk management related measures and less emphasis on financial measures compared to other Executives. Improved rigour of non-financial measures • Increased quantitative measurement of non-financial measures and the introduction of Net Promoter Score (NPS) customer targets. Improved depth of disclosure for STVR measures and basis for outcomes • Disclosure of the CEO’s FY18 STVR performance scorecard (including weightings and performance outcomes) will be included in the FY18 Remuneration Report. STVR deferred into equity together with a longer deferral period • The deferred component of the STVR will be delivered into equity, rather than cash, and the vesting period will be increased from one year to two years, with 50% vesting after one year and the remaining 50% vesting after two years. This change further strengthens the link between STVR outcomes and performance over the medium term. This also provides the Board with greater opportunity to adjust deferred STVR outcomes, if required, by taking into consideration any relevant matters that occur over the vesting period. Withdrawal of proposed People and Community measure for FY17 LTVR • The FY17 LTVR measures proposed in the FY16 Remuneration Report were FY17 withdrawn prior to the AGM. The Board made the decision to grant the FY17 LTVR award under the measures that were previously approved at the 2015 AGM (75% Relative Total Shareholder Return (TSR) and 25% Relative Customer Satisfaction). Comprehensive review of LTVR measures • A comprehensive review of LTVR performance measures was undertaken FY18 during the year. • The performance measures for the FY18 LTVR grant are: 75% Relative TSR, 12.5% Trust and Reputation and 12.5% Employee Engagement. Both Trust and Reputation and Employee Engagement will be quantitative measures. • A positive TSR gateway will be applied to the 25% non-financial LTVR component to ensure that no vesting on these measures occurs unless the change in shareholder value over the period is positive. LTVR Excessive Use of Non-Financial Measures 65 Issue LTVR Use of Fair Value Allocation Approach When it is effective FY18 Changes we have made Change from fair value to face value allocation methodology for LTVR • Face value rather than fair value will be used to determine the number of Reward Rights granted under the FY18 LTVR. Details of the FY18 LTVR will be disclosed in the 2017 Notice of Meeting and FY18 Remuneration Report. • The maximum face value of FY18 LTVR awards is set at 180% of Fixed Remuneration (FR) with no dividend equivalent payment. The overall maximum value has decreased as previously the total face value of LTVR awards was approximately 200% of FR, inclusive of dividend equivalent payments (three-year average). • A face value approach provides greater simplicity and transparency for shareholders. STVR and LTVR Excessive Use of Non-Financial Measures No duplication of performance measures between STVR and LTVR • The customer measure will no longer be duplicated in the STVR and LTVR FY18 plans. • Customer measures will only be included in the STVR with Customer NPS being adopted. Remuneration Governance Opaque Application of Board Discretion Enhanced risk and remuneration governance • The Board has reviewed and strengthened its remuneration governance FY17 procedures, including developing an enhanced framework for the consideration of risk and reputational matters in the determination of Executive variable remuneration outcomes. • The framework will provide the Board with increased transparency, rigour and consistency when applying its discretion in assessing Executive outcomes. This Remuneration Report details the performance and remuneration frameworks and outcomes for CBA and its KMP for FY17. The report has been prepared and audited against the disclosure requirements of the Corporations Act 2001 (Cth) (‘Corporations Act’). Contents 1. FY17 KMP 2. FY17 Summary 3. Executive Remuneration Framework 4. Linking Remuneration to Performance 5. Remuneration Governance 6. Executive Remuneration in Detail 7. Non-Executive Director Arrangements 8. Loans and Other Transactions 9. Key Terms 66 67 69 71 73 73 78 80 81 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 66 Remuneration report continued 1. FY17 KMP KMP are 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. The table below outlines CBA’s KMP for FY17. Name Chairman Position Term as KMP Catherine Livingstone AO (1) Chairman Current Non-Executive Directors Shirish Apte David Higgins Launa Inman Brian Long Andrew Mohl Mary Padbury Wendy Stops Harrison Young Former Non-Executive Directors David Turner(2) John Anderson(3) Director Director Director Director Director Director Director Director Chairman Director Managing Director and Chief Executive Officer Ian Narev Group Executives Managing Director and CEO Kelly Bayer Rosmarin Group Executive, Institutional Banking and Markets Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Part Year Part Year Full Year Full Year Full Year Full Year Full Year Adam Bennett David Cohen Matt Comyn David Craig(4) Rob Jesudason(5) Melanie Laing Anna Lenahan(6) Vittoria Shortt Annabel Spring David Whiteing Group Executive, Business and Private Banking Group Chief Risk Officer Group Executive, Retail Banking Services Group Executive, Financial Services and Chief Financial Officer Full Year Group Executive, International Financial Services Group Executive, Human Resources Group General Counsel and Group Executive, Group Corporate Affairs Group Executive, Marketing and Strategy Group Executive, Wealth Management Group Executive, Enterprise Services and Chief Information Officer Full Year Full Year Part Year Full Year Full Year Full Year (1) Catherine Livingstone AO was a Non-Executive Director from 1 July 2016 to 31 December 2016 and appointed as Chairman from 1 January 2017 to 30 June 2017. (2) David Turner retired from his role as Chairman on 31 December 2016. (3) Sir John Anderson retired from his role as a Non-Executive Director on 9 November 2016. (4) David Craig retired from the Group Executive, Financial Services and Chief Financial Officer role on 30 June 2017. (5) Rob Jesudason was appointed as the Group Executive, Financial Services and Chief Financial Officer on 1 July 2017. (6) Anna Lenahan was appointed to the Group General Counsel and Group Executive, Group Corporate Affairs role on 28 November 2016. 67 2. FY17 Summary FY17 Fixed Remuneration (FR) FR is reviewed annually, following the end of the 30 June performance year. For FY17: • The CEO did not receive a FR increase. • The average FR increase for the Executives who did not change roles during the year was 0.7%. • Due to a change in role, David Cohen received an increase to his FR effective from the date of his appointment to the position of Group Chief Risk Officer on 1 July 2016. FY17 Remuneration Adjustments The Board considered risk and reputation matters in the determination of variable remuneration outcomes, with adjustments made as follows: • The CEO and all Group Executives were assessed as Not Met on risk, reflecting collective accountability for the overall reputation of the Group and risk matters. Accordingly, the FY17 STVR outcomes for the CEO and all Group Executives were adjusted downwards to zero. Executive performance against financial and non-financial measures was strong for FY17, however, remuneration outcomes demonstrate overriding consideration of the significant damage caused to the Group’s trust and reputation as a result of risk matters, most notably the recent civil penalty proceedings initiated by AUSTRAC. • For former Group Executives, reductions were applied to the vesting outcome of their deferred variable remuneration to reflect risk and reputation matters identified after they ceased as a Group Executive. The Board considered the timing of these matters to determine the appropriate element of deferred variable remuneration for adjustment. Downward adjustments to former Group Executive variable remuneration outcomes include 100% forfeiture of deferred STVR and LTVR vesting reductions of approximately 40% – 70%. The Board will continue to review these matters and consider further impacts on Executive remuneration outcomes. STVR outcomes for FY17 reflect CBA’s overall performance and risk-related adjustments: FY17 STVR Outcomes FY16 STVR Outcomes % of Target % of Maximum % of Target % of Maximum CEO Group Executives 0% 0% 0% 0% 108% 72% 95% – 124% 63% – 82% FY17 STVR Outcomes FY14 LTVR Award Outcomes The FY14 LTVR Award, which reached the end of its four-year performance period on 30 June 2017, vested at 67.08%, reflecting sustained delivery of returns to shareholders and customer satisfaction. Performance Period: 1 July 2013 to 30 June 2017) Performance Measure Performance Outcome Vesting Outcome Relative TSR (75% of award) Relative Customer Satisfaction(1) (25% of award) 55th percentile ranking relative to peer group 60.0% Average result over performance period • Retail Main Financial Institution (MFI) Customer Satisfaction = 1.25 • Wealth Management Customer Satisfaction = 1.25 • Business MFI Customer Satisfaction =1.04 Total weighted average ranking = 1.16 92.0% (1) Vesting outcome for Relative Customer Satisfaction is calculated based on the weighted average ranking across the three independent surveys (weighted by the business area’s contribution to Net Profit after Tax (NPAT) at the beginning of the performance period). FY17 LTVR Grant (Performance Period: 1 July 2016 to 30 June 2020) For the FY17 LTVR grant: • The measures originally proposed in the FY16 Remuneration Report (50% Relative TSR, 25% Relative Customer Satisfaction, 25% People and Community) were withdrawn prior to the 2016 AGM. • The Board determined to grant the award under the measures that were previously approved by shareholders at the 2015 AGM (75% Relative TSR and 25% Relative Customer Satisfaction). • The actual number of rights and total FY17 LTVR value granted to Executives in FY17 was approximately 11% lower than the LTVR target fair value. FY17 Realised Remuneration The Realised Remuneration for Executives in FY17 is significantly lower in comparison to FY16. • The CEO’s FY17 Realised Remuneration was $5.5 million compared to $12.3 million in FY16. • On average, FY17 Realised Remuneration for Group Executives was $2.0 million (average FY16 Realised Remuneration was $3.6 million). FY17 Sign-on and Retention Awards • Anna Lenahan, Group General Counsel and Group Executive, Group Corporate Affairs, was granted a sign-on award of $1.8 million, when appointed in November 2016, to compensate for unvested awards that were forfeited due to the termination of her previous employment. The sign-on award was issued as rights (equity) which vest progressively over the period until October 2018, subject to service and risk review, which mirrors the vesting schedule of her forfeited awards. • No retention awards were made to Executives during FY17. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345768 Remuneration report continued Termination Arrangements for Ceased Executive KMP • Following David Craig’s retirement from the role of Group Executive, Financial Services and Chief Financial Officer effective 30 June 2017, he received standard contractual termination payments only, and the total termination payment was in compliance with the Corporations Act. • The LTVR Reward Rights statutory value for David Craig reflects the disclosable accruals for all previously granted LTVR awards that remained unvested at the time of his retirement on 30 June 2017. • This means that all future amounts relating to each unvested LTVR award have been disclosed in FY17, including those amounts which would otherwise have been included in future year disclosures. • These LTVR awards remain ‘on foot’ and will only vest subject to the achievement of the pre-determined performance conditions and risk review. FY17 Non- Executive Director Fees • There was no change to Non-Executive Director fees or the fee pool in FY17. The pool was last approved by shareholders on 17 November 2015. • Effective from February 2017, the Remuneration Committee became responsible for oversight of the Non-Executive Director fees. The Nominations Committee was previously responsible. FY17 Realised Remuneration for Executives The table below shows remuneration actually received by Executives in relation to FY17. The total cash payments received are made up of FR, and the portion of the FY17 STVR award which is not deferred. These amounts are consistent with those disclosed in the Executive Statutory Remuneration table on page 74 for the same items. This table also includes the value of previous years’ deferred STVR and LTVR awards which vested during FY17. This differs to the Executive Statutory Remuneration table which presents the accounting expense for both vested and unvested awards in accordance with accounting standards. Previous years’ deferred cash awards vested during FY17(3) $ Previous years’ deferred equity awards vested during FY17(4) $ Total remuneration realised during FY17 $ Previous years’ awards forfeited or lapsed during FY17 (5) $ Total cash in relation to FY17 $ FR (1) $ Cash STVR(2) $ CEO Ian Narev 2,650,000 Group Executives (6) Kelly Bayer Rosmarin 1,050,600 Adam Bennett 999,600 David Cohen Matt Comyn David Craig 1,200,000 1,055,750 1,380,000 Rob Jesudason(7) 1,152,103 Melanie Laing Anna Lenahan(8) Vittoria Shortt 845,000 509,521 861,900 Annabel Spring 1,055,750 David Whiteing 999,600 0 0 0 0 0 0 0 0 0 0 0 0 2,650,000 1,462,613 1,393,966 5,506,579 (4,828,549) 1,050,600 599,186 485,214 2,135,000 999,600 566,483 310,626 1,876,709 – – 1,200,000 541,294 510,966 2,252,260 (1,738,351) 1,055,750 667,623 556,427 2,279,800 (1,892,800) 1,380,000 829,983 783,464 2,993,447 (2,665,426) 1,152,103 702,706 454,251 2,309,060 (1,545,176) 845,000 494,180 454,251 1,793,431 (1,545,176) 509,521 – 859,586 1,369,107 861,900 512,533 186,335 1,560,768 – – 1,055,750 512,560 556,427 2,124,737 (1,892,800) 999,600 521,797 – 1,521,397 – (1) FR includes base remuneration and superannuation. (2) The FY17 STVR outcome for all Executives was adjusted downwards to zero, reflecting collective accountability for the overall reputation of the Group and risk matters. (3) The value of all deferred cash awards that vested during FY17 plus any interest accrued during the vesting period. (4) The value of deferred equity awards that vested during FY17 plus any dividends accrued during the vesting period based on the volume weighted average closing price of the Group’s ordinary shares over the five trading days preceding the vesting date. For Ian Narev, David Cohen, Matt Comyn, David Craig, Rob Jesudason, Melanie Laing and Annabel Spring this reflects the portion of the FY13 LTVR award (performance period ended 30 June 2016) that vested during FY17. For Kelly Bayer Rosmarin, Adam Bennett and Vittoria Shortt this amount reflects the FY13 deferred STVR awarded prior to their appointment as Group Executive under Executive General Manager arrangements that vested during FY17. For Anna Lenahan, this amount reflects the portion of the sign-on award that vested during FY17. 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 financial year. (5) The value of any deferred cash and/or equity awards that were forfeited/lapsed during FY17. (6) Group Executives as at 30 June 2017. (7) For Rob Jesudason, remuneration was paid in Hong Kong dollars and was impacted by movements in exchange rates. (8) Anna Lenahan was appointed to the Group General Counsel and Group Executive, Group Corporate Affairs role effective 28 November 2016 and her remuneration reflects time in role. 69 3. Executive Remuneration Framework The Executive remuneration framework is designed to attract and retain high-calibre Executives by rewarding them for achieving goals that are aligned to the Group’s strategy and shareholder interests. FY17 Executive Remuneration Framework Remuneration Principles • Aligned with shareholder value creation • Market competitive to attract and retain high-calibre talent • Rewards sustainable outperformance and discourages poor performance • Recognises the role of non-financial drivers in longer-term value creation • Simple and transparent remuneration approach that is fit for purpose, reflecting CBA’s strategy and values FR STVR (at risk) – Target LTVR (at risk) – Target • Base remuneration and • Target = 100% of FR • Target = 100% of FR superannuation (includes cash salary and any salary sacrificed items) • Reviewed annually against disclosed remuneration data • Primary peer group is the other three major Australian banks • Balanced scorecard comprising • Four year performance period financial and non-financial measures • Risk and values assessment • STVR outcomes may range from 0% • Measured against Relative TSR (75%) and Relative Customer Satisfaction (25%) measures to 150% of target STVR • Delivered as Reward Rights • Fair value allocation approach 50% is paid as cash 50% is deferred as cash for one year Year 1 Year 2 Year 4 75% of variable remuneration is deferred, with 50% of variable remuneration deferred over four years Risk Review • All variable remuneration is subject to Board risk review prior to payment or vesting • The Board has discretion to adjust STVR and LTVR outcomes down to zero where appropriate • Unvested STVR and LTVR is forfeited if Executives resign or are dismissed before the end of the vesting/deferral period, unless the Board determines otherwise Executive Mandatory Shareholding Executives are required to accumulate CBA shares over a five year period from 1 July 2013 when the Executive Mandatory Shareholding requirement was implemented or from the date of their appointment to an Executive role, to the value of 300% of FR for the CEO and 200% of FR for Group Executives. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345770 Remuneration report continued FY18 Executive Remuneration Framework effective from 1 July 2017 During FY17, the Remuneration Committee undertook a detailed review of all elements of the Executive remuneration framework. The table below provides a summary of changes to the FY17 framework, which are effective from 1 July 2017. Feature STVR Performance measures and weighting FY17 FY18 (Changes Effective 1 July 2017) • Weighting on financial measures: • Increased weighting on financial measures: • CEO – 40% • Group Executives managing business units – typically 45% • CEO – 60% • Group Executives managing business units – typically 60% • Group Executives managing support functions – typically 40% • Group Executives managing • The remainder of the STVR performance scorecard will support functions – typically 25% continue to focus on key non-financial measures in relation to customer, people and strategic initiatives, supported by a strong risk management framework • More quantitative measures for all Executives Deferral vehicle • 50% of STVR award deferred as cash • 50% of STVR award deferred as equity Deferral period • One year • Two years: 50% of deferred STVR award vests after one year and remaining 50% vests after two years LTVR Allocation approach • Fair value allocation approach • With dividend equivalent payments • Total face value is approximately 200% of FR, inclusive of dividend equivalent payments (three-year average) • Adopt a face value allocation approach • No dividend equivalent payments • Total face value is 180% of FR Performance measures • 75% Relative TSR and 25% Relative • 75% Relative TSR, 12.5% Trust and Reputation and 12.5% Customer Satisfaction Employee Engagement • A positive TSR gateway is applied to the 25% non-financial measures to ensure that no vesting occurs unless shareholder value over the period is positive FY18 LTVR – Non-financial Measures As summarised above, there will be a number of changes to the LTVR award effective 1 July 2017. Relative TSR continues to be the measure against which the majority, 75%, of the FY18 LTVR award is tested. The methodology for this measure has not changed for FY18. The Relative TSR hurdle has been chosen because it provides a direct link between Executive remuneration and shareholder returns, relative to CBA’s ASX peers. The remaining 25% of the award continues to be tested against non-financial measures. There are two new measures selected for the FY18 LTVR award each of which will be applied to 12.5% of the total award. In selecting the measures the Board has listened to and acknowledged concerns that: • The People and Community hurdle for the originally proposed FY17 LTVR award was seen to lack transparency and to be overly reliant on Board discretion to determine vesting outcomes; • The use of non-financial measures was excessive, as the proposed introduction of the People and Community measure would have reduced the weighting on Relative TSR to 50%; and • The adoption of customer measures for the FY17 LTVR award created a duplication of performance measures between the short- term and long-term components of the variable reward framework. The proposed FY18 LTVR measures are intended to drive a strong focus and improvement in CBA’s Trust and Reputation, and Employee Engagement, both of which are considered by the Board to be critical drivers of sustainable long-term value creation for shareholders, and are closely linked to the strategic imperatives of CBA. In today’s challenging and increasingly competitive environment we need to focus not only on direct financial returns, but also the way we do business, how we support our people and our role in society. In particular: • The Board recognises the critical importance for CBA and the industry of rebuilding and improving the trust of customers and the broader community. This is a key factor in ensuring CBA maintains its social licence to operate, as well as enhancing long-term financial performance and value to shareholders. Accordingly, this is a fundamental focus area for the Executive team and one for which they are accountable. • The Board views that an engaged workforce results in greater productivity and better customer outcomes and experience. It is therefore fundamental for the continued success of CBA that its employees are proud advocates of CBA and committed to its vision, values and strategy. A positive TSR gateway will be applied to the non-financial performance measures, such that no vesting on these measures occurs unless the change in shareholder value over the period is positive. In addition, the total FY18 LTVR award will be subject to a risk and compliance review undertaken by the Board before any vesting can occur. 71 4. Linking Remuneration to Performance Variable remuneration is directly linked to both short-term and long-term performance goals. Financial Performance The below table illustrates CBA’s financial performance over the past five financial years (including FY17) and the link to Executive remuneration. Financial Performance Measure Link to Executive Remuneration FY17 FY16 Group Cash NPAT ($M) (1) STVR scorecard measure Group PACC ($M) (2) STVR scorecard measure Share Price as at 30 June ($) LTVR Relative TSR measure Dividends per Share ($) LTVR Relative TSR measure TSR (four-year period) as at 30 June (%) LTVR Relative TSR measure 9,881 6,525 82.81 4.29 50.75 9,445 6,187 74.37 4.20 FY15 9,127 n/a 85.13 4.20 FY14 8,680 n/a 80.88 4.01 FY13 7,760 n/a 69.18 3.64 74.74 110.43 109.89 122.57 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 to the Financial Statements. (2) Due to methodology changes comparatives for Group Profit after Capital Charge (PACC) have only been provided for FY16. FY17 STVR Performance Outcomes Overall Group performance, together with an assessment of individual Executive performance through a balanced scorecard approach, determines the individual STVR outcomes of Executives. All Executives scorecards contain the same performance categories, with financial and non-financial measures aligned with business unit specific targets where appropriate. Weighting of financial and non-financial measures varies by role. • The CEO had a 40% weighting on financial measures. • Group Executives managing business units typically had a 45% weighting on financial measures. • Group Executives managing support functions typically had a 25% weighting on financial measures. Risk is an important factor in accounting for short-term performance. The Group uses PACC, a risk-adjusted measure, as a key measure of financial performance. PACC takes into account the profit achieved, and also reflects the risk to capital that was taken to achieve it. Moreover, in managing risk, Executives are required to comply with the Group and relevant Business Unit Risk Appetite Statements and provide exemplary leadership of a strong risk culture. The following table provides the Board’s assessment of the CEO’s performance for FY17. Performance Category Measures % of STVR Target % of STVR Maximum Sound Risk Management Gate opener/STVR adjustment Exemplary leadership of risk culture The CEO was assessed as Not Met on risk reflecting consideration of risk and reputation matters. FY17 CEO Outcome Shareholder (40%) Customer (15%) Strategy (15%) People and Community (30%) • Group Cash NPAT • Group Underlying PACC • Productivity 132% • Roy Morgan (6 month rolling average, 100% four major banks) • DBM Institutional: in the +$300m category or +$500m category • DBM (whole of market) • Strategy development and execution • Reputation • Culture • Engagement • Safety Overall STVR Outcome Risk-Adjusted STVR Outcome 100% 67% 103% 0% 88% 67% 67% 44% 69% 0% Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345772 Remuneration report continued Group Performance and STVR Outcomes The below chart shows Cash NPAT over the past five years and STVR outcomes for Executives as a percentage of STVR maximum. Current and historical STVR outcomes reflect consideration of financial and non-financial factors in the determination of remuneration, including risk and reputation matters. 9,127 9,445 9,881 8,680 Cash NPAT (1) CEO STVR (% of maximum) Average GE STVR (% of maximum) 7,760 100% 80% 60% 40% 20% 0% FY13 FY14 FY15 FY16 FY17 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 to the Financial Statements. FY17 STVR Outcomes The average STVR payment for Executives was 0% of their STVR maximum. The following table provides the FY17 STVR outcomes for Executives. STVR Target (1) ($) Total ($) STVR Actual Cash(2) Deferred(3) STVR Actual as % of STVR Target STVR Actual as % of STVR Maximum ($) ($) (%) (%) CEO Ian Narev Group Executives Kelly Bayer Rosmarin Adam Bennett David Cohen Matt Comyn David Craig Rob Jesudason Melanie Laing Anna Lenahan (4) Vittoria Shortt Annabel Spring David Whiteing 2,650,000 1,050,600 999,600 1,200,000 1,055,750 1,380,000 1,152,103 845,000 509,521 861,900 1,055,750 999,600 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (1) STVR target is equal to 100% of FR. The maximum STVR is 150% of target STVR. (2) 50% of the STVR award payable as cash in recognition of performance for FY17 (payable September 2017). The FY17 STVR outcome for all Executives was adjusted downwards to zero, reflecting collective accountability for the overall reputation of the Group and risk matters. 50% of the STVR award that is deferred until 1 July 2018. Deferred STVR awards are subject to Board risk review at the time of payment. The FY17 STVR outcome for all Executives was adjusted downwards to zero, reflecting collective accountability for the overall reputation of the Group and risk matters. Anna Lenahan was appointed to the Group General Counsel and Group Executive, Group Corporate Affairs role effective 28 November 2016. STVR target reflects her time in role. (3) (4) FY14 LTVR Award Outcomes The FY14 LTVR Award, which reached the end of its four-year performance period on 30 June 2017, vested at 67.08% reflecting sustained delivery of returns to shareholders and customer satisfaction. Performance Measure Performance Outcome Vesting Outcome Relative TSR (75% of award) Relative Customer Satisfaction (1) (25% of award) 55th percentile ranking relative to peer group Average result over performance period • Retail MFI Customer Satisfaction = 1.25 • Wealth Management Customer Satisfaction = 1.25 • Business MFI Customer Satisfaction =1.04 Total weighted average ranking = 1.16 60.0% 92.0% (1) Vesting outcome for Relative Customer Satisfaction is calculated based on the weighted average ranking across the three independent surveys (weighted by the business area’s contribution to NPAT at the beginning of the performance period). 73 5. Remuneration Governance Remuneration Committee The Remuneration Committee is the main governing body for remuneration across the Group. The Remuneration Committee develops the remuneration philosophy, framework and policies for Board approval. The Remuneration Committee has a robust framework for the systematic review of risk and compliance issues impacting remuneration and works closely with the Board’s Risk Committee and management’s Risk and Remuneration Review Committee (RRRC) to consider risk and reputational matters in the determination of variable remuneration outcomes. The following diagram illustrates the Group’s remuneration governance framework. CBA Board Risk Committee Remuneration Committee Assists the Board in the governance of the Group’s risks. Members Advises the Remuneration Committee of material risk issues which may impact remuneration outcomes. RRRC Management committee that advises the Group Chief Risk Officer on material risk issues which may impact remuneration outcomes. David Higgins (Chairman) Launa Inman Catherine Livingstone AO Andrew Mohl Mary Padbury Wendy Stops Roles and responsibilities The responsibilities of the Remuneration Committee are outlined in its Charter and reviewed periodically: www.commbank.com.au/corporategovernance Independent remuneration consultant (EY) EY provides information to assist the Committee in making remuneration decisions. EY did not make any remuneration recommendations in FY17. Remuneration Committee Focus Areas for FY17 During FY17, the Remuneration Committee continued to focus on embedding a remuneration framework that is appropriate for the Group’s different businesses with transparency in design, strong governance and risk oversight. This year the Remuneration Committee’s key areas of focus were: • Comprehensive review of the Executive remuneration strategy and framework following the significant vote against the FY16 Remuneration Report at the 2016 AGM; • A review of Executive remuneration governance with a particular focus on risk. An enhanced framework has been developed for the consideration of risk and reputational matters in the determination of variable remuneration outcomes; • Ongoing review and monitoring of variable remuneration practices, with a particular focus on the Group’s retail customer facing roles, in line with the Group’s commitment to adopt in full, in FY18, the recommendations from Stephen Sedgwick’s independent review of product sales commissions and product based payments; • The annual review of the Group Remuneration Policy (GRP) ensuring that the GRP remains fit for purpose and continues to effectively deliver on intent; • Ongoing monitoring of regulatory and legislative changes, both locally and offshore, ensuring that the Group’s policies and practices remain compliant with all regulatory requirements; • The retirement of David Craig from the Group Executive, Financial Services and Chief Financial Officer role, effective 30 June 2017; • The appointment of Rob Jesudason to the role of Group Executive, Financial Services and Chief Financial Officer, effective 1 July 2017; and • The appointment of Coenraad Jonker to the role of Group Executive, International Financial Services, effective 1 July 2017. 6. Executive Remuneration in Detail Executive Statutory Remuneration The following statutory tables detail the statutory accounting expense of all remuneration related items for the Executives. This includes remuneration costs in relation to both FY16 and FY17. The tables are different to the Realised Remuneration table on page 68, which shows the remuneration realised in FY17 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 Australian Accounting Standards. Refer to the footnotes below each table for more detail on each remuneration component. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345774 Remuneration report continued FR (1) Other Short-Term Benefits Long-Term Benefits Share-Based Payments Base Remuneration (2) $ Super- annuation $ Non Monetary(3) $ Cash STVR (at risk)(4) $ Deferred STVR (at risk) (5) $ Other (6) $ Long- Term (7) $ Deferred Rights (at risk)(8) LTVR Reward Rights (at risk)(9) Total Statutory Remuneration (10) $ 2,625,000 25,000 15,909 0 0 (33,007) 113,341 – 2,966,120 5,712,363 2,625,000 25,000 15,052 1,431,000 1,431,000 35,870 137,211 – 3,068,219 8,768,352 1,025,600 25,000 1,025,600 25,000 15,909 15,052 0 0 18,037 (52,237) 70,583 833,943 1,936,835 586,235 586,235 3,760 68,876 210,317 555,203 3,076,278 974,600 25,000 955,000 25,000 15,909 15,052 0 0 (36,560) 24,113 145,640 523,671 1,672,373 554,239 554,239 9,385 51,361 183,108 283,329 2,630,713 1,175,000 25,000 875,000 25,000 15,909 15,052 0 0 44,169 100,122 529,594 529,594 60,308 35,088 – – 988,620 964,254 2,348,820 3,033,890 1,030,750 25,000 1,030,750 25,000 14,599 13,846 0 0 24,802 25,425 – 1,078,073 2,198,649 653,193 653,193 6,656 36,150 – 982,736 3,401,524 1,360,384 1,355,000 19,616 25,000 15,909 15,052 0 0 812,044 812,044 51,519 57,916 69,661 60,057 – 3,935,949 5,453,038 – 1,478,428 4,615,541 1,149,030 1,190,237 3,073 3,184 – – 0 0 972,349 712,174 712,174 627,302 41,466 24,014 820,000 25,000 820,000 25,000 15,909 15,052 0 0 2,409 22,217 483,499 483,499 (4,412) 17,412 – – – – 987,414 853,286 3,153,332 4,122,371 878,734 885,233 1,764,269 2,725,283 497,966 11,555 10,455 836,900 25,000 820,000 25,000 15,909 15,052 0 0 0 0 18,571 3,292 1,158,780 118,307 1,818,926 40,010 (41,739) 129,441 374,761 1,380,282 501,455 501,455 (19,300) 25,425 126,107 185,175 2,180,369 1,030,750 25,000 1,030,750 25,000 14,599 13,846 0 0 13,905 501,481 501,481 16,215 34,003 43,865 – 1,078,073 2,196,330 – 1,080,090 3,212,728 979,984 960,692 19,616 19,308 14,599 13,846 0 0 (8,609) 19,620 52,634 585,192 1,663,036 510,519 510,519 8,810 14,547 52,563 346,102 2,436,906 CEO Ian Narev FY17 FY16 Group Executives Kelly Bayer Rosmarin FY17 FY16 Adam Bennett FY17 FY16 David Cohen (11) FY17 FY16 Matt Comyn FY17 FY16 David Craig (12) FY17 FY16 Rob Jesudason (13) FY17 FY16 Melanie Laing FY17 FY16 Anna Lenahan (14) FY17 Vittoria Shortt FY17 FY16 Annabel Spring FY17 FY16 David Whiteing FY17 FY16 (1) FR comprises Base Remuneration and Superannuation (post-employment benefit). Superannuation contributions for Rob Jesudason are made in line with Hong Kong Mandatory Provident Fund regulations. (2) Total cost of salary including cash salary, short-term compensated absences and any salary sacrificed benefits. (3) Cost of car parking (including associated fringe benefits tax). (4) 50% of the FY17 STVR for performance during the 12 months to 30 June 2017 (payable September 2017). The FY17 STVR outcome for all Executives was adjusted downwards to zero, reflecting collective accountability for the overall reputation of the Group and risk matters. 50% of the FY17 STVR award that is deferred until 1 July 2018. Deferred STVR awards are subject to Board review at the time of payment. The FY17 STVR outcome for all Executives was adjusted downwards to zero, reflecting collective accountability for the overall reputation of the Group and risk matters. Includes company funded benefits (including associated fringe benefits tax where applicable), interest accrued in relation to the FY16 STVR deferred award, which vested on 1 July 2017, and the net change in accrued annual leave. For Rob Jesudason, this includes costs in relation to his Hong Kong assignment and relocation to Australia. 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. The FY16 comparative has been restated to reflect a disclosure methodology change where Deferred Rights are included in share-based payments instead of long-term benefits. FY17 expense for deferred STVR awarded under Executive General Manager arrangements, and sign-on and retention awards received as Deferred Rights. These equity awards are subject to forfeiture if the Executive ceases to be employed by the Group prior to the vesting date as a result of resignation. The FY16 comparative has been restated to reflect a disclosure methodology change where Deferred Rights are included in share-based payments instead of long-term benefits. FY17 expense for the FY14, FY15, FY16 and FY17 LTVR awards (including true up for the Customer Satisfaction performance hurdle portion of the FY13 LTVR award). (5) (6) (7) (8) (9) (10) The percentage of FY17 remuneration related to performance was: Ian Narev 52%, Kelly Bayer Rosmarin 47%, Adam Bennett 40%, David Cohen 42%, Matt Comyn 49%, David Craig 72%, Rob Jesudason 31%, Melanie Laing 50%, Anna Lenahan 70%, Vittoria Shortt 37%, Annabel Spring 49%, and David Whiteing 38%. (11) David Cohen commenced in the Group Chief Risk Officer role from 1 July 2016. Prior year comparison reflects statutory remuneration for his prior role, Group General Counsel and Group Executive, Group Corporate Affairs. (12) The LTVR Reward Rights value for David Craig reflects the disclosable accruals for all previously granted LTVR awards that remain unvested following his retirement on 30 June 2017 up to the end of each performance period. This means that up to three years of each unvested LTVR award has been disclosed in FY17, including those amounts which would otherwise have been included in future year disclosures. These LTVR awards remain ‘on foot’ and will only vest subject to the achievement of the pre-determined performance conditions and risk review. (13) For Rob Jesudason, remuneration was paid in Hong Kong dollars and was impacted by movements in exchange rates. (14) Anna Lenahan was appointed to the Group General Counsel and Group Executive, Group Corporate Affairs role effective 28 November 2016 and her remuneration reflects time in role. 75 FY17 LTVR Award Executives were granted LTVR awards in FY17 for the performance period from 1 July 2016 to 30 June 2020. The following table provides the key features of the FY17 LTVR award: Relative TSR Relative Customer Satisfaction Performance Measures 75% of each award is subject to the Group’s TSR performance relative to a set peer group (1). The peer group 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 CBA. The next five largest companies listed on the ASX by market capitalisation will form a reserve bench of companies. 25% of each award is subject to 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 Framework Peer Group Ranking Vesting % Weighted Average Ranking Vesting % 75th percentile or higher Median Below the median 100% 50% 1st 2nd 0% Lower than 2nd 100% 50% 0% Vesting occurs on a straight line basis if the Group is ranked between the median and the 75th percentile. Calculated independently by Orient Capital. Calculation of the Performance Results Vesting occurs on a straight line basis if the weighted average ranking is between 2nd and 1st. Measured with reference to the three independent surveys below (weighted by the business area’s contribution to NPAT at the beginning of the performance period): • Roy Morgan Research (Retail Banking); • DBM, Business Financial Services Monitor (Business Banking); and • Wealth Insights Service Level Report, Platforms (Wealth Management). Instrument Determining the number of Reward Rights Performance Period 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. The number of Reward Rights allocated depends on each Executive’s LTVR Target (see diagram on page 69 for explanation of target remuneration), using a fair value allocation approach. The number of Reward Rights allocated aligns the Executive’s LTVR Target to the expected value at the end of the performance period, in today’s dollars. The performance period commences at the beginning of the financial year in which the award is granted. For the LTVR award granted in FY17, the performance period started on 1 July 2016 and ends after four years on 30 June 2020. 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 lapse. (1) The peer group at the beginning of the performance period for the Relative TSR performance hurdle comprised Amcor Limited, AMP Limited, Australia & New Zealand Banking Group Limited, Brambles Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, QBE Insurance Group Limited, Ramsay 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. 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345776 Remuneration report continued Fair Value Assumptions for Equity Awards Granted in FY17 For the Relative TSR component of the LTVR awards, the fair value has been calculated using a Monte Carlo simulation method using the assumptions below. For the Relative Customer Satisfaction component of all LTVR awards, the fair value is the closing market price of a CBA share as at the grant date. The exercise price is nil across all LTVR awards. Equity Plan FY17 LTVR Reward Rights – Relative TSR FY17 LTVR Reward Rights – Relative Customer Satisfaction Anna Lenahan – Sign-on Award (2) Grant Date Fair Value $ Performance Period End Expected Life (Years) Expected Volatility % Assumptions(1) 22 February 2017 65.76 30 June 2020 3.35 22 February 2017 83.71 30 June 2020 28 November 2016 77.97 1 October 2018 n/a n/a 15 n/a n/a Risk Free Rate % 2.27 n/a n/a (1) (2) For the Relative TSR component of the LTVR awards, a zero dividend yield has been assumed given that dividends are incorporated into the fair value of the rights. Anna Lenahan was granted a sign-on award on 28 November 2016 vesting in three tranches. One tranche has already vested on 28 May 2017 and the remaining two tranches will vest on 1 October 2017 and 1 October 2018 respectively, subject to a Board risk review. Fair value is the closing market price of a CBA share as at the grant date. 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 FY17. It also shows the number of previous year’s awards that vested during FY17 (some of which relate to past non-KMP roles). Granted during FY17(1)(2)(3) Previous years’ awards vested during FY17(4) Forfeited or lapsed during FY17(5) Class (Units) ($) (Units) (Units) ($) LTVR Reward Rights 55,443 3,882,315 16,017 (62,839) (4,828,549) LTVR Reward Rights Deferred Rights LTVR Reward Rights Deferred Rights LTVR Reward Rights LTVR Reward Rights LTVR Reward Rights LTVR Reward Rights LTVR Reward Rights LTVR Reward Rights Deferred Rights LTVR Reward Rights Deferred Rights LTVR Reward Rights LTVR Reward Rights 21,981 – 20,914 – 25,107 22,089 28,873 24,503 17,680 18,099 23,086 18,033 – 22,089 20,914 1,539,188 – 1,464,480 – 1,758,072 1,546,756 2,021,790 1,715,786 1,238,009 1,267,357 1,800,015 1,262,730 – 1,546,756 1,464,480 – 5,742 – 3,676 5,766 6,279 8,841 5,126 5,126 – 10,389 – 2,205 6,279 – – – – – (22,623) (24,633) (34,688) (20,109) (20,109) – – – – (24,633) – – – – – (1,738,351) (1,892,800) (2,665,426) (1,545,176) (1,545,176) – – – – (1,892,800) – CEO Ian Narev Group Executives Kelly Bayer Rosmarin Adam Bennett David Cohen Matt Comyn David Craig Rob Jesudason Melanie Laing Anna Lenahan Vittoria Shortt Annabel Spring David Whiteing (1) (2) (3) (4) (5) Represents the maximum number of LTVR Reward Rights and Deferred Rights that may vest to each Executive. For LTVR Reward Rights the value represents the fair value at grant date. Deferred Rights represent the deferred STVR awarded under Executive General Manager arrangements, sign-on and retention awards received as rights. For Deferred Rights the value reflects the face value at grant date. The minimum potential outcome for LTVR Reward Rights and Deferred Rights is zero. As at 1 July 2016, the maximum value of LTVR Reward Rights granted during FY17 based on the volume weighted average price of the Group’s ordinary shares over the five trading days up to and including 1 July 2016 was: Ian Narev $4,064,526, Kelly Bayer Rosmarin $1,611,427, Adam Bennett $1,533,205, David Cohen $1,840,594, Matt Comyn $1,619,345, David Craig $2,116,680, Rob Jesudason $1,796,315, Melanie Laing $1,296,121, Anna Lenahan $1,326,838, Vittoria Shortt $1,321,999, Annabel Spring $1,619,345 and David Whiteing $1,533,205. The FY17 LTVR grant value was capped based on the fair value that would have applied to the withdrawn 25% People and Community hurdle had it not been replaced by the Relative TSR measure. The actual number of rights and total LTVR fair value granted was approximately 11% less in FY17 than the LTVR target. Previous years’ awards that vested include the FY13 LTVR 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 financial year. This is the portion of the FY13 LTVR Award (79.69%) that did not meet the performance hurdle and lapsed. The value of the lapsed award is calculated using the volume weighted average closing price for the five days preceding the lapse date. 77 Overview of Unvested Equity Awards Equity Plan FY15 LTVR (1) FY16 LTVR (2) FY17 LTVR (3) Performance Period – Start Date Performance Period – End Date Performance Hurdles 1 July 2014 1 July 2015 1 July 2016 30 June 2018 30 June 2019 Each award is split and tested: • 75% TSR ranking relative to peer group 30 June 2020 • 25% Customer Satisfaction average ranking relative to peer group (1) 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. (2) For Ian Narev, the grant date was 17 November 2015. For all other Executives the grant date was 10 November 2015. (3) The grant date was 22 February 2017. Shares and Other Securities held by Executives Details of the shareholdings and other securities held by Executives (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 Executive equity plans refer to the Financial Statements Note 24 Share-Based Payments. Executives are required to accumulate CBA shares over a five year period from 1 July 2013 when the Executive Mandatory Shareholding requirement was implemented or from the date of their appointment to an Executive role, to the value of 300% of FR for the CEO and 200% of FR for Group Executives. CEO Ian Narev (4) Class (1) Ordinary LTVR Reward Rights Group Executives Kelly Bayer Rosmarin Ordinary Adam Bennett David Cohen Matt Comyn (4) David Craig (5) Rob Jesudason (4) Melanie Laing Anna Lenahan (6) Vittoria Shortt Annabel Spring David Whiteing LTVR Reward Rights Deferred Rights Ordinary LTVR Reward Rights Deferred Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Deferred Rights Ordinary LTVR Reward Rights Deferred Rights Ordinary LTVR Reward Rights Ordinary LTVR Reward Rights Deferred Rights Balance 1 July 2016 Acquired/ Granted as Remuneration Previous Years’ Awards Vested during FY17 (2) Net Change Other (3) Balance 30 June 2017 127,990 254,271 15,242 56,818 8,352 12,685 30,023 9,196 51,130 88,591 30,783 99,599 170,800 135,835 – 86,690 33,467 81,268 – – – 6,498 23,395 7,139 27,891 99,599 – 40,874 1,946 – 55,443 – 21,981 – – 20,914 – – 25,107 – 22,089 – 28,873 – 24,503 – 17,680 – 18,099 23,086 – 18,033 – – 22,089 – 20,914 – – (16,017) – – (5,742) – – (3,676) – (5,766) – (6,279) – (8,841) – (5,126) – (5,126) – – (10,389) – – (2,205) – (6,279) – – – 3,359 (62,839) 6,615 – – 3,676 – – (12,334) (22,623) 2,779 (24,633) 12,534 (34,688) – (20,109) (1,487) (20,109) 10,389 – – 2,205 – – 1,479 (24,633) – – – 131,349 230,858 21,857 78,799 2,610 16,361 50,937 5,520 38,796 85,309 33,562 90,776 183,334 121,179 – 85,958 31,980 73,713 10,389 18,099 12,697 8,703 41,428 4,934 29,370 90,776 – 61,788 1,946 (1) (2) LTVR Reward Rights represent rights granted under the Group Leadership Reward Plan (GLRP) that are subject to performance hurdles. Deferred Rights represent the deferred STVR awarded under Executive General Manager arrangements, sign-on and retention awards received as rights. The minimum potential outcome for LTVR Reward Rights and Deferred Rights is zero. The maximum potential outcome for LTVR Reward Rights and Deferred Rights is subject to the CBA share price at the time of vesting. LTVR 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 financial year. (3) Net Change Other incorporates changes resulting from purchases, sales, forfeitures and appointment or departure of Executives during the year. (4) Opening balance has been restated to include a correction to CBA ordinary shares. The opening balance for ordinary shareholdings for Ian Narev has been restated from 129,969 to 127,990, the opening balance for ordinary shareholdings for Matt Comyn has been restated from 30,516 to 30,783 and the opening balance for ordinary shareholdings for Rob Jesudason has been restated from 27,618 to zero. (5) David Craig holds 28,150 PERLS. (6) Anna Lenahan was appointed to the Group General Counsel and Group Executive, Group Corporate Affairs role effective 28 November 2016. Her shareholdings have not been included in the opening balance as at 1 July 2016. Anna Lenahan holds 2,000 Capital Notes. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345778 Remuneration report continued Executive Employment Arrangements The table below provides the employment arrangements for current Executives. Contract Term Contract type (1) Notice period Severance (2) STVR entitlements on termination CEO Permanent 12 months n/a Group Executives Permanent 6 months 6 months • Unless otherwise determined by the Board, Executives who resign or are dismissed are generally not entitled to an STVR payment and will forfeit the unvested deferred portion of their STVR. • At the Board’s discretion, where an Executive’s exit is related to retrenchment, retirement or death, the Executive may be entitled to an STVR payment. LTVR entitlements on termination Unless otherwise determined by the Board: • Executives who resign or are dismissed before the end of the performance period will forfeit all unvested LTVR awards; and • Where an Executive’s exit is related to retrenchment, retirement or death, any unvested LTVR awards continue unchanged with performance measured at the end of the performance period related to each award. (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. 7. Non-Executive Director Arrangements Non-Executive Director Fees Non-Executive Directors receive fees to recognise their contribution to the work of the Board and the associated committees on which they serve. Non-Executive Directors do not receive any performance-related remuneration. The total amount of Non-Executive Directors fees is capped at a maximum fee pool that is approved by shareholders. The current fee pool is $4.75 million, which was approved by shareholders at the AGM on 17 November 2015. The following table outlines the Non-Executive Directors fees for the Board and the Committees as at 30 June 2017. Board/Committee Board Audit Committee Risk Committee Remuneration Committee Nominations Committee Chairman(1) ($) 870,000 65,000 65,000 60,000 11,600 Member(1) ($) 242,000 32,500 32,500 30,000 11,600 (1) Fees are inclusive of base fees and statutory superannuation. The Chairman does not receive separate Committee fees. FY18 Non-Executive Director base and committee fees will be reduced by an amount equivalent to 20% of their individual FY17 fees to reflect a shared accountability for the overall reputation of the Group and risk matters. Mandatory Shareholding Under the Non-Executive Directors’ Share Plan, Non-Executive Directors are required to hold 5,000 or more CBA shares. For those Non-Executive Directors who have 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. 79 Non-Executive Director Statutory Remuneration The statutory table below details individual statutory remuneration for the Non-Executive Directors for FY17 and the previous financial year. Short-Term Benefits Post-Employment Benefits Cash(1) $ Superannuation(2) $ Share-Based payments Non-Executive Directors’ Share Plan(3) $ Total Statutory Remuneration $ Chairman Catherine Livingstone AO (4) FY17 FY16 Non-Executive Directors Shirish Apte FY17 FY16 David Higgins FY17 FY16 Launa Inman FY17 FY16 Brian Long FY17 FY16 Andrew Mohl FY17 FY16 Mary Padbury FY17 FY16 Wendy Stops FY17 FY16 Harrison Young FY17 FY16 Former Non-Executive Directors David Turner (5) FY17 FY16 John Anderson (6) FY17 FY16 552,098 84,890 321,356 299,140 315,229 294,078 256,105 257,222 331,848 332,094 285,197 286,599 231,084 12,386 252,661 253,938 307,539 333,428 427,289 854,887 107,798 300,768 19,616 6,436 10,405 7,860 19,616 19,308 19,616 19,308 19,616 19,308 19,616 19,308 19,239 1,177 19,616 19,308 19,616 19,308 10,232 19,308 7,449 19,308 – – – – – – 28,980 29,233 – – – 30,806 – – – – – – – – – 571,714 91,326 331,761 307,000 334,845 313,386 304,701 305,763 351,464 351,402 304,813 305,907 281,129 13,563 272,277 273,246 327,155 352,736 437,521 874,195 115,247 320,076 (1) Cash includes Board and Committee fees received as cash. (2) Superannuation contributions are capped at the superannuation maximum contributions base as prescribed under the Superannuation Guarantee legislation. The FY17 superannuation value for Mary Padbury has been trued up for prior year disclosure. (3) The values shown in the table represent the post-tax portion of fees received as shares under the Non-Executive Directors’ Share Plan. (4) Catherine Livingstone AO was a Non-Executive Director from 1 July 2016 to 31 December 2016 and appointed as Chairman from 1 January 2017 to 30 June 2017. Her remuneration has been prorated accordingly to reflect both roles. (5) David Turner retired from his role as Chairman on 31 December 2016 and his remuneration reflects time in role. (6) Sir John Anderson retired from his role as a Non-Executive Director on 9 November 2016 and his remuneration reflects time in role. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345780 Remuneration report continued Shares and Other Securities held by Non-Executive Directors All shares were acquired by Non-Executive Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan. Other securities acquired by Non-Executive Directors were on normal terms and conditions. Class Balance 1 July 2016 Acquired(1) Net Change Other(2) Balance 30 June 2017 Ordinary 5,204 133 Chairman Catherine Livingstone AO (3) Non-Executive Directors Shirish Apte David Higgins (3) Launa Inman Brian Long Andrew Mohl Mary Padbury Wendy Stops Harrison Young Former Non-Executive Directors David Turner (4) John Anderson (5) Ordinary Ordinary PERLS (6) Ordinary Ordinary PERLS (6) Ordinary Ordinary PERLS (6) Ordinary Ordinary Ordinary PERLS (6) Ordinary 7,500 10,878 – 4,221 14,654 6,850 82,234 – 1,600 15,218 30,000 12,268 1,380 18,978 – – 3,094 432 143 – – 294 – 782 – – – – – – – (474) – – – – – – – – – (380) – 5,337 7,500 10,878 2,620 4,653 14,797 6,850 82,234 294 1,600 16,000 30,000 n/a n/a n/a (1) Incorporates shares and other securities acquired during the year. Non-Executive Directors who hold fewer than 5,000 Commonwealth Bank shares are required to receive 20% of their total after-tax base fees as CBA shares. These shares are subject to a 10-year trading restriction (the shares will be released earlier if the Non-Executive Director leaves the Board). In FY17, under the Non-Executive Directors’ Share Plan, Launa Inman received 307 shares and Mary Padbury received 257 shares. Mary Padbury also voluntarily salary sacrificed a portion of her fees to purchase 37 shares during FY17. (2) Net Change Other incorporates changes resulting from sales of securities. (3) Opening balance has been restated to include a correction to CBA ordinary shares. The opening balance for ordinary shareholdings for Catherine Livingstone has been restated from 5,146 to 5,204 and the opening balance for ordinary shareholdings for David Higgins has been restated from 10,346 to 10,878. (4) David Turner retired from the Group on 31 December 2016 and his shareholdings are not included in the balance as at 30 June 2017. (5) Sir John Anderson retired from the Group on 9 November 2016 and his shareholdings are not included in the balance as at 30 June 2017. (6) Includes cumulative holdings of all PERLS securities issued by the Group. 8. Loans and Other Transactions 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 those family members or entities 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. Total Loans to KMP Opening Balance (1) Closing Balance (2) Interest Charged (1) The opening balance has been restated from $11,354,745. (2) The aggregate loan amount at the end of the reporting period includes loans issued to 16 KMP. FY17 ($) 11,330,450 12,145,179 406,211 81 Loans to KMP Exceeding $100,000 in Aggregate Kelly Bayer Rosmarin (2) David Cohen Matt Comyn Melanie Laing Mary Padbury Vittoria Shortt (2) David Whiteing Total Balance 1 July 2016 $ 2,209,545 509,980 2,324,854 279,955 786,881 3,658,888 1,425,731 11,195,834 Interest Charged $ 72,693 21,794 93,374 6,560 25,282 126,915 59,565 406,183 Interest Not Charged $ Write-off $ Balance 30 June 2017 $ Highest Balance in Period(1) $ – – – – – – – – – – – – – – – – 1,643,424 487,134 2,360,099 929,178 676,992 3,417,879 2,502,057 12,016,763 2,273,301 542,387 2,553,059 1,228,395 809,709 3,807,271 2,525,617 13,739,739 (1) Represents the sum of highest balances outstanding at any point during FY17 for each individual loan held by the KMP. (2) Opening balance has been restated to reflect actual drawn balance. 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, their close family members and entities controlled or significantly influenced by them. All such financial instrument transactions that have occurred between entities within the Group and 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, their close family members, 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. 9. 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 Board Deferred Rights Definition The Board of Directors of the Group. Rights to ordinary shares in CBA granted under the Group Rights Plan subject to forfeiture on resignation. These are used for deferred STVR awarded under Executive General Manager arrangements, deferred STVR awarded under Executive arrangements from 1 July 2017, sign-on and retention awards. Executives The CEO and Group Executives are collectively referenced as ‘Executives’. Fixed Remuneration (FR) Consists of cash and non-cash remuneration, including any salary sacrifice items, paid regularly with no performance conditions (base remuneration) plus employer contributions to superannuation. Group Commonwealth Bank of Australia and its subsidiaries. Group Executive (GE) Key Management Personnel who are also members of the Group’s Executive Committee (excludes the CEO). Group Leadership Reward Plan (GLRP) Key Management Personnel (KMP) Long-Term Variable Remuneration (LTVR) The Group’s long-term variable remuneration plan for Executives. 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 variable remuneration arrangement which grants instruments 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 LTVR plan for Executives is the GLRP. Non-Executive Director Key Management Personnel who are not Executives. Realised Remuneration The dollar value of remuneration actually received by Executives during the financial year. This is the sum of FR, plus the cash portion of the current year STVR plus any deferred STVR awards, LTVR awards or sign-on awards that vested during the financial year. Reward Rights Rights to ordinary shares in CBA granted under the GLRP and subject to performance hurdles. Short-Term Variable Remuneration (STVR) Variable remuneration paid subject to the achievement of predetermined performance hurdles over one financial year. Total Shareholder Return (TSR) TSR measures a company’s share price movement, dividend yield and any return of capital over a specific period. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 82 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 2017 $’000 87 2,218 4,029 765 7,099 28,556 (1) An additional amount of $2,327,788 million was paid to PwC for non-audit services provided to entities not consolidated into the Financial Statements. Auditor’s Independence Declaration We have obtained an independence declaration from our external auditor as presented on the following page. Auditor Independence The Bank has in place an Independent Auditor Services Policy, details of which are set out in the Corporate Governance Statement that can be viewed at www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance to assist in ensuring the independence of the Group’s external auditor. 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. 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 require Audit Committee pre-approval for all such engagements; and • The relative quantum of fees paid for non-audit services compared to the quantum for audit and audit related services. The above Directors’ statements are in accordance with the advice received from the Audit Committee. Incorporation of Additional Material This Report incorporates the Our business section (pages 2 to 24) including the Chairman and CEO statement, Performance overview (pages 25 to 38), Corporate governance (pages 49 to 58) and Shareholding information (pages 202 to 206) sections of this Annual Report. Catherine Livingstone AO Chairman 8 August 2017 Ian Narev Managing Director and Chief Executive Officer 8 August 2017 Auditor’s independence declaration 83 As lead auditor for the audit of Commonwealth Bank of Australia for the year ended 30 June 2017, 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 8 August 2017 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345784 Financial report Financial statements 85 85 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 86 87 88 89 91 93 104 106 109 112 113 113 113 114 114 118 119 122 124 126 128 128 129 129 131 132 133 134 137 139 140 143 145 145 146 148 152 166 168 171 174 179 180 181 182 188 189 190 192 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 86 86 Financial statements Income Statements For the year ended 30 June 2017 Interest income Interest expense Net interest income Other banking income Net banking operating income Funds management income Investment revenue Claims, policyholder liability and commission expense Net funds management operating income Premiums from insurance contracts Investment revenue Claims, policyholder liability and commission expense from insurance contracts Net insurance operating income Total net operating income before impairment and operating expenses Loan impairment expense Operating expenses Net profit before income tax Corporate income tax expense Policyholder tax expense Net profit after income tax Non-controlling interests Net profit attributable to Equity holders of the Bank Note 2 2 2 2 2 2,13 2 2 4 4 2017 $M 33,293 (15,693) 17,600 5,626 23,226 2,343 514 (806) 2,051 2,949 224 (2,329) 844 2016 $M 33,817 (16,882) 16,935 4,576 21,511 2,315 283 (537) 2,061 2,921 467 (2,382) 1,006 Group (1) 2015 $M 34,145 (18,322) 15,823 4,828 20,651 2,396 618 (1,011) 2,003 2,797 543 (2,326) 1,014 2017 $M 33,534 (17,764) 15,770 6,579 22,349 Bank 2016 $M 34,660 (19,545) 15,115 6,035 21,150 - - - - - - - - - - - - - - - - 26,121 24,578 23,668 22,349 21,150 (1,095) (11,082) 13,944 (3,960) (32) 9,952 (24) (1,256) (10,473) 12,849 (3,505) (101) 9,243 (20) (988) (10,078) 12,602 (3,429) (99) 9,074 (21) 9,928 9,223 9,053 (1,040) (9,184) 12,125 (1,153) (8,538) 11,459 (3,146) (2,820) - 8,979 - 8,979 - 8,639 - 8,639 The above Income Statements should be read in conjunction with the accompanying notes. Earnings Per Share for profit attributable to equity holders of the parent entity during the year: Earnings per share: Basic Fully diluted 2017 2016 Note Cents per share Group (1) 2015 6 6 577. 6 559. 1 542. 3 529. 2 553. 1 539. 1 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Financial statements 87 87 Statements of Comprehensive Income For the year ended 30 June 2017 Net profit after income tax for the financial year (1) Other comprehensive income/(expense): Items that may be reclassified subsequently to profit/(loss): Foreign currency translation reserve net of tax Gains and (losses) on cash flow hedging instruments net of tax Gains and (losses) on available-for-sale investments net of tax Total of items that may be reclassified Items that will not be reclassified to profit/(loss): Actuarial gains from defined benefit superannuation plans net of tax Losses on liabilities at fair value due to changes in own credit risk net of tax Revaluation of properties net of tax Total of items that will not be reclassified Other comprehensive income/(expense) net of income tax Total comprehensive income for the financial year Total comprehensive income for the financial year is attributable to: Equity holders of the Bank Non-controlling interests Total comprehensive income net of income tax 2017 $M 9,952 (282) (580) (52) (914) 175 (3) 23 195 (719) 9,233 9,209 24 9,233 2016 $M 9,243 383 210 (316) 277 10 (1) 1 10 287 9,530 9,510 20 9,530 Group 2015 $M 9,074 398 39 (45) 392 311 (3) 15 323 715 2017 $M 8,979 (11) (666) 35 (642) 175 (3) 19 191 (451) Bank 2016 $M 8,639 53 202 (331) (76) 10 (1) 1 10 (66) 9,789 8,528 8,573 9,768 21 9,789 8,528 - 8,528 8,573 - 8,573 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. The above Statements of Comprehensive Income should be read in conjunction with the accompanying notes. Dividends per share attributable to shareholders of the Bank: Ordinary shares Trust preferred securities 2017 2016 Note Cents per share Group 2015 5 429 - 420 7,994 420 7,387 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345788 88 Financial statements Balance Sheets As at 30 June 2017 Assets Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables Bank acceptances of customers Shares in and loans to controlled entities Property, plant and equipment Investment in associates and joint ventures Intangible assets Deferred tax assets (1) Other assets (1) Total assets Liabilities Deposits and other public borrowings Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative liabilities Bank acceptances Due to controlled entities Current tax liabilities Deferred tax liabilities Other provisions Insurance policy liabilities Debt issues Managed funds units on issue Bills payable and other liabilities (1) Loan capital Total liabilities Net assets Shareholders' Equity Share capital: Ordinary share capital Other equity instruments Reserves Retained profits (1) Shareholders' Equity attributable to Equity holders of the Bank Non-controlling interests Total Shareholders' Equity Note 2017 $M Group 2016 $M 23,372 11,591 34,067 13,547 1,480 46,567 80,898 695,398 1,431 - 3,940 2,776 10,384 389 7,161 2017 $M 42,814 8,678 31,127 - 796 32,094 79,019 647,503 463 101,337 1,494 1,241 4,449 1,380 6,457 Bank 2016 $M 21,582 10,182 32,985 - 1,187 46,525 76,361 617,919 1,413 145,953 1,503 1,231 4,778 793 5,997 45,850 10,037 32,704 13,669 1,111 31,724 83,535 731,762 463 - 3,873 2,778 10,024 962 7,882 976,374 933,001 958,852 968,409 626,655 588,045 571,353 536,086 28,432 10,392 30,330 463 - 1,450 332 1,780 12,018 167,571 2,577 11,932 893,932 18,726 912,658 63,716 34,971 - 1,869 26,330 63,170 546 63,716 28,771 10,292 39,921 1,431 - 1,022 340 1,656 12,636 161,284 1,606 9,889 856,893 15,544 872,437 60,564 33,845 - 2,734 23,435 60,014 550 60,564 28,038 8,989 32,173 463 91,222 1,278 - 1,372 - 28,328 7,441 43,884 1,413 130,046 892 - 1,249 - 134,966 134,214 - 10,909 880,763 17,959 898,722 60,130 35,262 - 2,556 22,312 60,130 - 60,130 - 11,642 895,195 15,138 910,333 58,076 34,125 406 3,115 20,430 58,076 - 58,076 7 8 9 10 11 12 38 14 36 15 4 16 17 18 10 4 19 27 20 21 22 23 23 23 23 36 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. The above Balance Sheets should be read in conjunction with the accompanying notes. Financial statements 89 89 Statements of Changes in Equity For the year ended 30 June 2017 Group Shareholders' Equity attributable Ordinary share Other equity to Equity Non- Total Retained holders controlling Shareholders' capital instruments Reserves profits of the Bank interests Equity $M 27,619 $M 939 As at 30 June 2015 (1) Net profit after income tax (1) Net other comprehensive income Total comprehensive income for the financial year Transactions with Equity holders in their capacity as Equity holders: Dividends paid on ordinary shares Dividends paid on other equity instruments Dividend reinvestment plan (net of issue costs) Issue of shares (net of issue costs) Share-based payments Purchase of treasury shares Sale and vesting of treasury shares Redemptions Other changes As at 30 June 2016 (1) Net profit after income tax Net other comprehensive income Total comprehensive income for the financial year Transactions with Equity holders in their capacity as Equity holders: Dividends paid on ordinary shares Dividends paid on other equity instruments Dividend reinvestment plan (net of issue costs) Issue of shares (net of issue costs) Share-based payments Purchase of treasury shares Sale and vesting of treasury shares Redemptions Other changes - - - - - 1,209 5,022 - (108) 103 - - 33,845 - - - - - 1,143 (6) - (92) 81 - - $M 2,345 - 278 278 - - - - 10 - - - 101 2,734 - (891) (891) - - - - 32 - - - (6) $M 21,340 9,223 9 9,232 $M 52,243 9,223 287 9,510 (6,994) (6,994) (50) (50) - - - - - - (93) 23,435 9,928 172 10,100 1,209 5,022 10 (108) 103 (939) 8 60,014 9,928 (719) 9,209 (7,237) (7,237) - - - - - - - 32 - 1,143 (6) 32 (92) 81 - 26 1,869 26,330 63,170 $M 562 20 - 20 - - - - - - - - (32) 550 24 - 24 - - - - - - - - (28) 546 $M 52,805 9,243 287 9,530 (6,994) (50) 1,209 5,022 10 (108) 103 (939) (24) 60,564 9,952 (719) 9,233 (7,237) - 1,143 (6) 32 (92) 81 - (2) 63,716 - - - - - - - - - - (939) - - - - - - - - - - - - - - - As at 30 June 2017 34,971 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 90 90 Financial statements Statements of Changes in Equity (continued) For the year ended 30 June 2017 Ordinary share Other equity Bank Shareholders' Equity attributable to Equity Retained holders capital instruments Reserves profits of the Bank $M 27,894 $M 1,895 - - - - 1,209 5,022 - - - 34,125 - - - - 1,143 (6) - - - 35,262 - - - - - - - (1,489) - 406 - - - - - - - (406) - - $M 3,195 - (75) (75) - - - 10 - (15) 3,115 - (623) (623) - - - 32 - 32 $M 18,763 8,639 9 8,648 (6,994) - - - - 13 20,430 8,979 172 9,151 (7,237) - - - - (32) $M 51,747 8,639 (66) 8,573 (6,994) 1,209 5,022 10 (1,489) (2) 58,076 8,979 (451) 8,528 (7,237) 1,143 (6) 32 (406) - 2,556 22,312 60,130 As at 30 June 2015 Net profit after income tax Net other comprehensive income Total comprehensive income for the financial year Transactions with Equity holders in their capacity as Equity holders: Dividends paid on ordinary shares Dividend reinvestment plan (net of issue costs) Issue of shares (net of issue costs) Share-based payments Redemptions Other changes As at 30 June 2016 Net profit after income tax Net other comprehensive income Total comprehensive income for the financial year Transactions with Equity holders in their capacity as Equity holders: Dividends paid on ordinary shares Dividend reinvestment plan (net of issue costs) Issue of shares (net of issue costs) Share-based payments Redemptions Other changes As at 30 June 2017 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. Financial statements 91 91 Note 2017 $M 2016 $M 33,536 (15,006) 5,556 (9,763) (3,976) 4,220 34,047 (16,285) 5,688 (9,981) (3,071) (2,642) Group 2015 $M 34,112 (17,442) 5,439 (8,740) (3,444) 1,457 2017 $M 33,807 (17,057) 3,959 (8,152) (3,163) 2,742 186 3,366 (3,854) 156 (362) 3,114 (3,301) 1,872 118 2,910 (3,307) 738 - - - 1,588 14,421 9,079 11,841 13,724 Bank 2016 $M 34,908 (18,935) 3,674 (7,961) (2,661) (3,367) - - - 246 5,904 (54,608) 49,392 (38,744) (50,233) 46,150 (52,825) (60,967) 53,569 (41,768) (53,883) 48,750 (31,708) (48,759) 46,541 (45,917) 1,100 803 (3,799) 1,121 238 (13,993) 4,574 (6,174) (13,381) 4,467 (6,323) 8,598 718 (5,511) (1,789) (2,020) (2,741) 3,152 (174) 39,821 666 (853) 802 (15,228) (807) 4,276 (108) 37,783 4,789 39 41,229 4,148 135 (13,640) (4,561) 3,015 (448) (4,658) 7,183 (31) (857) (29) 1 94 - 381 (602) (25) (495) (677) 110 78 - 405 (1,259) - (509) (2,032) 72 71 - 69 (578) (270) (550) (1,215) - - - - (152) 36,379 (157) 35,054 (804) (1,947) (14,907) (1,183) - - 1,200 5,500 50 (320) (15) (409) 6,006 4,257 (1,580) (11,367) (5,463) - 110 1,462 1,307 122 (426) - (450) 2,125 Statements of Cash Flows (1) For the year ended 30 June 2017 Cash flows from operating activities Interest received Interest paid Other operating income received Expenses paid Income taxes paid Net inflows/(outflows) from assets at fair value through Income Statement (excluding life insurance) Net inflows/(outflows) from liabilities at fair value through Income Statement: Insurance: Investment income Premiums received (2) Policy payments and commission expense (2) Other liabilities at fair value through Income Statement Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities arising from cash flow movements Movement in available-for-sale investments: Purchases Proceeds Net increase in loans, bills discounted and other receivables Net decrease/(increase) in receivables due from other financial institutions and regulatory authorities Net (increase)/decrease in securities purchased under agreements to resell Insurance business: Purchase of insurance assets at fair value through Income Statement Proceeds from sale/maturity of insurance assets at fair value through Income Statement Net (increase)/decrease in other assets Net increase in deposits and other public borrowings Net increase/(decrease) in payables due to other financial institutions Net (increase)/decrease in securities sold under agreements to repurchase Net increase/(decrease) in other liabilities Changes in operating assets and liabilities arising from cash flow movements Net cash (used in)/provided by operating activities 39 (a) Cash flows from investing activities Payments for acquisition of controlled entities Net proceeds from disposal of entities and businesses (net of cash disposals) Dividends received Net amounts received from controlled entities (3) Proceeds from sale of property, plant and equipment 39 (d) Purchases of property, plant and equipment Payments for acquisitions of investments in associates/joint ventures Net purchase of intangible assets Net cash (used in)/provided by investing activities 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) Represents gross premiums and policy payments before splitting between policyholders and shareholders. (3) Amounts received from and paid to controlled entities are presented in line with how they are managed and settled. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 92 92 Financial statements Statements of Cash Flows (1) (continued) For the year ended 30 June 2017 Note 2017 $M 2016 $M Cash flows from financing activities Dividends paid (excluding Dividend Reinvestment Plan) Redemption of other equity instruments (net of costs) Proceeds from issuance of debt securities Redemption of issued debt securities Purchase of treasury shares Sale of treasury shares Issue of loan capital Redemption of loan capital Proceeds from issuance of shares (net of issue costs) Other Net cash provided by/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Effect of foreign exchange rates on cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 39 (b) (6,084) - 94,560 (81,758) (92) 34 3,757 - (6) 61 10,472 8,988 (318) 14,447 23,117 (5,827) (939) 98,958 (97,740) (108) 50 3,949 (1,678) 5,022 (67) 1,620 (4,973) 150 19,270 14,447 Group 2015 $M (6,200) - 68,655 (73,377) (790) 744 6,184 (2,971) - (120) (7,875) (1,907) 2,049 19,128 19,270 2017 $M (6,084) (406) 77,938 (71,345) - - 3,379 3 (6) 30 3,509 8,332 (292) 12,909 20,949 Bank 2016 $M (5,777) (1,483) 88,920 (90,149) - - 3,943 (2,645) 5,022 179 (1,990) (5,328) 72 18,165 12,909 (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. Financial statements 93 93 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 2017, were approved and authorised the Board of Directors on 8 August 2017. 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 accordance with Australian Accounting Standards (the 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. During the year, the Group changed its accounting policy in relation to the recognition of Global Asset Management long- term incentives provided to certain employees in Wealth Management. The new accounting policy expenses the long- term incentives when granted rather than over the vesting period per the previous accounting policy. The new policy more closely aligns the economic substance of the arrangements. The change has been applied retrospectively and results in a reduction in net profit after tax of $4 million (30 June 2015: $10 million), a reduction of $192 million (30 June 2015: $188 million), a decrease of $77 million in total assets (30 June 2015: $43 million increase) and an increase in total liabilities of $115 million (30 June 2015: $231 million). the accounting with retained earnings in (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. the Group are Transactions between subsidiaries 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. (d) Segment Reporting Business Combinations and management Operating segments are reported based on the Group’s structures. Senior organisational 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 other than the changes outlined below. 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 Financial Statements. Other the presentation of segment information, as disclosed in Note 26, the restatements are not considered to have a material impact on the Financial Statements. than changes to 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 Associates and joint ventures are entities over which the Group has significant influence or joint control, but not control. In they are equity accounted. They are initially recorded at cost and adjusted for the consolidated financial report, Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 94 94 Notes to the financial statements Note 1 Accounting Policies (continued) 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. 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. (g) Foreign Currency Translation Functional and Presentation Currency The consolidated are presented in Australian dollars, which is the Bank’s functional and presentation currency. The foreign operations functional currency of (including subsidiaries, branches, associates, and joint ventures) will vary based on the currency of the main economy to which it is exposed. the Group’s 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 the Income Income and expenses are only offset relevant accounting if permitted under Statement standard. Examples of offsetting include gains and losses from foreign exchange exposures and trading operations. the in 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. (i) Fair Value Measurement 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 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 Notes to the financial statements 95 95 Note 1 Accounting Policies (continued) 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. (l) Other Income 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). (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 initially Interest expense 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 performance conditions, are into account when estimating the fair value. Non–market vesting conditions, such as service conditions, are taken into account by adjusting the number of the equity instruments included in the measurement of the expense. taken 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 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 offset 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 legislation allows Australian resident Tax consolidation 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’. (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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report621345796 96 Notes to the financial statements Note 1 Accounting Policies (continued) 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:  fair value through Income the financial assets at Statement;    derivative assets; 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. 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. Derivative Financial Instruments 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, commodity 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. (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 Notes to the financial statements 97 97 Note 1 Accounting Policies (continued) included in the Income Statement when the foreign subsidiary or branch is disposed of. measured at fair value through Income Statement in line with the accounting policy for assets held for trading. (iv) Embedded Derivatives 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. 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. 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 include Loans, bills discounted and other 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 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. loan impairment. The Group has Loans and other receivables are presented net of provisions individually and for Individually assessed collectively assessed provisions. that are provisions are made against individually significant, or which have been individually assessed as impaired. financial assets Individual provisions for impairment are recognised to reduce the carrying amount of non-performing facilities to the present Individually value of 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. loans and other receivables All 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 98 98 Notes to the financial statements Note 1 Accounting Policies (continued) 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. 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 the repurchase price repurchase agreement and charged to interest expense in the Income Statement. is accrued over life of the 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 ‘Provisions, Contingent is calculated under AASB 137 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. Income Operating Statement on a straight line basis over the lease term. As a lessee, rental expense is recognised on a straight line basis over the lease term. lease revenue is recognised the in (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 The Group measures its property assets (land and buildings) at fair value, based on annual independent market valuations. 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, including direct and incremental acquisition costs less required. accumulated depreciation and 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 Aircraft Assets under lease    Ships Rail 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. Notes to the financial statements 99 99 Note 1 Accounting Policies (continued) Computer Software Costs internal and external costs directly in Certain 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 five years. The Core Banking amortised over Modernisation software project is amortised over ten years. incurred two to Liabilities at Amortised Cost (i) Deposits From Customers Deposits from customers include certificates of deposit, term deposits, savings deposits, other demand deposits and debentures. Subsequent they are measured at amortised cost. Interest and yield related fees are recognised on an effective interest basis. initial recognition, to Software maintenance is expensed as incurred. (ii) Payables Due to Other Financial Institutions Core Deposits 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. The core deposits were fully amortised in the year ended 30 June 2016. 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 accumulated at 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 less Liabilities (y) Financial Liabilities The Group classifies its financial liabilities in the following categories:    liabilities at fair value through Income Statement; derivative liabilities (refer to Note 1(t)). liabilities at amortised cost; and 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 Group’s own credit risk are comprehensive fair value movement recognised in other operating income. Interest incurred is recorded within net interest income using the effective interest method. recognised remaining income, with the 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. (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 the to 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 directly attributable thereafter at 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 is recognised to reflect the offsetting claim against the drawer of the bill. liability. An asset of equal value 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 amount less cumulative amortisation recognised in the Income Statement, and the best estimate of expenditure required to settle any financial obligation arising initially recognised Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 100 100 Notes to the financial statements Note 1 Accounting Policies (continued) 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. 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 (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 to a Other employee entitlements comprises registered health fund for subsidies with respect to retired and current employees, and employee incentives under employee share plans and bonus schemes. liabilities 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. Defined Benefit Superannuation Plans Asset Revaluation Reserve 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. 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. Notes to the financial statements 101 101 Note 1 Accounting Policies (continued) 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. the extent that they are deemed recoverable from the expected future profits. (ff) Investment Assets 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. General insurance contracts are insurance contracts that are not life insurance contracts. Life investment contract liabilities are measured at fair value. The balance is no less than the contract surrender value. 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 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 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 102 102 Notes to the financial statements Note 1 Accounting Policies (continued) recognition by the Group. An imputed borrowing is recognised by the Bank inclusive of the derivative and any related fees. Changes in these estimates could have a direct impact on the level of provision determined. (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. 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. Credit losses arise primarily from loans, but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments. 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. (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. (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:   There may be a commencement of a new paradigm requiring a change in long-term assumptions. Recent results may be a statistical aberration; or 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. Notes to the financial statements 103 103 Note 1 Accounting Policies (continued) 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 reliable technique has been demonstrated 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. 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 that are uncertain. For such respect 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. Future Accounting Developments AASB 9 ‘Financial Instruments’ introduces an ‘expected credit loss’ model, revised classification and measurement requirements and modified hedge accounting rules. AASB 9 is not mandatorily effective until 1 July 2018 and the Group does not intend to early adopt the standard. Impairment AASB 9 expected credit loss model replaces the existing incurred loss model requirement to recognise impairment when there is objective evidence of default. It requires entities to recognise expected credit losses based on unbiased forward looking information. The key changes under AASB 9 are as follows: AASB 9 requires more timely recognition of expected credit losses using a three stage approach. For financial assets where there has been no significant increase in credit risk to 12 months since origination, a provision equivalent expected credit losses is recognised. For financial assets where there has been a significant increase in credit risk or where the asset is credit impaired, a provision equivalent to full lifetime expected loss is required. Expected credit losses are probability weighted amounts determined by evaluating a range of possible outcomes and taking into account the time value of money, past events, current conditions and future economic conditions. forecasts of Classification and measurement AASB 9 replaces the classification and measurement requirements in AASB 139 with the approach that classifies financial assets based on a business model for managing financial assets and whether the contractual cash flows represent solely payments of principal and interest. Financial assets can be classified as financial assets at amortised cost, financial assets at fair value through profit or loss or financial assets at through OCI. Non-traded equity instruments can be measured at fair value through OCI. fair value Hedging AASB 9 will change hedge accounting by introducing more principal based approach to hedge effectiveness testing and by increasing eligibility of both hedge instruments and hedged items. Adoption of the new hedge accounting model is optional and current hedge accounting under AASB 139 can continue to apply until the IASB completes its accounting for dynamic risk management project. The Group will apply the new hedge accounting requirements from 1 July 2018. A Group-wide program has been in progress to implement AASB 9 requirements. It is not practical to disclose a financial impact until the implementation program is further advanced and reliable estimates of the impact are available. ‘Revenue AASB 15 from Contracts with Customers’ 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 been eliminated. Lessor accounting largely unchanged. AASB 16 is not mandatory until 1 July 2019 for the Group. remains for introduces for accounting ‘Insurance Contracts’ three new AASB 17 measurement approaches insurance contracts. These include the Building Block Approach for long term contracts; the Premium Allocation Approach for short term contracts and a Variable Fee Approach for direct participating contracts. In addition, the level of contract aggregration is likely to be lower than under current practices. AASB 17 is not mandatory until 1 July 2021 for the Group. 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 104 104 Notes to the financial statements Note 2 Profit Profit before income tax has been determined as follows: Interest Income Loans and bills discounted Other financial institutions Cash and liquid assets Assets at fair value through Income Statement Available-for-sale investments Controlled entities Total interest income (1) Interest Expense Deposits Other financial institutions Liabilities at fair value through Income Statement Debt issues Loan capital Controlled entities Total interest expense (2) Net interest income Other Operating Income Lending fees Commissions Trading income Net gain/(loss) on non-trading financial instruments (3) (4) Net gain/(loss) on sale of property, plant and equipment Net hedging ineffectiveness Dividends - Controlled entities Dividends - Other Net funds management operating income (5) Insurance contracts income Share of profit from associates and joint ventures net of impairment Other (6) Total other operating income Total net operating income before impairment and operating expenses Impairment Expense Loan impairment expense Total impairment expense (Note 13) 2017 $M 2016 $M Group 2015 $M 2017 $M Bank 2016 $M 30,723 30,966 31,476 27,214 27,576 152 321 490 1,607 - 33,293 137 291 576 1,847 - 33,817 73 268 518 1,810 - 34,145 10,453 11,685 12,936 300 102 4,159 679 - 15,693 17,600 1,078 2,482 1,149 433 6 62 - 10 2,051 844 292 114 8,521 277 211 4,125 584 - 16,882 16,935 1,010 2,215 1,087 (27) (21) (72) - 12 2,061 1,006 289 83 7,643 220 222 4,372 572 - 18,322 15,823 1,005 2,209 1,039 251 (8) (95) - 16 2,003 1,014 285 126 7,845 133 291 467 1,510 3,919 33,534 9,039 274 58 3,326 650 4,417 17,764 15,770 1,002 2,092 1,043 413 (3) 30 122 246 553 1,740 4,423 34,660 10,176 246 110 3,361 563 5,089 19,545 15,115 927 1,838 975 (90) (15) (35) 1,105 1,407 95 - - (5) 807 6,579 55 - - 21 952 6,035 26,121 24,578 23,668 22,349 21,150 1,095 1,095 1,256 1,256 988 988 1,040 1,040 1,153 1,153 (1) Total interest income for financial assets that are not at fair value through profit or loss is $32,652 million (2016: $33,002 million, 2015: $33,208 million) for the Group and $32,917 million (2016: $33,868 million) for the Bank. (2) Total interest expense for financial liabilities that are not at fair value through profit or loss is $15,591 million (2016: $16,713 million, 2015: $18,100 million) for the Group and $17,706 million (2016: $19,435 million) for the Bank. Includes non-trading derivatives that are held for risk management purposes. (3) (4) The current year includes a $397 million gain on sale of the Group’s remaining investment in Visa Inc. (5) (6) Includes net profit of $25 million from First Gas Limited (2016: $nil; 2015 $nil). Includes depreciation of $88 million (2016: $107 million, 2015: $80 million) and impairment of $6 million (2016: $69 million, 2015: $nil) in relation to assets held for lease by the Group. Includes depreciation of $13 million (2016: $26 million) and impairment of $2 million (2016: $nil) in relation to assets held for lease by the Bank. Notes to the financial statements 105 105 Note 2 Profit (continued) Staff Expenses Salaries and related on-costs (1) Share-based compensation Superannuation Total staff expenses Occupancy and Equipment Expenses Operating lease rentals Depreciation of property, plant and equipment Other occupancy expenses Total occupancy and equipment expenses Information Technology Services Application maintenance and development Data processing Desktop Communications Amortisation of software assets (2) Software write-offs IT equipment depreciation 2017 $M 5,652 122 494 6,268 661 288 190 1,139 512 210 188 193 779 6 53 2016 $M 5,657 102 410 6,169 650 266 218 Group 2015 $M 5,331 96 399 5,826 620 253 213 1,134 1,086 511 197 143 203 379 1 51 430 183 110 190 308 11 60 2017 $M 4,112 118 388 4,618 572 237 155 964 455 209 173 173 724 6 51 Bank 2016 $M 4,128 99 316 4,543 564 221 171 956 450 197 132 180 333 - 47 Total information technology services 1,941 1,485 1,292 1,791 1,339 Other Expenses Postage and stationery Transaction processing and market data Fees and commissions: Professional fees Other Advertising, marketing and loyalty Amortisation of intangible assets (excluding software and merger related amortisation) Non-lending losses Other Total other expenses Total expenses Investment and Restructuring Merger related amortisation (3) Total investment and restructuring Total operating expenses Profit before income tax Net hedging ineffectiveness comprises: Gain/(loss) on fair value hedges: Hedging instruments Hedged items Cash flow and net investment hedge ineffectiveness Net hedging ineffectiveness 187 186 404 76 437 11 125 304 1,730 11,078 4 4 11,082 13,944 192 179 247 93 491 14 103 327 1,646 10,434 39 39 10,473 12,849 195 153 390 97 522 16 118 308 1,799 10,003 75 75 10,078 12,602 841 (799) 20 62 (709) 642 (5) (72) (568) 493 (20) (95) 168 130 367 346 380 - 115 301 1,807 9,180 4 4 9,184 12,125 1,862 (1,829) (3) 30 171 129 209 353 392 - 74 333 1,661 8,499 39 39 8,538 11,459 (1,409) 1,369 5 (35) (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. (2) The current year includes a $393 million one-off expense for acceleration of amortisation on certain software assets. (3) Merger related amortisation relates to Bankwest core deposits and customer lists. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 106 106 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 (2016: 25 basis points), while rates in New Zealand decreased 50 basis points (2016: 100 basis points) during the year which is reflected in Overseas. Interest earning assets (1) Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Assets at fair value through Income Statement - Trading and Other Australia Overseas Available-for-sale investments Australia Overseas Loans, bills discounted and other receivables (2) Australia (3) Overseas Total interest earning assets and interest income Average Average Average Average Average 2017 2016 Group 2015 Average Balance Interest Rate Balance Interest Rate Balance Interest Rate $M $M % $M $M % $M $M % 17,734 19,626 2,266 8,850 21,731 3,895 66,615 13,870 271 50 20 132 422 68 1,458 149 581,093 99,061 26,266 4,457 834,741 33,293 1. 5 0. 3 0. 9 1. 5 1. 9 1. 7 2. 2 1. 1 4. 5 4. 5 4. 0 11,536 20,183 3,387 8,986 19,354 3,090 66,543 12,770 186 105 26 111 500 76 1,662 185 1. 6 0. 5 0. 8 1. 2 2. 6 2. 5 2. 5 1. 4 8,951 21,500 3,418 7,262 17,367 4,618 58,338 10,094 174 94 20 53 396 122 1,656 154 554,206 90,541 26,620 4,346 4. 8 4. 8 522,430 82,186 27,117 4,359 790,596 33,817 4. 3 736,164 34,145 1. 9 0. 4 0. 6 0. 7 2. 3 2. 6 2. 8 1. 5 5. 0 5. 3 4. 6 (1) Comparative information has been restated to conform to presentation in the current year. (2) Loans, bills discounted and other receivables includes bank acceptances. (3) Net of average mortgage offset balances that were reclassified as Non-interest earning assets. Gross Australian loan balance is $616,418 million (2016: $581,067 million, 2015: $542,138 million). Non-interest earning assets Assets at fair value through Income Statement - Insurance Australia Overseas Property, plant and equipment Australia Overseas Other assets Australia (1) (2) Overseas (1) Provisions for impairment Australia Overseas Total non-interest earning assets Total assets Percentage of total assets applicable to overseas operations (%) (1) Comparative information has been restated to conform to presentation in the current year. (2) Includes average mortgage offset balances. Group 2017 2016 2015 Average Average Average Balance Balance Balance $M $M $M 12,105 2,477 3,743 289 108,987 13,774 (3,303) (424) 137,648 972,389 16. 6 11,819 2,502 2,827 266 97,068 14,889 (3,272) (375) 125,724 916,320 16. 7 12,531 2,574 2,531 249 81,563 11,623 (3,524) (288) 107,259 843,423 16. 6 Notes to the financial statements 107 107 Note 3 Average Balances and Related Interest (continued) Interest bearing liabilities (1) Time deposits Australia (2) Overseas Savings deposits Australia (2) Overseas Other demand deposits Australia Overseas Payables due to other financial institutions Australia Overseas Liabilities at fair value through Income Statement Australia Overseas Debt issues (3) Australia Overseas Loan capital Australia Overseas Average Average Average Average Average 2017 2016 Group 2015 Average Balance Interest Rate Balance Interest Rate Balance Interest Rate $M $M % $M $M % $M $M % 207,501 48,461 144,631 16,136 106,267 8,154 11,098 19,235 7,049 1,467 136,614 32,307 11,239 5,453 5,579 1,555 2,005 172 1,041 101 158 142 63 39 3,322 837 447 232 2. 7 3. 2 1. 4 1. 1 1. 0 1. 2 1. 4 0. 7 0. 9 2. 7 2. 4 2. 6 4. 0 4. 3 2. 1 196,883 41,541 156,648 16,688 94,904 7,288 14,367 22,664 4,516 2,349 136,453 25,564 9,442 4,447 5,847 1,417 2,844 293 1,156 128 154 123 95 116 3,469 656 388 196 3. 0 3. 4 1. 8 1. 8 1. 2 1. 8 1. 1 0. 5 2. 1 4. 9 2. 5 2. 6 4. 1 4. 4 207,120 38,706 141,224 14,821 81,534 5,916 11,661 20,030 4,398 2,696 132,766 21,023 6,715 4,766 7,063 1,097 3,076 439 1,123 138 139 81 108 114 3,823 549 301 271 733,754 16,882 2. 3 693,376 18,322 3. 4 2. 8 2. 2 3. 0 1. 4 2. 3 1. 2 0. 4 2. 5 4. 2 2. 9 2. 6 4. 5 5. 7 2. 6 Total interest bearing liabilities and interest expense 755,612 15,693 (1) Certain comparative information has been restated to conform to presentation in the current year. (2) Net of average mortgage offset balances that were reclassified to Non-interest bearing liabilities. (3) Debt issues includes bank acceptances. Non-interest bearing liabilities Deposits not bearing interest Australia (1) (2) Overseas Insurance policy liabilities Australia Overseas Other liabilities Australia Overseas (1) Total non-interest bearing liabilities Total liabilities Shareholders' Equity (1) Total liabilities and Shareholders' Equity Total liabilities applicable to overseas operations (%) (1) Comparative information has been restated to conform to presentation in the current year. (2) Includes average mortgage offset balances. 2017 Average 2016 Average Group 2015 Average Balance Balance Balance $M $M $M 72,303 3,671 11,190 1,368 53,418 12,796 154,746 910,358 62,031 972,389 16. 4 47,182 3,035 11,482 1,406 48,604 13,178 124,887 858,641 57,679 916,320 16. 1 30,956 2,589 11,811 1,471 40,077 12,160 99,064 792,440 50,983 843,423 15. 7 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 108 108 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). Changes in net interest income: Volume and rate analysis (1) Interest Earning Assets Cash and liquid assets Australia Overseas Receivables due from other financial institutions Australia Overseas Assets at fair value through Income Statement - Trading and Other Australia Overseas Available-for-sale investments Australia Overseas Loans, bills discounted and other receivables Australia Overseas Changes in interest income Interest Bearing Liabilities and Loan Capital Time deposits Australia Overseas Savings deposits Australia Overseas Other demand deposits Australia Overseas Payables due to other financial institutions Australia Overseas Liabilities at fair value through Income Statement Australia Overseas Debt issues Australia Overseas Loan capital Australia Overseas Changes in interest expense Changes in net interest income June 2017 vs June 2016 June 2016 vs June 2015 Volume $M Rate $M Total Volume $M $M Rate $M Total $M 97 (2) (9) (2) 54 17 2 14 (12) (53) 3 23 (132) (25) (206) (50) 1,253 396 1,824 (1,607) (285) (2,348) 300 229 (192) (8) 125 13 (41) (22) 38 (34) 4 174 73 44 478 938 (568) (91) (647) (113) (240) (40) 45 41 (70) (43) (151) 7 (14) (8) (1,667) (273) 85 (55) (6) 21 (78) (8) (204) (36) (354) 111 (524) (268) 138 (839) (121) (115) (27) 4 19 (32) (77) (147) 181 59 36 (1,189) 665 46 (6) - 17 48 (39) 219 40 1,588 422 2,426 (327) 89 308 44 174 28 31 12 3 (16) 100 118 117 (16) 998 1,168 (34) 17 6 41 56 (7) (213) (9) (2,085) (435) (2,754) (889) 231 (540) (190) (141) (38) (16) 30 (16) 18 (454) (11) (30) (59) (2,438) (56) 12 11 6 58 104 (46) 6 31 (497) (13) (328) (1,216) 320 (232) (146) 33 (10) 15 42 (13) 2 (354) 107 87 (75) (1,440) 1,112 (1) Comparative information has been restated to conform to presentation in the current year. Notes to the financial statements 109 109 Note 4 Income Tax The income tax expense for the year is determined from the profit before income tax as follows: Profit before Income Tax Prima facie income tax at 30% Effect of amounts which are non-deductible/(assessable) in calculating taxable income: Taxation offsets and other dividend adjustments Tax adjustment referable to policyholder income Tax losses not previously brought to account Offshore tax rate differential Offshore banking unit Effect of changes in tax rates Income tax (over) provided in previous years Other Total income tax expense Corporate tax expense Policyholder tax expense Total income tax expense Effective tax rate (%) (2) 2017 $M 13,944 4,183 2016 $M 12,849 3,855 (11) 22 (56) (76) (42) 4 (66) 34 3,992 3,960 32 3,992 28. 5 (4) 71 (5) (79) (33) 1 (177) (23) 3,606 3,505 101 3,606 27. 5 Group (1) 2015 $M 12,602 3,781 (6) 69 (9) (116) (39) 2 (163) 9 2017 $M 12,125 3,638 (369) - (56) (15) (40) (1) (53) 42 3,528 3,146 3,429 99 3,528 27. 4 3,146 - 3,146 26. 0 Bank 2016 $M 11,459 3,438 (426) - (5) (32) (27) 1 (171) 42 2,820 2,820 - 2,820 24. 6 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. (2) 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. Income tax expense attributable to profit from ordinary activities Australia Current tax expense Deferred tax expense Total Australia Overseas Current tax expense Deferred tax expense/(benefit) Total overseas Income Tax Expense attributable to profit from ordinary activities 2017 $M 3,884 (336) 3,548 435 9 444 2016 $M 2,971 84 3,055 507 44 551 Group (1) 2015 $M 2,865 124 2,989 547 (8) 539 2017 $M 3,453 (341) 3,112 68 (34) 34 Bank 2016 $M 2,708 28 2,736 103 (19) 84 3,992 3,606 3,528 3,146 2,820 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 110 110 Notes to the financial statements Note 4 Income Tax (continued) Deferred tax asset balances comprise temporary differences attributable to: Amounts recognised in the Income Statement: Provision for employee benefits Provisions for impairment on loans, bills discounted and other receivables Other provisions not tax deductible until expense incurred Financial instruments Defined benefit superannuation plan Unearned Income Other 2017 $M 2016 $M Group (1) 2015 $M 2017 $M Bank 2016 $M 493 1,032 201 1 320 228 224 501 1,051 216 56 310 101 126 496 1,008 283 36 293 98 109 387 946 129 - 320 228 165 385 961 125 10 310 101 81 Total amount recognised in the Income Statement 2,499 2,361 2,323 2,175 1,973 Amounts recognised directly in Other Comprehensive Income: Cash flow hedge reserve Other reserves Total amount recognised directly in Other Comprehensive Income Total deferred tax assets (before set off) Set off to tax pursuant to set-off provisions in Note 1(q) Net deferred tax assets Deferred tax liability balances comprise temporary differences attributable to: Amounts recognised in the Income Statement: Lease financing Intangible assets Financial instruments Insurance Investments in associates Other Total amount recognised in the Income Statement Amounts recognised directly in Other Comprehensive Income: Revaluation of properties Foreign currency translation reserve Cash flow hedge reserve Defined benefit superannuation plan Available-for-sale investments reserve Total amount recognised directly in Other Comprehensive Income Total deferred tax liabilities (before set off) Set off to tax pursuant to set-off provisions in Note 1(q) Net deferred tax liabilities Deferred tax assets opening balance: Movement in temporary differences during the year: Provisions for employee benefits Provisions for impairment on loans, bills discounted and other receivables Other provisions not tax deductible until expense incurred Financial instruments Defined benefit superannuation plan Unearned Income Other Set off to tax pursuant to set-off provisions in Note 1(q) Deferred tax assets closing balance 123 12 135 2,634 (1,672) 962 161 16 177 2,538 (2,149) 389 155 6 161 2,484 (1,986) 498 13 17 30 2,205 (825) 1,380 9 11 20 1,993 (1,200) 793 235 8 179 485 122 246 282 149 196 510 95 233 341 123 235 425 78 97 1,275 1,465 1,299 76 8 70 445 130 729 2,004 (1,672) 332 389 (8) (19) (15) (97) 10 127 98 477 962 74 26 416 376 132 1,024 2,489 76 40 293 365 264 1,038 2,337 (2,149) (1,986) 340 498 5 43 (67) 36 17 3 17 (163) 389 351 629 16 (36) 123 87 28 10 (36) (323) 498 96 8 14 - - 25 143 76 - 37 445 124 682 825 (825) - 793 2 (15) 4 - 10 127 84 375 108 146 13 - - 49 316 74 - 329 376 105 884 1,200 (1,200) - 771 16 17 (109) 19 17 3 (5) 64 1,380 793 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Notes to the financial statements 111 111 Note 4 Income Tax (continued) Deferred tax liabilities opening balance: Movement in temporary differences during the year: Lease financing Defined benefit superannuation plan Intangible assets Financial instruments Insurance Investments in associates Other Set off to tax pursuant to set-off provisions in Note 1(q) Deferred tax liabilities closing balance 2017 $M 340 (47) 69 (141) (383) (25) 27 15 477 332 2016 $M 351 (59) 11 26 (62) 85 17 134 (163) 340 Group 2015 $M 366 (40) 136 78 167 19 16 (68) (323) 351 2017 $M - (12) 69 (138) (272) - - (22) 375 - Bank 2016 $M - (62) 11 28 (27) - - (14) 64 - 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: Deferred tax assets not taken to account Tax losses and other temporary differences on revenue account: Expire under current legislation Do not expire under current legislation Total Tax Consolidation 2017 $M 52 29 81 2016 $M 124 7 131 Group 2015 $M 83 - 83 2017 $M 47 - 47 Bank 2016 $M 117 - 117 The Bank has recognised a tax consolidation contribution to the wholly-owned tax consolidated entity of $97 million (2016: $99 million). The amount receivable by the Bank under the tax funding agreement was $302 million as at 30 June 2017 (2016: $213 million receivable). This balance is included in ‘Other assets’ in the Bank’s separate Balance Sheet. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 112 112 Notes to the financial statements Note 5 Dividends Ordinary Shares Interim ordinary dividend (fully franked) (2017: 199 cents; 2016: 198 cents; 2015: 198 cents) Interim ordinary dividend paid - cash component only Interim ordinary dividend paid - Dividend Reinvestment Plan Total dividend paid Other Equity Instruments Dividend paid Total dividend provided for, reserved or paid Other provision carried Dividend proposed and not recognised as a liability (fully franked) (2017: 230 cents; 2016: 222 cents; 2015: 222 cents) (1) Provision for dividends Opening balance Provision made during the year Provision used during the year Closing balance (Note 19) 2017 $M 2016 $M Group 2015 $M 2,871 558 3,429 - 3,429 100 3,979 90 7,237 (7,227) 100 2,829 552 3,381 56 3,437 90 3,808 82 6,994 (6,986) 90 2,636 574 3,210 52 3,262 82 3,613 73 6,744 (6,735) 82 2017 $M 2,871 558 3,429 - 3,429 100 3,979 90 7,237 (7,227) 100 Bank 2016 $M 2,829 552 3,381 - 3,381 90 3,808 82 6,994 (6,986) 90 (1) The 2017 final dividend will be satisfied by cash disbursements with the Dividend Reinvestment Plan (DRP) anticipated to be satisfied by the issue of shares of approximately $1.4 billion. The 2016 final dividend was satisfied by cash disbursements of $3,222 million and $586 million being reinvested by the participants through the DRP. The 2015 final dividend was satisfied by cash disbursements $2,958 million and $655 million being reinvested by the participants through the DRP. Final Dividend The Directors have declared a franked final dividend of 230 cents per share amounting to $3,979 million. The dividend will be payable on 29 September 2017 to shareholders on the register at 5pm AEST on 17 August 2017. The ex-dividend date is 16 August 2017. Current and expected rates of business growth and the mix of business; 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:      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. 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 2017 to frank dividends for subsequent financial years, is $1,067 million (2016: $532 million). This figure is based on the franking accounts of the Bank at 30 June 2017, 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 2017. Dividend History Half year ended 31 December 2014 30 June 2015 31 December 2015 30 June 2016 31 December 2016 30 June 2017 Cents Per Share Payment Date 198 02/04/2015 222 01/10/2015 198 31/03/2016 222 29/09/2016 199 04/04/2017 230 29/09/2017 Half-year Full Year Payout Ratio (1) Payout Ratio (1) DRP DRP Price Participation Rate (2) % 71. 2 80. 4 73. 6 83. 1 70. 1 79. 0 % - 75. 8 - 78. 4 - 74. 6 $ 91. 26 74. 75 72. 68 72. 95 83. 21 - % 17. 9 18. 1 16. 3 15. 4 16. 3 - (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. Notes to the financial statements 113 113 Note 6 Earnings Per Share Earnings per ordinary share (1) Basic Fully diluted 2017 2016 Cents per Share Group (2) 2015 577. 6 559. 1 542. 3 529. 2 553. 1 539. 1 (1) EPS calculations are based on actual amounts prior to rounding to the nearest million. (2) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. 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 adding back 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 convertible non- cumulative redeemable loan capital instruments and shares issuable under executive share plans). Reconciliation of earnings used in calculation of earnings per share Profit after income tax (1) Less: Other equity instrument dividends Less: Non-controlling interests Earnings used in calculation of basic earnings per share Add: Profit impact of assumed conversions of loan capital Earnings used in calculation of fully diluted earnings per share (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Weighted average number of ordinary shares used in the calculation of basic earnings per share Effect of dilutive securities - executive share plans and convertible loan capital instruments Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share Note 7 Cash and Liquid Assets Notes, coins and cash at banks Money at short call Securities purchased under agreements to resell Bills received and remittances in transit Total cash and liquid assets 2017 $M 14,635 8,281 22,733 201 45,850 Note 8 Receivables Due from Other Financial Institutions Placements with and loans to other financial institutions Deposits with regulatory authorities (1) Total receivables due from other financial institutions (1) Required by law for the Group to operate in certain regions. 2017 $M 9,815 222 10,037 2017 $M 9,952 - (24) 9,928 218 10,146 2017 M 1,719 96 1,815 Group 2016 $M 12,103 2,201 8,925 143 23,372 Group 2016 $M 11,384 207 11,591 2016 $M 9,243 (50) (20) 9,173 195 9,368 Group 2015 $M 9,074 (52) (21) 9,001 225 9,226 Number of Shares 2016 M 1,692 79 1,771 2017 $M 12,707 8,167 21,865 75 42,814 2017 $M 8,641 37 8,678 2015 M 1,627 84 1,711 Bank 2016 $M 10,809 2,073 8,673 27 21,582 Bank 2016 $M 10,140 42 10,182 The majority of the above amounts are expected to be recovered within 12 months of the Balance Sheet date. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 114 114 Notes to the financial statements Note 9 Assets at Fair Value through Income Statement Assets at Fair Value through Income Statement Trading Government bonds, notes and securities Corporate/financial institution bonds, notes and securities Shares and equity investments Commodities Total trading assets (2) (3) Insurance Investments backing life risk contracts Equity security investments Debt security investments Property investments Other assets Investments backing life investment contracts Equity security investments Debt security investments Property investments Other assets 2017 $M 20,370 4,640 922 6,772 32,704 397 3,055 86 668 5,072 2,473 109 1,809 Group (1) 2016 $M 17,653 5,353 2,484 8,577 34,067 510 3,563 82 703 4,383 2,417 123 1,766 Total life insurance investment assets 13,669 13,547 2017 $M 19,879 3,873 603 6,772 31,127 Bank (1) 2016 $M 17,440 4,808 2,160 8,577 32,985 - - - - - - - - - - - - - - - - - - - - - - 796 796 1,187 1,187 (4) Other Government securities Receivables due from other corporate/financial institutions Other lending Total other assets at fair value through Income Statement Total assets at fair value through Income Statement (5) Maturity Distribution of assets at fair value through income statement Less than twelve months More than twelve months Total assets at fair value through Income Statement 51 264 796 1,111 47,484 35,951 11,533 47,484 43 250 1,187 1,480 49,094 31,923 34,172 36,065 13,029 49,094 31,923 - 31,923 34,172 - 34,172 (1) Comparative information has been reclassified to conform to presentation in the current year. (2) (3) Investments held in the Australian statutory funds may only be used within the restrictions imposed under the Life Insurance Act 1995. Insurance assets include investment assets of controlled and consolidated trusts that are not wholly owned by the Group. Such assets relate to insurance contracts issued by the Group and managed fund units held by external unit holders. (4) 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 (5) mismatch. 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. Notes to the financial statements 115 115 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: Within 6 months 6 months - 1 year 1 - 2 years 2 - 5 years After 5 years Net deferred gains/(losses) Net Investment Hedges Group Total 2016 $M (46) 8 108 846 (237) 679 2017 $M (72) (26) 133 (168) (45) (178) 2017 $M 3 15 131 (34) (24) 91 Bank Total 2016 $M (9) 80 153 969 (148) 1,045 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: Derivatives assets and liabilities Held for trading Foreign exchange rate related contracts: Forward contracts Swaps Futures Options purchased and sold Total foreign exchange rate related contracts Interest rate related contracts: Swaps Futures Options purchased and sold Total interest rate related contracts Credit related swaps Equity related contracts: Swaps Options purchased and sold Total equity related contracts Commodity related contracts: Swaps Options purchased and sold Total commodity related contracts Identified embedded derivatives 2017 Group 2016 Fair Value Fair Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M 5,735 7,556 - 785 (6,058) (8,473) - (832) 9,055 6,646 1 874 (8,656) (9,762) - (897) 14,076 (15,363) 16,576 (19,315) 6,232 64 918 7,214 42 18 2 20 452 16 468 190 (4,654) (192) (1,048) (5,894) (72) (85) (9) (94) (284) (35) (319) (131) 10,590 15 1,120 11,725 38 38 14 52 593 40 633 338 (7,266) (42) (1,261) (8,569) (50) (86) (27) (113) (510) (43) (553) (125) Total derivative assets/(liabilities) held for trading 22,010 (21,873) 29,362 (28,725) Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 116 116 Notes to the financial statements Note 10 Derivative Financial Instruments (continued) 2017 Group 2016 Fair Value Fair Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M Fair value hedges Foreign exchange rate related swaps Interest rate related swaps Total fair value hedges Cash flow hedges Foreign exchange rate related swaps Interest rate related swaps Total cash flow hedges Net investment hedges Foreign exchange rate related forward contracts Total net investment hedges 5,242 451 5,693 2,615 1,402 4,017 4 4 (4,184) (2,096) (6,280) (1,371) (794) (2,165) (12) (12) 8,631 881 9,512 5,002 2,691 7,693 - - Total derivative assets/(liabilities) held for hedging 9,714 (8,457) 17,205 (4,612) (2,930) (7,542) (2,150) (1,495) (3,645) (9) (9) (11,196) 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. Derivatives assets and liabilities Held for trading Foreign exchange rate related contracts: Forward contracts Swaps Futures Options purchased and sold Derivatives held with controlled entities Total foreign exchange rate related contracts Interest rate related contracts: Swaps Futures Options purchased and sold Derivatives held with controlled entities Total interest rate related contracts Credit related swaps Equity related contracts: Swaps Options purchased and sold Total equity related contracts Commodity related contracts: Swaps Options purchased and sold Total commodity related contracts Identified embedded derivatives 2017 Bank 2016 Fair Value Fair Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M 5,706 8,356 - 785 688 15,535 5,963 55 917 110 7,045 42 18 2 20 452 16 468 190 (6,014) (9,181) - (830) (1,998) (18,023) (4,357) (191) (1,047) (139) (5,734) (72) (85) (9) (94) (285) (34) (319) (131) 9,010 8,366 1 873 915 19,165 10,166 15 1,119 216 11,516 38 38 14 52 593 40 633 338 (8,554) (10,691) - (894) (3,083) (23,222) (6,868) (37) (1,255) (261) (8,421) (50) (86) (27) (113) (510) (43) (553) (125) Total derivative assets/(liabilities) held for trading 23,300 (24,373) 31,742 (32,484) Notes to the financial statements 117 117 Note 10 Derivative Financial Instruments (continued) Fair value hedges Foreign exchange rate related contracts: Swaps Derivatives held with controlled entities Total foreign exchange rate related contracts Interest rate related contracts: Swaps Derivatives held with controlled entities Total interest rate related contracts Total fair value hedges Cash flow hedges Foreign exchange rate related contracts: Swaps Derivatives held with controlled entities Total foreign exchange rate related contracts Interest rate related contracts: Swaps Derivatives held with controlled entities Total interest rate related contracts Total cash flow hedges Net investment hedges Foreign exchange rate related forward contracts Total net investment hedges 2017 Bank 2016 Fair Value Fair Value Fair Value Fair Value Asset Liability Asset Liability $M $M $M $M 4,337 349 4,686 364 2 366 5,052 2,444 11 2,455 1,253 30 1,283 3,738 4 4 (3,504) (789) (4,293) (1,895) (56) (1,951) (6,244) (948) (81) (1,029) (511) (4) (515) (1,544) (12) (12) 6,856 52 6,908 738 - 738 7,646 4,688 13 4,701 2,433 3 2,436 7,137 - - (3,815) (1,934) (5,749) (2,673) (194) (2,867) (8,616) (1,613) (188) (1,801) (969) (5) (974) (2,775) (9) (9) Total derivative assets/(liabilities) held for hedging 8,794 (7,800) 14,783 (11,400) 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 118 118 Notes to the financial statements Note 11 Available-for-Sale Investments Government bonds, notes and securities Corporate/financial institution bonds, notes and securities Shares and equity investments Covered bonds, mortgage backed securities and SSA (1) Total available-for-sale investments (1) Supranational, Sovereign and Agency Securities (SSA). 2017 $M 48,257 22,129 295 12,854 83,535 Group 2016 $M 47,190 18,740 959 14,009 80,898 2017 $M 46,424 21,199 37 11,359 79,019 Bank 2016 $M 45,754 17,724 486 12,397 76,361 The amounts expected to be recovered within 12 months of the Balance Sheet date are $18,052 million (2016: $16,324 million) for the Group and $16,900 million (2016: $15,660 million) for the Bank. Maturity Distribution and Weighted Average Yield Group Maturity Period at 30 June 2017 10 or Non- Government bonds, notes and securities Corporate/financial institution bonds, notes and securities Shares and equity investments Covered bonds, mortgage backed securities and SSA 0 to 1 Year 1 to 5 Years 5 to 10 Years more Years Maturing Total $M % $M % $M % $M % $M $M 9,514 0. 55 15,379 1. 96 17,641 2. 57 5,723 3. 10 7,117 1. 84 14,565 2. 69 447 2. 88 - - - - - - - - - - - - 48,257 22,129 295 295 1,364 2. 81 3,999 2. 76 624 2. 68 6,867 2. 69 - 12,854 Total available-for-sale investments 17,995 - 33,943 - 18,712 - 12,590 - 295 83,535 The maturity table is based on contractual terms. . Notes to the financial statements 119 119 Note 12 Loans, Bills Discounted and Other Receivables Australia Overdrafts Home loans (1) Credit card outstandings Lease financing Bills discounted (2) Term loans and other lending Total Australia Overseas Overdrafts Home loans (1) Credit card outstandings Lease financing Term loans and other lending Total overseas Gross loans, bills discounted and other receivables Less Provisions for Loan Impairment (Note 13): Collective provision Individually assessed provisions Unearned income: Term loans Lease financing Net loans, bills discounted and other receivables 2017 $M 24,385 436,184 12,073 4,302 7,486 149,506 633,936 1,545 49,673 960 36 50,389 102,603 736,539 (2,722) (971) (681) (403) (4,777) 731,762 Group 2016 $M 26,857 409,452 12,122 4,412 10,507 140,784 604,134 1,592 46,622 912 72 46,967 96,165 700,299 (2,783) (935) (701) (482) (4,901) 695,398 2017 $M 24,385 430,056 12,073 3,161 7,486 149,294 626,455 277 519 - 9 24,533 25,338 651,793 (2,457) (888) (680) (265) (4,290) 647,503 Bank 2016 $M 26,857 404,352 12,122 3,073 10,507 140,700 597,611 318 550 - 28 23,754 24,650 622,261 (2,510) (855) (699) (278) (4,342) 617,919 (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. Based on behavioural terms and current market conditions, the amounts expected to be recovered within 12 months of the Balance Sheet date are $177,267 million (2016: $206,157 million) for the Group, and $161,734 million (2016: $191,962 million) for the Bank. 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. Gross Investment in 2017 Present Value Gross of Minimum Investment in Group 2016 Present Value of Minimum Finance Lease Unearned Lease Payment Finance Lease Unearned Lease Payment Receivable Income Receivable Receivable Income Receivable $M 1,439 2,651 248 4,338 $M (151) (187) (65) (403) $M 1,288 2,464 183 3,935 $M 1,247 2,906 331 4,484 $M (161) (287) (34) (482) $M 1,086 2,619 297 4,002 Not later than one year One year to five years Over five years Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 120 120 Notes to the financial statements Note 12 Loans, Bills Discounted and Other Receivables (continued) Gross Investment in 2017 Present Value Gross of Minimum Investment in Bank 2016 Present Value of Minimum Not later than one year One year to five years Over five years Finance Lease Unearned Lease Payment Finance Lease Unearned Lease Payment Receivable Income Receivable Receivable Income Receivable $M 1,166 1,797 207 3,170 $M (95) (108) (62) (265) $M 1,071 1,689 145 2,905 $M 1,008 1,856 237 3,101 $M (94) (155) (29) (278) $M 914 1,701 208 2,823 Contractual Maturity Tables Industry (1) Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total overseas Gross loans, bills discounted and other receivables (1) The industry split has been prepared on an industry exposure basis. Maturity Period at 30 June 2017 Group Maturing 1 Maturing Maturing Year Between 1 After or Less and 5 Years 5 Years 389,852 436,184 $M $M 17,128 3,597 8,841 8,548 1,158 7,873 2,903 41,567 91,615 1,180 2,170 2,837 7,562 284 1,687 17 10,539 26,276 117,891 772 4,595 6,141 37,784 2,176 13,268 4,842 68,581 138,159 600 5,270 2,292 5,838 152 25 170 15,162 29,509 167,668 $M 185 592 443 431 2,042 127 10,490 404,162 120 2,408 646 36,273 198 1 277 6,895 46,818 450,980 Total $M 18,085 8,784 15,425 3,765 23,183 7,872 120,638 633,936 1,900 9,848 5,775 49,673 634 1,713 464 32,596 102,603 736,539 Total $M 532,314 50,804 583,118 101,622 51,799 153,421 736,539 Interest rate Australia Overseas Total variable interest rates Australia Overseas Total fixed interest rates Gross loans, bills discounted and other receivables Maturing 1 Maturing Maturing Year Between 1 After or Less and 5 Years 5 Years $M 73,530 12,920 86,450 18,085 13,356 31,441 $M 120,749 17,750 138,499 17,410 11,759 29,169 $M 338,035 20,134 358,169 66,127 26,684 92,811 117,891 167,668 450,980 Notes to the financial statements 121 121 Note 12 Loans, Bills Discounted and Other Receivables (continued) Maturity Period at 30 June 2016 Group Maturing 1 Maturing Maturing Year Between 1 After or Less and 5 Years 5 Years Industry (1) (2) Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total overseas Gross loans, bills discounted and other receivables $M $M 17,249 3,054 8,916 14,808 1,806 8,975 2,822 36,945 94,575 186 1,741 1,440 6,635 160 1,676 8 16,032 27,878 122,453 1,219 4,269 6,470 40,454 1,273 13,741 4,707 70,490 142,623 930 3,401 1,048 4,701 89 42 54 14,050 24,315 166,938 (1) The industry split has been prepared on an industry exposure basis. (2) Comparative information has been reclassified to conform to presentation in the current period. $M 811 678 343 725 808 148 9,233 366,936 317 3,602 983 35,286 103 1 164 3,516 43,972 410,908 354,190 409,452 Interest rate Australia Overseas Total variable interest rates Australia Overseas Total fixed interest rates Gross loans, bills discounted and other receivables Maturing 1 Maturing Maturing Year Between 1 After or Less and 5 Years 5 Years $M 72,158 17,832 89,990 22,417 10,046 32,463 $M 113,467 14,576 128,043 29,156 9,739 38,895 $M 313,702 20,005 333,707 53,234 23,967 77,201 122,453 166,938 410,908 Total $M 19,279 8,001 15,729 3,804 23,524 7,677 116,668 604,134 1,433 8,744 3,471 46,622 352 1,719 226 33,598 96,165 700,299 Total $M 499,327 52,413 551,740 104,807 43,752 148,559 700,299 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 122 122 Notes to the financial statements Note 13 Provisions for Impairment Provisions for impairment losses Collective provision Opening balance Net collective provision funding Impairment losses written off Impairment losses recovered Other Closing balance Individually assessed provisions Opening balance Net new and increased individual provisioning Write-back of provisions no longer required Discount unwind to interest income Impairment losses written off Other Closing balance Total provisions for impairment losses Less: Provision for Off Balance Sheet exposures Total provisions for loan impairment Provision ratios Total provisions for impaired assets as a % of gross impaired assets Total provisions for impairment losses as a % of gross loans and acceptances Loan impairment expense Net collective provision funding Net new and increased individual provisioning Write-back of individually assessed provisions Total loan impairment expense 2017 $M 2,818 617 (894) 210 (4) 2,747 944 670 (192) (31) (454) 43 980 3,727 (34) 3,693 2017 % 36. 05 0. 51 2016 $M Group 2015 $M 2,762 2,779 664 (846) 225 13 589 (770) 176 (12) 2,818 2,762 887 788 (196) (27) (571) 63 944 3,762 (44) 3,718 2016 % 1,127 659 (260) (38) (709) 108 887 3,649 (31) 3,618 Group 2015 % 36. 17 35. 94 0. 54 0. 56 2017 2016 $M 617 670 (192) 1,095 $M 664 788 (196) 1,256 Group 2015 $M 589 659 (260) 988 2017 $M 2,545 621 (871) 186 1 2,482 864 585 (166) (31) (399) 44 897 3,379 (34) 3,345 2017 % 39. 51 0. 52 2017 $M 621 585 (166) 1,040 Bank 2016 $M 2,553 566 (782) 207 1 2,545 832 760 (173) (27) (590) 62 864 3,409 (44) 3,365 Bank 2016 % 39. 59 0. 55 Bank 2016 $M 566 760 (173) 1,153 Notes to the financial statements 123 123 Note 13 Provisions for Impairment (continued) Individually assessed provisions by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total overseas Total individually assessed provisions Loans written off by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total overseas Gross loans written off Recovery of amounts previously written off Australia Overseas Total amounts recovered Net loans written off 2017 $M 2016 $M 2015 $M - 47 27 249 25 9 18 442 817 - 25 - 4 1 - 10 123 163 980 - 42 29 193 25 7 28 483 807 - 23 4 6 8 1 10 85 137 944 - 133 36 148 20 10 28 400 775 - 14 - 10 1 - 10 77 112 887 2014 $M - 123 68 151 29 14 30 620 1,035 - 3 15 11 1 - - 62 92 Group 2013 $M - 168 217 182 89 14 23 871 1,564 - 16 5 17 - - - 26 64 1,127 1,628 2017 $M 2016 $M 2015 $M 2014 $M - 17 1 115 16 792 41 210 - 84 10 82 11 747 54 249 - 65 36 72 14 686 45 404 - 138 122 113 52 677 37 568 Group 2013 $M - 30 79 217 139 622 25 686 1,192 1,237 1,322 1,707 1,798 - 15 5 4 8 60 - 64 156 1,348 194 16 210 1,138 - 7 - 7 - 54 - 112 180 1,417 211 14 225 - 3 69 8 - 42 - 35 157 1,479 165 11 176 - 3 - 13 - 30 - 60 106 1,813 148 17 165 - 4 10 21 - 25 - 31 91 1,889 144 10 154 1,192 1,303 1,648 1,735 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 124 124 Notes to the financial statements Note 13 Provisions for Impairment (continued) Loans recovered by industry classification Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total Australia Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total overseas Total loans recovered Note 14 Property, Plant and Equipment Land and Buildings (1) At 30 June valuation Total land and buildings Leasehold Improvements At cost Accumulated depreciation Closing balance Equipment At cost Accumulated depreciation Closing balance Total property, plant and equipment held for own use Assets Held for Lease At cost Accumulated depreciation Closing balance Other Property, Plant and Equipment (2) At cost Accumulated depreciation Closing balance Total property, plant and equipment 2017 $M 2016 $M 2015 $M 2014 $M Group 2013 $M - - 8 4 - 113 6 13 144 - - 1 1 - 8 - - - - 6 4 - 106 5 27 148 - 3 3 1 - 8 - 2 17 165 10 154 2017 $M 426 426 1,339 (885) 454 1,652 (1,188) 464 1,344 212 (62) 150 - - - Bank 2016 $M 446 446 1,307 (817) 490 1,502 (1,106) 396 1,332 247 (76) 171 - - - 1,494 1,503 - - 1 3 1 170 7 12 194 - - - 1 1 11 - 3 16 210 - 1 27 3 1 154 4 21 211 - - 1 1 - 10 - 2 14 225 2017 $M 471 471 1,589 (1,024) 565 2,044 (1,496) 548 1,584 1,437 (319) 1,118 1,189 (18) 1,171 3,873 - - 9 3 - 125 4 24 165 - - - 1 - 10 - - 11 176 Group 2016 $M 496 496 1,557 (952) 605 1,891 (1,406) 485 1,586 1,558 (271) 1,287 1,067 - 1,067 3,940 (1) Had land and buildings been measured using the cost model rather than fair value, the carrying value would have been $243 million (2016: $270 million) for Group and $231 million (2016: $249 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. Notes to the financial statements 125 125 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: Land and Buildings Carrying amount at the beginning of the year Additions Disposals Net revaluations Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Leasehold Improvements Carrying amount at the beginning of the year Additions Disposals Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Equipment Carrying amount at the beginning of the year Additions Disposals Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Assets Held for Lease Carrying amount at the beginning of the year Additions Disposals Impairment losses Depreciation Foreign currency translation adjustment Carrying amount at the end of the year Other Property, Plant and Equipment Carrying amount at the beginning of the year Acquisitions attributed to business combinations Additions Depreciation Foreign currency translation adjustment Carrying amount at the end of the year 2017 $M Group 2016 $M 2017 $M Bank 2016 $M 496 6 (31) 32 (32) - 471 605 107 (9) (135) (3) 565 485 259 (22) (174) - 548 1,287 229 (304) (6) (88) - 463 73 (14) 2 (31) 3 496 609 148 (18) (137) 3 605 378 260 (8) (149) 4 485 1,383 448 (385) (69) (107) 17 1,118 1,287 1,067 120 - (18) 2 - 693 330 - 44 1,171 1,067 446 5 (22) 28 (31) - 426 490 85 (6) (113) (2) 454 396 225 (13) (144) - 464 171 6 (12) (2) (13) - 150 - - - - - - 416 70 (11) 1 (30) - 446 496 130 (16) (118) (2) 490 304 218 (6) (120) - 396 293 8 (104) - (26) - 171 - - - - - - Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 126 126 Notes to the financial statements Note 15 Intangible Assets Goodwill Purchased goodwill at cost Closing balance Computer Software Costs Cost Accumulated amortisation Closing balance Core Deposits (1) Cost Accumulated amortisation Closing balance Brand Names (2) Cost Accumulated amortisation Closing balance Other Intangibles (3) Cost Accumulated amortisation Closing balance Total Intangible assets 2017 $M 7,872 7,872 4,329 (2,395) 1,934 495 (495) - 190 (1) 189 154 (125) 29 Group 2016 $M 7,925 7,925 3,823 (1,595) 2,228 495 (495) - 190 (1) 189 156 (114) 42 2017 $M 2,522 2,522 3,792 (2,057) 1,735 495 (495) - 186 - 186 38 (32) 6 10,024 10,384 4,449 Bank 2016 $M 2,522 2,522 3,361 (1,300) 2,061 495 (495) - 186 - 186 38 (29) 9 4,778 (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 rate 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 12.4 – 12.8 (2016: 10.4 – 12.4), for the IFS businesses 5.9 – 14.5 (2016: 6.2 – 16.4) and for Wealth Management businesses were in the range of 12.0 – 18.4 (2016: 11.6 – 15.1). Notes to the financial statements 127 127 Note 15 Intangible Assets (continued) Goodwill Allocation to Cash-Generating Units Retail Banking Services Business and Private Banking Wealth Management New Zealand IFS and Other Total Reconciliation of the carrying amounts of Intangible Assets is set out below: Goodwill Opening balance Additions Transfers/disposals/other adjustments (1) Closing balance Computer Software Costs Opening balance Additions (2) Amortisation and write-offs Closing balance Core Deposits Opening balance Amortisation Closing balance Brand Names Opening balance Amortisation Closing balance Other Intangibles Opening balance Additions Disposals Amortisation Closing balance Includes foreign currency revaluation. (1) (2) Primarily relates to internal development costs. 2017 $M 4,149 297 2,678 697 51 7,872 Group 2016 $M 4,149 297 2,732 698 49 7,925 2017 $M Bank 2016 $M 2,522 2,522 - - - - 2,522 2,522 2,061 404 (730) 1,735 1,944 450 (333) 2,061 - - - 186 - 186 9 - - (3) 6 34 (34) - 186 - 186 14 - - (5) 9 2017 $M 7,925 16 (69) 7,872 2,228 491 (785) 1,934 - - - 189 - 189 42 2 - (15) 29 Group 2016 $M 7,599 304 22 7,925 2,089 519 (380) 2,228 34 (34) - 189 - 189 59 2 - (19) 42 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457128 128 Notes to the financial statements Note 16 Other Assets Accrued interest receivable Accrued fees/reimbursements receivable Securities sold not delivered Intragroup current tax receivable Current tax assets Prepayments (1) Life insurance other assets Defined benefit superannuation plan surplus Other Total other assets 2017 $M 2,326 1,348 2,352 - 23 257 524 426 626 Group 2016 $M 2,312 1,110 2,177 - 17 260 537 261 487 2017 $M 3,097 137 1,833 302 - 182 - 426 480 Bank 2016 $M 3,118 157 1,726 213 - 200 39 261 283 7,882 7,161 6,457 5,997 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Except for the defined benefits superannuation plan surplus, the majority of the above amounts are expected to be recovered within 12 months of the Balance Sheet date. Note 17 Deposits and Other Public Borrowings Australia Certificates of deposit Term deposits On-demand and short-term deposits Deposits not bearing interest Securities sold under agreements to repurchase Total Australia Overseas Certificates of deposit Term deposits On-demand and short term deposits Deposits not bearing interest Securities sold under agreements to repurchase Total overseas Total external deposits and other public borrowings 2017 $M 39,854 158,453 293,579 41,787 16,175 549,848 12,496 36,308 24,012 3,896 95 76,807 626,655 Group 2016 $M 43,762 138,443 281,648 35,164 17,124 516,141 9,098 32,069 27,327 3,410 - 71,904 588,045 2017 $M 41,856 158,691 292,819 41,764 16,406 551,536 10,021 8,047 1,605 49 95 19,817 571,353 Bank 2016 $M 45,639 138,664 281,059 35,145 17,305 517,812 6,254 9,359 2,597 64 - 18,274 536,086 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: Group At 30 June 2017 Maturing Maturing Maturing Maturing Three Between Between Six Months or Three and and Twelve Less Six Months Months $M $M $M 18,384 97,878 116,262 4,749 18,906 23,655 139,917 12,417 22,869 35,286 1,750 10,234 11,984 47,270 2,908 29,164 32,072 5,957 4,779 10,736 42,808 after Twelve Months $M 6,145 8,542 14,687 40 2,389 2,429 Total $M 39,854 158,453 198,307 12,496 36,308 48,804 17,116 247,111 Australia Certificates of deposit (1) Term deposits Total Australia Overseas Certificates of deposit (1) Term deposits Total overseas Total certificates of deposits and term deposits (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. Notes to the financial statements 129 129 Note 17 Deposits and Other Public Borrowings (continued) Maturing Maturing Maturing Maturing Group At 30 June 2016 Three Between Between Six Months or Three and and Twelve Less Six Months Months $M $M $M Australia Certificates of deposit (1) Term deposits Total Australia Overseas Certificates of deposit (1) Term deposits Total overseas Total certificates of deposits and term deposits 21,571 84,848 106,419 6,906 16,534 23,440 129,859 11,370 20,852 32,222 1,452 7,815 9,267 41,489 (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 Deposits and other borrowings (1) Debt instruments (1) Trading liabilities 2017 $M 7,212 655 2,525 653 26,012 26,665 532 4,851 5,383 32,048 Group 2016 $M 5,695 1,848 2,749 Total liabilities at fair value through Income Statement 10,392 10,292 (1) These liabilities have been initially designated at fair value through the Income Statement. after Twelve Months $M 10,168 6,731 16,899 208 2,869 3,077 Total $M 43,762 138,443 182,205 9,098 32,069 41,167 19,976 223,372 2017 $M 6,197 267 2,525 8,989 Bank 2016 $M 4,416 276 2,749 7,441 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 $7,878 million (2016: $7,345 million) and for the Bank is $6,437 million (2016: $4,501 million). Note 19 Other Provisions Employee entitlements General insurance claims Self insurance and non-lending losses Dividends Compliance, programs and regulation Restructuring costs Other Total other provisions Maturity Distribution of Other Provisions Less than twelve months More than twelve months Total other provisions Note 5 2017 $M 847 273 232 100 69 52 207 1,780 2017 $M 1,441 339 1,780 Group 2016 $M 823 260 196 90 78 28 181 1,656 Group 2016 $M 1,320 336 1,656 2017 $M 757 - 224 100 69 50 172 1,372 2017 $M 1,089 283 1,372 Bank 2016 $M 730 - 162 90 78 27 162 1,249 Bank 2016 $M 968 281 1,249 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457130 130 Notes to the financial statements Note 19 Other Provisions (continued) Reconciliation General insurance claims: Opening balance Additional provisions Amounts utilised during the year Closing balance Self insurance and non-lending losses: Opening balance Additional provisions Amounts utilised during the year Release of provision Closing balance Compliance, programs and regulation: Opening balance Additional provisions Amounts utilised during the year Closing balance Restructuring: Opening balance Additional provisions Amounts utilised during the year Closing balance Other: Opening balance Additional provisions Amounts utilised during the year Release of provision Closing balance Provision Commentary General Insurance Claims 2017 $M 260 548 (535) 273 196 73 (37) - 232 78 79 (88) 69 28 28 (4) 52 181 127 (76) (25) 207 Group 2016 $M 2017 $M 314 502 (556) 260 198 15 (17) - 196 193 - (115) 78 43 - (15) 28 146 60 (11) (14) 181 - - - - 162 73 (11) - 224 78 78 (87) 69 27 27 (4) 50 162 93 (60) (23) 172 Bank 2016 $M - - - - 181 15 (17) (17) 162 193 - (115) 78 41 - (14) 27 97 85 (6) (14) 162 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 and the current status as at the date of this report is 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 closed in July 2015. Customer file assessments are complete and remediation is ongoing. The program’s independent expert, Promontory Financial Group, released its final report in June 2017, noting progress towards completion and compliance with the program’s documented processes and objectives. Notes to the financial statements 131 131 Note 19 Other Provisions (continued) Advice Review Programs (continued)   Variations to CFPL's and FWL's licence conditions were agreed with ASIC in August 2014. The licensees are continuing to work with ASIC and the compliance expert to complete further reviews of customer files for 17 advisers identified by the compliance expert. The reviews will assess if the advice provided was appropriate, and where required, customers will be remediated. A review of service delivery against past adviser service package offerings from 1 July 2007 to 30 June 2015. In instances where the Group's records do not show that customers who paid for the service package during this period received an annual review, customers are being refunded with interest. Affected customers have been advised and payments are nearing completion. 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 scope. 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 Medium-term notes Commercial paper Securitisation notes Covered bonds Total debt issues Short Term Debt Issues by currency USD AUD GBP Other currencies Total short term debt issues Long Term Debt Issues by currency (1) USD EUR AUD GBP NZD JPY Other currencies Offshore loans (all JPY) Total long term debt issues Maturity Distribution of Debt Issues (2) Less than twelve months Greater than twelve months Total debt issues Note 41 41 2017 $M 96,016 28,800 13,771 28,984 Group 2016 $M 88,343 29,033 12,106 31,802 167,571 161,284 29,856 1,858 5,687 769 38,170 45,343 28,109 32,405 6,059 5,129 3,790 8,158 408 29,008 214 6,741 312 36,275 43,479 28,329 27,223 5,604 4,839 6,547 8,464 524 2017 $M 83,637 26,685 - 24,644 134,966 27,314 1,858 5,687 769 35,628 44,120 22,241 16,883 4,075 1,079 3,680 6,852 408 Bank 2016 $M 79,246 27,105 - 27,863 134,214 27,080 214 6,741 312 34,347 43,013 24,210 13,164 4,283 1,119 6,453 7,101 524 129,401 125,009 99,338 99,867 57,640 109,931 167,571 64,459 96,825 161,284 47,976 86,990 134,966 57,901 76,313 134,214 (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; ASB Domestic Medium Term Note Program; the USD25 billion CBA New York Branch Medium Term Note Program; EUR7 billion ASB Covered Bond 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 132 132 Notes to the financial statements Note 20 Debt Issues (continued) Short term borrowings by Commercial paper program Total Outstanding at year-end (2) Maximum amount outstanding at any month end (1) Average amount outstanding US Commercial Paper Program Outstanding at year-end (2) Maximum amount outstanding at any month end Average amount outstanding Weighted average interest rate on: Average amount outstanding Outstanding at year end Euro Commercial Paper Program Outstanding at year-end (2) Maximum amount outstanding at any month end Average amount outstanding Weighted average interest rate on: Average amount outstanding Outstanding at year end 2017 2016 Group 2015 $M (except where indicated) 28,800 33,779 29,226 28,393 31,460 27,593 1. 2% 1. 5% 407 2,789 1,633 1. 0% 1. 2% 29,033 41,453 37,368 27,117 38,528 35,208 0. 5% 0. 8% 1,916 2,925 2,160 0. 7% 0. 9% 37,032 39,774 35,621 35,754 38,147 34,018 0. 3% 0. 3% 1,278 2,327 1,603 0. 7% 0. 9% (1) Short term borrowings include callable medium term notes of $9,370 million which have been excluded from the table above. (2) The amount outstanding at year end is measured at amortised cost. Exchange rates utilised (1) AUD 1.00 = As At As At 30 June 30 June 2017 0. 7684 0. 6720 0. 5903 1. 0493 2016 0. 7431 0. 6689 0. 5534 1. 0470 86. 1110 76. 2441 Currency USD EUR GBP NZD JPY (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 remain guaranteed until maturity. Note 21 Bills Payable and Other Liabilities Bills payable Accrued interest payable Accrued fees and other items payable (1) Defined benefit superannuation plan deficit Securities purchased not delivered Unearned income Life insurance other liabilities and claims payable Other Total bills payable and other liabilities Note 35 2017 $M 1,495 2,633 2,586 11 2,771 1,430 297 709 11,932 Group 2016 $M 948 2,659 2,568 51 1,438 1,018 214 993 9,889 2017 $M 1,431 1,920 1,693 11 2,297 1,007 - 2,550 10,909 Bank 2016 $M 891 1,925 1,755 51 964 599 81 5,376 11,642 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. 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. Notes to the financial statements 133 133 Note 22 Loan Capital Currency Amount (M) Footnotes Tier 1 Loan Capital Undated Undated Undated Undated Undated Total Tier 1 Loan Capital Tier 2 Loan Capital AUD denominated USD denominated JPY denominated GBP denominated NZD denominated EUR denominated Other currencies denominated Total Tier 2 Loan Capital Fair value hedge adjustments Total Loan Capital FRN USD 100 PERLS VI AUD 2,000 PERLS VII AUD 3,000 PERLS VIII AUD 1,450 PERLS IX AUD 1,640 (1) (2) (2) (2) (2) (3) (4) (5) (6) (7) (8) (9) 2017 $M 130 1,994 2,979 1,435 1,622 8,160 1,773 3,047 850 254 755 3,338 293 10,310 256 18,726 Group 2016 $M 135 1,990 2,978 1,437 - 6,540 1,772 2,145 262 270 378 3,351 202 8,380 2017 $M 130 1,994 2,979 1,435 1,622 8,160 1,773 3,047 850 254 - 3,338 293 9,555 Bank 2016 $M 135 1,990 2,978 1,437 - 6,540 1,772 2,145 262 270 - 3,351 202 8,002 624 15,544 244 17,959 596 15,138 As at the reporting date, the majority of securities of the Group and the Bank are not 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, the current outstanding balance is 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 VI, PERLS VII, PERLS VIII and PERLS IX the Bank 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. issued (PERLS VII). On 30 March 2016, $1,450 million of CommBank PERLS VIII Capital Notes (PERLS VIII). On 31 March 2017, the Bank issued $1,640 million of CommBank PERLS IX Capital Notes (PERLS IX). PERLS VI, PERLS VII, PERLS VIII and PERLS IX are subordinated, unsecured notes. the Bank PERLS VI, PERLS VII, PERLS VIII and PERLS IX 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. (3) 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. (4) 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; and USD750 million subordinated EMTN (Euro Medium Term Notes) issued October 2016, due October 2026.  (5) JPY denominated Tier 2 Loan Capital issuances  JPY20 billion perpetual subordinated EMTN, February 1999; JPY40 billion subordinated EMTNs issued December 2016 (three tranches JPY20 billion, JPY10 billion and JPY10 billion), due December 2026; and JPY13.3 billion subordinated EMTN issued March 2017, due March 2027. issued  (6) GBP denominated Tier 2 Loan Capital issuances  GBP150 million subordinated EMTN, issued June 2003, due December 2023. (7) NZD denominated Tier 2 Loan Capital issuances  NZD400 million subordinated, unsecured notes, issued April 2014, due June 2024: On 17 April 2014, a wholly owned entity of the Bank (ASB NZD400 million subordinated, unsecured notes (ASB Notes) with a face value of NZD1 each; and Limited) issued Bank Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 134 134 Notes to the financial statements Note 22 Loan Capital (continued)  NZD400 million subordinated, unsecured notes, issued November 2016, due December 2026: On 30 November 2016, ASB Bank Limited issued NZD400 million subordinated, unsecured notes (ASB Notes 2) with a face value of NZD1 each. ASB Notes and ASB Notes 2 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. (8) 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. (9) Other foreign currency denominated Tier 2 Loan Capital Issuances  CNY1,000 million subordinated March 2015, due March 2025; and notes issued  HKD608 million subordinated EMTN issued March 2017, due March 2027. 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 PERLS VI, PERLS VII, PERLS VIII, PERLS IX, and all Tier 2 Capital securities issued after 1 January 2013, are subject to Basel III, under which these securities must be exchanged for a variable number of CBA ordinary shares or written down if a capital trigger event (PERLS VI, PERLS VII, PERLS VIII, and PERLS IX only) or a non-viability trigger event (all securities) occurs. Any exchange will occur as described in the terms of the applicable instrument documentation. Note 23 Shareholders’ Equity Ordinary Share Capital Ordinary Share Capital Shares on issue: Opening balance Issue of shares (net of issue costs) Dividend reinvestment plan (net of issue costs) (1) Less treasury shares: Opening balance Purchase of treasury shares (2) Sale and vesting of treasury shares (2) 2017 $M 34,129 (6) 1,143 35,266 (284) (92) 81 (295) Group 2016 $M 27,898 5,022 1,209 34,129 (279) (108) 103 (284) 2017 $M 34,125 (6) 1,143 35,262 - - - - Closing balance 34,971 33,845 35,262 Bank 2016 $M 27,894 5,022 1,209 34,125 - - - - 34,125 (1) The determined dividend includes an amount attributable to Dividend Reinvestment Plan (DRP) of $558 million (interim 2016/2017), $586 million (final 2015/2016), $552 million (interim 2015/2016) and $655 million (final 2014/2015) with $557 million, $586 million, $552 million and $657 million ordinary shares being issued under plan rules respectively which include the carry forward of DRP balance from previous dividends. (2) The movement in treasury shares held within Life Insurance Statutory Funds, and 2,658,100 shares acquired at an average price of $79.65 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. Number of shares on issue Opening balance (excluding treasury shares deduction) Issue of shares Dividend reinvestment plan issues: 2014/2015 Final dividend fully paid ordinary shares $74.75 2015/2016 Interim dividend fully paid ordinary shares $72.68 2015/2016 Final dividend fully paid ordinary shares $72.95 2016/2017 Interim dividend fully paid ordinary shares $83.21 Closing balance (excluding treasury shares deduction) Less: treasury shares (1) Closing balance 2017 Shares Group 2016 Shares 2017 Shares Bank 2016 Shares 1,715,142,177 1,627,592,713 1,715,142,177 1,627,592,713 - - - 71,161,207 8,790,794 7,597,463 - - - 8,036,332 6,689,652 - - 8,036,332 6,689,652 71,161,207 8,790,794 7,597,463 - - 1,729,868,161 1,715,142,177 1,729,868,161 1,715,142,177 (3,854,763) (4,080,435) - - 1,726,013,398 1,711,061,742 1,729,868,161 1,715,142,177 (1) Relates to Treasury shares held within the Life Insurance statutory funds and the employees share scheme trust. Notes to the financial statements 135 135 Note 23 Shareholders’ Equity (continued) Ordinary Share Capital (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 Other equity instruments Issued and paid up Number of shares 2017 $M Shares - - Group 2016 $M Shares - - 2017 $M Shares - - Bank 2016 $M 406 Shares 300,000 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 and the remaining shares were fully redeemed on 5 October 2016. Retained Profits and Reserves Retained Profits Opening balance (1) Actuarial gains from defined benefit superannuation plans Losses on liabilities at fair value due to changes in own credit risk Realised gains and dividend income on treasury shares Operating profit attributable to Equity holders of the Bank Total available for appropriation Net loss on sale/redemption of other equity (2) Transfers from/(to) general reserve Transfers from asset revaluation reserve Transfers to employee compensation reserve Interim dividend - cash component Interim dividend - Dividend Reinvestment Plan Final dividend - cash component Final dividend - Dividend Reinvestment Plan Other dividends Closing balance 2017 $M 23,435 175 (3) 26 Group 2016 $M 21,340 10 (1) 20 2017 $M 20,430 175 (3) - Bank 2016 $M 18,763 10 (1) - 9,928 9,223 8,979 8,639 33,561 30,592 29,581 27,411 - 33 (27) - (2,871) (558) (3,222) (586) - 26,330 (10) (120) 19 (2) (2,829) (552) (2,958) (655) (50) 23,435 - (2) (30) - (2,871) (558) (3,222) (586) - - (4) 19 (2) (2,829) (552) (2,958) (655) - 22,312 20,430 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. (2) Includes other equity instruments and non-controlling interests. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457136 136 Notes to the financial statements Note 23 Shareholders’ Equity (continued) Retained Profits and Reserves (continued) Reserves General Reserve Opening balance Appropriation (to)/from retained profits Closing balance Capital Reserve Opening balance Closing balance Asset Revaluation Reserve Opening balance Revaluation of properties Transfer to retained profits Tax on revaluation of properties Closing balance Foreign Currency Translation Reserve Opening balance Currency translation adjustments of foreign operations Currency translation on net investment hedge Tax on translation adjustments Closing balance Cash Flow Hedge Reserve Opening balance Gains and losses on cash flow hedging instruments: Recognised in other comprehensive income Transferred to Income Statement: Interest income Interest expense Tax on cash flow hedging instruments Closing balance Employee Compensation Reserve Opening balance Current period movement Closing balance Available-for-Sale Investments Reserve Opening balance Net gains and (losses) on revaluation of available-for-sale investments Net (gains) and losses on available-for-sale investments transferred to Income Statement on disposal Tax on available-for-sale investments Closing balance Total Reserves 2017 $M 939 (33) 906 - - 173 32 27 (9) 223 739 (315) 14 19 457 473 (1,282) (1,241) 1,684 259 (107) 132 32 164 278 414 (464) (2) 226 1,869 Group 2016 $M 819 120 939 - - 191 2 (19) (1) 173 356 389 (12) 6 739 263 250 (968) 1,018 (90) 473 122 10 132 594 (236) (222) 142 278 2,734 2017 $M 578 2 580 1,254 1,254 147 28 30 (9) 196 46 (23) 12 - 35 732 (987) (1,226) 1,258 289 66 132 32 164 226 494 (447) (12) 261 2,556 Bank 2016 $M 574 4 578 1,254 1,254 165 1 (19) - 147 (7) 62 (9) - 46 530 479 (916) 725 (86) 732 122 10 132 557 (248) (222) 139 226 3,115 Notes to the financial statements 137 137 137 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 variable remuneration 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 Customer satisfaction Scale  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. TSR  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 2013 financial year award reached the end of its performance period on 30 June 2016 and in line with the plan rules 20.31% of the awarded rights vested. The following table provides details of outstanding awards of performance rights granted under the GLRP. Period 2017 2016 Outstanding 1 July 1,250,589 1,265,446 Granted 295,725 291,188 Vested (75,442) (263,969) Forfeited (295,973) (42,076) Outstanding 30 June 1,174,899 1,250,589 Expense ($'000) 15,658 12,930 The average fair value at the grant date for TSR and Customer Satisfaction Reward Rights issued during the year was $65.76 and $83.71 respectively per right (2016: $32.96 and $75.21 respectively). The fair value of TSR hurdled Reward Rights granted during the period has been independently calculated at grant date using a Monte-Carlo pricing model. The assumptions included in the valuation of the 2017 financial year award includes a risk-free interest rate of 2.27%, a nil dividend yield on the Bank’s ordinary shares and a volatility in the Bank share price of 15%. The fair value for customer satisfaction hurdled Reward Rights granted during the period is the closing price of CBA shares on the grant date. Group Rights Plan (GRP) The GRP facilitates mandatory short-term variable remuneration deferral, sign-on incentives and retention awards. Participants are awarded rights to shares, that vest on a 1-for-1 basis, provided the participant remains in employment of the Group until vesting date. The Board has discretion to apply a cash equivalent. The following table provides details of outstanding awards of shares granted under the GRP. Period 2017 2016 Outstanding 1 July 1,795,728 1,238,974 Granted 1,067,588 825,705 Vested (673,224) (181,138) Forfeited (64,165) (87,813) Outstanding 30 June 2,125,927 1,795,728 Expense ($'000) 70,455 53,097 The weighted average fair value at grant date of the awards issued during the year was $72.07 (2016: $74.11). 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 138 138 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 2016 resulting in shares being awarded to each eligible employee during the financial year ended 30 June 2017. The following table provides details of shares granted under the ESAP. Period Allocation date Participants Allocated by Participant of Shares Allocated Issue Price $ Fair Value $ 2017 2016 9 Sep 2016 17 Sep 2015 32,049 32,336 13 13 416,637 420,368 71.89 74.88 29,952,034 31,477,156 Number of Shares Total Number Total It is estimated that approximately $34 million of CBA shares will be purchased on market at the prevailing market price for the 2017 grant. Other Employee Awards A number of other plans are operated by the Group, including:   The Employee Share (Performance Unit) Plan, which is the cash-based version of the GRP; and The International Employee Share Acquisition Plan, which is the cash-based version of the ESAP. The following table provides a summary of the movement in awards during the year. Period 2017 2016 Outstanding 1 July 298,693 677,708 Granted 269,766 209,170 Vested (77,300) (573,959) Forfeited (32,395) (14,226) Outstanding 30 June 458,764 298,693 Expense ($'000) 17,913 10,447 The average fair value at grant date of the awards issued during the year was $71.83 (2016: $74.86). Salary Sacrifice Arrangements The Group facilitates the purchase of CBA shares via salary sacrifice as follows: Type Australian-based employees (ESSSP) Non-Executive Directors Arrangements   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 if 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. Period 2017 2016 Number of Average purchase Participants shares purchased 828 775 37,310 36,264 price $ 77.14 75.66 Total purchase consideration $ 2,878,131 2,743,646 During the year, two (2016: one) Non-Executive Directors applied $43,427 in fees (2016: 28,994) to purchase 564 shares (2016: 382 shares). Notes to the financial statements 139 139 Note 25 Capital Adequacy Capital Management The Group is an Authorised Deposit-taking Institution (ADI) regulated by APRA under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks based on the Basel Committee on Banking Supervision (BCBS) guidelines. 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 also adopted an accelerated timetable for implementation. 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 Licenced Entity Group (known as “Level 1”, comprising the Bank and APRA approved subsidiaries) and for the Bank and all of its banking subsidiaries, which includes ASB Bank (known as “Level 2” or the “Group”). All entities which are consolidated for accounting purposes are included within the Group capital adequacy calculations except for:  The insurance and funds management operating subsidiaries; and  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. 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. These include share issues and buybacks, dividend and DRP policies, hybrid capital raising and dated and undated subordinated loan capital issues. All major capital related initiatives require approval of the Board. The Group’s capital position is monitored on a continuous basis and reported monthly to the Executive Committee and at regular intervals throughout the year to the Risk Committee. Three-year capital forecasts are conducted on a quarterly basis with a detailed capital and strategic plan presented to the Board annually. The Group’s capital ratios throughout the 2016 and 2017 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved minimums. The Group 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 140 140 Notes to the financial statements (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:    International Financial Services incorporates the Asian retail and business banking operations (Indonesia, China, Vietnam and India), associate investments in China and Vietnam, 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 elimination entries arising on consolidation, raised provisions and other unallocated centrally revenue and expenses. 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 transfer pricing allocations. 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 affected segments. There have also been changes to the recognition of Global Asset Management long- term incentives in Wealth Management, as set out in Note 1 Accounting Policies, which have had a minor impact on the Group’s cash net profit. 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. Institutional Banking and Markets has international operations in London, New York, Houston, Japan, Singapore, Malta, Hong Kong, New Zealand, Beijing and Shanghai. s t n e m e t a t s l a i c n a n i f e h t o t s e t o N 7 1 0 2 M $ l a t o T 0 0 6 7 1 , 0 2 5 5 , 0 2 1 3 2 , 6 8 7 4 3 0 2 , 0 4 9 5 2 , 5 6 5 0 0 6 2 , ) 8 7 0 1 1 ( , ) 5 9 0 1 ( , ) 7 2 9 3 ( , 2 3 8 3 1 , ) 4 2 ( 1 8 8 9 , 3 7 ) 6 2 ( 8 2 9 9 , M $ 6 2 5 5 1 7 8 4 0 7 1 4 2 1 , ) 7 ( 9 5 3 1 , 2 5 3 1 , ) 7 4 6 1 ( , ) 4 0 1 ( ) 9 9 3 ( ) 0 2 ( 3 6 1 ) 6 5 2 ( - 6 4 ) 0 1 2 ( - - M $ 4 4 6 1 , 3 4 2 7 8 8 1 , - 7 8 8 1 , 7 8 8 1 , ) 9 8 ( ) 4 9 7 ( ) 2 0 3 ( 4 0 0 1 , - 2 0 7 - ) 3 ( 9 9 6 ) 7 2 ( M $ 4 5 6 1 , 0 9 2 4 4 9 1 , 2 9 8 7 2 ) 7 ( 4 1 3 2 , 7 0 3 2 , ) 5 6 ( ) 9 0 9 ( ) 0 6 3 ( 3 3 3 1 , - 3 7 9 - 7 2 0 0 0 1 , - - - M $ 8 3 4 4 9 8 , 1 2 3 3 , 2 9 7 1 1 4 , 2 ) 3 5 6 , 1 ( - 8 5 7 ) 1 0 2 ( ) 4 ( 3 5 5 - ) 3 2 ( 0 3 5 M $ 7 0 5 , 1 7 4 3 , 1 4 5 8 , 2 - - - 4 5 8 , 2 4 5 8 , 2 ) 2 7 0 , 1 ( ) 4 6 ( ) 2 1 4 ( 8 1 7 , 1 - 6 0 3 , 1 - - M $ 4 4 0 , 3 5 2 9 9 6 9 , 3 - - - 9 6 9 , 3 9 6 9 , 3 ) 1 5 5 , 1 ( ) 4 7 ( ) 5 0 7 ( 4 4 3 , 2 - 9 3 6 , 1 - - - - M $ 5 2 2 , 9 0 0 0 , 2 5 2 2 , 1 1 - 5 2 2 , 1 1 5 2 2 , 1 1 ) 2 5 4 , 3 ( ) 9 9 6 ( 4 7 0 , 7 ) 0 1 1 , 2 ( - 4 6 9 , 4 - - 6 0 3 , 1 9 3 6 , 1 4 6 9 , 4 r e h t O d n a S F I t s e w k n a B l d n a a e Z t n e m e g a n a M s t e k r a M i g n k n a B w e N h t l a e W d n a g n k n a B i e t a v i r P i g n k n a B s e c i v r e S l a n o i t u t i t s n I d n a s s e n i s u B l i a t e R ) d e u n i t n o c ( s t n e m g e S y b g n i t a r e p o d n a t n e m r i a p m i e r o f e b e m o c n i g n i t a r e p o t e n l a t o T ) 4 ( " s i s a b h s a c " - x a t r e t f a t i f o r p t e N x a t e m o c n i e r o f e b t i f o r p t e N t i f e n e b / ) e s n e p x e ( x a t e t a r o p r o C s t s e r e t n i g n i l l o r t n o c - n o N e s n e p x e t n e m r i a p m i n a o L ) 3 ( s e s n e p x e g n i t a r e p O s e s n e p x e e m o c n i t n e m e g a n a m s d n u F e m o c n i g n i k n a b l a t o T e m o c n i g n i t a r e p o l a t o T ) 2 ( e c n e i r e p x e t n e m t s e v n I e m o c n i e c n a r u s n I " s i s a b y r o t u t a t s " - x a t r e t f a t i f o r p t e N s m e t i h s a c - n o n r e h O t n o i t a m r o f n i l a n o i t i d d A l y t i l i t a o v S R F I d n a g n g d e H i i i g n n a m e r ’ s p u o r G e h t f o l e a s e h t n o i n a g n o i l l i m 7 9 3 $ a s e d u c n I l i . s s a b x a t - e r p a n o d e t n e s e r p s i e c n e i r e p x e t n e m t s e v n I t e e h S e c n a l a B s t e s s a l t a o T s e i t i l i b a i l l t a o T ) 1 ( ) 2 ( ) 3 ( ) 4 ( g n i t r o p e R l i a c n a n F i 6 2 e t o N e m o c n i t s e r e t n i t e N ) 1 ( e m o c n i i g n k n a b r e h O t 4 7 3 6 7 9 , 8 5 6 2 1 9 , 1 0 7 4 4 1 , 8 0 8 9 4 2 , 6 6 1 6 8 , 1 9 6 6 5 , 4 8 7 6 8 , 5 2 6 0 8 , 4 1 0 , 2 2 5 5 4 , 7 2 4 3 2 , 3 7 1 7 0 8 , 1 6 1 9 9 4 , 3 8 2 7 9 , 6 0 1 3 0 5 , 6 5 3 3 7 7 , 2 5 2 . c n I a s V n i i t n e m t s e v n i 141 141 . ) e s n e p x e n o i l l i m 3 2 $ ( t n e m t s u d a n o j i t a u a v l s e r a h s y r u s a e r t d n a ) e s n e p x e n o i l l i m 3 $ ( s m e t i h s a c - n o n t s e w k n a B i , ) n a g n o i l l i m 3 7 $ ( l y t i l i t a o v S R F I d n a i g n g d e h o t g n i t a e r l s e s s o l d n a s n a g i d e s i l a e r n u s a h c u s , s m e t i h s a c - n o n s e d u c x e l e c n a a b l i s h T . s t e s s a e r a w t f o s i n a t r e c n o n o i t a s i t r o m a f o n o i t a r e e c c a l r o f e s n e p x e f f o - e n o n o i l l i m 3 9 3 $ a s e d u c n I l ) 5 3 1 1 ( , ) 6 4 5 ( ) 1 8 ( ) 8 3 ( ) 9 0 1 ( ) 4 1 1 ( ) 0 2 2 ( n o i t i a c e r p e d d n a n o i t a s i t r o m A Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 142 142 ) 1 ( 6 1 0 2 M $ l a t o T 5 3 9 6 1 , 0 6 8 4 , 5 9 7 1 2 , 5 9 7 6 1 0 2 , 1 4 1 6 0 6 4 2 , 7 4 7 4 2 , ) 4 3 4 0 1 ( , ) 6 5 2 1 ( , 7 5 0 3 1 , ) 2 9 5 3 ( , ) 0 2 ( 5 4 4 9 , ) 3 2 ( ) 9 9 1 ( 3 2 2 9 , M $ 2 6 3 6 4 4 8 0 8 5 4 1 5 4 4 0 9 8 0 9 ) 5 5 ( ) 5 9 2 ( 7 3 2 ) 0 2 ( ) 8 7 ( ) 0 6 ( - ) 8 3 1 ( ) 8 4 1 1 ( , - - M $ 7 5 6 1 , 7 1 2 4 7 8 1 , - 4 7 8 1 , 4 7 8 1 , 0 1 ) 3 7 7 ( ) 3 3 3 ( 1 1 1 1 , - - 8 7 7 ) 7 2 ( 1 5 7 ) 0 6 ( M $ 1 8 5 1 , 8 8 2 9 6 8 1 , 0 8 2 4 2 6 1 1 9 1 2 , 7 0 2 2 , ) 9 8 8 ( ) 0 2 1 ( ) 7 1 3 ( 8 9 1 1 , - 1 8 8 ) 9 3 1 ( - 2 4 7 - - - M $ 2 0 5 1 9 8 , 1 1 2 1 3 9 3 , 2 4 1 5 , 2 ) 1 8 6 , 1 ( - 3 3 8 ) 1 2 2 ( - 2 1 6 - 4 6 1 6 M $ 7 1 6 , 1 6 7 2 , 1 3 9 8 , 2 - - - 3 9 8 , 2 3 9 8 , 2 ) 2 8 0 , 1 ( ) 2 5 2 ( 9 5 5 , 1 ) 9 6 3 ( - 0 9 1 , 1 - - M $ 1 0 0 , 3 9 3 8 0 4 8 , 3 - - - 0 4 8 , 3 0 4 8 , 3 ) 8 8 4 , 1 ( ) 6 7 1 ( 6 7 1 , 2 ) 4 5 6 ( - 2 2 5 , 1 - - - - M $ 7 1 7 , 8 4 9 7 , 1 1 1 5 , 0 1 - 1 1 5 , 0 1 1 1 5 , 0 1 ) 3 7 3 , 3 ( ) 3 6 6 ( 5 7 4 , 6 ) 5 3 9 , 1 ( - 0 4 5 , 4 - - 0 9 1 , 1 2 2 5 , 1 0 4 5 , 4 r e h t O d n a S F I t s e w k n a B l d n a a e Z t n e m e g a n a M s t e k r a M i g n k n a B w e N h t l a e W d n a g n k n a B i e t a v i r P i g n k n a B s e c i v r e S l a n o i t u t i t s n I d n a s s e n i s u B l i a t e R ) d e u n i t n o c ( s t n e m g e S y b g n i t a r e p o d n a t n e m r i a p m i e r o f e b e m o c n i g n i t a r e p o t e n l a t o T ) 3 ( " s i s a b h s a c " - x a t r e t f a t i f o r p t e N x a t e m o c n i e r o f e b t i f o r p t e N t i f e n e b / ) e s n e p x e ( x a t e t a r o p r o C e s n e p x e t n e m r i a p m i n a o L s t s e r e t n i g n i l l o r t n o c - n o N s e s n e p x e g n i t a r e p O s e s n e p x e e m o c n i t n e m e g a n a m s d n u F e m o c n i g n i k n a b l a t o T e m o c n i g n i t a r e p o l a t o T ) 2 ( e c n e i r e p x e t n e m t s e v n I e m o c n i e c n a r u s n I " s i s a b y r o t u t a t s " - x a t r e t f a t i f o r p t e N s m e t i h s a c - n o n r e h O t n o i t a m r o f n i l a n o i t i d d A l y t i l i t a o v S R F I d n a g n g d e H i g n i t r o p e R l i a c n a n F i 6 2 e t o N e m o c n i t s e r e t n i t e N e m o c n i i g n k n a b r e h O t ) 9 4 7 ( ) 0 6 1 ( ) 7 7 ( ) 9 3 ( ) 7 8 ( ) 2 1 1 ( ) 4 1 2 ( n o i t i a c e r p e d d n a n o i t a s i t r o m A 1 0 0 3 3 9 , , 7 3 4 2 7 8 6 9 3 1 3 1 , 8 4 0 2 5 2 , 0 8 8 2 8 , 0 0 1 1 5 , 6 8 3 0 8 , 1 3 8 3 7 , 3 0 0 , 1 2 4 3 2 , 6 2 2 5 2 , 1 8 1 9 1 5 , 4 5 1 1 8 1 , 6 7 2 5 4 , 1 0 1 2 3 6 , 4 3 3 4 2 5 , 8 3 2 t e e h S e c n a l a B s t e s s a l t a o T s e i t i l i b a i l l t a o T n i d e l i a t e d y c i l o p g n i t n u o c c a e v i t n e c n i n i e g n a h c a d n a , s n o i t a c o l l a i g n c i r p r e f s n a r t d e t a d p u i g n d u c n l i l y g o o d o h t e m e s n e p x e d n a e u n e v e r , s e c n a a b l r e m o t s u c f o n o i t a c o l l a e h t o t s t n e m e n i f e r t c e l f e r o t d e t a t s e r n e e b s a h n o i t a m r o f n i e v i t a r a p m o C ) 1 ( . ) n a g i n o i l l i m 4 $ ( t n e m t s u d a j n o i t a u a v l s e r a h s y r u s a e r t d n a ) e s n e p x e n o i l l i m 7 2 $ ( s m e t i h s a c - n o n t s e w k n a B , ) e s n e p x e n o i l l i m 9 9 1 $ ( l y t i l i t a o v S R F I d n a i g n g d e h o t g n i t a e r l s e s s o l d n a s n a g i d e s i l a e r n u s a h c u s , s m e t i h s a c - n o n s e d u c x e l e c n a a b l i s h T i . s s a b x a t - e r p a n o d e t n e s e r p s i e c n e i r e p x e t n e m t s e v n I ) 2 ( ) 3 ( . 1 e t o N s t n e m e t a t s l a i c n a n i f e h t o t s e t o N Notes to the financial statements 143 143 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 Financial performance and position Income Australia New Zealand Other locations (1) Total Income Non-Current Assets Australia New Zealand Other locations (1) Total non-current assets (2) 2017 $M 37,304 5,099 2,546 44,949 15,301 1,045 329 16,675 % 83. 0 11. 3 5. 7 100. 0 91. 8 6. 2 2. 0 100. 0 2016 $M 36,721 5,015 2,643 44,379 15,687 1,087 326 17,100 Group Year Ended 30 June % 82. 7 11. 3 6. 0 100. 0 91. 7 6. 4 1. 9 2015 $M 37,656 5,215 2,456 45,327 14,149 994 297 % 83. 1 11. 5 5. 4 100. 0 91. 7 6. 4 1. 9 100. 0 15,440 100. 0 (1) Other locations include: United Kingdom, United States, Japan, Singapore, Malta, Hong Kong, Indonesia, China, India, Vietnam and South Africa. (2) 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. Summarised Income Statement Net premium income and related revenue Outward reinsurance premiums expense Claims expense Reinsurance recoveries Investment revenue (excluding investments in subsidiaries) Increase in contract liabilities Operating income Acquisition expenses Maintenance expenses Management expenses Net profit before income tax Corporate tax expense Policyholder tax expense Net profit after income tax Life Insurance Life Investment Contracts 2016 $M 2,077 (291) (1,437) 244 494 (316) 771 (95) (239) (11) 426 (72) (99) 255 2017 $M 2,045 (273) (1,592) 260 153 (58) 535 (97) (226) (11) 201 (39) 3 165 Contracts 2016 $M 235 - (82) - 338 (297) 194 (3) (54) (13) 124 (32) (2) 90 2017 $M 240 - (106) - 671 (570) 235 (5) (53) (12) 165 (32) (35) 98 2017 $M 2,285 (273) (1,698) 260 824 (628) 770 (102) (279) (23) 366 (71) (32) 263 Group 2016 $M 2,312 (291) (1,519) 244 832 (613) 965 (98) (293) (24) 550 (104) (101) 345 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457144 144 3 Notes to the financial statements Note 27 Life Insurance (continued) Sources of life insurance net profit Net profit after income tax is represented by: Emergence of planned profit margins Difference between actual and planned experience Effects of changes to underlying assumptions Reversal of previously recognised losses or loss recognition on groups of related products Investment earnings on assets in excess of policyholder liabilities Other movements Net profit after income tax Life insurance premiums received and receivable Life insurance claims paid and payable Life Insurance Life Investment Contracts Contracts 2017 $M 247 (7) (3) (100) 28 - 165 2,433 1,620 2016 $M 269 (43) (2) (60) 70 21 255 2017 $M 101 2 - (6) 1 - 98 2016 $M 94 (3) - (2) 1 - 90 2,460 1,480 726 1,745 501 1,243 2017 $M 348 (5) (3) (106) 29 - 263 3,159 3,365 Group 2016 $M 363 (46) (2) (62) 71 21 345 2,961 2,723 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. Reconciliation of movements in policy liabilities Contract policy liabilities Gross policy liabilities opening balance Movement in policy liabilities reflected in the Income Statement Contract contributions recognised in policy liabilities Contract withdrawals recognised in policy liabilities Non-cash movements FX translation adjustment Life Insurance Life Investment Contracts Contracts 2017 2016 2017 2016 $M $M $M $M 4,054 96 3 (47) (19) (8) 3,752 344 7 (50) (17) 18 8,582 570 442 9,159 297 216 (1,637) (1,163) - (18) - 73 2017 $M 12,636 666 445 (1,684) (19) (26) Group 2016 $M 12,911 641 223 (1,213) (17) 91 Gross policy liabilities closing balance 4,079 4,054 7,939 8,582 12,018 12,636 Liabilities ceded under reinsurance Opening balance Increase in reinsurance assets Closing balance Net policy liabilities Expected to be realised within 12 months Expected to be realised in more than 12 months Total net insurance policy liabilities (385) (38) (423) 459 3,197 3,656 (357) (28) (385) 479 3,190 3,669 - - - 1,475 6,464 7,939 - - - (385) (38) (423) (357) (28) (385) 1,872 6,710 8,582 1,934 9,661 11,595 2,351 9,900 12,251 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 buffer to absorb unanticipated losses from its activities and, in the event of such losses, enable the life company to continue to meet its insurance obligations. APRA has issued Life Prudential Standard LPS 110 to LPS 118 'Capital Adequacy' for determining the level of capital reserves. These prudential standards prescribe the methodology for determining both the minimum capital requirements for each of its funds and the composition of assets available to meet these capital requirements. The table below shows the Capital Adequacy Multiple representing the ratio or assets available for capital over the capital reserve. Capital Adequacy Multiple The Colonial Mutual Life Assurance Society Limited, Australia 2017 Times 1. 58 2016 Times 1. 44 Notes to the financial statements 145 145 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: a) Audit and audit related services Audit services PricewaterhouseCoopers Australian firm Network firms of PricewaterhouseCoopers Australian firm Total remuneration for audit services Audit related services PricewaterhouseCoopers Australian firm Network firms of PricewaterhouseCoopers Australian firm Total remuneration for audit related services Total remuneration for audit and audit related services b) Non-audit services Taxation services PricewaterhouseCoopers Australian firm Network firms of PricewaterhouseCoopers Australian firm Total remuneration for tax related services Other Services PricewaterhouseCoopers Australian firm Network firms of PricewaterhouseCoopers Australian firm Total remuneration for other services Total remuneration for non-audit services Total remuneration for audit and non-audit services (1) 2017 $'000 16,643 5,167 21,810 5,765 981 6,746 28,556 617 1,601 2,218 4,347 534 4,881 7,099 Group 2016 $'000 15,779 4,886 20,665 3,433 1,083 4,516 25,181 1,215 1,465 2,680 4,741 123 4,864 7,544 35,655 32,725 2017 $'000 10,758 705 11,463 4,952 178 5,130 16,593 197 834 1,031 4,300 - 4,300 5,331 21,924 Bank 2016 $'000 11,271 703 11,974 2,564 374 2,938 14,912 1,161 598 1,759 4,394 - 4,394 6,153 21,065 (1) An additional amount of $10,728,963 (2016: $9,429,368) was paid to PricewaterhouseCoopers by way of fees for entities not consolidated into the Financial Statements. Of this amount, $8,401,175 (2016: $7,279,197) 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 Commitments - Property, Plant and Equipment Due within one year Due after one year but not later than five years Due after five years Total lease commitments - property, plant and equipment Lease Arrangements 2017 $M 662 1,826 2,160 4,648 Group 2016 $M 606 1,847 2,436 4,889 2017 $M 603 1,641 1,951 4,195 Bank 2016 $M 550 1,672 2,212 4,434 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 $99 million as at 30 June 2017 (2016: $110 million). Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457146 146 3 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. Credit risk related instruments Guarantees (1) Documentary letters of credit (2) Performance related contingents (3) Commitments to provide credit (4) Other commitments (5) Total credit risk related instruments Credit risk related instruments Guarantees (1) Documentary letters of credit (2) Performance related contingents (3) Commitments to provide credit (4) Other commitments (5) Total credit risk related instruments Face Value Credit Equivalent Group 2016 $M 6,216 1,308 2,568 170,742 1,636 182,470 2017 $M 7,424 1,168 2,127 167,205 835 178,759 2016 $M 6,216 1,153 2,560 162,967 1,359 174,255 Bank Face Value Credit Equivalent 2016 $M 5,873 1,227 2,568 155,446 1,073 166,187 2017 $M 7,037 1,086 2,127 153,638 711 164,599 2016 $M 5,873 1,075 2,560 149,272 1,036 159,816 2017 $M 7,424 1,183 2,133 173,555 837 185,132 2017 $M 7,037 1,098 2,133 158,567 713 169,548 (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 the Bank’s 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. Notes to the financial statements 147 147 Note 30 Contingent Liabilities, Contingent Assets and Commitments (continued) Contingent Credit Liabilities (continued) 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 2017 was $5,614,191 (2016: $5,041,791). 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 Network 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 On 3 August 2017, Australian Transaction Reports and Analysis Centre (AUSTRAC) commenced civil penalty proceedings against CBA. Full details of which are included in Note 44 Subsequent Events. The Group is not engaged in any other 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457148 148 3 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 (RAS) articulates the type and degree of risk the Board is prepared to accept (Risk Appetite) and the maximum level of risk that the institution must operate within (Risk 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 and its implementation. reflects material arising risks from The Group’s Risk Management Strategy (RMS) describes each material risk, the approach taken to managing these risks and how this is operationalised through governance, policies and procedures. 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 chairs of the Board and Risk Committee to APRA on Risk Management 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. The Board discusses culture and values on a continuous basis, and takes action whenever necessary. 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. Notes to the financial statements 149 149 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 (ICAAP) used, risk 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 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 and industry sectors. Governing Policies:  Group Credit Risk Management Framework  Group Level Credit Risk Policies 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  The Group Market Risk Policy  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, Business Unit (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. 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 these risks include:  Value at Risk, 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;  Aggregate Portfolio Limit; and  Value at Risk 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 adverse and ordinary operating circumstances. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457150 150 3 Notes to the financial statements Note 31 Risk Management (continued) Material Risks (continued) Description Risk Type Governing Policies and Key Management Committees Key Limits, Standards and Measurement Approaches Operational Risk Operational risk is the 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 Committee:  Executive Committee Compliance Risk 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. Governing Policies:  Group Operational Risk Management Framework  Compliance Risk Management Framework  Compliance Incident Management Group Policy Insurance Risk Key Management Committee:  Executive Committee Governing Policies:  Product Management Policy  Underwriting Policy  Claims Management Policy  Reinsurance Management Policy Key Management Committee:  Executive Committees of insurance writing businesses 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. 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. Notes to the financial statements 151 151 Note 31 Risk Management (continued) Material Risks (continued) Risk Type Description Strategic Business 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. Governing Policies and Key Management Committees Key Limits, Standards and Measurement Approaches Governing Policies:  Group Risk Management Strategy (RMS)  Climate Policy Position Statement 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. Key Management Committee:  Executive Committee Strategic risk is measured using a combination of judgemental assessments captured through Scenario Analysis and an internal profit simulation model. Potential adverse Climate Change impacts are measured and managed as an outcome of all other material risks. In addition, Corporate Responsibility programs and initiatives:  Commit us to playing our part in limiting climate change to well below two degrees in line with the Paris Agreement;  Support the responsible global transition to net zero emissions by 2050;  Outline our objectives for safeguarding the environment, whilst supporting economic growth and development;  Consider Environmental, Social and Governance (ESG) issues, including climate change impacts in assessing our relationships with customers and suppliers; and  Provide guidelines in monitoring and reducing our own greenhouse gas emissions and energy use. Potential adverse Reputational impacts are managed as an outcome of all other material risks. In addition, the Group:  Sets a range of conduct codes to ensure we provide a high level of service to our customers (as set out in Statement of Professional Practices); and  Has a corporate responsibility plan focused on driving positive change through education, innovation and good business practice. Reputational Risk 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:  Group RMS  Group Environment Policy  Climate Policy Position Statement  Human Rights Position Statement Key Management Committee:  Executive Committee Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457152 152 3 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. Credit policies 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 counterparties to meet their contracted repayment, financial obligations acceptable forms of collateral and security and the frequency of credit reviews. for The credit policies and frameworks include concentration limits which 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 credit policies, 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 counterparties in this segment. Auto-decisioning uses a scorecard approach based on the Group’s historical experience on similar applications, information from a credit reference bureau and the Group’s existing knowledge of a counterparties behaviour and updated information provided by the counterparty. Loan applications that do not meet scorecard Auto- to a Risk decisioning 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 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: Credit risk-rated exposures are generally reviewed on an individual basis, at least annually, and fall within the following categories:   “Pass” – these credit facilities qualify for approval of new or increased exposure on normal commercial terms; and or recovery prospects) “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 facilitate (maximising rehabilitation to “pass grade”. Where a counterparty is in default but the facility is well secured, the facility may be classed as troublesome but not impaired. Where a counterparty’s facility is not well secured and a loss is expected, impaired. Restructured facilities, where the original contractual arrangements have been modified to provide concessions for the customer’s financial difficulties, are rendered non-commercial to the Group. is classed as facility the 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. 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. The estimate 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 the Group applies a credit conversion factor of 100% to the undrawn amount. facilities, For uncommitted facilities the EAD will generally be the drawn balance only. For defaulted facilities it is the actual amount outstanding at default. 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    Aid in assessing changes to counterparty credit quality;  Type and level of any collateral held; Influence decisions on approval, management and pricing of individual credit facilities; and Provide the basis for reporting details of the Group's credit portfolio. Notes to the financial statements 153 153 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 Performance Overview 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. The Group’s cash and included $20,307 million (2016: $11,629 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 investment grade banks. 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. 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. 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 less (typically 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). 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. 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 42. 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, $100,078 million (2016: $96,111 million) are secured. Loans, Bills Discounted and Other Receivables The principal collateral balances are: types for loans and receivable    Mortgages over residential and commercial real estate; Charges over business assets such as cash, shares, inventory, fixed assets and accounts receivables; and Guarantees received from third parties. Collateral security, 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, are generally secured against real estate, while short term revolving consumer credit is generally not secured by formal collateral. 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457154 154 3 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. Group At 30 June 2017 Bank Asset Other Agri- and Other Home Constr- Other Financ- Comm and Sovereign culture Financial Loans uction Personal $M $M $M $M $M $M ing $M Indust. Other $M $M Total $M Australia Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets 21,929 4,711 - Receivables due from other financial institutions - Assets at fair value through Income Statement: Trading Insurance Other Derivative assets 18,107 2,131 51 1,181 Available-for-sale investments 41,323 - - - - 56 - 2,565 1,545 5,806 607 20,037 27,126 - - - - - - - - - - - - 53 - - - - - - - - - - - - - - - - - 8,811 3,535 453 4,668 294 18,085 8,784 15,425 436,184 3,765 23,183 7,872 120,638 - 1,460 2 16 - 4,073 - - 1 4 - 6 - - 38 359 Loans, bills discounted and other receivables (1) Bank acceptances Other assets (2) Total on Balance Sheet Australia 87,049 8,858 99,113 436,184 3,823 23,189 7,872 138,796 17,056 821,940 Credit risk exposures relating to off Balance Sheet assets: Guarantees 1,092 16 50 8 510 - Loan commitments Other commitments Total Australia 795 42 1,967 30 7,439 1,040 66,869 2,973 22,495 1 962 - - - 10 4,321 39,467 1,849 - - - 5,997 142,005 3,934 87,936 10,871 108,684 503,062 8,268 45,684 7,882 184,433 17,056 973,876 Overseas Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets 15,595 3,615 - Receivables due from other financial institutions 109 Assets at fair value through Income Statement: Trading Insurance Other Derivative assets 2,264 354 - 412 Available-for-sale investments 11,832 - - - - 19 - 7,363 1,712 1,843 - 3,037 2,959 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 265 - - 2,261 1 1,900 9,848 5,775 49,673 634 1,713 464 32,596 - 41 - - - 413 - - - - - 3 - 8 422 57 Loans, bills discounted and other receivables (1) Bank acceptances Other assets (2) Total on Balance Sheet overseas 32,507 9,867 26,717 49,673 634 1,716 472 35,602 2,023 159,211 Credit risk exposures relating to off Balance Sheet assets: Guarantees 1,086 1 2 - Loan commitments Other commitments Total overseas Total gross credit risk 284 26 881 5 32,818 120,754 10,755 21,626 6,335 7,414 1 - 34,139 57,087 37 196 - 867 - 2,017 - 3,733 - - - 301 14,423 187 - - - 1,427 31,550 219 472 8,354 50,513 2,023 192,407 234,946 19,079 1,166,283 142,823 560,149 9,135 49,417 (1) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income 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. - - - - - - - - - 26,640 2,565 28,463 11,472 1,111 25,995 68,743 633,936 41 17,056 22,974 - - - - - - - - - 2,023 19,210 7,472 4,241 2,197 - 5,729 14,792 102,603 422 2,545 Notes to the financial statements Notes to the financial statements 155 155 155 Note 32 Credit Risk (continued) Note 32 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements (continued) Group (1) At 30 June 2016 Group (1) At 30 June 2016 Bank Bank Asset Asset Other Other Agri- and Other Agri- and Other Home Constr- Home Constr- Other Other Financ- Comm and Financ- Comm and Sovereign Sovereign culture Financial culture Financial Loans Loans uction Personal uction Personal ing ing Indust. Indust. Other Other Total Total $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M Australia Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets 7,786 Australia Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets 7,786 3,185 3,185 - - Receivables due from other Receivables due from other financial institutions financial institutions - - - - 2,930 2,930 Assets at fair value through Assets at fair value through Income Statement: Income Statement: Trading Trading Insurance Insurance Other Other 16,763 16,763 1,402 1,402 43 43 - - - - - - 1,552 1,552 5,963 5,963 532 532 Derivative assets Derivative assets 1,630 1,630 115 115 30,209 30,209 Available-for-sale investments Available-for-sale investments 43,400 43,400 - - 23,856 23,856 - - - - - - - - - - - - - - - - - - - - - - - - 133 133 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,900 12,900 3,781 3,781 905 905 2,305 2,305 821 821 Loans, bills discounted Loans, bills discounted and other receivables (2) and other receivables (2) Bank acceptances Bank acceptances Other assets (3) Other assets (3) Total on Balance Sheet Total on Balance Sheet Australia Australia 19,279 19,279 8,001 8,001 15,729 15,729 409,452 409,452 3,804 3,804 23,524 23,524 7,677 7,677 116,668 116,668 2 2 707 707 68 68 - - 338 338 1,531 1,531 4 4 3,845 3,845 708 708 3 3 - 8 - 8 - - - - 44 44 363 363 15,703 15,703 22,165 22,165 87,235 87,235 8,827 8,827 92,470 92,470 410,160 410,160 4,278 4,278 23,532 23,532 7,677 7,677 137,787 137,787 15,703 15,703 787,669 787,669 Credit risk exposures relating to off Balance Sheet assets: Guarantees 839 Credit risk exposures relating to off Balance Sheet assets: Guarantees 839 18 63 18 63 58 58 542 542 6 6 Loan commitments Loan commitments Other commitments Other commitments Total Australia Total Australia 848 848 1,406 1,406 7,436 7,436 68,577 68,577 2,227 2,227 22,957 22,957 55 55 24 24 1,876 1,876 59 59 986 986 1 1 14 14 1,801 1,801 - - - - 4,321 4,321 37,667 37,667 - - - - - - 5,847 5,847 141,118 141,118 4,816 4,816 88,201 88,201 10,275 10,275 102,621 102,621 478,854 478,854 8,033 8,033 46,496 46,496 7,691 7,691 181,576 181,576 15,703 15,703 939,450 939,450 Overseas Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets Overseas Credit risk exposures relating to on Balance Sheet assets: Cash and liquid assets 3,918 3,918 8,483 8,483 - - Receivables due from other Receivables due from other financial institutions financial institutions 148 148 - - 8,513 8,513 Assets at fair value through Assets at fair value through Income Statement: Income Statement: Trading Trading Insurance Insurance Other Other 890 890 - - - - - - - - - - 1,559 1,559 2,401 2,401 - - Derivative assets Derivative assets 916 916 31 31 5,120 5,120 Available-for-sale investments Available-for-sale investments 9,507 9,507 - - 3,166 3,166 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 403 403 - - - - 6,108 6,108 148 148 Loans, bills discounted Loans, bills discounted and other receivables (2) and other receivables (2) Bank acceptances Bank acceptances Other assets (3) Other assets (3) Total on Balance Sheet Total on Balance Sheet overseas overseas 1,433 1,433 8,744 8,744 3,471 3,471 46,622 46,622 352 352 1,719 1,719 226 226 33,598 33,598 - - 17 17 - - - - - - 247 247 - - 70 70 - - - - - 6 - 6 - 5 - 5 272 272 30 30 2,110 2,110 2,485 2,485 21,394 21,394 8,775 8,775 28,395 28,395 46,692 46,692 352 352 1,725 1,725 231 231 40,559 40,559 2,110 2,110 150,233 150,233 Credit risk exposures relating to off Balance Sheet assets: Guarantees 60 Credit risk exposures relating to off Balance Sheet assets: Guarantees 60 4 1 4 1 - - 53 53 - - Loan commitments Loan commitments Other commitments Other commitments Total overseas Total gross credit risk Total overseas Total gross credit risk 313 313 827 827 4,018 4,018 7,309 7,309 194 194 1,940 1,940 43 43 - - - - - - 1 1 - - - 5 - - 5 - 251 251 15,018 15,018 652 652 - - - - - - 369 369 29,624 29,624 696 696 21,751 21,751 9,606 9,606 32,473 32,473 54,001 54,001 600 600 3,665 3,665 236 236 56,480 56,480 2,110 2,110 180,922 180,922 109,952 109,952 19,881 19,881 135,094 135,094 532,855 532,855 8,633 8,633 50,161 50,161 7,927 7,927 238,056 238,056 17,813 17,813 1,120,372 1,120,372 (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 (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. 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 (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. Property, plant and equipment, Investment in Associates and Joint Ventures, Intangible assets, Deferred tax assets and Other assets. - - - - - - - - - - - - - - - - - - 10,971 10,971 2,930 2,930 31,215 31,215 11,146 11,146 1,480 1,480 34,392 34,392 68,077 68,077 604,134 604,134 1,159 1,159 - - - - - - - - - - - - - - - - - - 12,401 12,401 8,661 8,661 2,852 2,852 2,401 2,401 - - 12,175 12,175 12,821 12,821 96,165 96,165 272 272 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457156 156 3 Notes to the financial statements Note 32 Credit Risk (continued) Large Exposures Concentrations of exposure to any counterparty 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): 5% to less than 10% of the Group's capital resources 10% to less than 15% of the Group's capital resources 2017 Group 2016 Number Number - - - - The Group has a high quality, well diversified credit portfolio, with 59% 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. Excluding some retail portfolios, the amount included as past due is the entire contractual balance, rather than the overdue portion. Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Credit related commitments Total $M 45,850 10,037 32,704 13,669 1,111 31,717 83,535 619,072 99,245 463 184,997 1,122,400 Neither Past Past due Due nor but not Impaired Impaired Impaired Assets Total Provisions for Impairment Losses $M - - - - - - - Gross $M 45,850 10,037 32,704 13,669 1,111 31,724 83,535 Group 2017 Net $M 45,850 10,037 32,704 13,669 1,111 31,724 83,535 $M $M - - - - - - - - - - - - 7 - 12,543 2,634 - - 15,177 2,321 724 - 135 3,187 633,936 102,603 463 185,132 1,140,764 (3,271) (422) - 630,665 102,181 463 (34) 185,098 (3,727) 1,137,037 Notes to the financial statements 157 157 Note 32 Credit Risk (continued) Neither Past Past Due Due nor but not Impaired Impaired Impaired Assets Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Credit related commitments Total $M 23,372 11,591 34,067 13,547 1,480 46,547 80,898 588,634 93,245 1,431 182,353 1,077,165 Total Provisions for Impairment Losses $M - - - - - - - Gross $M 23,372 11,591 34,067 13,547 1,480 46,567 80,898 Group 2016 Net $M 23,372 11,591 34,067 13,547 1,480 46,567 80,898 $M $M - - - - - - - - - - - - 20 - 13,104 2,337 - - 15,441 2,396 583 - 117 3,116 604,134 96,165 1,431 182,470 1,095,722 (3,318) 600,816 (400) - 95,765 1,431 (44) 182,426 (3,762) 1,091,960 Neither Past Past Due Due nor but not Impaired Impaired Impaired Assets $M $M Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Shares in and loans to controlled entities Credit related commitments $M 42,814 8,678 31,127 - 796 32,088 79,019 611,624 25,056 463 101,337 169,418 Total 1,102,420 12,581 Neither Past Past Due Due nor but not Impaired Impaired Impaired Assets $M $M Cash and liquid assets Receivables due from other financial institutions Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Loans, bills discounted and other receivables: Australia Overseas Bank acceptances Shares in and loans to controlled entities Credit related commitments $M 21,582 10,182 32,985 - 1,187 46,505 76,361 582,155 24,512 1,413 145,953 166,075 Total 1,108,910 13,117 - - - - - - - 12,541 40 - - - - - - - - - - 13,098 19 - - - Total Provisions for Impairment Losses $M - - - - - - - Bank 2017 Net $M 42,814 8,678 31,127 - 796 32,094 79,019 (3,262) 623,193 (83) 25,255 - - (34) 463 101,337 169,514 Gross $M 42,814 8,678 31,127 - 796 32,094 79,019 626,455 25,338 463 101,337 169,548 1,117,669 (3,379) 1,114,290 Total Provisions for Impairment Losses $M - - - - - - - Bank 2016 Net $M 21,582 10,182 32,985 - 1,187 46,525 76,361 (3,309) 594,302 (56) - - (44) 24,594 1,413 145,953 166,143 Gross $M 21,582 10,182 32,985 - 1,187 46,525 76,361 597,611 24,650 1,413 145,953 166,187 1,124,636 (3,409) 1,121,227 - - - - - 6 - 2,290 242 - - 130 2,668 - - - - - 20 - 2,358 119 - - 112 2,609 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457158 158 3 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 counterparty’s internally assessed PD to S&P Global ratings, reflecting a counterparty’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. Credit grading Australia Investment Pass Weak Total Australia Overseas (1) Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Credit grading Australia Investment Pass Weak Total Australia Overseas (1) Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Home Other Asset Commercial Loans Personal Financing and Industrial $M $M $M $M Other 296,466 121,035 7,791 425,292 15,200 31,530 934 47,664 472,956 4,249 14,362 3,416 22,027 - 1,356 - 1,356 23,383 300 7,172 164 7,636 10 438 - 448 8,084 77,407 83,758 2,952 164,117 23,696 25,363 718 49,777 213,894 Other Group 2017 Total $M 378,422 226,327 14,323 619,072 38,906 58,687 1,652 99,245 718,317 Group 2016 (2) Home Other Asset Commercial Loans Personal Financing and Industrial Total $M $M $M $M $M 275,186 112,840 9,861 397,887 15,218 29,340 328 44,886 442,773 4,454 14,237 3,669 22,360 - 1,391 - 1,391 23,751 299 6,940 198 7,437 8 188 - 196 7,633 77,918 80,769 2,263 160,950 22,592 23,181 999 46,772 207,722 357,857 214,786 15,991 588,634 37,818 54,100 1,327 93,245 681,879 (1) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading. (2) Following enhancements to methodology in the current period, there was a change to the categorisation of credit exposures by credit grade for loans which were neither past due nor impaired. Comparative information was restated to conform to presentation in the current period. Notes to the financial statements 159 159 Note 32 Credit Risk (continued) Credit Quality of Loans, Bills Discounted and Other Financial Assets which were Neither Past Due nor Impaired (continued) Credit grading Australia Investment Pass Weak Total Australia Overseas Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Credit grading Australia Investment Pass Weak Total Australia Overseas Investment Pass Weak Total overseas Total loans which were neither past due nor impaired Bank 2017 Other Home Other Asset Commercial Loans Personal Financing and Industrial Total $M $M $M $M $M 296,403 114,974 7,793 419,170 4,240 14,331 3,408 21,979 87 388 - 475 - 7 - 7 285 7,114 163 7,562 - - - - 419,645 21,986 7,562 76,598 83,380 2,935 162,913 18,015 6,320 239 24,574 187,487 Other 377,526 219,799 14,299 611,624 18,102 6,715 239 25,056 636,680 Bank 2016 (1) Home Other Asset Commercial Loans Personal Financing and Industrial Total $M $M $M $M $M 275,033 107,899 9,858 392,790 4,461 14,191 3,655 22,307 115 417 - 532 - 16 - 16 291 6,895 198 7,384 - - 3 3 393,322 22,323 7,387 77,107 80,359 2,208 159,674 18,252 5,253 456 23,961 183,635 356,892 209,344 15,919 582,155 18,367 5,686 459 24,512 606,667 (1) Following enhancements to methodology in the current period, there was a change to the categorisation of credit exposures by credit grade for loans which were neither past due nor impaired. Comparative information was restated to conform to presentation in the current period. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457160 160 3 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 2017 and 30 June 2016 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. Loans which were past due but not impaired Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Loans which were past due but not impaired Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Group 2017 Home Other Loans Personal (1) Other Asset Commercial Financing and Industrial Total $M $M $M $M $M 5,004 1,675 922 1,136 1,048 9,785 1,623 185 53 41 18 1,920 11,705 568 180 121 - 4 873 263 45 15 16 5 344 1,217 87 55 23 - - 165 - 6 2 2 - 10 175 1,147 145 98 132 198 6,806 2,055 1,164 1,268 1,250 1,720 12,543 255 15 21 24 45 360 2,080 2,141 251 91 83 68 2,634 15,177 Group 2016 Other Home Loans Personal (1) Other Asset Commercial Financing and Industrial Total $M 6,166 1,755 877 1,027 819 10,644 1,328 187 69 38 15 1,637 12,281 $M 592 188 124 - 5 909 238 41 15 16 6 316 1,225 $M 85 45 23 - 2 155 8 2 1 1 - 12 167 $M 767 154 102 177 196 $M 7,610 2,142 1,126 1,204 1,022 1,396 13,104 277 40 14 6 35 372 1,768 1,851 270 99 61 56 2,337 15,441 (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. Notes to the financial statements 161 161 Note 32 Credit Risk (continued) Age Analysis of Loans, Bills Discounted and Other Receivables that are Past Due but Not Impaired (continued) Loans which were past due but not impaired Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Loans which were past due but not impaired Australia Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total Australia Overseas Past due 1 - 29 days Past due 30 - 59 days Past due 60 - 89 days Past due 90 - 179 days Past due 180 days or more Total overseas Total loans which were past due but not impaired Bank 2017 Home Other Loans Personal (1) Other Asset Commercial Financing and Industrial Total $M $M $M $M $M 5,003 1,674 922 1,136 1,048 9,783 31 2 - - - 33 9,816 568 180 121 - 4 873 1 - - - - 1 87 55 23 - - 165 - - - - - - 1,147 145 98 132 198 6,805 2,054 1,164 1,268 1,250 1,720 12,541 2 2 1 1 - 6 34 4 1 1 - 40 874 165 1,726 12,581 Bank 2016 Other Home Loans Personal (1) Other Asset Commercial Financing and Industrial Total $M $M $M $M $M 6,162 1,754 877 1,026 819 10,638 9 - - - 1 10 592 188 124 - 5 909 1 - - - - 1 85 45 23 - 2 155 - - - - - - 767 154 102 177 196 7,606 2,141 1,126 1,203 1,022 1,396 13,098 3 2 1 2 - 8 13 2 1 2 1 19 10,648 910 155 1,404 13,117 (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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457162 162 3 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. Australia Non-Performing assets: Gross balances Less individual provisions for impairment Net non-performing assets Restructured assets: Gross balances Less individual provisions for impairment Net restructured assets Unsecured retail products 90 days or more past due: Gross balances Less provisions for impairment (1) Net unsecured retail products 90 days or more past due Net Australia impaired assets Overseas Non-Performing assets: Gross balances Less individual provisions for impairment Net non-performing assets Restructured assets: Gross balances Less individual provisions for impairment Net restructured assets Unsecured retail products 90 days or more past due: Gross balances Less provisions for impairment (1) Net unsecured retail products 90 days or more past due Net overseas impaired assets Total net impaired assets (1) Collective provisions are held for these portfolios. Impaired Assets by Size 2017 $M 2016 $M 2015 $M 2014 $M Group 2013 $M 1,962 (817) 1,145 174 - 174 251 (157) 94 1,413 686 (163) 523 101 - 101 13 (12) 1 625 2,002 (807) 1,195 221 - 221 252 (169) 83 1,499 560 (138) 422 67 - 67 14 (13) 1 490 2,038 1,989 1,940 (775) 1,165 144 - 144 251 (130) 121 1,430 454 (112) 342 54 - 54 12 (9) 3 2,134 3,316 (1,035) (1,564) 1,099 1,752 361 - 361 236 (131) 105 346 - 346 217 (128) 89 1,565 2,187 377 (92) 285 248 - 248 11 (8) 3 356 (64) 292 87 - 87 8 (3) 5 399 1,829 536 2,101 384 2,571 Impaired assets by size Less than $1 million $1 million to $10 million Greater than $10 million Total Australia Overseas 2017 $M 1,338 666 383 2,387 2017 $M 114 260 426 800 Total 2017 $M 1,452 926 809 3,187 Australia Overseas 2016 $M 1,170 661 644 2,475 2016 $M 123 215 303 641 Group Total 2016 $M 1,293 876 947 3,116 Notes to the financial statements 163 163 Note 32 Credit Risk (continued) Movement in Impaired Assets Movement in gross impaired assets Gross impaired assets - opening balance New and increased Balances written off Returned to performing or repaid Portfolio managed - new/increased/return to performing/repaid Gross impaired assets - closing balance Impaired Assets by Industry and Status 2017 $M 3,116 2,164 (1,225) (1,637) 769 3,187 2016 $M 2,855 2,370 (1,328) (1,460) 679 3,116 2015 $M 3,367 2,095 (1,355) (1,903) 651 2,855 2014 $M 4,330 2,393 (1,697) (2,303) 644 3,367 Group 2013 $M 4,687 3,016 (1,774) (2,165) 566 4,330 Group 2017 Gross Total Provisions Net Total Impaired for Impaired Balance Assets $M $M Assets $M Impaired Net (1) Assets Write-offs (1) Recoveries (1) Write-offs Industry Loans - Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total loans - Australia Loans - Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total loans - overseas Total loans Other balances - Australia Credit commitments Derivatives Total other balances - Australia Other balances - Overseas Credit commitments Derivatives Total other balances - overseas Total other balances 18,085 8,784 15,425 436,184 3,765 23,183 7,872 120,638 633,936 1,900 9,848 5,775 49,673 634 1,713 464 32,596 102,603 736,539 151,936 25,995 177,931 33,196 5,729 38,925 216,856 - 87 24 1,107 48 283 71 701 2,321 - 279 9 89 1 13 6 327 724 3,045 61 5 66 74 2 76 142 $M - 40 (3) 858 23 117 53 259 $M - 17 1 115 16 792 41 210 1,347 1,192 - (47) (27) (249) (25) (166) (18) (442) (974) - (25) - (4) (1) (12) (10) (114) (166) - 254 9 85 - 1 (4) 213 558 (1,140) 1,905 - - - (9) - (9) (9) 61 5 66 65 2 67 133 - 15 5 4 8 60 - 64 156 1,348 - - - - - - - $M $M - - (1) (3) (1) (170) (7) (12) (194) - - - (1) (1) (11) - (3) (16) (210) - - - - - - - - 17 - 112 15 622 34 198 998 - 15 5 3 7 49 - 61 140 1,138 - - - - - - - Total 953,395 3,187 (1,149) 2,038 1,348 (210) 1,138 (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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457164 164 3 Notes to the financial statements Note 32 Credit Risk (continued) Impaired Assets by Industry and Status (continued) Gross Total Provisions Net Group (1) 2016 Total Impaired for Impaired Impaired Net (2) Assets Write-offs (2) Recoveries (2) Write-offs Balance Assets Industry Loans - Australia Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total loans - Australia Loans - Overseas Sovereign Agriculture Bank and other financial Home loans Construction Other personal Asset financing Other commercial and industrial Total loans - overseas Total loans Other balances - Australia Credit commitments Derivatives Total other balances - Australia Other balances - Overseas Credit commitments Derivatives Total other balances - overseas Total other balances $M 19,279 8,001 15,729 409,452 3,804 23,524 7,677 116,668 604,134 1,433 8,744 3,471 46,622 352 1,719 226 33,598 96,165 700,299 151,781 34,392 186,173 30,689 12,175 42,864 229,037 $M - 136 18 921 28 255 85 953 2,396 - 277 10 99 14 12 18 153 583 2,979 59 20 79 58 - 58 137 Assets $M - (42) (29) (193) (25) (176) (28) (483) (976) - (23) (4) (6) (8) (15) (10) (76) $M - 94 (11) 728 3 79 57 470 1,420 - 254 6 93 6 (3) 8 77 (142) (1,118) 441 1,861 - - - (9) - (9) (9) 59 20 79 49 - 49 128 $M $M $M - 84 10 82 11 747 54 249 1,237 - 7 - 7 - 54 - 112 180 1,417 - - - - - - - - (1) (27) (3) (1) (154) (4) (21) (211) - - (1) (1) - (10) - (2) (14) (225) - - - - - - - - 83 (17) 79 10 593 50 228 1,026 - 7 (1) 6 - 44 - 110 166 1,192 - - - - - - - Total 929,336 3,116 (1,127) 1,989 1,417 (225) 1,192 (1) Comparative information has been restated to conform to presentation in the current year. (2) Write-offs, recoveries and net write-offs are not recognised against credit commitments or derivatives as these exposures are closed out and converted to loans and receivables on impairment. Write-offs and recoveries take place subsequent to this conversion. Collateral held against Loans, Bills Discounted and Other Receivables Maximum exposure ($M) Collateral classification: Secured (%) Partially secured (%) Unsecured (%) Group 2017 Other Home Loans Other Asset Commercial Personal Financing and Industrial Total 485,857 24,896 8,336 217,450 736,539 99. 2 0. 8 - 12. 7 - 87. 3 99. 3 0. 7 - 42. 0 15. 4 42. 6 79. 8 5. 0 15. 2 Notes to the financial statements 165 165 Note 32 Credit Risk (continued) Collateral held against Loans, Bills Discounted and Other Receivables (continued) Maximum exposure ($M) Collateral classification: Secured (%) Partially secured (%) Unsecured (%) Maximum exposure ($M) Collateral classification: Secured (%) Partially secured (%) Unsecured (%) Maximum exposure ($M) Collateral classification: Secured (%) Partially secured (%) Unsecured (%) Group (1) 2016 Other Home Loans Other Asset Commercial Personal Financing and Industrial Total 456,074 25,243 7,903 211,079 700,299 99. 3 0. 7 - 13. 6 - 86. 4 98. 7 1. 3 - 41. 8 15. 4 42. 8 Other 78. 9 5. 1 16. 0 Bank 2017 Home Loans Other Asset Commercial Personal Financing and Industrial Total 430,575 23,143 7,801 190,274 651,793 99. 1 0. 9 - 13. 4 - 86. 6 99. 2 0. 8 - 40. 5 14. 6 44. 9 Other 79. 5 4. 8 15. 7 Bank (1) 2016 Home Loans Other Asset Commercial Personal Financing and Industrial Total 404,902 23,467 7,639 186,253 622,261 99. 2 0. 8 - 14. 3 - 85. 7 98. 8 1. 2 - 40. 7 14. 6 44. 7 78. 5 4. 9 16. 6 (1) Comparative information has been restated to conform to presentation in the current year. 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), and personal loans are 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 shares. 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457166 166 3 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 measures 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. that loss 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 stress testing to measure levels the potential significantly higher than 97.5%. Management then uses these results in decisions to manage the economic impact of market risk positions. loss at confidence for economic Total Market Risk VaR (1-day 97.5% confidence) Traded Market Risk Non-Traded Interest Rate Risk (2) Non-Traded Equity Risk (2) Non-Traded Insurance Market Risk (2) June Average As at Average As at June 2016 (1) 2016 $M June 2017 (1) 2017 $M June $M $M 10. 6 11. 1 10. 1 16. 9 21. 5 19. 5 6. 6 5. 8 14. 7 10. 2 17. 2 7. 5 5. 1 5. 0 4. 5 5. 0 (1) Average VaR calculated for each 12 month period. (2) 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 through Traded market risk the Group’s is generated 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 treasury, capital market and risk management instruments, range of securities and derivatives. including a broad Traded Market Risk VaR (1-day 97.5% confidence) Interest rate risk Foreign exchange risk Equities risk Commodities risk Credit spread risk Average As at Average As at June 2017 (1) $M 8. 9 1. 8 0. 5 3. 0 3. 3 June 2017 $M 6. 7 1. 1 0. 1 3. 3 2. 8 June 2016 (1) $M 7. 9 2. 4 0. 4 2. 2 3. 0 June 2016 $M 16. 7 1. 7 1. 1 2. 3 3. 2 Diversification benefit (9. 3) (5. 1) (8. 3) (10. 4) Total general market risk Undiversified risk ASB Bank Total 8. 2 2. 2 0. 2 8. 9 2. 1 0. 1 7. 6 2. 3 0. 2 14. 6 2. 1 0. 2 10. 6 11. 1 10. 1 16. 9 (1) Average VaR calculated for each 12 month period. Non-Traded Market Risk Interest Rate Risk in the Banking Book transformation activities of 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. The maturity the Group create mismatches in the repricing terms of assets and liabilities positions. These mismatches may have undesired earnings and value outcomes depending on rate movements. The Group’s objective is to manage interest rate risk to achieve stable and sustainable net interest income in the long-term. interest the 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. Notes to the financial statements 167 167 Note 33 Market Risk (continued) Non-Traded 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. Net Interest Earnings at Risk Average monthly exposure High monthly exposure Low monthly exposure As at balance date June 2017 $M 284. 7 25. 4 352. 3 33. 5 248. 9 17. 4 304. 4 18. 5 June 2016 $M 316. 1 30. 2 408. 7 38. 9 227. 1 16. 5 308. 9 27. 6 AUD NZD AUD NZD AUD NZD AUD NZD (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 impact of customer prepayments on 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. 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. Non-Traded Interest Rate VaR (20 day 97.5% confidence) (2) AUD Interest rate risk NZD Interest rate risk (3) Average Average June 2016 (1) $M June 2017 (1) $M 96. 1 4. 5 65. 5 3. 6 (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 primarily through business activities in IB&M and Wealth Management. A 20-day, 97.5% confidence VaR is used to measure the economic impact of adverse changes in value. Non-Traded Equity VaR (20 day 97.5% confidence) VaR As at June 2017 $M 26. 0 As at June 2016 $M 34. 0 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 the Statutory Funds and A portion of financial assets held within the Insurance business, both within the 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 2017. in A 20-day 97.5% VaR measure is used to capture the Non- traded market risk exposures. Non-Traded VaR in Australian Life Insurance Business (20 day 97.5% confidence) Shareholder funds (2) Guarantees (to Policyholders) (3) Average Average June 2016 (1) $M June 2017 (1) $M 1. 3 22. 3 3. 9 19. 4 (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 prices of these assets 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). Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457168 168 3 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 to achieve funding policies are designed diversified sources of funding by product, term, maturity date, investor type, investor location, currency and concentration, on a cost effective basis. This objective applies to the Group’s wholesale and retail funding activities. Liquidity and Funding Risk Management Framework includes the charter of which The CBA Board is ultimately responsible for the sound and prudent management of liquidity risk across the Group. 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) the management of assets and liabilities, reviewing liquidity and regularly funding policies and strategies, as well as monitoring compliance with those policies across the Group. Group Treasury manages the Group’s liquidity and funding 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. reviewing 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. Liquidity and Funding Policies and Management The Group’s liquidity and funding policies provide that:  An excess of liquid assets over the minimum prescribed under APRA’s Liquidity Coverage Ratio (LCR) 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;    Additional internal funding and liquidity metrics are also calculated and stress tests additional to the LCR are run; long-term wholesale Short and established, monitored and reviewed regularly. funding limits are The Group’s wholesale funding market capacity is regularly assessed and used as a factor in funding strategies;    Balance Sheet assets that cannot be liquidated quickly are funded with stable 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 certain Reserve Bank of Australia (RBA) criteria for purchases under reverse internal RMBS, being repo. The mortgages that have been securitised but retained by the Bank, that are repo-eligible with the RBA under stress; and final category is  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 international and domestic Its wholesale funding programs which include 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 type delivering granular customer and product information to inform business decision making, product development and resulting in a greater awareness of the liquidity risk adjusted value of banking products;   A liquidity management model similar to a “maturity ladder” or “liquidity gap analysis”, that allows 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 idiosyncratic 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; Notes to the financial statements 169 169 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. International wholesale funding conditions were generally positive with credit spreads tracking tighter over the course of the financial year. Geopolitical events such as elections in the US, France and the United Kingdom had a smaller impact on debt markets than some had anticipated. The to avoid Group has managed 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. its debt portfolio 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. Maturity Period as at 30 June 2017 Group Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative financial instruments: Held for trading Held for hedging purposes (net-settled) Held for hedging purposes (gross-settled): Outflows Inflows Bank acceptances Insurance policy liabilities Debt issues and loan capital Managed funds units on issue Other monetary liabilities Total monetary liabilities Guarantees (2) Loan commitments (2) Other commitments (2) Total off Balance Sheet items Total monetary liabilities and off Balance Sheet items 0 to 3 Months $M 509,615 24,508 6,188 21,283 77 5,724 (5,018) 205 - 3 to 12 Months $M 98,303 3,964 1,553 - 204 6,923 (6,159) 258 - - 6,304 589,780 7,424 173,555 4,153 185,132 - 1,794 144,722 - - - - Over 5 Not Years Specified $M $M 1 to 5 Years $M 20,132 - 1,168 - 1,595 272 - 1,682 - 1,201 65,799 (62,248) 19,905 (18,940) - - - - - 731 - 323 Total $M 628,322 28,472 10,591 21,283 3,077 98,351 (92,365) 463 12,018 188,313 2,577 9,152 - - - - - - - - 12,018 - 2,577 - 128,001 33,156 14,595 910,254 - - - - - - - - - - - - 7,424 173,555 4,153 185,132 20,894 37,882 100,824 28,713 774,912 144,722 128,001 33,156 14,595 1,095,386 (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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457170 170 3 Notes to the financial statements Note 34 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities (continued) Maturity Period as at 30 June 2016 Group Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative financial instruments: Held for trading Held for hedging purposes (net-settled) Held for hedging purposes (gross-settled): Outflows Inflows Bank acceptances Insurance policy liabilities Debt issues and loan capital Managed funds units on issue Other monetary liabilities Total monetary liabilities Guarantees (2) Loan commitments (2) Other commitments (2) Total off Balance Sheet items Total monetary liabilities and off Balance Sheet items Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative financial instruments: Held for trading Held for hedging purposes (net-settled) Held for hedging purposes (gross-settled): Outflows Inflows Bank acceptances Debt issues and loan capital Due to controlled entities Other monetary liabilities Total monetary liabilities Guarantees (2) Loan commitments (2) Other commitments (2) Total off Balance Sheet items Total monetary liabilities and off Balance Sheet items Over 5 Not Years Specified $M $M 1 to 5 Years $M 20,773 3 1,247 - 1,889 561 - 1,209 - 2,729 35,336 (32,938) 22,289 (20,982) - - - - Total $M 589,408 28,795 10,308 27,959 4,622 83,507 (77,263) 1,431 12,636 - - - - - - - - 12,636 0 to 3 Months $M 492,838 27,247 6,128 27,959 (510) 3,431 (3,271) 1,378 - 19,059 - 4,657 3 to 12 Months $M 75,236 1,545 1,724 - 514 22,451 (20,072) 53 - 46,358 - 1,445 82,969 32,358 - 180,744 - 88 - 4 1,606 13 1,606 6,207 578,916 129,254 109,367 38,168 14,255 869,960 6,216 170,742 5,512 182,470 - - - - - - - - - - - - - - - - 6,216 170,742 5,512 182,470 761,386 129,254 109,367 38,168 14,255 1,052,430 Maturity Period as at 30 June 2017 Bank Over 5 Not Years Specified $M $M 0 to 3 Months $M 471,711 24,113 4,899 21,050 51 3,683 (3,042) 205 17,155 6,273 5,935 3 to 12 Months $M 83,962 3,964 1,437 - 105 5,385 (4,629) 258 31,674 5,877 2,091 1 to 5 Years $M 16,997 - 1,168 - 1,348 71,013 (65,902) - 80,618 23,743 120 88 - 1,682 - 1,201 24,902 (22,973) - 24,344 55,329 9 552,033 130,124 129,105 84,582 7,037 158,567 3,944 169,548 - - - - - - - - - - - - 721,581 130,124 129,105 84,582 Total $M 572,758 28,077 9,186 21,050 2,705 104,983 (96,546) 463 153,791 91,222 8,155 895,844 7,037 158,567 3,944 169,548 1,065,392 - - - - - - - - - - - - - - - - - (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. Notes to the financial statements 171 171 Note 34 Liquidity and Funding Risk (continued) Maturity Analysis of Monetary Liabilities (continued) Maturity Period as at 30 June 2016 Bank Monetary liabilities Deposits and other public borrowings (1) Payables due to other financial institutions Liabilities at fair value through Income Statement Derivative financial instruments: Held for trading Held for hedging purposes (net-settled) Held for hedging purposes (gross-settled): Outflows Inflows Bank acceptances Debt issues and loan capital Due to controlled entities Other monetary liabilities Total monetary liabilities Guarantees (2) Loan commitments (2) Other commitments (2) Total off Balance Sheet items Total monetary liabilities and off Balance Sheet items Over 5 Not Years Specified $M $M 0 to 3 Months $M 456,306 26,804 3,844 27,672 (604) 3,143 (2,906) 1,359 16,495 6,681 4,442 3 to 12 Months $M 63,101 1,545 1,151 - 327 26,209 (22,059) 54 41,229 6,365 4,688 1 to 5 Years $M 17,641 3 1,247 - 1,620 40,622 (36,762) - 65,816 24,266 56 180 - 1,210 - 2,813 35,132 (31,333) - 27,965 92,735 2 543,236 122,610 114,509 128,704 5,873 155,446 4,868 166,187 - - - - - - - - - - - - 709,423 122,610 114,509 128,704 Total $M 537,228 28,352 7,452 27,672 4,156 105,106 (93,060) 1,413 151,505 130,047 9,193 909,064 5,873 155,446 4,868 166,187 1,075,251 - - - - - - - - - - 5 5 - - - - 5 (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) The actuarial assessment of the Fund at 30 June 2016 is due to be finalised by September 2017. Demographic assumptions approved for the 30 June 2016 actuarial assessment have been applied in the 30 June 2017 valuation. 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 ($105 million). The Bank agreed to continue the deficit recovery contributions of GBP15 million per annum ($25 million) until 31 December 2017 to CBA (UK) SBS in addition to the regular GBP3 million per annum ($5 million) contributions for future defined benefit accruals. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 172 172 3 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 2018 are $240 million and GBP10 million ($17 million) respectively. Defined Benefit Superannuation Plans The amounts reported in the Balance Sheet are reconciled as follows: Commonwealth Bank Group Super CBA(UK)SBS 2017 $M (656) 645 (11) - (11) (11) (7) (1) - (8) (656) (7) (18) - 41 (84) (4) 32 40 2016 $M (656) 605 (51) - (51) (51) (6) (2) - (8) (672) (6) (24) - - (57) (9) 27 85 2017 $M (3,566) 3,981 415 426 (11) 415 (45) 5 (275) (315) Total 2016 $M (3,770) 3,980 210 261 (51) 210 (40) 7 (266) (299) (3,770) (3,856) (45) (123) (7) 41 91 (13) 220 40 (40) (168) (7) 321 (325) (17) 237 85 Present value of funded obligations Fair value of plan assets Net pension assets/(liabilities) as at 30 June Amounts in the Balance Sheet: Assets (Note 16) Liabilities (Note 21) Net assets/(liabilities) The amounts recognised in the Income Statement are as follows: Current service cost Net interest income/(expense) Employer financed benefits within accumulation division (1) Total included in superannuation plan expense Changes in the present value of the defined benefit obligation are as follows: 2017 $M (2,910) 3,336 426 426 - 426 (38) 6 (275) (307) 2016 $M (3,114) 3,375 261 261 - 261 (34) 9 (266) (291) Opening defined benefit obligation (3,114) (3,184) (38) (105) (7) - 175 (9) 188 - (34) (144) (7) 321 (268) (8) 210 - Current service cost Interest cost Member contributions Actuarial gains/(losses) from changes in demographic assumptions Actuarial gains/(losses) from changes in financial assumptions Actuarial gains/(losses) from changes in other assumptions Payments from the plan Exchange differences on foreign plans Closing defined benefit obligation Changes in the fair value of plan assets are as follows: Opening fair value of plan assets Interest income Return on plan assets (excluding interest income) Member contributions Employer contributions Employer financed benefits within accumulation division Payments from the plan Exchange differences on foreign plans Closing fair value of plan assets (2,910) (3,114) (656) (656) (3,566) (3,770) 3,375 111 66 7 240 (275) (188) - 3,336 3,460 153 (9) 7 240 (266) (210) - 3,375 605 17 63 - 29 - (32) (37) 645 615 3,980 23 37 - 36 - (27) (79) 605 128 129 7 269 (275) (220) (37) 3,981 4,075 176 28 7 276 (266) (237) (79) 3,980 (1) Represents superannuation contributions required by the Bank to meet its obligations to members of the defined contribution division of Commonwealth Bank Group Super. Notes to the financial statements 173 173 Note 35 Retirement Benefit Obligations (continued) Economic Assumptions Economic assumptions The above calculations were based on the following assumptions: Discount rate Inflation rate Rate of increases in salary Commonwealth Bank Group Super CBA(UK)SBS 2017 % 4. 20 2. 00 3. 00 2016 % 3. 40 1. 60 2. 60 2017 % 2. 60 3. 50 4. 50 2016 % 3. 00 3. 10 4. 10 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: Expected life expectancies for pensioners Male pensioners currently aged 60 Male pensioners currently aged 65 Female pensioners currently aged 60 Female pensioners currently aged 65 Sensitivity to Changes in Assumptions Commonwealth Bank Group Super CBA(UK)SBS 2017 2016 2017 2016 Years Years Years Years 28. 7 23. 7 33. 0 28. 0 28. 6 23. 6 33. 0 27. 9 27. 8 23. 0 29. 7 24. 9 28. 7 23. 8 31. 2 26. 2 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: Impact of change in assumptions on liabilities 0.25% decrease in discount rate 0.25% increase in inflation rate 0.25% increase to the rate of increases in salary Longevity increase of 1 year Average Duration The average duration of defined benefit obligation at 30 June is as follows: Average duration at balance date Risk Management Commonwealth Bank Group Super CBA(UK)SBS 2017 2017 % 3. 30 2. 60 0. 50 4. 40 % 5. 10 3. 50 0. 50 3. 90 Commonwealth Bank Group Super CBA(UK)SBS 2017 Years 12 2017 Years 19 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 42% growth and 58% 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 rate swaps. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457174 174 3 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: Asset allocations Cash Equities - Australian (1) Equities - Overseas (1) Bonds - Commonwealth Government (1) Bonds - Semi-Government (1) Bonds - Corporate and other (1) Real Estate (2) Derivatives (2) Other (3) Total fair value of plan assets 2017 2016 Fair value % of plan Fair value % of plan Commonwealth Bank Group Super ($M) asset 144 307 520 648 1,107 62 367 (18) 199 3,336 4. 3 9. 2 15. 6 19. 4 33. 2 1. 9 11. 0 (0. 6) 6. 0 100. 0 ($M) 108 311 431 670 1,150 122 214 (14) 383 3,375 asset 3. 2 9. 2 12. 8 19. 9 34. 1 3. 6 6. 3 (0. 4) 11. 3 100. 0 (1) Values based on prices or yields quoted in an active market. (2) Values based on non-quoted information. (3) These are alternative investments which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include multi-asset investments, liquid alternative investments and hedge funds. The Australian equities fair value includes $20 million of Commonwealth Bank shares. The real estate fair value includes $2 million of property assets leased to the Bank. The bonds – corporate and other fair value includes $1 million of Commonwealth Bank debt securities. Note 36 Investments in Subsidiaries and Other Entities Subsidiaries The key subsidiaries of the Bank are: Entity Name Australia (a) Banking CBA Covered Bond Trust Commonwealth Securities Limited Medallion Trust Series 2008-1R Medallion Trust Series 2011-1 Medallion Trust Series 2013-1 Medallion Trust Series 2013-2 Medallion Trust Series 2014-1 Medallion Trust Series 2014-2 (b) Insurance and Funds Management Capital 121 Pty Limited Colonial Holding Company Limited Commonwealth Insurance Holdings Limited Entity Name Medallion Trust Series 2015-1 Medallion Trust Series 2015-2 Medallion Trust Series 2016-1 Medallion Trust Series 2016-2 Medallion Trust Series 2017-1 Medallion Trust Series 2017-1P Residential Mortgage Group Pty Ltd Series 2008-1D SWAN Trust Commonwealth Insurance Limited The Colonial Mutual Life Assurance Society Limited All the above subsidiaries are 100% owned and incorporated in Australia. Notes to the financial statements 175 175 Note 36 Investments in Subsidiaries and Other Entities (continued) Subsidiaries (continued) Entity Name New Zealand and Other Overseas (a) Banking ASB Bank Limited ASB Covered Bond Trust ASB Finance Limited ASB Holdings Limited ASB Term Fund CommBank Europe Limited Medallion NZ Series Trust 2009-1R PT Bank Commonwealth (b) Insurance and Funds Management ASB Group (Life) Limited PT Commonwealth Life Sovereign Assurance Company Limited Extent of Beneficial Interest if not 100% Incorporated in New Zealand New Zealand New Zealand New Zealand New Zealand Malta New Zealand Indonesia New Zealand Indonesia New Zealand 99% 80% 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 Shareholders' Equity Total non-controlling interests 2017 $M 546 546 Group 2016 $M 550 550 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457176 176 3 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 2017 and 30 June 2016. 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. AHL Holdings Pty Limited (1) Bank of Hangzhou Co., Ltd BoCommLife Insurance Company Limited First State European Diversified Infrastructure Fund FCP-SIF Qilu Bank Co., Ltd Vietnam International Commercial Joint Stock Bank Other Carrying amount of investments in associates and joint ventures Group 2017 2016 2017 2016 $M 288 1,412 151 116 445 186 180 Ownership Ownership Principal Country of Balance $M Interest % Interest % Activities Incorporation Date 272 1,405 174 110 444 192 179 80 18 38 3 20 20 80 Mortgage Broking Australia 20 Commercial Banking Insurance 38 China China 30-Jun 31-Dec 31-Dec 4 Funds Management Luxembourg 31-Dec 20 Commercial Banking China 31-Dec 20 Financial Services Vietnam 31-Dec Various Various Various Various Various 2,778 2,776 (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 $292 million (2016: $280 million). Share of Associates' and Joint Ventures profits Operating profits before income tax Income tax expense Operating profits after income tax (1) 2017 $M 373 (81) 292 Group 2016 $M 367 (78) 289 (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, Medallion NZ and Swan structured entities. 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 $773 million (2016: $1,118 million). The Group has no contractual obligations to purchase assets from its securitisation structured entities. Notes to the financial statements 177 177 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’). The Trusts are bankruptcy remote SPVs that guarantee any debt obligations owing under the US$30 billion CBA Covered Bond Programme and the EUR7 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 2017, the Bank entered into a debt forgiveness arrangement with two wholly owned structured entities for the total of $11 million (2016: $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. Exposures to unconsolidated structured entities Assets at fair value through income statement - trading Available-for-sale investments Loans, bills discounted and other receivables Other assets Total on Balance Sheet exposures Total notional amounts of off Balance Sheet exposures (1) Total maximum exposure to loss Total assets of the entities (2) Other Investment 2017 RMBS ABS Financing Funds Total $M 10 6,824 2,573 - 9,407 1,348 10,755 62,805 $M - 701 1,589 - 2,290 1,658 3,948 19,017 $M - - 2,589 - 2,589 668 3,257 9,736 $M 828 212 7,410 133 8,583 5,837 14,420 325,941 $M 838 7,737 14,161 133 22,869 9,511 32,380 417,499 (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 $10.7 billion. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457178 178 3 Notes to the financial statements Note 36 Investments in Subsidiaries and Other Entities (continued) Unconsolidated Structured Entities (continued) Exposures to unconsolidated structured entities Assets at fair value through income statement - trading Available-for-sale investments Loans, bills discounted and other receivables Other assets Total on Balance Sheet exposures Total notional amounts of off Balance Sheet exposures (1) Total maximum exposure to loss Total assets of the entities (2) RMBS ABS Financing Funds Other Investment $M 5 7,123 2,432 - 9,560 1,338 10,898 47,626 $M - 872 1,606 - 2,478 543 3,021 15,066 $M - - 2,627 - 2,627 501 3,128 9,967 $M 1,078 205 9,861 123 11,267 3,915 15,182 290,261 362,920 2016 Total $M 1,083 8,200 16,526 123 25,932 6,297 32,229 (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. 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. Ranking and credit rating of exposures to unconsolidated structured entities Senior (1) Mezzanine (2) Subordinated (3) Total maximum exposure to loss RMBS $M 10,727 13 15 Other Financing $M 3,257 - - ABS $M 3,936 12 - 2017 Total $M 17,920 25 15 10,755 3,948 3,257 17,960 (1) All RMBS and ABS exposures, and $1,776 million of other financing exposures are rated investment grade, $1,481 million of other financing exposures are sub-investment grade. (2) All RMBS and ABS exposures are rated investment grade. (3) All exposures are rated sub-investment grade. Ranking and credit rating of exposures to unconsolidated structured entities Senior (1) Mezzanine (2) Subordinated (3) Total maximum exposure to loss RMBS $M 10,853 18 27 Other Financing $M 3,128 - - ABS $M 3,008 13 - 2016 Total $M 16,989 31 27 10,898 3,021 3,128 17,047 (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. 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 2017, the Group 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), was the manager of SHIELD and SHIELD was the trustee of SHIELD Trust No. 2. The Group deregistered SHIELD and wound up SHIELD Trust No. 2 during the year ended 30 June 2017. There was no significant income earned or expense incurred directly from these entities during the year ended 30 June 2017. There were no assets transferred by all parties to the sponsored entities during the year ended 30 June 2017. Notes to the financial statements 179 179 Note 37 Key Management Personnel Detailed remuneration disclosures by Key Management Personnel are provided in the Remuneration Report of the Directors’ Report on pages 63 to 81 and have been audited. Key management personnel compensation Short-term benefits Post-employment benefits Long-term benefits (1) Share-based payments (1) Total 2017 $'000 18,167 438 359 15,966 34,930 Group 2016 $'000 34,707 457 562 12,815 48,541 2017 $'000 18,167 438 359 15,966 34,930 Bank 2016 $'000 34,707 457 562 12,815 48,541 (1) 2016 comparatives have been restated to reflect a disclosure methodology change where Deferred Rights are included in share-based payments instead of long-term benefits. Shareholdings Details of the aggregate shareholdings of Key Management Personnel are set out below. Previous Acquired/ Years Net Non-Executive Directors Executives (7) Class (1) Ordinary (5) (6) PERLS Ordinary (6) LTVR - Reward Rights Deferred Rights Balance Granted as 1 July 2016 Remuneration Awards Vested (2) Change Other (3) 30 June 2017 Balance (4) 201,155 9,830 601,430 1,137,718 26,633 1,784 3,094 - 295,725 23,086 - - - (53,434) (22,012) (31,246) (1,854) (95,729) (350,389) - 171,693 11,070 505,701 1,029,620 27,707 (1) LTVR Reward Rights represent rights granted under the GLRP which are subject to performance hurdles. Deferred Rights represent the deferred STVR awarded under Executive General Manager arrangements, sign-on and retention awards received as rights. PERLS include cumulative holdings of all PERLS securities issued by the Group. (2) LTVR 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 financial year. (3) Net Change Other incorporates changes resulting from purchases, sales, forfeitures, appointments and retirement of Non-Executive Directors and Executives during the financial year. (4) 30 June 2017 balances represent aggregate shareholdings of all Key Management Personnel at balance date. (5) Non-Executive Directors who hold fewer than 5,000 Commonwealth Bank shares are required to receive 20% of their total after-tax base fees as CBA shares. These shares are subject to a 10 year trading restriction (the shares will be released earlier if the director leaves the Board). (6) Opening balance has been restated to include a correction to CBA ordinary shares. (7) David Craig holds 28,150 PERLS. Anna Lenahan holds 2,000 Capital Notes. Loans to Key Management Personnel All loans to Key Management Personnel (including close family members or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of those family members or entities 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. Details of aggregate loans to Key Management Personnel are set out below: Loans Interest Charged (1) Comparatives have been restated to align to actual balances. Other transactions of Key Management Personnel 2017 $'000 12,145 406 2016 (1) $'000 11,330 460 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 180 180 3 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. Shares in controlled entities Loans to controlled entities Total shares in and loans to controlled entities 2017 $M 10,572 90,765 101,337 Bank 2016 $M 11,720 134,233 145,953 The Group also receives fees on an arm’s length basis of $53 million (2016: $49 million) from funds classified as associates. The Bank provides letters of comfort to other entities within the Group on standard terms. Guarantees include a $50 million (2016: $40 million) guarantee to AFS license holders in respect of excess compensation claims. 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 $302 million as at 30 June 2017 (2016: $213 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. Notes to the financial statements 181 181 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 Net profit after income tax (1) (Increase)/decrease in interest receivable (Decrease)/increase in interest payable Net decrease/(increase) in assets at fair value through Income Statement (excluding life insurance) Net gain on sale of controlled entities and associates Net gain on sale of investments Net movement in derivative assets/liabilities Net (gain)/loss on sale of property, plant and equipment Equity accounting profit Loan impairment expense Depreciation and amortisation (including asset write downs) Increase in liabilities at fair value through Income Statement (excluding life insurance) Increase/(decrease) in other provisions Increase/(decrease) in income taxes payable Decrease in deferred tax liabilities (Increase)/decrease in deferred tax assets (1) (Increase)/decrease in accrued fees/reimbursements receivable Increase/(decrease) in accrued fees and other items payable (1) Decrease in life insurance contract policy liabilities Cash flow hedge ineffectiveness Loss/(gain) on changes in fair value of hedged items Dividend received - controlled entities Changes in operating assets and liabilities arising from cash flow movements Other (1) Net cash (used in)/provided by operating activities 2017 $M 9,952 (14) (26) 2016 $M 9,243 (148) (312) Group 2015 $M 9,074 3 14 2017 $M 8,979 21 (5) Bank 2016 $M 8,639 (130) (295) 2,788 (8,538) (5,490) 3,372 (8,787) - - (21) - (3,509) 6,288 (2) - (492) (6) (292) 1,095 1,229 121 114 603 (14) (573) (238) 18 (1,240) (20) 799 - (15,228) 619 (807) - - 5,988 21 (289) 1,256 857 1,651 (78) 486 (162) 66 137 (150) (991) 5 (642) - (13,640) 679 (4,561) (13) - 6,180 8 (268) 988 803 975 354 (32) (15) 131 66 349 (1,133) 20 (493) - (4,658) 320 7,183 3 - 1,040 1,035 1,550 113 570 - (587) 20 (62) - 3 1,829 (1,200) (14,907) 552 (1,183) (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. (b) Reconciliation of Cash For the purposes of the Statements of Cash Flows, cash includes cash and money at short call. Notes, coins and cash at banks Other short-term liquid assets Cash and cash equivalents at end of year (c) Non-cash Financing and Investing Activities 2017 $M 14,635 8,482 23,117 2016 $M 12,103 2,344 14,447 Group 2015 $M 15,683 3,587 19,270 2017 $M 12,707 8,242 20,949 Shares issued under the Dividend Reinvestment Plan (1) 2017 $M 1,143 2016 $M 1,209 (1) No part of the Dividend Reinvestment Plan paid out in the 2017 financial year was satisfied through the on-market purchase and transfer of shares to participating shareholders (2016: nil and 2015: $704 million) (d) Acquisition of Controlled Entities On 2 December 2016, 100% of the contributed equity of Water Utilities Australia Limited was purchased for $32 million. 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 acquisitions 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. 15 - 1,153 666 123 (13) 181 - (22) (10) (67) - (5) (1,369) (1,462) (11,367) 1,020 (5,463) Bank 2016 $M 10,809 2,100 12,909 Group 2015 $M 571 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457182 182 3 Notes to the financial statements Note 39 Notes to the Statements of Cash Flows (continued) FGL is the owner and operator of gas transmission and distribution networks within New Zealand. 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: Net identifiable assets at fair value Add: Goodwill Purchase consideration transferred Less: Cash and cash equivalents acquired Less: Contingent consideration Net cash outflow on acquisition 2017 $M (1) 16 16 32 (1) 31 - 31 2016 $M (2) 553 304 857 - 857 - 857 Group 2015 $M (2) 43 41 - 41 (12) 29 (1) As the purchase price allocation is ongoing, the provisional fair value of net identifiable assets has been disclosed in accordance with Australian (2) Accounting Standards. In the current financial year, upon completion of purchase price allocation, net identifiable assets at fair value for FGL has been revised to $605 million and goodwill to $252 million, from provisional amounts disclosed in the prior year. 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. Notes to the financial statements 183 183 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 assets backing insurance liabilities held through infrastructure funds, 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: Fair Value as at 30 June 2017 Fair Value as at 30 June 2016 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $M $M $M $M $M $M $M $M Group Financial assets measured at fair value on a recurring basis Assets at fair value through Income Statement: Trading Insurance Other Derivative assets Available-for-sale investments Bills Discounted 24,657 3,519 51 63 75,050 7,486 8,047 8,620 1,060 31,594 8,346 - - 1,530 - 67 139 - 32,704 13,669 1,111 31,724 83,535 7,486 23,180 10,887 4,014 43 16 71,244 10,507 9,533 1,437 46,491 9,353 - - - - 60 301 - 34,067 13,547 1,480 46,567 80,898 10,507 Total financial assets measured at fair value 110,826 57,667 1,736 170,229 109,004 77,701 361 187,066 Financial liabilities measured at fair value on a recurring basis Liabilities at fair value through Income Statement Derivative liabilities Life investment contracts Total financial liabilities measured at fair value 2,525 192 - 7,867 30,036 7,374 2,717 45,277 - 102 565 667 10,392 30,330 7,939 2,749 38 - 7,543 39,819 8,582 48,661 2,787 55,944 - 64 - 64 10,292 39,921 8,582 58,795 Bank Fair Value as at 30 June 2017 Fair Value as at 30 June 2016 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $M $M $M $M $M $M $M $M Financial assets measured at fair value on a recurring basis Assets at fair value through Income Statement: Trading Other Derivative assets Available-for-sale investments Bills Discounted 23,866 - 55 71,206 7,486 7,261 796 31,972 7,674 - - - 67 139 - 31,127 796 32,094 79,019 7,486 22,731 10,254 - 16 68,190 10,507 1,187 46,449 7,870 - - - 60 301 - 32,985 1,187 46,525 76,361 10,507 Total financial assets measured at fair value 102,613 47,703 206 150,522 101,444 65,760 361 167,565 Financial liabilities measured at fair value on a recurring basis Liabilities at fair value through Income Statement Derivative liabilities Total financial liabilities measured at fair value 2,525 192 6,464 31,878 2,717 38,342 - 103 103 8,989 32,173 2,749 4,692 33 43,781 41,162 2,782 48,473 - 70 70 7,441 43,884 51,325 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457184 184 3 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 2017, the Group reclassified $752 million of available-for-sale securities (30 June 2016: $547 million) from Level 2 to Level 1. The Group also had insurance assets reclassifications of $488 million (30 June 2016: $628 million) from Level 1 to Level 2. There were $20 million trading security reclassifications (30 June 2016: nil) 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. Transfers in and out of level 3 were due to changes in the observability of inputs. Level 3 Movement Analysis for the year ended 30 June 2017 As at 1 July 2015 Purchases Sales/Settlements Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Statement of Comprehensive Income Transfers in Transfers out As at 30 June 2016 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016 As at 1 July 2016 Purchases Sales/Settlements Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Statement of Comprehensive Income Transfers in Transfers out As at 30 June 2017 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2017 Financial Assets Financial Liabilities Available Life Insurance Derivative for Sale Derivative Investment Assets Assets Investments Liabilities Contracts Group $M - - - - - - - - - - - - - - 1,530 - 1,530 - $M 80 13 - (33) - - - 60 - 60 3 - (4) - 8 - 67 (4) $M 115 4 (104) (2) - 305 (17) 301 1 301 - (160) - (2) - - 139 - $M (23) - (46) 5 - - - (64) - (64) - 29 6 - (73) - (102) $M - - - - - - - - - - - - - - (565) - (565) 6 - The valuation of insurance assets directly impacts the life investment contracts they are backing. The Group’s exposure to other 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, changes in fair value assumptions on all these instruments due to size or backing by policy holder funds generally have minimal impact on the Group’s Income Statement and Shareholders’ Equity. Notes to the financial statements 185 Note 40 Disclosures about Fair Values (continued) Level 3 Movement Analysis for the year ended 30 June 2017 (continued) Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Statement of Comprehensive Income As at 1 July 2015 Purchases Sales/Settlements Transfers in Transfers out As at 30 June 2016 As at 1 July 2016 Purchases Sales/Settlements Transfers in Transfers out As at 30 June 2017 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016 Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Statement of Comprehensive Income Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2017 Bank Financial Liabilities Financial Assets Available Derivative for Sale Derivative Assets Investments Liabilities $M 80 14 (34) 60 60 - - - - - 3 - - 8 - (4) 67 (4) $M 115 4 (104) (2) - 305 (17) 301 1 301 (160) (2) 139 - - - - - $M (25) (46) (70) (70) 32 - 1 - - - - - 8 - - 8 (73) (103) Notes to the financial statements Notes to the financial statements 185 185 185 Note 40 Disclosures about Fair Values (continued) Note 40 Disclosures about Fair Values (continued) Level 3 Movement Analysis for the year ended 30 June 2017 (continued) Level 3 Movement Analysis for the year ended 30 June 2017 (continued) As at 1 July 2015 Purchases As at 1 July 2015 Purchases Sales/Settlements Sales/Settlements Gains/(losses) in the period: Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Income Statement Recognised in the Statement of Comprehensive Income Recognised in the Statement of Comprehensive Income Transfers in Transfers in Transfers out Transfers out As at 30 June 2016 As at 30 June 2016 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2016 As at 1 July 2016 Purchases As at 1 July 2016 Purchases Sales/Settlements Sales/Settlements Gains/(losses) in the period: Gains/(losses) in the period: Recognised in the Income Statement Recognised in the Income Statement Recognised in the Statement of Comprehensive Income Recognised in the Statement of Comprehensive Income Transfers in Transfers in Transfers out Transfers out As at 30 June 2017 As at 30 June 2017 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2017 Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2017 Financial Assets Financial Assets Available Available Bank Bank Financial Financial Liabilities Liabilities Derivative Derivative for Sale for Sale Derivative Derivative Assets Assets Investments Investments Liabilities Liabilities $M $M 80 80 14 14 - - (34) (34) - - - - - - 60 60 - - 60 60 3 3 - - (4) (4) - - 8 8 - - 67 67 (4) (4) $M $M 115 115 4 4 (104) (104) (2) (2) - - 305 305 (17) (17) 301 301 1 1 301 301 - - (160) (160) - - (2) (2) - - - - 139 139 $M $M (25) (25) - - (46) (46) 1 1 - - - - - - (70) (70) - - (70) (70) - - 32 32 8 8 - - (73) (73) - - (103) (103) - - 8 8 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457186 186 3 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 2017 are presented below: Financial assets not measured at fair value on a recurring basis Cash and liquid assets Receivables due from other financial institutions Loans and other receivables Bank acceptances of customers Other assets Total financial assets Financial liabilities not measured at fair value on a recurring basis Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Debt issues Managed funds units on issue Bills payable and other liabilities Loan capital Total financial liabilities Financial guarantees, loan commitments and other off Balance Sheet instruments Financial assets not measured at fair value on a recurring basis Cash and liquid assets Receivables due from other financial institutions Loans and other receivables Bank acceptances of customers Other assets Total financial assets Financial liabilities not measured at fair value on a recurring basis Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Debt issues Managed funds units on issue Bills payable and other liabilities (1) Loan capital Total financial liabilities Financial guarantees, loan commitments and other off Balance Sheet instruments Group 30 June 2017 Fair value Level 1 Level 2 Level 3 $M $M $M Total $M 23,117 - - 463 2,371 25,951 - - 463 - 1,547 2,795 8,278 13,083 22,733 10,037 - - 3,655 36,425 626,924 28,432 - 167,752 1,030 6,690 10,428 841,256 - - 724,271 - - 45,850 10,037 724,271 463 6,026 724,271 786,647 - - - - - - - - 626,924 28,432 463 167,752 2,577 9,485 18,706 854,339 - - 182,999 182,999 Group 30 June 2016 Fair value Level 1 Level 2 Level 3 $M $M $M Total $M 14,447 - - 1,431 2,177 18,055 - - 1,431 - 1,400 1,414 6,151 8,925 11,591 - - 3,422 23,938 588,405 28,771 - 161,049 206 6,199 8,950 10,396 793,580 - - 685,341 - - 23,372 11,591 685,341 1,431 5,599 685,341 727,334 - - - - - - - - 588,405 28,771 1,431 161,049 1,606 7,613 15,101 803,976 - - 179,902 179,902 Carrying value Total $M 45,850 10,037 724,276 463 6,026 786,652 626,655 28,432 463 167,571 2,577 9,485 18,726 853,909 182,999 Carrying value Total $M 23,372 11,591 684,891 1,431 5,599 726,884 588,045 28,771 1,431 161,284 1,606 7,613 15,544 804,294 179,902 (1) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1. Notes to the financial statements 187 187 Note 40 Disclosures about Fair Values (continued) (d) Fair Value Information for Financial Instruments not measured at Fair Value (continued) Financial assets not measured at fair value on a recurring basis Cash and liquid assets Receivables due from other financial institutions Loans and other receivables Bank acceptances of customers Loans to controlled entities Other assets Total financial assets Financial liabilities not measured at fair value on a recurring basis Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Due to controlled entities Debt issues Bills payable and other liabilities Loan capital Total financial liabilities Financial guarantees, loan commitments and other off Balance Sheet instruments Financial assets not measured at fair value on a recurring basis Cash and liquid assets Receivables due from other financial institutions Loans and other receivables Bank acceptances of customers Loans to controlled entities Other assets Total financial assets Financial liabilities not measured at fair value on a recurring basis Deposits and other public borrowings Payables due to other financial institutions Bank acceptances Due to controlled entities Debt issues Bills payable and other liabilities Loan capital Total financial liabilities Financial guarantees, loan commitments and other off Balance Sheet instruments Bank 30 June 2017 Fair value Level 1 Level 2 Level 3 $M $M $M Total $M 20,949 - - 463 - 1,833 23,245 - - 463 - - 2,297 8,277 11,037 21,865 8,678 - - - 3,234 33,777 571,505 28,038 - - 135,621 5,044 9,642 - - 640,114 - 90,797 - 730,911 - - - 91,222 - - - 749,850 91,222 42,814 8,678 640,114 463 90,797 5,067 787,933 571,505 28,038 463 91,222 135,621 7,341 17,919 852,109 - - 167,415 167,415 Bank 30 June 2016 Fair value Level 1 Level 2 Level 3 $M $M $M Total $M 12,909 - - 1,413 - 1,727 16,049 - - 1,413 - - 964 6,155 8,532 - 8,673 10,182 - - - 3,274 22,129 536,331 28,328 - - 134,968 4,571 8,543 - - 607,899 - 133,567 - 741,466 - - - 130,046 - - - 712,741 130,046 21,582 10,182 607,899 1,413 133,567 5,001 779,644 536,331 28,328 1,413 130,046 134,968 5,535 14,698 851,319 - 163,619 163,619 Carrying value Total $M 42,814 8,678 640,017 463 90,765 5,067 787,804 571,353 28,038 463 91,222 134,966 7,341 17,959 851,342 167,415 Carrying value Total $M 21,582 10,182 607,412 1,413 134,233 5,001 779,823 536,086 28,328 1,413 130,046 134,214 5,535 15,138 850,760 163,619 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457188 188 3 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. The Bank’s access to residential mortgages transferred to the SPV are subject to the conditions set out in the transaction documents. 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. The Bank may repurchase loans from the SPV, subject to the conditions set out in the transaction documents. Notes to the financial statements 189 189 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: Carrying amount of transferred assets Carrying amount of associated liabilities (1) For those liabilities that have recourse only to the transferred assets: Fair value of transferred assets Fair value of associated liabilities Net position Carrying amount of transferred assets Carrying amount of associated liabilities (2) For those liabilities that have recourse only to the transferred assets: Fair value of transferred assets Fair value of associated liabilities Net position Repurchase Agreements 2017 $M 16,270 16,270 2016 $M 17,180 17,180 Group Covered Bonds Securitisation 2017 $M 31,796 28,984 2016 $M 36,770 31,802 2017 $M 15,108 13,771 15,116 13,771 1,345 2016 $M 13,863 12,106 13,874 12,106 1,768 Bank Repurchase Agreements Covered Bonds Securitisation 2017 $M 16,501 16,501 2016 $M 17,361 17,361 2017 $M 26,414 24,644 2016 $M 30,907 27,863 2017 $M 59,985 59,985 60,020 59,985 35 2016 $M 94,369 94,369 94,433 94,369 64 (1) Securitisation liabilities of the Group include RMBS notes issued by securitisation SPVs and held by external investors. (2) 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. The carrying amount of associated liabilities from securitisation SPVs is recorded under loans of controlled entities in Note 38. 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: Cash Securities Collateral held Collateral held which is re-pledged or sold 2017 $M 7,280 22,733 30,013 - Group 2016 $M 12,172 8,925 21,097 - 2017 $M 7,042 21,865 28,907 - Bank 2016 $M 11,856 8,673 20,529 - 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: Cash Securities (1) Assets pledged Asset pledged which can be re-pledged or re-sold by counterparty 2017 $M 6,307 16,360 22,667 16,360 Group 2016 $M 7,865 17,228 25,093 17,228 2017 $M 5,607 16,591 22,198 16,591 Bank 2016 $M 7,016 17,411 24,427 17,411 (1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 17. The Group and the Bank have pledged collateral as part of entering repurchase and derivative agreements. These transactions are governed by standard industry agreements. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457p u o r G 7 1 0 2 e n u J 0 3 s t n e m e e r g A r a l i i m S r o g n i t t e N r e t s a M e b a e c r o f n E o t l j t c e b u S l t e e h S e c n a a B e h t n o t e s f f o t o n s t n u o m A l t e e h S e c n a a B e h t n o t e s f f o s t n u o m A 190 190 s t n e m e t a t s l a i c n a n i f e h t o t s e t o N d e l t t e s h s a C . f f o t e s r o f y f i l a u q t o n o d t a h t s t n e m e e r g a r a l i m s i r o s t n e m e g n a r r a g n i t t e n l e b a e c r o f n e y b d e r e v o c s t n u o m a d n a t e e h S e c n a a B e h t l n o t e s f f o n e e b e v a h t a h t s t n u o m a s e i f i t n e d i w o e b l l e b a t e h T s e i t i l i b a L i l i a c n a n F i d n a s t e s s A l i a c n a n F i g n i t t e s f f O 3 4 e t o N 3 . s e r u s o c s d i l e s e h t f o e p o c s e h t i e d s t u o e r o f e r e h t d n a d e l t t e s y l l i a c m o n o c e e b o t d e m e e d e r a e g n a h c x e n a n o e d a r t t a h t s e v i t a v i r e d M $ 4 2 7 , 1 3 3 3 7 , 2 2 5 5 3 2 1 8 , 4 5 ) 0 3 3 , 0 3 ( ) 0 7 2 , 6 1 ( ) 7 1 4 ( ) 7 1 0 , 7 4 ( p u o r G 6 1 0 2 e n u J 0 3 M $ 6 1 3 , 3 - - 6 1 3 , 3 ) 1 8 8 , 2 ( - - ) 1 8 8 , 2 ( M $ 5 2 0 , 4 7 8 1 5 5 3 7 6 5 , 4 ) 4 5 8 , 3 ( - ) 7 1 4 ( ) 1 7 2 , 4 ( M $ ) 6 3 2 , 6 ( ) 9 8 2 , 1 2 ( - ) 5 2 5 , 7 2 ( 8 4 4 , 5 3 1 0 , 5 1 - 1 6 4 , 0 2 M $ ) 7 4 1 , 8 1 ( - ) 7 5 2 , 1 ( ) 4 0 4 , 9 1 ( 7 4 1 , 8 1 - 7 5 2 , 1 4 0 4 , 9 1 M $ 8 0 4 , 8 2 3 3 7 , 2 2 5 5 3 6 9 4 , 1 5 ) 9 4 4 , 7 2 ( ) 0 7 2 , 6 1 ( ) 7 1 4 ( ) 6 3 1 , 4 4 ( M $ ) 1 0 5 , 5 ( - ) 3 1 2 ( ) 4 1 7 , 5 ( 3 8 3 , 8 - 3 1 2 6 9 5 , 8 M $ 9 0 9 , 3 3 3 3 7 , 2 2 8 6 5 0 1 2 , 7 5 ) 2 3 8 , 5 3 ( ) 0 7 2 , 6 1 ( ) 0 3 6 ( ) 2 3 7 , 2 5 ( t n u o m a t e e h S s t n e m e e r g A g n i t t e N t n u o m A t e N ) 1 ( d e g d e P l / ) d e v i e c e R ( ) 1 ( s t n e m u r t s n I t e e h S e c n a a B l t e s f f o t n u o m A t n u o m A t e e h S e c n a a B l l a t o T o t j t c e b u s t o N l a r e t a l l o C l i a c n a n F i l i a c n a n F i e h t n o d e t r o p e R l e c n a a B s s o r G M $ 7 6 5 , 6 4 4 8 3 5 2 9 , 8 6 7 8 , 5 5 ) 1 2 9 , 9 3 ( ) 0 8 1 , 7 1 ( ) 7 5 4 ( ) 8 5 5 , 7 5 ( M $ 1 8 6 , 5 - - 1 8 6 , 5 ) 8 7 7 , 3 ( - - ) 8 7 7 , 3 ( M $ 6 3 6 , 6 9 4 8 3 9 2 0 , 7 ) 5 4 6 , 5 ( - ) 7 5 4 ( ) 2 0 1 , 6 ( M $ ) 3 7 1 , 1 1 ( - ) 7 2 4 , 8 ( ) 0 0 6 , 9 1 ( 1 2 4 , 7 1 9 6 , 6 1 - 2 1 1 , 4 2 M $ ) 7 7 0 , 3 2 ( - ) 9 8 4 ( ) 6 6 5 , 3 2 ( 7 7 0 , 3 2 - 9 8 4 6 6 5 , 3 2 M $ 6 8 8 , 0 4 4 8 3 5 2 9 , 8 5 9 1 , 0 5 ) 3 4 1 , 6 3 ( ) 0 8 1 , 7 1 ( ) 7 5 4 ( ) 0 8 7 , 3 5 ( M $ ) 5 9 7 , 7 ( - ) 1 3 5 ( ) 6 2 3 , 8 ( 9 7 4 , 1 1 - 1 3 5 0 1 0 , 2 1 M $ 1 8 6 , 8 4 5 1 9 5 2 9 , 8 1 2 5 , 8 5 ) 2 2 6 , 7 4 ( ) 0 8 1 , 7 1 ( ) 8 8 9 ( ) 0 9 7 , 5 6 ( t n u o m a t e e h S s t n e m e e r g A g n i t t e N t n u o m A t e N ) 1 ( d e g d e P l / ) d e v i e c e R ( ) 1 ( s t n e m u r t s n I t e e h S e c n a a B l t e s f f o t n u o m A t n u o m A t e e h S e c n a a B l l a t o T o t j t c e b u s t o N l a r e t a l l o C l i a c n a n F i l i a c n a n F i e h t n o d e t r o p e R l e c n a a B s s o r G l t e e h S e c n a a B e h t n o t e s f f o t o n s t n u o m A l t e e h S e c n a a B e h t n o t e s f f o s t n u o m A s t n e m e e r g A r a l i i m S r o g n i t t e N r e t s a M e b a e c r o f n E o t l j t c e b u S o t s t n e m e e r g a r e d n u d e s a h c r u p s e i t i r u c e S s t n e m u r t s n I l a i c n a n F i s t e s s a e v i t a v i r e D d e r e v i l e d t o n d o s l s e i t i r u c e s y t i u q E l l e s e r s t e s s a l a i c n a n i f l a t o T d e r e v i l e d t o n d e s a h c r u p s e i t i r u c e s y t i u q E o t s t n e m e e r g a r e d n u d o s l s e i t i r u c e S e s a h c r u p e r s e i t i l i b a i l l a i c n a n i f l a t o T o t s t n e m e e r g a r e d n u d e s a h c r u p s e i t i r u c e S d e r e v i l e d t o n d o s l s e i t i r u c e s y t i u q E s t e s s a l a i c n a n i f l a t o T l l e s e r s t n e m u r t s n I l a i c n a n F i s t e s s a e v i t a v i r e D d e r e v i l e d t o n d e s a h c r u p s e i t i r u c e s y t i u q E o t s t n e m e e r g a r e d n u d o s l s e i t i r u c e S e s a h c r u p e r s e i t i l i b a i l l a i c n a n i f l a t o T s e i t i l i b a i l e v i t a v i r e D s e i t i l i b a i l e v i t a v i r e D / s t e s s a l i a c n a n i f f o s t n u o m a t e n e h t d e e c x e o t t o n s a o s s t n e m e e r g a g n i t t e n t n a v e e r l y b d e p p a c n e e b e v a h t e e h S e c n a a B l e h t n o f f o t e s t o n l a r e t a l l o c l i a c n a n i f d n a s t n e m u r t s n i l i a c n a n i f f o s t n u o m a d e t a e r l e h t , e r u s o c s d i l i s h t f o e s o p r u p e h t r o F ) 1 ( . 2 4 t e o N n i l s e b a t e h t o t d n o p s e r r o c t o n l l i w s e c n a a b l l a r e t a l l o c e v o b a e h t t l u s e r a s A l . s e b a t e h t n i d e t c e l f e r t o n s i , s t s x e i t i e r e h w , n o i t a s i l a r e t a l l o c - r e v o . e . i , t e e h S e c n a a B e h t n o l d e t r o p e r ) s e i t i l i b a i l ( k n a B 7 1 0 2 e n u J 0 3 s t n e m e e r g A r a l i i m S r o g n i t t e N r e t s a M e l b a e c r o f n E o t t c e j b u S l t e e h S e c n a a B e h t n o t e s f f o t o n s t n u o m A l t e e h S e c n a a B e h t n o t e s f f o s t n u o m A 1 9 1 s t n e m e t a t s l a i c n a n i f e h t o t s e t o N s e i t i l i b a L i l i a c n a n F i d n a s t e s s A l i a c n a n F i g n i t t e s f f O 3 4 e t o N e c n a a B l l a t o T o t j t c e b u s t o N l a r e t a l l o C l i a c n a n F i l i a c n a n F i e h t n o d e t r o p e R l e c n a a B s s o r G M $ 4 9 0 , 2 3 5 6 8 , 1 2 9 5 9 , 3 5 ) 3 7 1 , 2 3 ( ) 1 0 5 , 6 1 ( ) 4 7 6 , 8 4 ( k n a B 6 1 0 2 e n u J 0 3 M $ 8 7 0 , 3 - 8 7 0 , 3 ) 6 0 1 , 3 ( - ) 6 0 1 , 3 ( M $ 7 4 9 , 3 0 6 1 7 0 1 , 4 ) 9 2 4 , 5 ( - ) 9 2 4 , 5 ( M $ ) 3 3 1 , 6 ( ) 0 2 4 , 0 2 ( ) 3 5 5 , 6 2 ( 2 0 7 , 4 6 1 2 , 5 1 8 1 9 , 9 1 M $ ) 6 3 9 , 8 1 ( ) 5 8 2 , 1 ( ) 1 2 2 , 0 2 ( 6 3 9 , 8 1 5 8 2 , 1 1 2 2 , 0 2 M $ 6 1 0 , 9 2 5 6 8 , 1 2 1 8 8 , 0 5 ) 7 6 0 , 9 2 ( ) 1 0 5 , 6 1 ( ) 8 6 5 , 5 4 ( M $ ) 1 0 5 , 5 ( - ) 1 0 5 , 5 ( 3 8 3 , 8 - 3 8 3 , 8 M $ 7 1 5 , 4 3 5 6 8 , 1 2 2 8 3 , 6 5 ) 0 5 4 , 7 3 ( ) 1 0 5 , 6 1 ( ) 1 5 9 , 3 5 ( s t n e m e e r g A r a l i i m S r o g n i t t e N r e t s a M e l b a e c r o f n E o t t c e j b u S l t e e h S e c n a a B e h t n o t e s f f o t o n s t n u o m A l t e e h S e c n a a B e h t n o t e s f f o s t n u o m A t n u o m a t e e h S s t n e m e e r g A g n i t t e N t n u o m A t e N ) 1 ( d e g d e P l / ) d e v i e c e R ( ) 1 ( s t n e m u r t s n I t e e h S e c n a a B l t e s f f o t n u o m A t n u o m A t e e h S M $ 5 2 5 , 6 4 3 7 6 , 8 8 9 1 , 5 5 ) 4 8 8 , 3 4 ( ) 1 6 3 , 7 1 ( ) 5 4 2 , 1 6 ( M $ 5 4 3 , 5 - 5 4 3 , 5 ) 5 8 7 , 3 ( - ) 5 8 7 , 3 ( M $ 5 0 5 , 6 9 4 1 5 , 6 ) 9 3 8 , 9 ( - ) 9 3 8 , 9 ( M $ ) 2 2 0 , 1 1 ( ) 5 7 1 , 8 ( ) 7 9 1 , 9 1 ( 7 0 6 , 6 2 7 8 , 6 1 9 7 4 , 3 2 M $ ) 3 5 6 , 3 2 ( ) 9 8 4 ( ) 2 4 1 , 4 2 ( 3 5 6 , 3 2 9 8 4 2 4 1 , 4 2 M $ 0 8 1 , 1 4 3 7 6 , 8 3 5 8 , 9 4 ) 9 9 0 , 0 4 ( ) 1 6 3 , 7 1 ( ) 0 6 4 , 7 5 ( M $ ) 5 9 7 , 7 ( - ) 5 9 7 , 7 ( 9 7 4 , 1 1 - 9 7 4 , 1 1 M $ 5 7 9 , 8 4 3 7 6 , 8 8 4 6 , 7 5 ) 8 7 5 , 1 5 ( ) 1 6 3 , 7 1 ( ) 9 3 9 , 8 6 ( t n u o m a t e e h S s t n e m e e r g A g n i t t e N t n u o m A t e N ) 1 ( d e g d e P l / ) d e v i e c e R ( ) 1 ( s t n e m u r t s n I t e e h S e c n a a B l t e s f f o t n u o m A t n u o m A t e e h S e c n a a B l l a t o T o t j t c e b u s t o N l a r e t a l l o C l i a c n a n F i l i a c n a n F i e h t n o d e t r o p e R l e c n a a B s s o r G o t s t n e m e e r g a r e d n u d e s a h c r u p s e i t i r u c e S s t n e m u r t s n I l a i c n a n F i s t e s s a e v i t a v i r e D s t e s s a l a i c n a n i f l a t o T l l e s e r o t s t n e m e e r g a r e d n u d o s l s e i t i r u c e S s e i t i l i b a i l l a i c n a n i f l a t o T e s a h c r u p e r o t s t n e m e e r g a r e d n u d e s a h c r u p s e i t i r u c e S s t n e m u r t s n I l a i c n a n F i s t e s s a e v i t a v i r e D s t e s s a l a i c n a n i f l a t o T l l e s e r o t s t n e m e e r g a r e d n u d o s l s e i t i r u c e S s e i t i l i b a i l l a i c n a n i f l a t o T e s a h c r u p e r s e i t i l i b a i l e v i t a v i r e D s e i t i l i b a i l e v i t a v i r e D 191 191 / s t e s s a l i a c n a n i f f o s t n u o m a t e n e h t d e e c x e o t t o n s a o s s t n e m e e r g a g n i t t e n t n a v e e r l y b d e p p a c n e e b e v a h t e e h S e c n a a B l e h t n o f f o t e s t o n l a r e t a l l o c l i a c n a n i f d n a s t n e m u r t s n i l i a c n a n i f f o s t n u o m a d e t a e r l e h t , e r u s o c s d i l i s h t f o e s o p r u p e h t r o F ) 1 ( . 2 4 e t o N n i l s e b a t e h t o t d n o p s e r r o c t o n l l i w s e c n a a b l l a r e t a l l o c e v o b a e h t t l u s e r a s A l . s e b a t e h t n i d e t c e l f e r t o n s i , s t s x e i t i e r e h w , n o i t a s i l a r e t a l l o c - r e v o . e . i , t e e h S e c n a a B e h t l n o d e t r o p e r ) s e i t i l i b a i l ( Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 192 192 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 2017 will be satisfied by the issue of shares of approximately $1.4 billion. AUSTRAC Civil Proceedings On 3 August 2017, Australian Transaction Reports and Analysis Centre (AUSTRAC) commenced civil penalty proceedings against CBA. CBA takes the allegations made by AUSTRAC very seriously and will file a defence in relation to this matter, which will take significant time to prepare. The actual outcome in this matter will be determined by a Court in accordance with established legal principles. The AUSTRAC statement of claim relates to alleged past and ongoing contraventions of four provisions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). To the extent that contraventions may be established, a Court will ordinarily take into account a range of factors in setting penalties. One factor is the extent to which any contraventions arise from a single course of conduct. For example, AUSTRAC alleges that approximately 53,000 threshold transaction reports were lodged late. Late lodgement carries a penalty of up to $18 million. However, these alleged contraventions could be considered to arise from a single course of conduct to the extent that they emanated from the same systems error. Ultimately, a Court will seek to ensure that, overall, any civil penalties are just and appropriate and do not exceed what is proper having regard to the totality of established contraventions. Under the Act, the only mechanism available to AUSTRAC to secure a pecuniary penalty from CBA is by taking court action. What we can say about these proceedings is limited until they have run their course. CBA is reviewing the allegations in the 580 page statement of claim and at this time it is not possible to reliably estimate the possible financial effect on the Group. It is not appropriate to disclose any detailed information about the subject matter of the claims as court proceedings are on foot and such information would be highly likely to be prejudicial to our position. Aussie Home Loan Acquisition On 4 August 2017, John Symond exercised his put option, which will require the Group to acquire a 20% interest in AHL. The purchase price for the remaining 20% interest will be determined in accordance with the terms agreed in 2012. The purchase consideration will be paid in the issue of CBA shares. The Group will consolidate AHL from completion of the acquisition which is currently expected to be in late August 2017. Strategic Corporate Actions We are committed to securing and enhancing the financial wellbeing of people, businesses and communities, and the provision of insurance products to our customers remains core to that vision. CommInsure and Sovereign are strong businesses with scale, expertise, competitive products and access to attractive distribution channels. We are in discussions with third parties in relation to their potential interest in our life insurance businesses in Australia and New Zealand. The outcome of those discussions is uncertain. While the discussions may lead to the divestment of those businesses, we will also consider a full range of alternatives, including retaining the businesses, reinsurance arrangements or other strategic options. 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. Directors’ declaration 193 193 193 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 2017 in relation to the Bank and the consolidated entity (Group) are in accordance with the Corporations Act 2001, including: (i) (ii) 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 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 2017. Signed in accordance with a resolution of the Directors. Catherine Livingstone AO Ian Narev Chairman 8 August 2017 Managing Director and Chief Executive Officer 8 August 2017 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457194 194 Independent auditor’s report to the members of Commonwealth Bank of Australia Report on the audit of the financial report Our opinion on the financial report In our opinion the accompanying financial report of Commonwealth Bank of Australia (the ‘Company’) and its controlled entities (together ‘the Group’) is in accordance with the Corporations Act 2001, including:   giving a true and fair view of the Company and the Group’s financial positions as at 30 June 2017 and of their financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Company and Group financial report comprises:        the Company and the Group’s balance sheets as at 30 June 2017; the Company and the Group’s income statements for the year then ended; the Company and the Group’s statements of comprehensive income for the year then ended; the Company and the Group’s statements of changes in equity for the year then ended; the Company and the Group’s statements of cash flows for the year then ended; the notes to the financial statements, which include a summary of significant accounting policies; and the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls, and the financial services industry and the broader economies in which the Group operates. We also ensured that the audit team had the appropriate skills and competencies needed for the audit of a complex banking group. This included industry expertise in retail, business and institutional banking and wealth management services, as well as specialists and experts in IT, actuarial, tax, treasury and valuation. The Group is structured into 7 business segments being Retail Banking Services (RBS), Business and Private Banking (B&PB), Institutional Banking and Markets (IB&M), Wealth Management (WM), New Zealand (NZ), Bankwest (BW), International Financial Services and Other (IFS and Other). PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO Box 2650, Sydney, NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 195 195 Our Group audit scope is summarised below. It was designed based on the qualitative factors described above and with reference to our determined Group materiality threshold. Below are the key audit matters we considered during our audit of the financial report for the year ended 30 June 2017. Materiality Key audit matters Audit scope Group materiality     For the purposes of our audit we determined overall Group materiality to be $606 million, which represents approximately 5% of profit before tax of the Company. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose profit before tax because, in our view, it is the metric against which the performance of the Group is most commonly measured and is a generally accepted benchmark in the banking industry. We selected 5% based on our professional judgement noting that it is also within the range of commonly accepted profit related thresholds in the banking industry. Group audit scope     Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. We performed audit procedures over the financial information of the Group’s most financially significant operations being the RBS, B&PB and IB&M business segments, the Group’s Treasury (GT) function (reported within the IFS and Other segment) and several legal entities of the Group within other business segments, such as ASB Bank (reported within the NZ business segment) or Colonial First State and CommInsure (reported within the WM segment). Further audit procedures were performed over the remaining balances and the consolidation process, including substantive and analytical procedures. The majority of our audit work was performed in Australia given the structure of the Group’s operations including the location of support functions. Key audit matters Amongst other relevant topics, we communicated the following key audit matters to the Board Audit Committee (the ‘Audit Committee’). Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. We describe each key audit matter and include a summary of the principal audit procedures we performed to address those matters below. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters identified below relate to both the Company and Group audit. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457196 196 Key audit matter How our audit addressed the key audit matter Provision lending assets impairment of (Relevant business segments: RBS, B&PB, IB&M, NZ) for We considered this a key audit matter due to the subjective judgements made by management in determining when to recognise impairment provisions against lending assets and in estimating the size of such provisions. Provisions for impairment of loans that exceed specific thresholds are individually assessed by management. These provisions are established based on the expected future cash repayments and estimated proceeds from the value of the collateral held by the Group in respect of those loans. During the financial year ended 30 June 2017, the majority of the Group’s individually assessed provisions for specific lending assets related primarily to business and corporate loans. thresholds noted above, If an individually assessed loan is not impaired, it is then included in a group of loans with similar risk characteristics and, along with those loans below the specific is collectively assessed on a portfolio basis using models developed by management. These models use assumptions in their calculations which are based on the Group’s historical loss experience including both the frequency of defaults and the losses incurred where loans have defaulted. Adjustments or overlays to the provisions are applied by management to take account of emerging trends and where models may fail to fully capture all risks in the loan portfolio. An example of an overlay is one which allows the current macroeconomic environment (such as residential and consumer lending in mining towns). These overlays require significant judgement. impact of the for Relevant financial Refer notes 1 and 13 for further information. references the in report We developed an understanding of the controls relevant to our audit over the following areas and assessed whether they were appropriately designed and were operating effectively throughout the year: · · · · Identification of impaired loans; Reliability and integrity of credit information maintained in the Group’s systems; Transfer of data from the underlying source systems impairment provisioning to models; and Management’s assessment of the integrity of these models. the For a selection of individually assessed provisions for specific lending assets, we performed amongst others the following audit procedures: · · the Examined management’s cashflow forecasts impairment calculation by supporting assessing key judgements (in particular the amount and timing of recoveries) made by management in the context of the borrowers’ circumstances based on the detailed loan and counterparty information known by the Group; and Compared key in management’s inputs estimates (such as valuation of collateral held) information where available. to external To test the collectively assessed provisions, we independent actuarial experts together with our following audit performed amongst others procedures: the · · · Tested the completeness and accuracy of key data being transferred between the Group’s collective and management’s systems provisioning models; Compared management’s key assumptions to supporting evidence and market practices; and Compared the modelled calculations to our own calculated expectations on a sample basis. To assess the overlays to the provisions, we performed amongst others following audit procedures: the · Considered management’s rationale for the recognition of overlays by considering the potential for impairment to be affected by 197 197 Key audit matter How our audit addressed the key audit matter · events not captured by management’s models; and Assessed management’s estimate of ranges on key drivers of credit loss using sensitivity analysis. As part of this work, we considered local and global external data to provide objective support. Determination of instruments (Relevant business segments: IB&M, GT, NZ) fair value for financial The Group holds financial instruments representing 17% of the total assets and 5% of the total liabilities of the Group. The financial instruments held at fair value include: We developed an understanding of the controls relevant to our financial statement audit over the following areas and assessed whether they were appropriately designed and were operating effectively throughout the year: · · · · control governance Valuation model framework; Completeness and accuracy of data inputs; including sourcing independent market data inputs; Methodology for the determination of fair value adjustments; and Management’s assessment of models used to measure fair value. their own In relation to the fair value of financial instruments as at 30 June 2017, together with our valuation experts, we compared the Group’s calculation of fair value to our own independent calculation across a sample of financial sourcing independent inputs from market data providers and using our own valuation models. We considered the results to assess whether there was evidence of systemic bias or error in management’s calculation of fair value. instruments. This involved · · · · Derivative assets and liabilities; Available for sale securities; Life investment contracts; and Bills discounted and other assets and liabilities designated at fair value The majority of the Group’s financial instruments are considered to be non-complex in nature as fair value is based on prices and rates that can be easily observed in the relevant markets. On this basis the majority of the Group’s financial instruments are classified under Australian Accounting Standards as either ‘Level 1’ (i.e. where key inputs to the valuation are based on quoted prices in the market) or ‘Level 2’ (i.e. where key inputs to the valuation are based on observable prices in the market). We considered these Level 1 and Level 2 financial instruments to be a key audit matter due to their financial significance to the Group. The Group also holds a limited number of financial instruments considered to be ‘Level 3’ under Australian Accounting Standards in nature (i.e. where key inputs to the valuation require additional management judgement as observable inputs are not available in the market due to market illiquidity or complexity of the product) primarily in respect to complex derivatives, certain asset-backed securities and infrastructure funds. While the Group’s holdings of such instruments is limited relative to total financial instrument holdings, we considered their valuation to be a key audit matter because in determining their value. judgement is more involved there Relevant Refer notes 1, 9, 10, 11, 18 and 40 for information. references financial the in report Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457198 198 Key audit matter How our audit addressed the key audit matter Provisions relating to conduct risk, litigation and regulatory action, including related disclosures (Relevant business segments: All) We considered this a key audit matter as the Group is exposed to conduct risk related matters, legal cases and regulatory actions and investigations in various jurisdictions, which could give rise to significant liabilities of the Group. required In assessing and measuring such potential liabilities, management are to make significant judgements based on available information in respect to the probability and estimation of potential financial outcomes. These outcomes may be dependent on legal and regulatory processes. Therefore provisions recognised and contingent liabilities disclosed are subject to inherent uncertainty. In particular, management has had to assess the impact of civil penalty proceedings brought by the Australian Transactions Reports and Analysis Centre (AUSTRAC) on 3 August 2017 in respect to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) as disclosed in Note 44 Subsequent Events in the financial report. Relevant in Refer notes 1, 19, 30 and 44 for further information. references financial the report Valuation of (Relevant business segments: WM, NZ) insurance policyholder liabilities We considered this a key audit matter because management’s valuation of the provisions for the settlement of future insurance claims involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in a material impact to the valuation of these liabilities. The Group’s insurance policyholder liabilities relate to the life insurance businesses. In determining the valuation of the liabilities, the key actuarial assumptions made by management’s experts include: Our procedures included amongst others developing an understanding of the Group’s processes for identifying and assessing the impact of conduct risk, legal and regulatory matters. We read the minutes of the Group’s key governance meetings (i.e. Audit Committee, Risk Committee and Board of Directors), attended the Group’s Audit and Risk Committee meetings and considered key correspondence with relevant regulatory bodies. We discussed ongoing legal and regulatory matters with management and sought and obtained written representations and access to relevant documents in order to develop our understanding of the matters. In relation to such matters we considered management’s judgement as to whether there is potential material financial exposure for the Group, and if so the amount of any provision required. regulatory action, we assessed Where management determined that they were unable to reliably estimate the possible financial impact of a legal or the appropriateness of their conclusion. Our procedures included specific consideration of management’s treatment in the financial report of the civil penalty proceedings commenced by AUSTRAC. In relation to all matters identified, we assessed the adequacy of related disclosures. To assess the assumptions used to determine the value of insurance policyholder liabilities, we along with our independent actuarial experts performed amongst others the following audit procedures: · · Compared the methodology and models used by management to those commonly applied in the industry and recognised by regulatory standards; Developed an understanding of and evaluated the controls management has in place over key processes relating to the valuation. This included management’s use of models, the quality of oversight and controls over key those models, and assumptions within 199 199 Key audit matter How our audit addressed the key audit matter · · Expected amount, timing and duration of claims and/or policy payments, likely lapse rates of policies by policyholders, mortality and morbidity rates, acquisition and maintenance expenses; and Long term economic assumptions including inflation rates. Relevant references in the financial report Refer notes 1 and 27 for further information. · · · management’s preparation of the manually calculated components of the liability; Compared key inputs (for example inflation rates) used by management in the calculation to relevant supporting evidence, such as external market data; Considered the impact of key changes in assumptions and methodologies over the year and compared these to industry practice; and Compared the underlying supporting data relating to policyholder information used in management's source to valuation documentation on a sample basis. Valuation of (Relevant business segment: All) retirement benefit obligations We considered this a key audit matter because the Group operates defined benefit plans that are financially significant to the Group’s financial report. The Group sponsors two defined benefit plans for employees, one in Australia and the other in the UK. Management apply actuarial assumptions in their models used in determining the valuation of the retirement benefit obligation, including: · · · · Discount rates; Salary inflation; Life expectancy of members; and Investment returns under the plans’ assets Relevant references in the financial report Refer notes 1 and 35 for further information. To assess the appropriateness of the assumptions used to determine the valuation of retirement benefit obligations, we along with our independent actuarial experts performed amongst others the following audit procedures: · · · reasonableness of Tested the underlying data (e.g. fair value of plan assets) used by management in their calculation against source documentation on a sample basis; Assessed the the assumptions used within management’s calculation with reference to external market data; and Developed our own expectations for the obligations based on a range of possible alternative outcomes and compared these to management’s calculations. Operation of Technology systems (Relevant business segments: All) financial (IT) reporting Information controls and We focused on this area because the Group’s operations and financial reporting processes are heavily dependent on IT systems, including automated accounting procedures and IT dependent manual controls. The Group’s controls over IT systems include: · · framework of governance over The systems; Program development and changes; IT Our procedures included evaluating and testing the design and operating effectiveness of certain controls over the continued integrity of the IT systems that are relevant to financial reporting. We also carried out direct tests, on a sample basis, of system functionality that was key to our audit testing in order to assess the accuracy of certain system calculations, the generation of certain reports and the operation of certain system enforced access controls. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457200 200 Key audit matter How our audit addressed the key audit matter · · Access to process, data and IT operations; and Governance over generic and privileged user accounts. Where we noted design or operating effectiveness matters relating to IT systems and applications controls relevant to our audit, we performed alternative or additional audit procedures. Additional Information The directors and management are responsible for the Additional Information. The Additional Information comprises Our business, Performance overview, Corporate responsibility, Corporate governance, Directors’ report and Other information included in the Group’s annual report for the year ended 30 June 2017 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the Additional Information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the Additional Information identified above and, in doing so, consider whether the Additional Information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this Additional Information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the Remuneration Report Our opinion on the Remuneration Report We have audited the Remuneration Report included in pages 63 to 81 of the Directors’ report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Commonwealth Bank of Australia, for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. 201 201 Responsibilities 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. PricewaterhouseCoopers Marcus Laithwaite Partner Sydney 8 August 2017 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457202 202 Shareholding information Top 20 Holders of Fully Paid Ordinary Shares as at 2 August 2017 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 Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Limited Bond Street Custodians Limited Australian Foundation Investment Company limited Pacific Custodians Pty Limited Navigator Australia Limited Argo Investments Limited Milton Corporation Limited RBC Dexia Investor Services Australia Nominees Pty Limited Netwealth Investments Limited UBS Nominees Pty Ltd Nulis Nominees (Australia) Limited Invia Custodian Pty Limited IOOF Investment Management Limited Mr. Barry Martin Lambert ANZ Executors & Trustee McCusker Holdings Pty Ltd 376,380,123 186,821,486 101,043,275 59,912,985 56,776,266 16,812,646 7,900,000 4,812,429 3,723,861 3,203,731 3,111,148 3,032,654 2,364,986 2,339,250 2,191,295 1,787,477 1,678,128 1,643,613 1,472,555 1,430,000 % 21.75 10.79 5.84 3.46 3.28 0.97 0.46 0.28 0.22 0.19 0.18 0.18 0.14 0.13 0.13 0.10 0.10 0.10 0.09 0.08 The top 20 shareholders hold 838,437,908 shares which is equal to 48.47% of the total shares on issue. Substantial Shareholding The following organisation has disclosed a substantial shareholding notice to ASX. Name BlackRock Group (1) (1) Substantial shareholder notice dated 16 May 2017. Stock Exchange Listing Number of Shares 86,557,665 Percentage of Voting Power 5.00 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 2 August 2017 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 Percentage of Shareholders 588,814 189,065 19,393 8,206 186 805,664 13,400 73.08 23.47 2.41 1.02 0.02 100.00 1.66 Number of Shares 186,897,021 392,559,830 131,675,877 154,412,567 864,322,866 1,729,868,161 34,134 Percentage of Issued Capital 10.80 22.69 7.61 8.93 49.97 100.00 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. Shareholding information 203 203 203 203 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 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 2 August 2017 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 IOOF Investment Management Limited Netwealth Investments Limited Australian Executor Trustees Limited J P Morgan Nominees Australia Limited National Nominees Limited Nulis Nominees (Australia) Limited BNP Paribas Noms Pty Limited Navigator Australia Limited Dimbulu Pty Ltd Eastcote Pty Limited V S Access Pty Ltd Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Invia Custodian Pty Limited Marento Pty Ltd Edgelake Proprietary Limited Kaptock Pty Ltd Number of Securities 846,439 487,052 278,256 218,645 194,645 166,650 154,009 149,481 113,760 110,281 100,000 100,000 80,000 71,432 70,391 66,700 55,391 52,916 49,267 48,730 % 4.23 2.44 1.39 1.09 0.97 0.83 0.77 0.75 0.58 0.55 0.50 0.50 0.40 0.36 0.35 0.33 0.28 0.26 0.25 0.24 The top 20 PERLS VI security holders hold 3,414,045 securities which is equal to 17.07% 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 some daily newspapers. Range of Securities (PERLS VI) as at 2 August 2017 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 Percentage of Security Holders 26,342 2,738 192 94 10 29,376 6 89.68 9.32 0.65 0.32 0.03 100.00 0.02 Number of Securities 8,572,996 5,577,574 1,431,990 2,269,373 2,148,067 20,000,000 12 Percentage of Issued Capital 42.86 27.89 7.16 11.35 10.74 100.00 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 202 and 203 for the Bank’s ordinary shares. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457204 204 Shareholding information Top 20 Holders of CommBank PERLS VII Capital Notes (“PERLS VII”) as at 2 August 2017 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 BNP Paribas Noms Pty Limited Bond Street Custodians Limited Netwealth Investments Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited IOOF Investment Management National Nominees Limited Nulis Nominees (Australia) Limited Navigator Australia Limited RBC Dexia Investor Services Australia Nominees Pty Limited BNP Paribas Nominees Pty Limited Australian Executor Trustees Limited Invia Custodian Pty Limited Dimbulu Pty Ltd Simply Brilliant Pty Ltd Tandom Pty Ltd Randazzo C & G Developments Pty Ltd Tsco Pty Ltd Seymour Group Pty Ltd Number of Securities 2,013,376 485,515 441,566 409,794 398,684 343,101 314,916 257,670 201,521 177,753 149,609 147,613 138,064 100,946 100,000 90,500 90,000 84,286 80,000 73,700 % 6.71 1.62 1.47 1.37 1.33 1.14 1.05 0.86 0.67 0.59 0.50 0.49 0.46 0.34 0.33 0.30 0.30 0.28 0.27 0.25 The top 20 PERLS VII security holders hold 6,098,614 securities which is equal to 20.33% 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 some daily newspapers. Range of Securities (PERLS VII) as at 2 August 2017 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 Percentage of Security holders 28,576 4,021 316 201 14 33,128 8 86.26 12.14 0.95 0.61 0.04 100.00 0.02 Number of Securities 9,984,481 8,235,732 2,278,253 4,679,481 4,822,053 30,000,000 30 Percentage of Issued Capital 33.28 27.45 7.60 15.60 16.07 100.00 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 202 and 203 for the Bank’s ordinary shares. Shareholding information 205 205 205 205 Top 20 Holders of CommBank PERLS VIII Capital Notes (“PERLS VIII”) as at 2 August 2017 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 Noms Pty Limited HSBC Custody Nominees (Australia) Limited Goodridge Nominees Pty Ltd J P Morgan Nominees Australia Limited Mr. Walter Lawton & Mr. Brett Lawton G Harvey Nominees Pty Ltd Piek Holdings Pty Ltd National Nominees Limited Snowside Pty Ltd Bond Street Custodians Limited Netwealth Investments Limited Nulis Nominees (Australia) Limited V S Access Pty Ltd Navigator Australia Limited Citicorp Nominees Pty Limited Dimbulu Pty Ltd Mifare Pty Ltd Randazzo C & G Developments Pty Ltd Skyport Pty Ltd Adirel Holdings Pty Ltd Number of Securities 3,010,649 857,711 208,870 175,337 108,573 100,000 93,000 83,224 79,083 78,974 68,997 63,293 62,482 61,466 52,182 50,000 50,000 50,000 50,000 47,000 % 20.76 5.92 1.45 1.21 0.76 0.69 0.64 0.57 0.55 0.54 0.48 0.44 0.43 0.42 0.36 0.34 0.34 0.34 0.34 0.32 The top 20 PERLS VIII security holders hold 5,350,841 securities which is equal to 36.90% 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 some daily newspapers. Range of Shares (PERLS VIII) as at 2 August 2017 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 Percentage of Shareholders 13,107 1,353 118 74 5 14,657 3 89.43 9.23 0.81 0.50 0.03 100.00 0.02 Number of Shares 4,258,111 2,944,163 894,881 2,177,037 4,225,808 14,500,000 6 Percentage of Issued Capital 29.37 20.31 6.17 15.01 29.14 100.00 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 202 and 203 for the Bank’s ordinary shares. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457206 206 Shareholding information Top 20 Holders of CommBank PERLS IX Capital Notes (“PERLS IX”) as at 2 August 2017 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 Noms Pty Limited HSBC Custody Nominees (Australia) Limited Bond Street Custodians Limited Navigator Australia J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Mutual Trust Pty Ltd G Harvey Nominees Pty Ltd IOOF Investment Management Netwealth Investments Limited BNP Paribas Nominees Pty Limited Nulis Nominees (Australia) Invia Custodian Pty Limited National Nominees Limited Catholic Church Insurances Ltd Dimbulu Pty Ltd Sandhurst Trustees Limited Pacmin Holdings Pty Limited Navigator Australia Limited Ernron Pty Ltd Number of Securities 2,281,919 1,079,186 221,263 166,520 149,818 106,031 101,741 100,000 89,239 77,342 76,524 73,084 58,838 54,395 50,000 50,000 41,910 41,206 38,563 34,530 % 13.91 6.58 1.35 1.02 0.91 0.65 0.62 0.61 0.54 0.47 0.47 0.45 0.36 0.33 0.30 0.30 0.26 0.25 0.24 0.21 The top 20 PERLS IX security holders hold 4,892,109 securities which is equal to 29.83% of the total securities on issue. Stock Exchange Listing PERLS IX are subordinated unsecured notes issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPF. Details of trading activity are published in some daily newspapers. Range of Shares (PERLS IX) as at 2 August 2017 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 Percentage of Shareholders 18,454 1,818 139 77 7 20,495 0 90.04 8.87 0.68 0.38 0.03 100.00 0.00 Number of Shares 5,846,385 3,791,684 1,055,826 1,927,521 3,778,584 16,400,000 0 Percentage of Issued Capital 35.65 23.12 6.44 11.75 23.04 100.00 0.00 PERLS IX 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 202 and 203 for the Bank’s ordinary shares. Five year financial summary 207 207 207 207 Net interest income Other operating income (2) Total operating income Operating expenses Impairment expense Net profit before tax Corporate tax expense Non-controlling interests Net profit after tax "cash basis" Treasury shares valuation adjustment Hedging and IFRS volatility Gain/(loss) on disposal of controlled entities/investments Bankwest non-cash items Bell Group litigation 2017 $M 17,600 8,405 26,005 2016 (1) $M 16,935 7,812 24,747 2015 (1) $M 15,827 7,751 23,578 (11,078) (10,434) (10,003) (1,095) 13,832 (3,927) (24) 9,881 (23) 73 - (3) - (1,256) 13,057 (3,592) (20) 9,445 4 (199) - (27) - (988) 12,587 (3,439) (21) 9,127 (28) 6 - (52) - 2014 $M 15,131 7,270 22,401 (9,499) (953) 11,949 (3,250) (19) 8,680 (41) 6 17 (56) 25 2013 $M 13,944 6,877 20,821 (9,010) (1,082) 10,729 (2,953) (16) 7,760 (53) 27 - (71) (45) Net profit after income tax attributable to Equity holders of the Bank "statutory basis" 9,928 9,223 9,053 8,631 7,618 Contributions to profit (after tax) Retail Banking Services Business and Private Banking Institutional Banking and Markets Wealth Management New Zealand Bankwest IFS and Other Net profit after tax "cash basis" Investment experience after tax Net profit after tax "underlying basis" Balance Sheet Loans, bills discounted and other receivables Total assets Deposits and other public borrowings Total liabilities Shareholders' Equity Net tangible assets Risk weighted assets - Basel III (APRA) Average interest earning assets (3) Average interest bearing liabilities (3) Assets (on Balance Sheet) - Australia Assets (on Balance Sheet) - New Zealand Assets (on Balance Sheet) - Other 4,964 1,639 1,306 553 973 702 (256) 9,881 (44) 9,837 731,762 976,374 626,655 912,658 63,716 53,146 437,063 834,741 755,612 817,575 89,997 68,802 4,540 1,522 1,190 612 881 778 (78) 9,445 (100) 9,345 695,398 933,001 588,045 872,437 60,564 49,630 394,667 790,596 733,754 783,170 83,832 65,999 3,994 1,495 1,285 643 882 795 33 9,127 (150) 8,977 639,262 873,489 543,231 820,684 52,805 41,334 368,721 736,164 693,376 741,249 72,299 59,941 3,678 1,321 1,252 789 742 675 223 8,680 (197) 8,483 597,781 791,451 498,352 742,103 49,348 38,080 337,715 705,862 660,847 669,293 69,110 53,048 3,089 1,474 1,195 679 621 561 141 7,760 (105) 7,655 556,648 753,857 459,429 708,320 45,537 33,638 329,158 653,637 609,557 644,043 61,578 48,236 (1) Comparative information for 2016 and 2015 has been restated to reflect the change in accounting policy detailed in Note 1 and refinements to the allocation of customer balances. Includes investment experience. (2) (3) Comparative information for 2016 has been restated to disclose average interest earning assets and average interest bearing liabilities net of average mortgage offset balances that were reclassified as Non-interest earning/bearing. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457208 208 Five year financial summary Shareholder summary Dividends per share - fully franked (cents) Dividend cover - statutory (times) Dividend cover - cash (times) Earnings per share (cents) (1) Basic Statutory Cash basis Fully diluted Statutory Cash basis Dividend payout ratio (%) (1) Statutory Cash basis Net tangible assets per share ($) (1) Weighted average number of shares (statutory basic) (M) Weighted average number of shares (statutory fully diluted) (M) Weighted average number of shares (cash basic) (M) Weighted average number of shares (cash fully diluted) (M) Number of shareholders Share prices for the year ($) Trading high Trading low End (closing price) Performance ratios (%) Return on average Shareholders' Equity Statutory Cash basis Return on average total assets Statutory Cash basis Capital adequacy - Common Equity Tier 1 - Basel III (APRA) Capital adequacy - Tier 1 - Basel III (APRA) Capital adequacy - Tier 2 - Basel III (APRA) Capital adequacy - Total - Basel III (APRA) Leverage Ratio Basel III (APRA) (%) Liquidity Coverage Ratio (%) Net interest margin (2) Other information (numbers) Full-time equivalent employees Branches/services centres (Australia) Agencies (Australia) ATMs EFTPOS terminals (active) Productivity (3) Total operating income per full-time (equivalent) employee ($) Employee expense/Total operating income (%) Total operating expenses/Total operating income (%) 2017 2016 2015 2014 2013 429 1. 3 1. 3 577. 6 574. 4 559. 1 556. 1 74. 6 75. 0 30. 7 1,719 1,815 1,720 1,816 420 1. 3 1. 3 542. 3 554. 8 529. 2 541. 2 78. 4 76. 5 28. 9 1,692 1,771 1,693 1,772 420 1. 3 1. 3 553. 1 556. 9 539. 1 542. 7 75. 8 75. 2 25. 4 1,627 1,711 1,630 1,714 401 1. 3 1. 3 530. 6 532. 7 518. 9 521. 0 75. 5 75. 1 23. 5 1,618 1,691 1,621 1,694 364 1. 3 1. 3 474. 2 482. 1 461. 0 468. 6 77. 4 75. 9 20. 9 1,598 1,686 1,601 1,689 806,386 820,968 787,969 791,564 786,437 87. 74 69. 22 82. 81 16. 1 16. 0 1. 0 1. 0 10. 1 12. 1 2. 1 14. 2 5. 1 128. 6 2. 11 45,614 1,121 3,664 4,398 217,098 568,685 24. 2 42. 7 88. 88 69. 79 74. 37 16. 2 16. 5 1. 0 1. 0 10. 6 12. 3 2. 0 14. 3 5. 0 120. 0 2. 14 45,129 1,131 3,654 4,381 96. 69 73. 57 85. 13 18. 2 18. 2 1. 1 1. 1 9. 1 11. 2 1. 5 12. 7 n/a 120. 0 2. 15 45,948 1,147 3,670 4,440 82. 68 67. 49 80. 88 74. 18 53. 18 69. 18 18. 7 18. 7 1. 1 1. 1 9. 3 11. 1 0. 9 12. 0 n/a n/a 2. 19 18. 0 18. 2 1. 0 1. 1 8. 2 10. 3 0. 9 11. 2 n/a n/a 2. 13 44,329 1,150 3,717 4,340 44,969 1,166 3,764 4,304 217,981 208,202 200,733 181,227 545,237 508,578 500,034 459,583 25. 1 42. 4 24. 9 42. 8 25. 0 42. 9 25. 3 43. 6 (1) Comparative information for 2016 and 2015 has been restated to reflect the change in accounting policy detailed in Note 1. (2) Comparative information has been restated for 2016, 2015 and 2014 to align to presentation in the current period. (3) The productivity metrics have been calculated on a cash basis. Capital adequacy and liquidity 209 209 209 209 Capital The tables below show the APRA Basel III capital adequacy calculation at 30 June 2017 together with prior period comparatives. For a more detailed discussion on our capital position refer to our Basel III Pillar 3 document. FY17 FY16 Risk Weighted Capital Ratios Common Equity Tier 1 Tier 1 Tier 2 Total Capital Ordinary Share Capital and Treasury Shares Ordinary Share Capital Treasury Shares (1) Ordinary Share Capital and Treasury Shares Reserves Reserves Reserves related to non-consolidated subsidiaries (2) Total Reserves Retained Earnings and Current Period Profits (3) Retained earnings and current period profits Retained earnings adjustment from non-consolidated subsidiaries (4) Net Retained Earnings Non-controlling interests Non-controlling interests (5) Less ASB perpetual preference shares Less other non-controlling interests not eligible for inclusion in regulatory capital Non-controlling interests % 10. 1 12. 1 2. 1 14. 2 FY17 $M 34,971 295 35,266 1,869 (81) 1,788 26,330 (537) 25,793 546 (505) (41) - % 10. 6 12. 3 2. 0 14. 3 FY16 $M 33,845 284 34,129 2,734 (143) 2,591 23,435 (259) 23,176 550 (505) (45) - Common Equity Tier 1 Capital before regulatory adjustments 62,847 59,896 (1) Represents shares held by the Group's life insurance operations ($96 million) and employee share scheme trusts ($199 million). (2) Represents equity 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) Comparative information has been restated to reflect the change in accounting policy detailed in Note 1 to the Financial Statements. (4) Cumulative current period profit and retained earnings adjustments for subsidiaries not consolidated for regulatory purposes. (5) 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457210 210 Capital adequacy and liquidity Common Equity Tier 1 regulatory adjustments Goodwill (1) Other intangibles (including software) (2) Capitalised costs and deferred fees Defined benefit superannuation plan surplus (3) General reserve for credit losses (4) Deferred tax asset Cash flow hedge reserve Employee compensation reserve Equity investments (5) Equity investments in non-consolidated subsidiaries (1) (6) Shortfall of provisions to expected losses (7) Gain due to changes in own credit risk on fair valued liabilities Other Common Equity Tier 1 regulatory adjustments Common Equity Tier 1 Additional Tier 1 Capital Basel III complying instruments (8) Basel III non-complying instruments net of transitional amortisation (9) Holding of Additional Tier 1 Capital (10) Additional Tier 1 Capital Tier 1 Capital Tier 2 Capital Basel III complying instruments (11) Basel III non-complying instruments net of transitional amortisation (12) Holding of Tier 2 Capital Prudential general reserve for credit losses (13) Total Tier 2 Capital Total Capital FY17 $M (7,620) (2,144) (707) (298) (412) (1,683) 107 (164) (2,626) (2,673) (218) (128) (122) FY16 $M (7,603) (2,313) (535) (183) (386) (1,443) (473) (132) (3,120) (1,458) (314) (161) (112) (18,688) (18,233) 44,159 41,663 8,090 635 (200) 8,525 6,450 640 (200) 6,890 52,684 48,553 7,744 1,495 (29) 182 9,392 62,076 5,834 1,934 (25) 181 7,924 56,477 (1) Goodwill excludes $252 million which is included in equity investments in non-consolidated 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 interests in other entities. (6) Non-consolidated subsidiaries primarily represent the insurance and funds management companies operating within the Colonial Group. The adjustment at 30 June 2017 is net of $665 million of Colonial non-recourse debt and subordinated notes that are subject to APRA approved transitional relief for regulatory purposes. Effective 31 December 2016 a number of intermediate holding companies within the Colonial Group were consolidated into the Level 2 Banking Group. The Group’s insurance and fund management companies held $1,322 million of capital in excess of minimum regulatory requirements at 30 June 2017. (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 2017, comprises PERLS IX $1,640 million issued in March 2017, PERLS VIII $1,450 million issued 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. (10) Represents holdings of Additional Tier 1 capital instruments issued by the Colonial Mutual Life Assurance Society Limited. (11) During the 2017 financial year the Group issued the following instruments: USD750million, NZD400 million (issued through ASB, the group’s New Zealand subsidiary), HKD608 million and four separate JPY notes totalling JPY53.3 billion. (12) Includes both perpetual and term instruments subordinated to depositors and general creditors, having an original maturity of at least five years. APRA requires these to be included as if they were unhedged. Term instruments are amortised at 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. Capital adequacy and liquidity 211 211 211 211 Risk Weighted Assets Credit Risk Subject to AIRB approach (1) Corporate (2) SME corporate (2) SME retail SME retail secured by residential mortgage Sovereign Bank Residential mortgage (3) Qualifying revolving retail Other retail Total RWA subject to AIRB approach Specialised lending exposures subject to slotting criteria (2) Subject to Standardised approach Corporate (2) SME corporate (2) SME retail Sovereign Bank Residential mortgage (2) Other retail Other assets Total RWA subject to Standardised approach Securitisation Credit valuation adjustment Central counterparties Total RWA for Credit Risk Exposures Traded market risk Interest rate risk in the banking book Operational risk Total risk weighted assets FY17 $M FY16 $M 74,663 33,067 4,838 2,766 2,154 12,598 134,969 9,414 15,101 289,570 58,752 1,202 510 6,172 271 136 5,017 2,925 5,291 21,524 1,584 4,958 871 377,259 4,650 21,404 33,750 437,063 71,682 29,957 4,953 2,813 6,622 13,098 83,758 9,897 15,102 237,882 56,795 10,982 4,133 6,122 268 224 7,428 2,750 5,360 37,267 1,511 8,273 2,302 344,030 9,439 7,448 33,750 394,667 (1) Persuant to APRA requirements, RWA amounts derived from AIRB risk weight functions have been multiplied by a scaling factor of 1.06. Comparatives have been restated to conform to presentation in the current period. (2) APRA re-accredited the use of the AIRB approach for the Bankwest non-retail portfolio, effective 30 September 2016. (3) . Includes APRA requirements to increase average risk weight applied to Australian residential mortgages using the AIRB approach (FY17: $47billion). Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457212 212 Capital adequacy and liquidity Leverage Ratio Summary Group Leverage Ratio Tier 1 Capital ($M) Total Exposures ($M) (1) Leverage Ratio (APRA) (%) Leverage Ratio (Internationally Comparable) (%) (2) As at FY17 FY16 52,684 1,027,958 5. 1 5. 8 48,553 980,846 5. 0 5. 6 (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 exposure, was 5.1% at 30 June 2017 on an APRA basis and 5.8% on an internationally comparable basis. The BCBS has advised that the leverage ratio will migrate to a Pillar 1 minimum capital requirement of 3% from 1 January 2018. The BCBS will confirm the final calibration in 2017. Liquidity Level 2 Liquidity Coverage Ratio (LCR) Liquid Assets High Quality Liquid Assets (HQLA) (1) Committed Liquidity Facility (CLF) Total LCR liquid assets Net Cash Outflows (NCO) Customer deposits Wholesale funding Other net cash outflows (2) Total NCO Liquidity Coverage Ratio (%) LCR surplus As at FY17 $M 93,402 48,300 141,702 77,298 17,579 15,271 110,148 129 31,554 FY16 $M 75,147 58,500 133,647 70,139 19,406 21,854 111,399 120 22,248 (1) (2) 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 cash inflows. 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 2017, the Group’s LCR was 129%, up from 120% as at 30 June 2016. 213 213 3 1 2 n o i t a i l i c n o c e r t i f o r P 3 9 2 , 3 3 ) 3 9 6 , 5 1 ( 6 2 6 , 5 0 0 6 , 7 1 1 5 0 , 2 6 2 2 , 3 2 4 4 8 1 2 1 , 6 2 - 1 2 1 , 6 2 ) 2 8 0 , 1 1 ( ) 5 9 0 , 1 ( 4 4 9 , 3 1 ) 2 9 9 , 3 ( ) 4 2 ( 8 2 9 , 9 - - - - - 9 6 5 5 6 ) 5 6 ( - - - - - - - M $ " s i s a b t i f o r p t e N x a t r e t f a y r o t u t a t s " M $ t n e m t s e v n I e c n e i r e p x e x a t M $ - - - - - 2 0 3 2 3 - 2 3 - - 2 3 ) 2 3 ( - - l r e d o h y c i l o P 7 1 0 2 e n u J 0 3 d e d n E r a e Y l l u F s e r a h s y r u s a e r T n o i t a u l a v M $ t n e m t s u j d a M $ ) 1 ( s m e t i h s a c n o n - t s e w k n a B M $ g n i g d e H S R F I d n a y t i l i t a o v l M $ t i f o r p t e N x a t r e t f a " s i s a b h s a c " - - - - - ) 2 2 ( - - ) 2 2 ( ) 2 2 ( - - ) 1 ( ) 2 2 ( - ) 3 2 ( - - - - - - - - - - ) 4 ( - ) 4 ( 1 - ) 3 ( - - - - - 6 0 1 6 0 1 - 6 0 1 6 0 1 - - ) 3 3 ( 6 0 1 - 3 7 3 9 2 , 3 3 ) 3 9 6 , 5 1 ( 0 0 6 , 7 1 0 2 5 , 5 4 3 0 , 2 0 2 1 , 3 2 6 8 7 0 4 9 , 5 2 5 6 5 0 0 , 6 2 ) 8 7 0 , 1 1 ( ) 5 9 0 , 1 ( 2 3 8 , 3 1 ) 7 2 9 , 3 ( ) 4 2 ( 1 8 8 , 9 n o i t a i l i c n o c e R t i f o r P e m o c n i t n e m e g a n a m s d n u F e m o c n i i g n k n a b r e h t O e m o c n i t s e r e t n i t e N e m o c n i g n i k n a b l a t o T e m o c n i g n i t a r e p o l a t o T e c n e i r e p x e t n e m t s e v n I e m o c n i e c n a r u s n I s e s n e p x e g n i t a r e p O e m o c n i l a t o T e s n e p x e t n e m r i a p m i n a o L x a t e r o f e b t i f o r p t e N e s n e p x e t s e r e t n I e m o c n i t s e r e t n I p u o r G t i f e n e b / ) e s n e p x e ( x a t e t a r o p r o C s t s e r e t n i g n i l l o r t n o c - n o N x a t r e t f a t i f o r p t e N . n o i l l i m 1 $ f o t i f e n e b x a t e m o c n i n a d n a , n o i l l i m 4 $ f o s e s n e p x e g n i t a r e p o h g u o r h t n o i t a s i t r o m a d e t a e r l r e g r e m s e d u c n l I ) 1 ( Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457 214 214 7 1 8 , 3 3 ) 2 8 8 , 6 1 ( 5 3 9 , 6 1 6 7 5 , 4 1 1 5 , 1 2 1 6 0 , 2 6 0 0 , 1 8 7 5 , 4 2 - 8 7 5 , 4 2 ) 3 7 4 , 0 1 ( ) 6 5 2 , 1 ( ) 6 0 6 , 3 ( 9 4 8 , 2 1 ) 0 2 ( 3 2 2 , 9 - - - - - 9 3 2 0 1 1 4 1 ) 1 4 1 ( - - - - - - - M $ " s i s a b t i f o r p t e N x a t r e t f a y r o t u t a t s " M $ t n e m t s e v n I e c n e i r e p x e x a t M $ - - - - - ) 8 ( 9 0 1 1 0 1 - 1 0 1 - - 1 0 1 ) 1 0 1 ( - - l r e d o h y c i l ) 1 ( 6 1 0 2 e n u J 0 3 d e d n E r a e Y l l u F o P M $ s e r a h s y r u s a e r T n o i t a u a v l t n e m t s u d a j M $ ) 2 ( s m e t i t s e w k n a B h s a c n o n - M $ i g n g d e H S R F I d n a y t i l i t a o v l t i f o r p t e N x a t r e t f a M $ " s i s a b h s a c " - - - - - - 4 1 4 1 - 4 1 - - 4 1 ) 0 1 ( - 4 - - - - - - - - - - - ) 9 3 ( ) 9 3 ( - 2 1 ) 7 2 ( - - - - - ) 4 8 2 ( ) 4 8 2 ( ) 4 8 2 ( - ) 4 8 2 ( - - - 5 8 ) 4 8 2 ( ) 9 9 1 ( 7 1 8 3 3 , ) 2 8 8 6 1 ( , 5 3 9 6 1 , 0 6 8 4 , 5 9 7 1 2 , 5 9 7 6 1 0 2 , 1 4 1 6 0 6 4 2 , 7 4 7 4 2 , ) 4 3 4 0 1 ( , ) 6 5 2 1 ( , ) 2 9 5 3 ( , 7 5 0 3 1 , ) 0 2 ( 5 4 4 9 , n o i t a i l i c n o c e r t i f o r P n o i t a i l i c n o c e R t i f o r P e m o c n i t n e m e g a n a m s d n u F e m o c n i i g n k n a b r e h t O e m o c n i t s e r e t n i t e N e m o c n i g n i k n a b l a t o T e m o c n i g n i t a r e p o l a t o T e c n e i r e p x e t n e m t s e v n I e m o c n i e c n a r u s n I s e s n e p x e g n i t a r e p O e m o c n i l a t o T e s n e p x e t n e m r i a p m i n a o L x a t e r o f e b t i f o r p t e N e m o c n i t s e r e t n I e s n e p x e t s e r e t n I p u o r G t i f e n e b / ) e s n e p x e ( x a t e t a r o p r o C s t s e r e t n i g n i l l o r t n o c - n o N x a t r e t f a t i f o r p t e N . n o i l l i m 2 1 $ f o t i f e n e b x a t e m o c n i n a d n a , n o i l l i m 9 3 $ f o s e s n e p x e g n i t a r e p o h g u o r h t n o i t a s i t r o m a d e t a e r l r e g r e m s e d u c n I l . d o i r e p t n e r r u c e h t n i n o i t a t n e s e r p o t m r o f n o c o t d e i f i s s a c e r l n e e b s a h n o i t a m r o f n i e v i t a r a p m o C ) 1 ( ) 2 ( International representation 215 215 215 215 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 Coenraad Jonker First State Investments Level 25, One Exchange Square 8 Connaught Place, Central, Hong Kong Telephone: +852 2846 7555 Facsimile: +852 2868 4742 Regional Managing Director, Asia Joe Fernandes 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 2868833 Executive General Manager, South Africa Sandile Shabalala 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 10 East 53rd Street, Floor 21 New York NY 10022 Telephone: +1 212 497 9980 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 Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457Malta CommBank Europe Limited Level 3 Strand Towers 36 The Strand Sliema SLM07 Telephone: +356 2132 0812 Facsimile: +356 2132 0811 Chief Financial Officer Greg Williams 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 216 216 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 Elvis Liongosari 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 Hario Soeprobo 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 0008 Facsimile: +65 6538 0800 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 CBA Digital Solutions Company Limited Levels 7-11, 4B Ton Duc Thang, Dist. 1 Ho Chi Minh City Telephone: +842838246276 General Director Hanh Nguyen 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 Corporate directory 217 217 217217 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. 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. 132 221 Lost, Stolen or Damaged Cards 131 709 CommSec Margin Loan 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. 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. Our businessPerformance overview Corporate responsibility Corporate governanceDirectors’ reportOther informationCommonwealth Bank of AustraliaAnnual Report 2017Financial report6213457218 218 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/investors. 

Continue reading text version or see original annual report in PDF format above