AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDABN 11 005 357 522

THE COMPANY
2018 Financial Report
30 September 2018

FINANCIAL STATEMENTS
Income Statement
Statement of Comprehensive Income
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity

3
4
5
6
7

NOTES TO THE FINANCIAL STATEMENTS
1 About the Financial Statements
2 Operating Income
3 Operating Expenses
4 Income Tax
5 Dividends
6 Segment Reporting
7 Cash and Cash Equivalents
8 Trading Securities
9 Derivative Financial Instruments
10 Available-for-sale Assets
11 Net Loans and Advances
12 Provision for Credit Impairment
13 Deposits and Other Borrowings
14 Debt Issuances
15 Financial Risk Management
16 Fair Value of Financial Assets and Financial Liabilities
17 Assets Charged as Security for Liabilities and Collateral Accepted as Security for Assets
18 Offsetting
19 Goodwill and Other Intangible Assets
20 Other Provisions
21 Shareholders’ Equity
22 Capital Management
23 Shares in Controlled Entities
24 Transfers of Financial Assets
25 Assets and Liabilities Held For Sale
26 Superannuation and Post Employment Benefit Obligations
27 Employee Share and Option Plans
28 Related Party Disclosures
29 Commitments, Contingent Liabilities and Contingent Assets
30 Compensation of Auditors
31 Events Since the End of the Financial Year

8
13
16
18
20
21
21
22
23
27
28
29
31
32
32
43
48
49
50
51
53
55
56
57
58
59
60
65
66
70
70

Directors’ Declaration
Lead Auditor’s Independence Declaration
Independent Auditor’s Report

71
71
72

2

FINANCIAL REPORTFINANCIAL REPORTINCOME STATEMENT
2018
$m

2017
$m

Interest income

27,02025,613

Interest expense(16,574)(15,017)

For the year ended 30 September

Note

Net interest income

2

10,446

10,596

Other operating income

2

8,645

5,987

Net funds management and commission income

2

(8)

158

Share of associates’ (loss)/profit

2

Operating income
Operating expenses

3

Profit before credit impairment and income tax
Credit impairment charge

12

Profit before income tax
Income tax expense
Profit for the year

4

(1)

60

19,082

16,801(8,121)(7,623)

10,961

9,178

(629)

(881)

10,332

8,297(1,808)(2,063)

8,524

6,234

The notes appearing on pages 8 to 70 form an integral part of these financial statements.

3

ANZ 2018 ANNUAL REPORTFINANCIAL REPORT (continued)
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September

2018
$m

2017
$m

Profit for the year

8,524

6,234

27

2

Foreign currency translation reserve

(154)

(57)

Other reserve movements

177

(272)

Income tax attributable to the above items
Other comprehensive income after tax

(124)
(74)

8
(319)

Total comprehensive income for the year

8,450

5,915

Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Items that may be reclassified subsequently to profit or loss

The notes appearing on pages 8 to 70 form an integral part of the financial statements.

4

FINANCIAL REPORTBALANCE SHEETAs at 30 September

Note

2018
$m

2017
$m

7

80,22763,399

1,666

5,006

AssetsCash and cash equivalents1
Settlement balances owed to ANZ

9,184

7,685

Trading securities

8

29,51935,606

Derivative financial instruments

964,44857,036

Available-for-sale assets

1064,72858,506Net loans and advances

11475,419452,424

Collateral paid

Regulatory deposits
Assets held for sale25

Due from controlled entities

264

495

-

1,748

90,17091,20818,852

18,084

Investments in associates

18

20

Current tax assets

266

23

Shares in controlled entities

23

Deferred tax assets
Goodwill and other intangible assets

19

1,071

932

1,446

1,852

898

928

Other assets

2,571

2,427

Total assets

840,747

797,379

Settlement balances owed by ANZ

9,867

8,219

Collateral received

6,002

5,238

Premises and equipment

Liabilities

Deposits and other borrowings

13

511,992494,235

Derivative financial instruments

965,63856,83088,383

88,882Current tax liabilities

85

94

Deferred tax liabilities

39

71

5,002

5,683

421

394

Due to controlled entities

Payables and other liabilities
Employee entitlements
Other provisions

20

838

390

Debt issuances

14

98,62685,495

Total liabilities

786,893745,531

Net assets

53,854

51,84827,53329,416

Shareholders' equity
Ordinary share capital

21

Reserves

21

(56)

36

Retained earnings

21

26,37722,396

Total shareholders' equity

21

53,854

51,8481.

Includes settlement balances owed to ANZ that meet the definition of cash and cash equivalents.

The notes appearing on pages 8 to 70 form an integral part of the financial statements.

5

ANZ 2018 ANNUAL REPORTFINANCIAL REPORT (continued)
CASH FLOW STATEMENT
For the year ended 30 September

2018
$m

2017
$m

Profit after income tax

8,524

6,234

629
1,023
5,764
597
(246)
(2)

881
775
(2,099)
219
231
(39)

Net(increase)/decrease in operating assets:
Collateral paid
Trading securities
Net loans and advances
Net intra-group loans and advances
Other assets(1,083)
8,913(20,187)(1,796)
(525)

3,045
(1,696)(13,772)
938(270)

Net increase/(decrease) in operating liabilities:
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Other liabilities

7,432
1,604
341
84

29,131
(837)
(505)
686

Adjustments to reconcile to net cash provided by/(used in) operating activities:
Provision for credit impairment
Depreciation and amortisation
Net derivatives/foreign exchange adjustment
Impairment of investment in Wealth Australia(Gain)/Loss on sale from divestments
Reclassification of businesses to held for sale
Other non-cash movements

Total adjustments

2,548

16,688Net cash provided by operating activities1

11,072

22,922(18,853)
15,282
1,786
989(15,151)
11,512(5,472)173(301)(1,097)(353)(9,291)

21,962(11,921)(4,585)(114)(1,880)3,462

16,210(21,462)

13,43763,3993,893
61,994

3,391
80,227(2,488)63,399Cash flows from investing activities
Available-for-sale assets:
Purchases
Proceeds from sale or maturity
Proceeds from divestments
Net return of capital
Other assets
Net cash (used in) investing activities
Cash flows from financing activities
Debt issuances2:
Issue proceeds
Redemptions
Dividends paid
On market purchase of treasury shares
Share buy-back
Net cash provided by/(used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year1.
2.

(4,411)(75)(9,738)Net cash provided by operating activities includes income taxes paid of $2,648 million (2017: $2,155 million).
Non-cash changes in debt issuances includes fair value hedging gains of $1,168 million (2017: $1,149 million) and foreign exchange losses of $4,487 million (2017: foreign exchange gains $413 million).

The notes appearing on pages 8 to 70 form an integral part of the financial statements.

6

FINANCIAL REPORTFINANCIAL REPORT (continued)
STATEMENT OF CHANGES IN EQUITY

As at 1 October 2016

Ordinaryshare capital$m
29,162

Reserves1$m

Retainedearnings$m

Total
shareholders’equity$m

344

20,75350,259Profit for the year

-

-

6,234

6,234

Other comprehensive income for the year

-

(316)

(3)

(319)

Total comprehensive income for the year

-

(316)

6,231

5,915
-

Transactions with equity holders in their capacity as equity holders:
Dividends paid-

Dividend reinvestment plan2

198-(4,609)(4,609)--198

Other equity movements:
Group employee share acquisition scheme

56

Other items

29,416As at 30 September 2017

-

-

56

8

21

29

36

22,396

51,848

Profit for the year

-

-

8,524

8,524

Other comprehensive income for the year

-

(95)

21

(74)

Total comprehensive income for the year

-

(95)

8,545

8,450

-

-

(4,585)(4,585)

Transactions with equity holders in their capacity as equity holders:
Dividends paid
2

Dividend reinvestment plan

-

-

-

-

(1,880)--(1,880)Group employee share acquisition scheme

(3)

-

-

(3)

Other items

-

3

21

24

27,533(56)

26,37753,854

Group share buy-back3
Other equity movements:

As at 30 September 2018
1.

Further information on individual reserves is disclosed in Note 21 Shareholders’ Equity.
No new shares were issued under the Dividend Reinvestment Plan (DRP) for the 2018 interim dividend (nil shares for the 2017 final dividend; nil shares for the 2017 interim dividend; 7.1 million shares for the2016 final dividend) as the shares were purchased on-market and provided directly to the shareholders participating in the DRP. On-market share purchases for the DRP in the September 2018 financial year
were $392 million (Sept 17 full year: $176 million).
3.
As announced on 18 December 2017, 22 June 2018 and 19 October 2018, there is currently an on-market buy-back in relation to ANZ’s ordinary shares of $3.0 billion. The Company bought back $1,880
million worth of shares during the 2018 financial year resulting in 66.7 million shares being cancelled during the year.
2.

The notes appearing on pages 8 to 70 form an integral part of the financial statements.

7

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
1. ABOUT THE FINANCIAL STATEMENTS
These are the financial statements for Australia and New Zealand Banking Group Limited (the Company or ANZ) for the year ended 30 September
2018. The Company is incorporated and domiciled in Australia. The address of the Company’s registered office and its principal place of business is
ANZ Centre, 833 Collins Street, Docklands, Victoria, Australia 3008.
On 30 October 2018, the Directors resolved to authorise the issue of these financial statements.
Information in the financial statements is included only to the extent we consider it material and relevant to the understanding of the financial
statements. A disclosure is considered material and relevant if, for example:
 the dollar amount is significant in size (quantitative factor); the dollar amount is significant by nature (qualitative factor); the user cannot understand the Company’s results without the specific disclosure (qualitative factor); the information is critical to a user’s understanding of the impact of significant changes in the Company’s business during the period, for example:
business acquisitions or disposals (qualitative factor); and the information relates to an aspect of the Company’s operations that is important to its future performance (qualitative factor).
.This section of the financial statements:
 outlines the basis upon which the Company’s financial statements have been prepared; and discusses any new accounting standards or regulations that directly impact the financial statements.

BASIS OF PREPARATIONThis financial report is a general purpose (Tier 1) financial report (as defined under the Corporations law) prepared by a ‘for profit’ entity, in accordancewith Australian Accounting Standards (AASs) and other authoritative pronouncements of the Australian Accounting Standards Board (AASB) the
Corporations Act 2001, and the International Financial Reporting Standards (IFRS) and interpretations published by the International AccountingStandards Board (IASB).
The Company is a reporting entity under the Corporations Act 2001, and is not exempt from preparing consolidated financial statements. The financial
statements for the Company have been prepared for the purpose of the Company fulfilling its financial reporting obligations under part 7.8 of the
Corporations Act 2001, as required for Australian Financial Services Licensees.
The Company is the ultimate parent entity of the ANZ Group. The Company consists of the following operations undertaken in Australia and in its
overseas branches: Retail and Business & Private Banking operations, Institutional operations, and Technology Services & Operations and Group Centre operations
The consolidated financial statements of the Group can be found as part of the 2018 Annual Report at https//shareholder.anz.com/annual-reportshareholder-review and copies are available from the Company’s registered office and principal place of business.
We present these financial statements in Australian dollars, which is the Company’s functional and presentation currency. We have rounded values tothe nearest million dollars ($m), unless otherwise stated, as allowed under the Australian Securities and Investments Commission (ASIC) Corporations(Rounding in Financial/Directors Report) Instrument 2016/191.

BASIS OF MEASUREMENT
We have prepared the financial information in accordance with the historical cost basis - except the following assets and liabilities which we havestated at their fair value: derivative financial instruments and in the case of fair value hedging, a fair value adjustment is made on the underlying hedging exposure; available-for-sale financial assets;
 financial instruments held for trading; other financial assets and liabilities designated at fair value through profit and loss; and other assets held for sale where the fair value less cost of disposal is less than their carrying value.
In accordance with AASB 119 Employee Benefits defined benefit obligations are measured using the Projected Unit Credit Method.

8

NOTES TO THE FINANCIAL STATEMENTS

1. ABOUT THE FINANCIAL STATEMENTS (continued)
FOREIGN CURRENCY TRANSLATION
TRANSACTIONS AND BALANCES
Foreign currency transactions are translated into the relevant functional currency at the exchange rate prevailing at the date of the transaction. At thereporting date, monetary assets and liabilities denominated in foreign currencies are translated into Australian dollars, being the functional currency,
at the relevant spot rate. Any foreign currency translation gains or losses are included in profit or loss in the period they arise.
We measure translation differences on non-monetary items at fair value through profit or loss and report them as part of the fair value gain or loss onthese items. We include any translation differences on non-monetary items classified as available-for-sale financial assets in the available-for-salerevaluation reserve in equity.

KEY JUDGEMENTS AND ESTIMATES
When applying accounting policies, management has made a number of judgements and applied estimates and assumptions aboutpast and future events. Further information on the key judgements and estimates that we consider material to the financial statements
are contained within the relevant notes to the financial statements.

ACCOUNTING STANDARDS NOT EARLY ADOPTED
A number of new standards, amendments to standards and interpretations have been published but are not mandatory for the financial statements
for the year ended 30 September 2018, and have not been applied by the Company in preparing these financial statements.
We have identified three standards relevant to the Company and further details are set out below.
AASB 9 FINANCIAL INSTRUMENTS (AASB 9)
In December 2014, the AASB issued the Australian Accounting Standard AASB 9 Financial Instruments which has replaced AASB 139 Financial
Instruments: Recognition and Measurement (AASB 139). AASB 9 is effective for the Company from 1 October 2018.
AASB 9 stipulates new requirements for the impairment of financial assets, classification and measurement of financial assets and liabilities and generalhedge accounting. Details of the key requirements and estimated impacts on the Company are outlined below.
Impairment
AASB 9 replaces the incurred loss impairment model under AASB 139 with an expected credit loss (ECL) model incorporating forward looking
information and which does not require an actual loss event to have occurred for an impairment provision to be recognised.
The ECL model will be applied to all financial assets measured at amortised cost, debt instruments measured at fair value through othercomprehensive income, lease receivables, certain loan commitments and financial guarantees not measured at fair value through profit or loss.
Under the ECL model, the following three-stage approach is applied to measuring expected credit losses based on credit migration between thestages since origination:
 Stage 1: At the origination of a financial asset, and where there has not been a significant increase in credit risk since origination, a provisionequivalent to 12 months ECL is recognised.
 Stage 2: Where there has been a significant increase in credit risk since origination, a provision equivalent to lifetime ECL is recognised. If credit risk
were to improve in a subsequent period such that the increase in credit risk since origination is no longer considered significant, the exposure
returns to a Stage 1 classification and a 12 month ECL.
 Stage 3: Similar to the current AASB 139 requirements for individual impairment provisions, lifetime ECL is recognised for loans where there is
objective evidence of impairment.
Expected credit losses are estimated at the facility level by using a probability of default reflecting a probability weighted range of possible future
economic scenarios, and applying this to the estimated exposure of the Company at the point of default (exposure at default) after taking into
account the value of any collateral held or other mitigants of loss (loss given default), while allowing for the impact of discounting for the time value ofmoney.

9

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
1. ABOUT THE FINANCIAL STATEMENTS (continued)
Key judgements and estimates made by the Company include the following: Significant increase in credit risk
Stage 2 assets are those that have experienced a significant increase in credit risk (SICR) since initial recognition. In determining what constitutes a
SICR, the Company considers both qualitative and quantitative information. For the majority of portfolios, the primary indicator of a SICR is asignificant deterioration in the internal credit rating grade of a facility since origination. The Company will also use secondary indicators, such as 30days past due arrears, as backstops to these primary indicators.
The determination of trigger points in relation to the deterioration of rating grades, combined with secondary risk indicators where used, requires
judgement. In determining the Company’s policy, alternative indicators have been considered and assessed, and these will be subject to regularreview to ensure they remain appropriate.
 Forward looking information
The measurement of expected credit losses reflects an unbiased probability-weighted range of possible future outcomes.
In applying forward looking information in the Company’s AASB 9 credit models, the Company uses four alternative economic scenarios inestimating ECL. A base case scenario reflects management’s base case assumptions used for medium term planning purposes. Additional upsideand downside scenarios are determined together with a severe downside scenario. The Company’s Credit and Market Risk Committee (CMRC) will
be responsible for reviewing and approving forecast economic scenarios and the associated probability weights applied to each scenario.
Where applicable, adjustments may be made to account for situations where known or expected risks have not been adequately addressed in themodelling process. CMRC will be responsible for recommending such adjustments.
The overall level of expected credit losses and areas of significant management judgement will be reported to, and oversighted by, the Company’s
Board Risk Committee.
Classification and measurement
Financial assets - general
There are three measurement classifications for financial assets under AASB 9: Amortised Cost, Fair Value through Profit or Loss (FVTPL) and Fair Value
through Other Comprehensive Income (FVOCI). Financial assets are classified into these measurement classifications on the basis of two criteria:
 the business model within which the financial asset is managed; and the contractual cash flow characteristics of the financial asset (specifically whether the contractual cash flows represent ‘solely payments ofprincipal and interest’).
The resultant financial asset classifications are as follows: Amortised cost: financial assets with contractual cash flows that comprise the payment of principal and interest only and which are held in abusiness model whose objective is to collect their cash flows; Fair value through other comprehensive income: financial assets with contractual cash flows that comprise the payment of principal and interest
only and which are held in a business model whose objective is to both collect their cash flows and to sell; and Fair value through profit or loss: Any other financial assets not falling into the categories above are measured at FVTPL.
In December 2017, the AASB issued AASB 2017-6 Amendments to Australian Accounting Standards - Prepayment Features with Negative
Compensation which amends the requirements of AASB 9 so that certain prepayment features meet the solely payments of principal and interest test.
The Company intends to early adopt this amendment so that it applies from the date of initial application of AASB 9.
AASB 9 allows the Company to irrevocably elect to designate a financial asset as measured at FVTPL on initial recognition if doing so eliminates orsignificantly reduces an accounting mismatch.
Financial assets - equity instruments
AASB 9 also permits non-traded equity investments to be designated at FVOCI on an instrument by instrument basis. If this election is made under
AASB 9, gains or losses are not reclassified from other comprehensive income to profit or loss on disposal of the investment. However, gains or losses
may be reclassified within equity.
Financial liabilities
The classification and measurement requirements for financial liabilities under AASB 9 are largely consistent with AASB 139 with the exception that for
financial liabilities designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included in othercomprehensive income except where doing so would create or enlarge an accounting mismatch in profit or loss. This part of the standard was early
adopted by the Company on 1 October 2013.

10

NOTES TO THE FINANCIAL STATEMENTS

1. ABOUT THE FINANCIAL STATEMENTS (continued)
General hedge accounting
AASB 9 introduces new hedge accounting requirements which more closely align accounting with risk management activities undertaken when
hedging financial and non-financial risks.
AASB 9 provides the Company with an accounting policy choice to continue to apply the AASB 139 hedge accounting requirements until theInternational Accounting Standards Board’s ongoing project on macro hedge accounting is completed. The Company’s current expectation is that it
will continue to apply the hedge accounting requirements of AASB 139.
Transition to AASB 9
Other than as noted above under classification and measurement of financial liabilities, AASB 9 has a date of initial application for the Company of 1
October 2018.
The classification and measurement, and impairment requirements, will be applied retrospectively by adjusting opening retained earnings at 1
October 2018. The Company does not intend to restate comparatives.
Impact
The estimated impact of AASB 9 relates to the Impairment and the Classification and Measurement provisions. These estimates are based on
accounting policies, assumptions and judgements and estimation techniques that remain subject to change until the Company finalises its financial
statements for the year ending 30 September 2019.
 Impairment
For the financial statements of the Company, the adoption of AASB 9 is expected to reduce net assets at 1 October 2018 by approximately $729
million offset by deferred tax of approximately $208 million.
 Classification and measurement of financial assets
While some classification changes will occur as a result of the application of the business model and contractual cash flow characteristics tests,
these are not expected to be significant from a Company perspective.
The adoption of the Classification and Measurement requirements of the standard will result in measurement differences compared to thoseunder AASB 139. Financial assets with a current carrying value of approximately $4.8 billion, predominantly bonds and debt instruments, will bereclassified between amortised cost, FVTPL and FVOCI. The net re-measurement from these reclassifications is not material. There are no othermaterial changes in the measurement categories.
 Classification and measurement of financial liabilities
The Company has issued certain financial liabilities (bonds included within the Debt issuances caption) with an amortised cost carrying amount at
30 September 2018 of approximately $2.6 billion. The Company will elect to designate these liabilities as measured at fair value through profit orloss effective from initial application of AASB 9 to reduce an accounting mismatch that currently exists. The impact on net assets and retained
earnings is not material.
AASB 15 REVENUE FROM CONTRACTS WITH CUSTOMERSAASB 15 is effective for the Company from 1 October 2018 and replaces existing guidance on the recognition of revenue from contracts withcustomers. The standard requires identification of distinct performance obligations within a contract, and allocation of the transaction price of thecontract to those performance obligations. Revenue is then recognised as each performance obligation is satisfied. The standard also provides
guidance on whether an entity is acting as a principal or an agent which impacts the presentation of revenue on a gross or net basis.
The Company has assessed all revenue streams existing at the date of transition to the new standard and determined that the impact of AASB 15 isimmaterial, given a majority of Company revenues are outside the scope of the standard. The Company will adopt AASB 15 retrospectively including
restatement of prior period comparatives.
Certain revenues for the credit cards business will be impacted as follows: Certain loyalty costs will be presented as operating expenses rather than presented as a net reduction of other operating income where theCompany is assessed to be acting as a principal (rather than an agent) under the new standard. In addition, certain incentives received from card
scheme providers related to card marketing and migration activities will be presented as operating income and no longer netted against
operating expenses.

11

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
1. ABOUT THE FINANCIAL STATEMENTS (continued)
AASB 16 LEASESThe final version of AASB 16 was issued in February 2016 and is not effective for the Company until 1 October 2019. AASB 16 requires a lessee torecognise its:
 right to use the underlying leased asset, as a right-of-use asset; and obligation to make lease payments as a lease liability.
AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases.
The Company is in the process of the assessing the impact of application of AASB 16 and is not yet able to reasonably estimate the impact on its
financial statements.

12

NOTES TO THE FINANCIAL STATEMENTS

2. OPERATING INCOME
2018
$m

2017
$m

Available-for-sale assets

1,232

985

Financial assets at amortised cost

21,52020,546881

739

23,633

22,270Net interest income
Interest income by type of financial asset

Trading securities
Interest income - externalInterest income - controlled entities

3,387

3,343

Interest income

27,02025,613(12,148)(10,961)

(239)

(111)

Interest expense by type of financial liability
Financial liabilities at amortised cost
Securities sold shortFinancial liabilities designated at fair value through profit or loss
Interest expense - external

(69)

(78)

(12,456)(11,150)

Interest expense - controlled entities(3,763)(3,781)

Interest expense(16,219)(14,931)

Major bank levy

(355)

(86)

10,446

10,596599

652

Non-lending fees and commissions

2,152

2,211

Fee and commission income - external

2,751

2,863

Fee and commission income - controlled entities

1,279

1,197

Fee and commission income

4,030

4,060

Fee and commission expense(994)(1,019)Net fee and commission income

3,036

3,041

1,178

1,053

Dividends received from controlled entities

4,773

2,299

Sale of Asia Retail and Wealth businesses

13

(219)

Sale of Shanghai Rural Commercial Bank (SRCB)

233

(231)

Write down of investment in Wealth Australia (AWA)3

(597)

-

Net interest income
Other operating incomei) Fee and commission income
Lending fees1ii) Other income
Net foreign exchange earnings and other financial instruments income2
3

9

44

Other income4

5,609

2,946

Other operating income

8,645

5,987

(80)

74

Other

Net funds management and commission income
Funds management income
5Commission income

72

84

Net funds management and commission income

(8)

158

Share of associates' profit

(1)

60

19,082

16,801

6

Operating income
1.

Lending fees exclude fees treated as part of the effective yield calculation in interest income.
Includes fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting hedges entered into to manage interest rate and foreign exchange risk on funding
instruments, ineffective portions of cash flow hedges, and fair value movements in financial assets and liabilities designated at fair value through profit and loss.
3.
During 2018 the Company received a dividend of $582 million from AWA and wrote the investment in AWA down by an equivalent amount. The impact of this has been presented net in the income
statements.
4.
Total other income includes external dividend income from Bank of Tianjin of $27 million (2017: $26 million).
5.
Commission income includes insurance commissions which were previously reported separately.
6.
Includes customer remediation of $310 million for the September 2018 year (2017: $52 million).
2.

13

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME (continued)

RECOGNITION AND MEASUREMENTNET INTEREST INCOME
Interest Income and Expense
We recognise interest income and expense for all financial instruments, including those classified as held for trading, available-for-sale (AFS)
assets or designated at fair value, through profit or loss in net interest income. For assets held at amortised cost the Company use theeffective interest rate method to calculate its amortised cost. The effective interest rate is the rate that discounts the stream of estimatedfuture cash receipts or payments over the expected life of the financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or liability. For assets subject to prepayment, we determine their expected life on the basis ofhistorical behaviour of the particular asset portfolio - taking into account contractual obligations and prepayment experience.
We recognise fees and costs, which form an integral part of the financial instrument (for example loan origination fees and costs), using theeffective interest method. This is presented as part of interest income or expense depending on whether the underlying financial
instrument is a financial asset or financial liability.
Major Bank Levy
The Major Bank Levy Act 2017 (‘Levy’ or ‘Major bank levy’) became effective from 1 July 2017 and applies a rate of 0.06% to certain liabilitiesof the Company. The Company has determined that the levy represents a finance cost for the Company and is presented in interest
expense in the Income Statement.
OTHER OPERATING INCOME
Fee and Commission Income
We recognise fees or commissions: that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees)
when the significant act has been completed; and charged for providing ongoing services (for example, maintaining and administering existing facilities) as income over the period theservice is provided.
Net Foreign Exchange Earnings and Other Financial Instruments Income
We recognise the following as net foreign exchange earnings and other financial instruments income: exchange rate differences arising on the settlement of monetary items and translation differences on monetary items translated at
rates different to those at which they were initially recognised or included in a previous financial report;
 fair value movements (excluding realised and accrued interest) on derivatives that we use to manage interest rate and foreignexchange risk on funding instruments not designated as accounting hedges;
 the ineffective portions of fair value hedges, cash flow hedges and net investment hedges;
 fair value movements on financial assets and financial liabilities designated at fair value through profit or loss or held for trading; amounts released from the Available-for-sale (AFS) revaluation reserve in equity when an AFS asset is sold, and immediately upon sale or repayment of a hedged item, the unamortised fair value adjustments in items designated as fair value
hedges and amounts accumulated in equity related to designated cash flow hedges.
Dividends Received from Controlled Entities
Dividends are recognised as revenue when the right to receive payment is established.
Gain or Loss on Disposal of Non-Financial Assets
The gain or loss on the disposal of assets is the difference between the carrying value of the asset and the proceeds of disposal net of costs.
This is recognised in other income in the year in which the significant risks and rewards transfer to the buyer.

14

NOTES TO THE FINANCIAL STATEMENTS

2. OPERATING INCOME (continued)

RECOGNITION AND MEASUREMENT
NET FUNDS MANAGEMENT AND COMMISSION INCOME
Funds Management Income
We recognise the fees we charge to customers in connection with financial advice and the management of investment products when we
have provided the service.
Commission Income
We recognise commissions received for distributing products to customers in the period when we become entitled to the commission.
SHARE OF ASSOCIATES’ PROFITThe equity method is applied to accounting for associates in the financial statements. Under the equity method the Company’s share of
the after tax results of associates is included in the Income Statement and the Statement of Comprehensive Income.

15

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
3. OPERATING EXPENSES
2018
$m

2017
$m

Personnel
Salaries and related costs

3,233

3,288

Superannuation costs

258

266

Other

163

227

3,654

3,781

Rent

395

409

Other

264

275

Premises expenses

659

684

Depreciation and amortisation

682

662

Licences and outsourced services

457

413

Accelerated amortisation2

240

-

Other

204

216

1,583

1,291

210

55

Personnel expenses
Premises

Technology

Technology expenses
Restructuring
Other
Advertising and public relations

160

192

Professional fees

497

397

Freight, stationery, postage and communication

179

204

Royal Commission legal costs
Other
Other expenses
Operating expenses

1

55

-

1,124

1,019

2,015

1,812

8,121

7,623

1.

Includes customers remediation of $255 million for the September 2018 year (2017: $79million).
2.
Accelerated software amortisation charge relates to certain software assets in the Institutional and Australia divisions following the reassessment of useful lives.

RECOGNITION AND MEASUREMENTOPERATING EXPENSES
Operating expenses are recognised as services are provided to the Company over the period in which an asset is consumed or once
a liability is created.
SALARIES AND RELATED COSTS - ANNUAL LEAVE, LONG SERVICE LEAVE AND OTHER EMPLOYEE BENEFITS
Wages and salaries, annual leave, and other employee entitlements expected to be paid or settled within twelve months of employees
rendering service are measured at their nominal amounts using remuneration rates that the Company expects to pay when the liabilities aresettled.
We accrue employee entitlements relating to long service leave using an actuarial calculation. It includes assumptions regarding staff
departures, leave utilisation and future salary increases. The result is then discounted using market yields at the reporting date. The market
yields are determined from a blended rate of high quality corporate bonds with terms to maturity that closely match the estimated future cash
outflows.
If we expect to pay short term cash bonuses, then a liability is recognised when the Company has a present legal or constructive obligation to
pay this amount (as a result of past service provided by the employee) and the obligation can be reliably measured.

16

NOTES TO THE FINANCIAL STATEMENTS

3. OPERATING EXPENSES (continued)

RECOGNITION AND MEASUREMENT
Personnel expenses also include share-based payments which may be cash or equity settled. We calculate the fair value of equity settled
remuneration at grant date, which is then amortised over the vesting period, with a corresponding increase in share capital or the share option
reserve as applicable. When we estimate the fair value, we take into account market vesting conditions, such as share price performance
conditions. We take non-market vesting conditions, such as service conditions, into account by adjusting the number of equity instruments
included in the expense.
After the grant of an equity-based award, the amount we recognise as an expense is reversed when non-market vesting conditions are notmet, for example an employee fails to satisfy the minimum service period specified in the award on resignation, termination or notice ofdismissal for serious misconduct. However, we do not reverse the expense if the award does not vest due to the failure to meet a marketbased performance condition.
Further information on share-based payment schemes operated by the Company during the current and prior year is included in Note 27
Employee Share and Option Plans.

17

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
4. INCOME TAX
INCOME TAX EXPENSE
Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense recognised in profit or loss:
2018
$m

2017
$m

Profit before income tax

10,332

8,297

Prima facie income tax expense at 30%

3,100

2,489

-

(18)

Sale of Shanghai Rural Commercial Bank (SRCB)

(84)

172

Tax provisions no longer required

(39)

-

Interest on convertible instruments

67

69

Tax effect of permanent differences:
Share of associates’ profit

(6)

27

(1,606)(690)

Provision for foreign tax on dividend repatriation

28

8

Write down of investment in Wealth Australia

354

-

Other

13

24

Overseas tax rate differential
Rebatable and non-assessable dividends

Subtotal

1,827

2,081

Income tax over provided in previous years

(19)

(18)

Income tax expense

1,808

2,063

Current tax expense

2,037

1,997

Adjustments recognised in the current year in relation to the current tax of prior years

(19)

(18)

Deferred tax expense/(income) relating to the origination and reversal of temporary differences
Income tax expense
Australia
Overseas

(210)

84

1,808

2,063

1,695

1,975

113

88

Income tax expense

1,808

2,063

Effective tax rate

17.5%

24.9%

18

NOTES TO THE FINANCIAL STATEMENTS

4. INCOME TAX (continued)
TAX CONSOLIDATIONThe Company and all its wholly owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. The Company is
the head entity in the tax-consolidated group. We recognise each of the following in the separate financial statements of members of the tax
consolidated group on a ‘group allocation’ basis: tax expense/income, and deferred tax liabilities/assets, that arise from temporary differences of themembers of the tax-consolidated group. The Company (as head entity in the tax-consolidated group) recognises current tax liabilities and assets ofthe tax-consolidated group.
Under a tax funding arrangement between the entities in the tax consolidated group, amounts are recognised as payable to or receivable by theCompany and each member of the tax-consolidated group in relation to the tax contribution amounts paid or payable between the Company andthe other members of the tax-consolidated group.
Members of the tax-consolidated group have also entered into a tax sharing agreement that provides for the allocation of income tax liabilities
between the entities were the head entity to default on its income tax payment obligations.

UNRECOGNISED DEFERRED TAX ASSETS AND LIABILITIES
Unrecognised deferred tax assets related to unused realised tax losses (on revenue account) total $nil (2017: $nil). Unrecognised deferred tax liabilities
related to additional potential foreign tax costs (assuming all retained earnings in offshore branches are repatriated) total $42 million (2017: $38
million).

RECOGNITION AND MEASUREMENT
INCOME TAX EXPENSE
Income tax expense comprises both current and deferred taxes and is based on the accounting profit adjusted for differences in theaccounting and tax treatments of income and expenses (that is, taxable income). We recognise tax expense in profit or loss except to theextent to which it relates to items recognised directly in equity and other comprehensive income, in which case we recognise it directly inequity or other comprehensive income respectively.
CURRENT TAX EXPENSE
Current tax is the tax we expect to pay on taxable income for the year, based on tax rates (and tax laws) which are enacted at the reporting
date. We recognise current tax as a liability (or asset) to the extent that it is unpaid (or refundable).
DEFERRED TAX ASSETS AND LIABILITIESWe account for deferred tax using the balance sheet method. Deferred tax arises because accounting income is not always the same as thetaxable income. This creates temporary differences, which usually reverse over time. Until they reverse, we recognise a deferred tax asset, or
liability, on the balance sheet. We measure deferred taxes at the tax rates that we expect will apply to the period(s) when the asset isrealised, or the liability settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date.
We offset current and deferred tax assets and liabilities only to the extent that:

they relate to income taxes imposed by the same taxation authority;

there is a legal right and intention to settle on a net basis; and

it is allowed under the tax law of the relevant jurisdiction.

KEY JUDGEMENTS AND ESTIMATES
Judgement is required in determining provisions held in respect of uncertain tax positions. The Company estimates its tax
liabilities based on its understanding of the relevant law in each of the countries in which it operates and seeks independent
advice where appropriate.

19

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
5. DIVIDENDS
ORDINARY SHARE DIVIDENDSDividends are provided for in the financial statements once determined, accordingly, the final dividend announced for the current financial year isprovided for and paid in the following financial year.
Dividends% of total

Amountper share

Total dividend$m80.0 cents80.0 cents

2,342
2,349

Financial Year 20172016 final dividend paid2017 interim dividend paid
Bonus option plan adjustment(82)

Dividends paid during the year ended 30 September 2017

4,609

Cash

91.9%

4,235

Dividend reinvestment plan

8.1%

374
4,609

Dividends paid during the year ended 30 September 2017
Financial Year 20182017 final dividend paid

80.0 cents

2,3502018 interim dividend paid

80.0 cents

2,317

Bonus option plan adjustment(82)

Dividends paid during the year ended 30 September 2018

4,585

Cash

91.5%

Dividend reinvestment plan

8.5%

4,193
392

Dividends paid during the year ended 30 September 2018

Dividends announced and to be paid after year-end
2018 final dividend (fully franked at 30%, New Zealand imputation credit NZD 10cents per share)

4,585

Payment date18 December 2018

Amountper share

Total
dividend$m

80.0 cents

2,296

DIVIDEND REINVESTMENT PLAN AND BONUS OPTION PLAN
Eligible shareholders can elect to reinvest their dividend entitlement into ANZ ordinary shares under the Company’s Dividend Reinvestment Plan
(DRP). Eligible shareholders can elect to forgo their dividend entitlement and instead receive ANZ ordinary shares under the Company’s Bonus Option
Plan (BOP). For the 2018 final dividend, DRP participation will be satisfied by an on-market purchase of shares and BOP participation will be satisfied by
an issue of ANZ ordinary shares. There will be no discount applied to the DRP and BOP price.
See Note 21 Shareholders’ Equity for details of shares the Company issued or purchased in respect of the DRP and BOP.

DIVIDEND FRANKING ACCOUNT
Currency

2018
$m

2017
$m

Australian franking credits available at 30% (2017: 30%) tax rate

AUD

97

171

New Zealand imputation credits available (which can be attached to our Australian
dividends but may only be used by New Zealand resident shareholders)

NZD

3,868

3,680

The above amounts represent the balances of the franking accounts as at the end of the financial year, adjusted for:
 franking credits that will arise from the payment of income tax payable as at the end of the financial year; and franking credits/debits from the receipt/payment of dividends that have been recognised as tax receivables/payables as at the end of the financial
year.

20

NOTES TO THE FINANCIAL STATEMENTS

5. DIVIDENDS (continued)
The proposed final 2018 dividend will utilise the entire balance of $97 million franking credits available at 30 September 2018. Instalment tax
payments on account of the 2019 financial year which will be made after 30 September 2018 will generate sufficient franking credits to enable thefinal 2018 dividend to be fully franked. The extent to which future dividends will be franked will depend on a number of factors, including the level ofprofits generated by the Company that will be subject to tax in Australia.

RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
APRA’s written approval is required before paying dividends on ANZ ordinary shares: if the aggregate dividends exceed the Company’s after tax earnings (in calculating those after tax earnings, we take into account any payments wemade on senior capital instruments) in the financial year to which they relate; or if the Group’s Common Equity Tier 1 capital ratio falls within capital range buffers specified by APRA.
If the Company fails to pay a dividend or distribution on its ANZ Capital Notes or ANZ Capital Securities on the scheduled payment date, it may(subject to a number of exceptions) be restricted from resolving to pay or paying any dividend on the ANZ ordinary shares.

6. SEGMENT REPORTING
No operating segment disclosures have been presented in these Company financial statements. Disaggregated information for the Company’s
segments is not information which is regularly provided to the Chief Executive Officer, who is the Chief Operating Decision Maker (CODM) of theCompany.
Full details of the operating segments of the Group are provided in Note 7 Segment Reporting in the ANZ 2018 Group Annual Report located athttps://shareholder.anz.com/annual-report-shareholder-review.

7. CASH AND CASH EQUIVALENTS
2018$m
Coins, notes and cash at bank

2017
$m

912

1,096

Securities purchased under agreements to resell in less than 3 months

27,631

20,818

Balances with central banks

32,00922,389Settlement balances owed to ANZ within 3 months

19,67519,096

Cash and cash equivalents

80,22763,39921

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
8. TRADING SECURITIES
2018
$m

2017
$m

Government securities

21,54525,647

Corporate and financial institution securities

4,302

5,060

Equity and other securities

3,672

4,899

Trading securities

29,51935,606

RECOGNITION AND MEASUREMENT
Trading securities are financial instruments we either: acquire principally for the purpose of selling in the short-term; or hold as part of a portfolio we manage for short-term profit making.
We recognise purchases and sales of trading securities on trade date: initially, we measure them at fair value through the profit and loss; and subsequently, we measure them in the balance sheet at their fair value with any revaluation recognised in the profit or loss.

KEY JUDGEMENTS AND ESTIMATES
Judgement is required when applying the valuation techniques used to measure the fair value of trading securities not valued using
quoted market prices. Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for further details.

22

NOTES TO THE FINANCIAL STATEMENTS

9. DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value

Assets2018$m

Liabilities
2018$m

Assets2017$mLiabilities
2017$m

Derivative financial instruments - held for trading

62,813(63,177)

55,261(54,937)

Derivative financial instruments - designated in hedging relationships

1,635(2,461)

1,775(1,893)

Derivative financial instruments

64,448(65,638)

57,036(56,830)FEATURES
Derivative financial instruments are contracts:
 whose value is derived from an underlying price index (or other variable) defined in the contract – sometimes the value is derived from morethan one variable; that require little or no initial net investment; and that are settled at a future date.
Movements in the price of the underlying variables, which cause the value of the contract to fluctuate, are reflected in the fair value of the derivative.

PURPOSEThe Company’s derivative financial instruments have been categorised as following:
Trading

Derivatives held in order to: Meet customer needs for managing their own risks.
 Manage risk in the Company’s positions that are not in a designated hedge accounting relationship.
 Undertake market making and positioning activities to generate profits from short-term fluctuations in prices or
margins.

Designated in Hedging
Relationships

Derivatives designated into hedge accounting relationships in order to minimise profit or loss volatility by matching
movements to underlying positions relating to: Hedges of the Company’s exposures to interest rate risk and currency risk.
 Hedges of other exposures relating to non-trading positions.

TYPES
The Company offers and uses four different types of derivative financial instruments:
Forwards

A contract documenting the rate of interest, or the currency exchange rate, to be paid or received on a notional
principal obligation at a future date.

Futures

An exchange traded contract in which the parties agree to buy and sell an asset in the future for a price agreed on
the transaction date, with a net settlement in cash paid on the future date without physical delivery of the asset.

Swaps

A contract in which two parties exchanges one series of cash flows for another.

Options

A contract in which the buyer of the contract has the right - but not the obligation - to buy (known as a “call option”)
or to sell (known as a “put option”) an asset or instrument at a set price on a future date. The seller has thecorresponding obligation to fulfil the transaction to sell or buy the asset or instrument if the buyer exercises theoption.

RISKS MANAGED
The Company offers and uses the instruments described above to manage fluctuations in the following market factors:
Foreign Exchange

Currencies at current or determined rates of exchange.

Interest Rate

Fixed or variable interest rates applying to money lent, deposited or borrowed.

Commodity

Soft commodities (that is, agricultural products such as wheat, coffee, cocoa and sugar) and hard commodities (thatis, mined products such as gold, oil and gas).

CreditCounterparty risk in the event of default.

23

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS – HELD FOR TRADINGThe majority of the Company’s derivative financial instruments are held for trading. The fair value of derivative financial instruments held for tradingare:

Fair Value

Assets2018$m

Liabilities
2018$m

Assets2017$mLiabilities
2017
$m

6

(7)

2

(1)

Interest rate contracts
Forward rate agreements
Futures contracts

48

(31)

97

(34)

Swap agreements

32,873(33,510)

27,584(27,720)

Options purchased

780

-

742

-

-

(1,408)-(1,365)33,707(34,956)

28,425(29,120)

Spot and forward contracts

14,057(13,221)

14,132(13,731)

Swap agreements

12,276(11,609)

10,070(10,073)

Options purchased

461

-

475

-

-

(649)

-

(439)

Total

26,794(25,479)

24,677(24,243)

Commodity contracts

2,258(2,684)

1,991(1,398)

Options sold
Total
Foreign exchange contracts

Options sold

Credit default swaps
Structured credit derivative purchased

22

-

52

-

Other credit derivatives purchased

8

(29)

13

(110)

30

(29)

65

(110)

Credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Credit derivatives sold
Total
Derivative financial instruments - held for trading

-

(26)

-

(58)

24

(3)

103

(8)

24

(29)

103

(66)

54

(58)

168

(176)

62,813(63,177)

55,261(54,937)

24

NOTES TO THE FINANCIAL STATEMENTS

9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS – DESIGNATED IN HEDGING RELATIONSHIPS
There are three types of hedge accounting relationships the Company utilises:
Fair value hedge

Cash flow hedge

Net investment hedge

Objective of thishedgingarrangement

To hedge our exposure to changes tothe fair value of a recognised asset or
liability or unrecognised firm
commitment caused by interest rateor foreign currency movements.

To hedge our exposure tovariability in cash flows of arecognised asset or liability, aforeign exchange component of a
firm commitment or a highly
probable forecast transaction
caused by interest rate, foreign
currency and other pricemovements.

To hedge our exposure to exchange rate
differences arising from the translation of
our foreign operations from theirfunctional currency to Australian dollars.

Recognition ofeffective hedge
portionThe following are recognised in profit
or loss at the same time:

We recognise the effective portionof changes in the fair value ofderivatives designated as a cash
flow hedge in the cash flow hedge
reserve.

We recognise the effective portion ofchanges in the fair value of the hedging
instrument in the foreign currencytranslation reserve.



all changes in the fair value ofthe underlying item relating to
the hedged risk; andthe change in the fair value ofderivatives.

Recognition of
ineffective hedge
portionRecognised immediately in other operating income.

If a hedging
instrument expires,or is sold, terminated,or exercised; or nolonger qualifies forhedge accounting

When we recognise the hedged itemin profit or loss, we recognise therelated unamortised fair value
adjustment in profit or loss. This may
occur over time if the hedged item isamortised to profit or loss as part ofthe effective yield over the period tomaturity.

Only when we recognise thehedged item in profit or loss is theamount previously deferred in the
cash flow hedge reserve transferred
to profit or loss.

The amount we defer in the foreign
currency translation reserve remains inequity and is transferred to profit or loss
only when we dispose of, or partiallydispose of, the foreign operation.

Hedged item sold or
repaidWe recognise the unamortised fairvalue adjustment immediately in
profit or loss.

Amounts accumulated in equity aretransferred immediately to profit orloss.

The gain or loss, or applicableproportion, we recognise in equity istransferred to profit or loss on disposal
or partial disposal of a foreign operation.

The fair value of derivative financial instruments designated in hedging relationships are::Assets2018$m

Liabilities
2018$m

Assets2017$mLiabilities
2017
$m

1

-

1

-

Fair Value

Hedge
accounting
type

Foreign exchange swap agreements

Fair value

Foreign exchange spot and forward contracts

Fair value

1

-

-

-

Interest rate swap agreements

Fair value

1,211(2,251)

1,287(1,555)Interest rate futures contracts

Fair value

47

(1)

80

-

Interest rate swap agreements

Cash flow

330

(148)

361

(278)

Foreign exchange swap agreements

Cash flow

44

(52)

35

(49)

Foreign exchange spot and forward contracts

Cash flow

1

-

-

(5)

Foreign exchange spot and forward contracts

Net investment

-

(9)

11

(6)

Derivative financial instruments - designated in hedging relationships

1,635(2,461)

1,775(1,893)25

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The impact recognised in profit or loss arising from derivative financial instruments designated in hedge accounting relationships, is as follows:
Hedge
accounting type

2018
$m

2017
$m

Gain/(loss) recognised in other operating income
Hedged item

Fair value

934

(43)

Hedging instrument

Fair value

(949)

38

Ineffective portion of hedged instrument

Cash flow

13

(20)

RECOGNITION AND MEASUREMENT
Recognition

Initially and at each reporting date, we recognise all derivatives at fair value. If the fair value of a
derivative is positive, then we carry it as an asset, but if its value is negative, then we carry it as aliability.
Valuation adjustments are integral in determining the fair value of derivatives. This includes:a derivative credit valuation adjustment (CVA) to reflect the counterparty risk and/or event ofdefault; anda funding valuation adjustment (FVA) to account for funding costs and benefits in the derivatives
portfolio.

Derecognition ofassets and liabilities

We remove derivative assets from our balance sheet when the contracts expire or we have transferred
substantially all the risks and rewards of ownership. We remove derivative liabilities from our balance
sheet when the Company’s contractual obligations are discharged, cancelled or expired.

Impact on the
Income Statement

How we recognise gains or losses on derivative financial instruments depends on whether thederivative is held for trading or is designated into a hedging relationship. For derivative financial
instruments held for trading, gains or losses from changes in the fair value are recognised in profit orloss.
For an instrument designated into a hedging relationship the recognition of gains or losses depends
on the nature of the item being hedged. Refer to the table on page 25 for profit or loss treatment
depending on the hedge type.

Hedge effectivenessTo qualify for hedge accounting a hedge is expected to be highly effective. A hedge is highly effective
only if the following conditions are met:

the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk during the period for which the hedge is designated(prospective effectiveness); andthe actual results of the hedge are within the range of 80-125% (retrospective effectiveness).

The Company monitors hedge effectiveness on a regular basis but at a minimum at least at eachreporting date.

KEY JUDGEMENTS AND ESTIMATES
Judgement is required when we select the valuation techniques used to measure the fair value of derivatives, particularly the selection ofvaluation inputs that are not readily observable, and the application of valuation adjustments to certain derivatives. Refer to Note 16 Fair
Value of Financial Assets and Financial Liabilities for further details.

26

NOTES TO THE FINANCIAL STATEMENTS

10. AVAILABLE-FOR-SALE ASSETS
2018
Corporateandfinancial
Security Government institution
type
securities securities$m$m

Period2017
Equityandothersecurities$m

Corporateandfinancial
Government institution
Total
securities securities
$m
$m
$m

Equityandothersecurities
$m

Total
$m

Less than 3 months

5,725

850

-

6,575

5,424

768

-

6,192

Between 3 and 12 months

6,729

2,221

-

8,950

4,168

2,163

-

6,331

Between 1 and 5 years

24,455

10,364

159

34,97815,656

10,726403

26,785

Greater than 5 years

11,569-1,572

13,141

16,079260

2,134

18,473

-

-

1,084

1,084

-

-

725

725

48,47813,4352,815

64,72841,327

13,917

3,262

58,506

No maturity
Available-for-sale assets

During the year, the Company recognized a net gain (before tax) in respect of available-for-sale (AFS) assets of $70 million (2017: $15 million) was
recognised in other operating income.
The carrying value of AFS equity securities is $1,084 million (2017: $725 million). This includes the Company’s $1,025 million (2017: $676 million)
investment in the Bank of Tianjin (BoT) that ceased being classified as an associate in March 2016.

RECOGNITION AND MEASUREMENT
AFS assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principally for trading purposes.
They include both equity and debt securities. AFS assets are initially recognised at fair value plus transaction costs and are revalued at leastbi-annually. On revaluation, we include movements in fair value within the available-for-sale revaluation reserve in equity, except for certain
items which are recognised directly in profit or loss, being interest on debt securities, dividends received, foreign exchange on debt
securities and impairment charges.
When we sell the asset, any cumulative gain or loss from the available-for-sale revaluation reserve is recognised in profit or loss.
At each reporting date, we assess whether any AFS assets are impaired. We assess the impairment of any debt securities if an event has
occurred which will have a negative impact on the asset’s estimated cash flows. For equity securities, we assess if there is a significant or
prolonged decline in their fair value below cost.
If an AFS asset is impaired, then we remove the cumulative loss related to that asset from the available-for-sale revaluation reserve. We thenrecognise it in profit or loss for:
 debt instruments, as a credit impairment expense; and equity instruments, as a negative impact in other operating income.
We recognise any later reversals of impairment on debt securities in the profit or loss through the credit impairment charge line. However,
we do not make any reversals of impairment for equity securities. To the extent previously impaired equity securities recover in value, gains
are recognised directly in equity.

KEY JUDGEMENTS AND ESTIMATES
Judgement is required when we select valuation techniques used to measure the fair value of AFS assets not valued using quoted market
prices, particularly the selection of valuation inputs that are not readily observable. Refer to Note 16 Fair Value of Financial Assets andFinancial Liabilities for further details.

27

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
11. NET LOANS AND ADVANCES
2018
$m

2017
$m

Overdrafts

6,047

6,155

Credit cards

8,379

8,639

1

6,861

8,386

Term loans – housing

273,908

268,416

Term loans – non-housing1

180,965

161,610

Commercial bills

Other

1,494

1,578

Subtotal

477,654454,784

(165)

(149)

Unearned income
Capitalised brokerage/mortgage origination fees

710

751

Gross loans and advances (including assets classified as held for sale)478,199455,386

Provision for credit impairment (refer to Note 12)(2,780)(2,962)Net loans and advances

475,419452,424

Within one year

76,74467,609After more than one year

398,675

384,815

Net loans and advances

475,419452,424

475,418

452,4081

16

475,419452,424

Residual contractual maturity:

Carried on Balance Sheet at:
Amortised cost
Fair value through profit or loss (designated on initial recognition)
Net loans and advances
1.

Some of the loans previously shown in Commercial bills outstanding have been reclassified to Term Loans – non-housing. Restatement impact of $2,597 million for September 2017.

RECOGNITION AND MEASUREMENT
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market
and are facilities the Company provides directly to customers or through third party channels.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the issue of the loan or advance,
which are primarily brokerage/mortgage origination fees which we amortise over the estimated life of the loan. Subsequently, we thenmeasure loans and advances at amortised cost using the effective interest rate method, net of any provision for credit impairment, or
at fair value when they are specifically designated on initial recognition as fair value through profit or loss or when held for trading.
We classify contracts to lease assets and hire purchase agreements as finance leases if they transfer substantially all the risks andrewards of ownership of the asset to the customer or an unrelated third party. We include these facilities in ‘Other’ in the table above.
The Company enters into transactions in which it transfers financial assets that are recognised on its balance sheet. When the
Company retains substantially all of the risks and rewards of the transferred assets then the transferred assets remain on the Company’sbalance sheet, however, if substantially all the risks and rewards are transferred then the Company derecognises the asset.
If the risks and rewards are partially retained and control over the asset is lost, then the Company derecognises the asset. If control over
the asset is not lost, the Company continues to recognise the asset to the extent of its continuing involvement.
We separately recognise the rights and obligations retained, or created, in the transfer as assets and liabilities as appropriate.

28

NOTES TO THE FINANCIAL STATEMENTS

12. PROVISION FOR CREDIT IMPAIRMENTPROVISION FOR CREDIT IMPAIRMENT - BALANCE SHEETNet loans andadvances
Provision for credit impairment

Off-balance sheet credit related
commitments

Total

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

887

942

16

15

903

957

1,175

1,467

12

1

1,187

1,468

(337)

(348)

-

-

(337)

(348)

(1,031)(1,138)--(1,031)(1,138)

Individual provision
Balance at start of year
New and increased provisions
Write-backs
Bad debts written off (excluding recoveries)
Other1
Total individual provision

1

(36)

(10)

-

(9)

(36)

695

887

18

16

713

903

1,625

1,678

434

493

2,059

2,171

14

(24)

(27)

(42)

(13)

(66)

Collective provision
Balance at start of year
Charge/(release) to profit or loss
2

14

(29)

7

(17)

21

(46)

Total collective provision

1,653

1,625

414

434

2,067

2,059

Total provision for credit impairment

2,348

2,512

432

450

2,780

2,962

Credit impairment charge

2018
$m

2017
$m

New and increased provisions

1,187

1,468

Write-backs

(337)

(348)

Recoveries of amounts previously written-off

(208)

(173)

Individual credit impairment charge

642

947

Other

1.
2.

Other individual provision includes an adjustment for exchange rate fluctuations and the impact of discount unwind on individual provisions.
Other collective provision includes the Asia Retail and Wealth business divestment and an adjustment for exchange rate fluctuations.

CREDIT IMPAIRMENT CHARGE - INCOME STATEMENT

Collective credit impairment release

(13)

(66)

Total credit impairment charge

629

881

29

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
12. PROVISION FOR CREDIT IMPAIRMENT (continued)

RECOGNITION
MEASUREMENTKEY JUDGEMENTS
ANDANDESTIMATESThe Company
recognises
twooftypes
impairment
for its loans andadvances:of the extent of losses at reporting date.
When
we measure
impairment
loansofand
advances,provisions
we use management’s
judgement Individual provisionsIndividuallyfor significant assets that are assessed to be impaired; andCollectively
 Collective provisions for portfolios of similar assets that are assessed collectively for impairment.
Key Judgements
 Estimated future cash flows
 Estimated future cash flows
The accounting treatment
for eachprospectsof them isfor
detailed
below:
 Historical loss experience of assets with
 Businessthe customer
similarrisk characteristics
 Realisablevalue of any collateral
IndividuallyCollectively
 Impact of large concentrated losses Group’s
position
relativetootherclaimants
If any impaired loans and advances exceed
To allow for any small value loans and advances
Assessment
inherent in the portfolio
 Reliability of customer information
where losses may have been incurred but not yet
specified thresholds and an impairment event has
 Likely cost and duration of recovering loans
identified, and individually significant loans andbeen identified, then we assess the need for aadvances that we do not assess as impaired, we
We regularly review our key
judgements
andupdatethemtoreflect
actualloss
experience.
provision individually.
assess them collectively in pools of assets withsimilar risk characteristics.
Impairment

Loans and advances are assessed as impaired if weRecoveries

If we recover any cash flows from loans and advances we have previously written off, then we recognise therecovery in profit or loss in the period the cash flows are received.

Off-balance sheet
amounts

Any off-balance sheet items, such as loan commitments, are considered for impairment both on an individualand collective basis.

We estimate the provision on the basis of historicalloss experience for assets with similar credit risk
characteristics to others in the respective collective
principal or interest payments (that is, a loss event
When we measure impairment
loans
and advances, we use management’s judgement
theadjustextenttheof historicallosses at reporting
date. based
pool.ofWe
loss experience
hasof
been
incurred).
oncurrent
observable
data
–
such
as:
changing
IndividuallyCollectively
economic conditions, the impact of the inherent risk
Key Judgements
 Estimatedfuture cash flowsof large concentrated
losses within the portfolio andEstimated future cash flows
 Historicalloss experienceof assetswithan assessmentof the economic
cycle.
 Businessprospects
forthecustomer
similarrisk
characteristics
We measure impairment loss as the difference between the asset’s carrying amount and estimated future cash
Measurement Realisable value of any collateral Impactof large
concentrated
losses the result as anflows discounted to their present value at the asset’s original
effective
interest
rate. We record
 Group’s position relative to other claimants
inherent in the portfolio
expense in profit or loss in the period we identify the impairment and recognise a corresponding reduction in Reliability of customer information
the carrying amount of loans and advances through an offsetting provision.
 Likely cost and duration of recovering loans
If a loan or advance is uncollectable (whether partially or in full), then we write off the balance (and also any
Uncollectable
We regularly review our key judgements and update them to reflect actual loss experience.
related provision for credit impairment).
amounts
We write off unsecured retail facilities at the earlier of the facility becoming 180 days past due, or thecustomer’s bankruptcy or similar legal release from the obligation to repay the loan or advance. For secured
facilities, write offs occur net of the proceeds determined to be recoverable from the realisation of collateral.

KEY JUDGEMENTS have
AND
ESTIMATES
objective
evidence that we may not recover

KEY JUDGEMENTS AND ESTIMATES
When we measure impairment of loans and advances, we use management’s judgement of the extent of losses at reporting date.

Key Judgements

IndividuallyCollectively

 Estimated future cash flows

 Estimated future cash flows
 Historical loss experience of assets withsimilar risk characteristics
 Impact of large concentrated losses
inherent in the portfolio
 Assessment of the economic cycle

 Business prospects for the customer
 Realisable value of any collateral Company’s position relative to other claimants
 Reliability of customer information
 Likely cost and duration of recovering loans

We regularly review our key judgements and update them to reflect actual loss experience.

30

NOTES TO THE FINANCIAL STATEMENTS

13. DEPOSITS AND OTHER BORROWINGS
The table below shows our total deposits and other borrowings by type:
2018
$m

2017
$m

Certificates of deposit

41,86753,597

Term deposits

164,182

146,445

On demand and short term deposits

206,415

209,260

Deposits not bearing interest

13,794

12,389Deposits from banks and securities sold under repurchase agreements

70,992

57,945

Commercial paper

14,742

14,599Deposits and other borrowings

511,992494,235

504,182

479,809

Residual contractual maturity:- to be settled within 1 year
- to be settled after 1 year
Deposits and other borrowings

7,810

14,426

511,992494,235

511,937

494,1625573

511,992494,235

Carried on Balance Sheet at:
Amortised cost
Fair value through profit or loss (designated on initial recognition)
Deposits and other borrowings

RECOGNITION AND MEASUREMENT
For deposits and other borrowings that are: not designated at fair value through profit or loss on initial recognition, we measure them at amortised cost and recognise theirinterest expense using the effective interest rate method; and managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative, we designate them asfair value through profit or loss.
Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for details of the split between amortised cost and fair value.
For deposits and other borrowings designated at fair value we recognise the amount of fair value gain or loss attributable to changes in the
Company’s own credit risk in other comprehensive income in retained earnings. Any remaining amount of fair value gain or loss werecognise directly in profit or loss. Once we have recognised an amount in other comprehensive income, we do not later reclassify it toprofit or loss.
Securities sold under repurchase agreements represent a liability to repurchase the financial assets that remain on our balance sheet since
the risks and rewards of ownership remain with the Company. Over the life of the repurchase agreement, we recognise the difference
between the sale price and the repurchase price and charge it to interest expense in the Income Statement.

31

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
14. DEBT ISSUANCESThe Company uses a variety of funding programmes to issue senior debt (including covered bonds) and subordinated debt. The difference between
senior debt and subordinated debt is that holders of senior debt take priority over holders of subordinated debt owed by the relevant issuer andsubordinated debt will be repaid by the relevant issuer only after the repayment of claims of depositors, other creditors and the senior debt holders.
2018
$m

2017
$m

Senior debt

68,95154,046

Covered bonds

14,221

14,959Total unsubordinated debt

83,17269,005- Additional Tier 1 capital

7,461

7,995

- Tier 2 capital

7,993

8,495

Total subordinated debt

15,454

16,490Subordinated debt

Total debt issued
98,626
For further information relating to debt issuances, refer to the ANZ 2018 Group Annual Report (Note 15 Debt Issuances) available athttps://shareholder.anz.com/annual-report-shareholder-review.

85,495

15. FINANCIAL RISK MANAGEMENTRISK MANAGEMENT FRAMEWORK AND MODELINTRODUCTION
The use of financial instruments is fundamental to the Company’s businesses of providing banking and other financial services to our customers. The
associated financial risks (primarily credit, market, and liquidity risks) are a significant portion of the Company’s principal risks.
We disclose details of all principal risks impacting the Company, and further information on the Company’s risk management activities, in the Our
Approach to Risk Management section of the Directors’ Report in the ANZ 2018 Group Annual Report available at https//shareholder.anz.com/annualreport-shareholder-review.
This note details the Company’s financial risk management policies, processes and quantitative disclosures in relation to the key financial risks:
Principal financial risks

Key sections applicable to this risk

Overview

 An overview of our Risk Management Framework

Credit risk

 Credit risk overview, management and control responsibilities

Credit risk is the risk of financial loss from a customer, or
counterparty, failing to meet their financial obligations – including
the whole and timely payment of principal, interest, and otherreceivables.

 Maximum exposure to credit risk
 Credit quality
 Concentrations of credit risk
 Collateral management

Market risk

 Market risk overview, management and control responsibilities

Market risk is the risk of loss arising from potential adverse changes
in the value of the Company’s assets and liabilities and othertrading positions from fluctuations in market variables. Thesevariables include, but are not limited to interest rates, foreignexchange, equity prices, commodity prices, credit spreads, implied
volatilities, and asset correlations.

 Measurement of market risk

Liquidity and funding risk

 Liquidity risk overview, management and control responsibilities

Liquidity risk is the risk that the Company is unable to meet its
payment obligations when they fall due; or does not have theappropriate amount, tenor and composition of funding andliquidity to fund increases in its assets.

 Key areas of measurement for liquidity risk

 Traded and non-traded market risk
 Equity securities classified as available-for-sale Foreign currency risk – structural exposure Funding position
 Residual contractual maturity analysis of the Company’s liabilities

32

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
OVERVIEWAN OVERVIEW OF OUR RISK MANAGEMENT FRAMEWORKThis overview is provided to aid the users of the financial statements to understand the context of the financial disclosures required under AASB 7
Financial Instruments: Disclosures. It should be read in conjunction with the Our Approach to Risk Management section of the Directors’ Report in the
ANZ 2018 Group Annual Report available at https//shareholder.anz.com/annual-report-shareholder-review.
The Board is responsible for establishing and overseeing the Company’s Risk Management Framework (RMF). The Board has delegated authority to
the Board Risk Committee (BRC) to develop and monitor compliance with the Company’s risk management policies. The BRC reports regularly to theBoard on its activities.
The Board approves the strategic objectives of the Company including: the Risk Appetite Statement (RAS), sets out the Board’s expectations regarding the degree of risk that the Company is prepared to accept in
pursuit of its strategic objectives and business plan; and the Risk Management Strategy (RMS), which describes the Company’s strategy for managing risks and the key elements of the RMF that gives
effect to this strategy. This includes a description of each material risk, and an overview of how the RMF addresses each risk, with reference to therelevant policies, standards and procedures. It also includes information on how the Company identifies measures, evaluates, monitors, reports
and controls or mitigates material risks.
The Company, through its training and management standards and procedures, aims to maintain a disciplined and robust control environment inwhich all employees understand their roles and obligations. At the Company, risk is everyone’s responsibility.
The Company has an independent risk management function, headed by the Chief Risk Officer who:
 is responsible for overseeing the risk profile and the risk management framework; can effectively challenge activities and decisions that materially affect the Company’s risk profile; and has an independent reporting line to the BRC to enable the appropriate escalation of issues of concern.
The Internal Audit Function reports directly to the Board Audit Committee (BAC). Internal Audit provides:
 an independent evaluation of the Company’s RMF annually and undertakes a comprehensive review every three years;
 assurance on the appropriateness, effectiveness and adequacy of the risk management framework, which includes assurance the framework is
operating effectively; and recommendations to improve the framework and/or work practices to strengthen the effectiveness of day to day operations.

33

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISKCREDIT RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Granting credit facilities to customers is one of the Company’s major sources of income. As this activity is also a principal risk, the Company dedicatesconsiderable resources to its management. The Company assumes credit risk in a wide range of lending and other activities in diverse markets and inmany jurisdictions. Credit risks arise from traditional lending to customers as well as from inter-bank, treasury, trade finance and capital markets
activities around the world.
Our credit risk management framework ensures we apply a consistent approach across the Company when we measure, monitor and manage thecredit risk appetite set by the Board. The Board is assisted and advised by the BRC in discharging its duty to oversee credit risk. The BRC: sets the credit risk appetite and credit strategies; and approves credit transactions beyond the discretion of executive management.
We quantify credit risk through an internal credit rating system (masterscales) to ensure consistency across exposure types and to provide a consistentframework for reporting and analysis. The system uses models and other tools to measure the following for customer exposures:
Probability of Default (PD)Expressed by a Customer Credit Rating (CCR), reflecting the Company’s assessment of a customer’sability to service and repay debt.

Exposure at Default (EAD)

The expected amount of loan outstanding at the time of default.

Loss Given Default (LGD)

Expressed by a Security Indicator (SI) ranging from A to G. The SI is calculated by reference to thepercentage of loan covered by security which the Company can realise if a customer defaults. The A-G
scale is supplemented by a range of other SIs which cover factors such as cash cover and sovereign
backing. For retail and some small business customers, we group exposures into large homogenous
pools – and the LGD is assigned at the pool level.

Our specialist credit risk teams develop and validate the Company’s PD and LGD rating models. The outputs from these models drive our day-to-day
credit risk management decisions including origination, pricing, approval levels, regulatory capital adequacy, economic capital allocation, and credit
provisioning.
All customers with whom the Company has a credit relationship are assigned a CCR at origination via either of the following assessment approaches:
Large and more complex lending

Retail and some small business lending

Rating models provide a consistent and structured assessment, withjudgement required around the use of out-of-model factors. We
handle credit approval on a dual approval basis, jointly with thebusiness writer and an independent credit officer.

Automated assessment of credit applications using a combination ofscoring (application and behavioural), policy rules and external credit
reporting information. If the application does not meet the automatedassessment criteria, then it is referred out for manual assessment.

We use the Company’s internal CCRs to manage the credit quality of financial assets neither past due nor impaired. To enable wider comparisons, theCompany’s CCRs are mapped to external rating agency scales as follows:
Internal Rating

ANZ Customer Requirements

Moody’s RatingStandard & Poor’s Rating

Strong credit profile

Demonstrated superior stability in their operating and financial
performance over the long-term, and whose earnings capacity is not
significantly vulnerable to foreseeable events.

Aaa – Baa3

AAA – BBB-

Satisfactory risk

Demonstrated sound operational and financial stability over the
medium to long-term — even though some may be susceptible tocyclical trends or variability in earnings.

Ba1 – B1

BB+ – B+

Sub-standard but notpast due nor impaired

Demonstrated some operational and financial instability, with variability
and uncertainty in profitability and liquidity projected to continue overthe short and possibly medium term.

B2 - Caa

B - CCC34

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
MAXIMUM EXPOSURE TO CREDIT RISKFor financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In certain circumstances there may
be differences between the carrying amounts reported on the balance sheet and the amounts reported in the tables below. Principally, thesedifferences arise in respect of financial assets that are subject to risks other than credit risk, such as equity instruments which are primarily subject tomarket risk, or bank notes and coins.
For undrawn facilities, this maximum exposure to credit risk is the full amount of the committed facilities. For contingent exposures, the maximum
exposure to credit risk is the maximum amount the Company would have to pay if the instrument is called upon.
The table below shows our maximum exposure to credit risk of on-balance sheet and off-balance sheet positions before taking account of any
collateral held or other credit enhancements:
Maximum exposure
to credit risk

Excluded1/Other2

Reported
2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

475,419452,424

(432)

(450)

475,851452,874

80,22763,399912

1,096

79,31562,303On-balance sheet positions
Net loans and advances2
Other financial assets:
Cash and cash equivalents
3

1,666

5,006

1,666

5,006

-

-

Collateral paid

9,184

7,685

-

-

9,184

7,685

Settlement balances owed to ANZ
Trading securities

29,51935,606

3,486

4,653

26,03330,953

Derivative financial instruments

64,44857,036--64,44857,036

Available-for-sale assets

64,72858,506

1,084

725

63,64457,781

264

495

-

-

264

495

90,17091,208--90,17091,208Regulatory deposits
Due from controlled entities
4

2,177

2,040

-

-

2,177

2,040

Total other financial assets

342,383

320,981

7,148

11,480335,235

309,501

Subtotal

817,802773,405

6,716

11,030811,086

762,375

203,483

187,291432

450

203,051

186,841

1,021,285

960,696

7,148

11,4801,014,137

949,216

Other financial assets

Off-balance sheet positions
Undrawn and contingent facilities2,5
Total
1.

Excluded comprises bank notes and coins and cash at bank within cash and cash equivalents, and equity securities within available-for-sale financial assets. Equity securities and precious metal exposures
recognised as trading securities have been excluded as they do not have credit exposure.
Other relates to the transfer of individual and collective provisions for credit impairment, related to off-balance sheet facilities held in net loans and advances. The provisions are transferred for the purposesof showing the maximum exposure to credit risk by relevant facility type in this and the following tables.
3.
Settlement balances owed to ANZ relating to trade dated assets which do not carry credit risk and thus are excluded.
4.
Other financial assets mainly comprise accrued interest and acceptances.
5.
Undrawn facilities and contingent facilities includes guarantees, letters of credit and performance related contingencies.
2.

35

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
CREDIT QUALITY
The table below provides an analysis of the credit quality of the maximum exposure to credit risk split by: neither past due nor impaired financial assets by credit quality; past due but not impaired assets by ageing; and restructured and impaired assets presented as gross amounts and net of individual provisions.
Loans
and advances

Off-balance sheet
credit related
commitments

Other financial
assets

Total

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

350,031

323,613

333,962

308,116

173,688

154,941

857,681786,670

Satisfactory risk

98,222

101,510

1,185

1,285

27,99630,361

127,403

133,156

Sub-standard but not past due or impaired3

13,348

14,160

88

100

1,337

1,471

14,773

15,731

Sub-total

461,601

439,283

335,235

309,501

203,021

186,773

999,857

935,557≥ 1 < 30 days

7,456

7,231

-

-

-

-

7,456

7,231

≥ 30 < 60 days

2,067

1,841

-

-

-

-

2,067

1,841

≥ 60 < 90 days

1,138

1,005

-

-

-

-

1,138

1,005

≥ 90 days

2,780

2,706

-

-

-

-

2,780

2,706

Sub-total

13,441

12,783----

13,441

12,783

1,256

1,624

-

-

-

-

1,256

1,624

248

71

-

-

-

-

248

71

-

-

-

-

48

84

48

84

Gross impaired financial assets

1,504

1,695

-

-

48

84

1,552

1,779

Individual provisions

(695)

(887)

-

-

(18)

(16)

(713)

(903)

68

839

876

186,841 1,014,137

949,216

Neither past due nor impaired
Strong credit profile1
2

Past due but not impaired

Restructured and impaired
Impaired loans
Restructured items4
Non-performing commitments and contingencies

Sub-total restructured and net impaired
Total

809

808

-

-

30

475,851452,874

335,235

309,501

203,051

1.

In 2018, collective provisions against Satisfactory and Sub-standard risk, which previously had been allocated against Strong credit profile are now reallocated to Satisfactory and Sub-standard risk.
Comparatives have been restated accordingly.
In 2018, collective provisions against Satisfactory and Sub-standard risk, which previously had been allocated against Strong credit profile are now reallocated to Satisfactory and Sub-standard risk.
Comparatives have been restated accordingly (Sep 17: Net loans and advances $438 million, Credit related commitments $139 million).
3.
In 2018, collective provisions against Satisfactory and Sub-standard risk, which previously had been allocated against Strong credit profile are now reallocated to Satisfactory and Sub-standard risk.
Comparatives have been restated accordingly (Sep 17: Net loans and advances $438 million, Credit related commitments $61 million).
4.
Restructured items are facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest,principal or other payments legally due, or an extension in maturity materially beyond those typically offered for new facilities with similar risk.
2.

36

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
CONCENTRATIONS OF CREDIT RISK
Credit risk becomes concentrated when a number of customers are engaged in similar activities, have similar economic characteristics, or have similar
activities within the same geographic region – therefore, they may be similarly affected by changes in economic or other conditions. The Company
monitors its credit portfolio to manage risk concentration and rebalance the portfolio. The Company also applies single customer counterparty limits
to protect against unacceptably large exposures to one single customer.
Composition of financial instruments that give rise to credit risk by industry group are presented below:
Loans
and advances

Off-balance sheet credit
relatedcommitments

Other financial
assets

Total

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

Agriculture, forestry, fishing and mining

19,65817,346538

528

15,317

13,45035,51331,324

Business services

7,158

7,044

82

137

5,989

6,319

13,22913,500Construction

5,101

5,273

32

37

5,379

5,209

10,512

10,519

Electricity, gas and water supply

4,916

4,800

534

752

4,508

4,537

9,958

10,089Entertainment, leisure and tourism

10,652

10,679

305

317

3,118

3,151

14,07514,147

Financial, investment and insurance

43,24534,256262,203

236,975

35,326

27,690340,774

298,921748

846

63,22561,440

2,043

2,016

66,01664,302

Manufacturing

Government and official institutions

16,926

14,838

1,815

1,902

33,29829,92652,03946,666

Personal lending

288,127

282,823

1,070

1,038

42,98245,856332,179

329,717

Property services

33,57630,595484

559

13,584

11,06547,64442,219Retail trade

10,95911,150

105

187

5,458

4,974

16,522

16,311

Transport and storage

10,204

9,805

459

959

6,606

5,598

17,26916,362Wholesale trade

11,946

11,013

2,644

2,225

17,725

16,54232,31529,780Other

14,43814,316

1,739

2,445

12,15010,95828,327

27,719Gross total

477,654454,784

335,235

309,501

203,483

187,291

1,016,372

951,576

Provision for credit impairment(2,348)(2,512)

-

-

(432)

(450)

(2,780)(2,962)

Subtotal

475,306

452,272

335,235

309,501

203,051

186,841

1,013,592

948,614

Unearned income

(165)

(149)

-

-

-

-

(165)

(149)

Capitalised brokerage/mortgage
origination fees

710

751

-

-

-

-

710

751

Maximum exposure to credit risk

475,851452,874

335,235

309,501

203,051

186,841

1,014,137

949,21637

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
COLLATERAL MANAGEMENT
We use collateral for on and off-balance sheet exposures to mitigate credit risk if a counterparty cannot meet its repayment obligations from its
expected cashflows. For some products, the collateral provided by customers is fundamental to the product’s structuring, so it is not strictly thesecondary source of repayment - for example, lending secured by trade receivables is typically repaid by the collection of those receivables.
The nature of collateral or security held for the relevant classes of financial assets is as follows:
Net loans and advances
Loans – housing andpersonal

Housing loans are secured by mortgage(s) over property and additional security may take the form ofguarantees and deposits.
Personal lending (including credit cards and overdrafts) is predominantly unsecured. If we take security, thenit is restricted to eligible vehicles, motor homes and other assets.

Loans – businessBusiness loans may be secured, partially secured or unsecured. Typically, we take security by way of amortgage over property and/or a charge over the business or other assets.
If appropriate, we may take other security to mitigate the credit risk, for example: guarantees, standby lettersof credit or derivative protection.

Other financial assets
Trading securities,
Available-for-sale assets,
Derivatives and Other
financial assets

For trading securities, we do not seek collateral directly from the issuer or counterparty. However, thecollateral may be implicit in the terms of the instrument (for example, with an asset-backed security). The
terms of debt securities may include collateralisation.
For derivatives, we typically terminate all contracts with the counterparty and settle on a net basis at market
levels current at the time of a counterparty default under International Swaps and Derivatives Association(ISDA) Master Agreements.
Our preferred practice is to use a Credit Support Annex (CSA) to the ISDA so that open derivative positions
with the counterparty are aggregated and cash collateral (or other forms of eligible collateral) is exchanged
daily. The collateral is provided by the counterparty when their position is out of the money (or provided tothe counterparty by the Company when our position is out of the money).

Off-balance sheet
positions
Undrawn and contingent
liabilities.

Collateral for off balance sheet positions is mainly held against undrawn facilities, and they are typically
performance bonds or guarantees. Undrawn facilities that are secured include housing loans secured by
mortgages over residential property and business lending secured by commercial real estate and/or charges
over business assets.

The table below shows the estimated value of collateral we hold and the net unsecured portion of credit exposures:
Credit exposure

Unsecured portion of
credit exposure

Total value of collateral

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

Net loans and advances

475,851452,874

372,996364,745

102,855

88,129Other financial assets

335,235

309,501

30,16622,705305,069

286,796

Off-balance sheet positions

203,051

186,841

34,072

31,696

168,979

155,145

1,014,137

949,216

437,234

419,146

576,903

530,070

Total

38

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISKMARKET RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIESMarket risk stems from the Company’s trading and balance sheet management activities, the impact of changes and correlation between interest
rates, foreign exchange rates, credit spreads and volatility in bond, commodity or equity prices.
The BRC delegates responsibility for day-to-day management of both market risks and compliance with market risk policies to the Credit & Market Risk
Committee (CMRC) and the Group Asset & Liability Committee (GALCO).
Within overall strategies and policies established by the BRC, business units and risk management have joint responsibility for the control of market
risk at the Company level. The Market Risk team (a specialist risk management unit independent of the business) allocates market risk limits at various
levels and monitors and reports on them daily. This detailed framework allocates individual limits to manage and control exposures using risk factors
and profit and loss limits.
Management, measurement and reporting of market risk, the management of market risk is undertaken in two broad categories:
Traded Market Risk

Non-Traded Market Risk

Risk of loss from changes in the value of financial instruments due
to movements in price factors for both physical and derivative
trading positions. Principal risk categories monitored are:Risk of loss associated with the management of non-traded interest rate risk,
liquidity risk and foreign exchange exposures. This includes interest rate riskin the banking book. This risk of loss arises from adverse changes in theoverall and relative level of interest rates for different tenors, differences in
the actual versus expected net interest margin, and the potential valuation
risk associated with embedded options in financial instruments and bankproducts.

1. Currency risk – potential loss arising from changes in foreignexchange rates or their implied volatilities.
2. Interest rate risk – potential loss from changes in market
interest rates or their implied volatilities.
3. Credit spread risk – potential loss arising from a movement inmargin or spread relative to a benchmark.
4. Commodity risk – potential loss arising from changes incommodity prices or their implied volatilities.
5. Equity risk – potential loss arising from changes in equity prices.

MEASUREMENT OF MARKET RISKWe primarily manage and control market risk using Value at Risk (VaR), sensitivity analysis and stress testing.
VaR gauges the Company’s possible daily loss based on historical market movements.
The Company’s VaR approach for both traded and non-traded risk is historical simulation. We use historical changes in market rates, prices andvolatilities over: the previous 500 business days, to calculate standard VaR; and a 1-year stressed period, to calculate stressed VaR.
We calculate traded and non-traded VaR using one-day and ten-day holding periods. For stressed VaR, we use a ten-day period. Back testing is used toensure our VaR models remain accurate.
The Company measures VaR at a 99% confidence interval which means there is a 99% chance that a loss will not exceed the VaR for the relevant
holding period.

39

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK (continued)
TRADED AND NON-TRADED MARKET RISK
Traded market risk
The table below shows the traded market risk VaR on a diversified basis by risk categories:

30 September 2018

30 September 2017

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

As at
$m

High foryear$m

Low foryear$mAveragefor year$m

Foreign exchange

2.9

9.8

1.7

4.0

4.3

10.0

2.6

5.1

Interest rate

8.2

14.9

4.8

7.4

5.6

18.9

4.7

7.2

Credit

2.0

6.2

2.0

3.7

4.1

5.1

1.6

3.2

Commodity

3.5

4.4

1.1

2.9

2.2

3.8

1.4

0.5

-

0.2

Traded value at risk 99% confidence

Equity

2.1

-

-

-

-

-

Diversification benefit1

(9.1)

n/a

n/a

(7.8)

(6.1)

n/a

n/a

(7.6)

Total VaR

7.5

16.9

5.8

10.2

10.1

20.8

6.3

10.2

1.

The diversification benefit reflects risks that offset across categories. The high and low VaR figures reported for each factor did not necessarily occur on the same day as the high and low VaR reported for theCompany as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from the table.

Non-traded market risk
Balance sheet risk management
The principal objectives of balance sheet risk management are to maintain acceptable levels of interest rate and liquidity risk to mitigate the negative
impact of movements in interest rates on the earnings and market value of the Company’s banking book, while ensuring the Company maintains
sufficient liquidity to meet its obligations as they fall due.
Interest rate risk management
Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on the Company’s future net interest income.
This risk arises from two principal sources, namely mismatches between the repricing dates of interest bearing assets and liabilities; and theinvestment of capital and other non-interest bearing liabilities in interest bearing assets. Interest rate risk is reported using VaR and scenario analysis(based on the impact of a 1% rate shock). The table below shows VaR figures for non-traded interest rate risk for the combined Company as well asAustralia, New Zealand and Asia Pacific, Europe and Americas (APEA) geographies which are calculated separately.
30 September 2018

30 September 2017

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

21.9

32.7

20.3

23.6

31.6

37.5

25.9

31.3

Non-traded value at risk 99% confidence
Australia
New Zealand

-

0.2

-

-

-

0.1

-

0.1

APEA

15.5

15.5

12.5

14.0

13.7

18.6

13.5

15.3

Diversification benefit1(11.8)

n/a

n/a

(9.6)

(13.3)

n/a

n/a

(9.3)

28.0

32.0

43.7

31.3

37.4

Total VaR
1.

25.6

35.2

22.3

The diversification benefit reflects the historical correlation between the regions. The high and low VaR figures reported for the region did not necessarily occur on the same day as the high and low VaRreported for the Company as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from the table.

40

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK (continued)
We undertake scenario analysis to stress test the impact of extreme events on the Company’s market risk exposures. We model a 1% overnight parallel
positive shift in the yield curve to determine the potential impact on our net interest income over the next 12 months. This is a standard risk measure
which assumes the parallel shift is reflected in all wholesale and customer rates.
The table below shows the outcome of this risk measure for the current and previous financial years, expressed as a percentage of reported net
interest income. A positive number signifies that a rate increase is positive for net interest income over the next 12 months.
2018

2017

As at period end

0.15%

0.14%

Maximum exposure

0.76%

1.20%

Minimum exposure

0.02%

0.13%

Average exposure (in absolute terms)

0.30%

0.53%

Impact of 1% rate shock

EQUITY SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE
Our available-for-sale financial assets contain equity investment holdings which predominantly comprise investments we hold for longer-term
strategic reasons. The market risk impact on these equity investments is not captured by the Company’s VaR processes for traded and non-tradedmarket risks. Therefore, the Company regularly reviews the valuations of the investments within the portfolio and assesses whether the investments
are impaired based on the recognition and measurement policies set out in Note 10 Available-for-sale Assets.
FOREIGN CURRENCY RISK – STRUCTURAL EXPOSURES
Our investment of capital in foreign operations — for example, branches, subsidiaries or associates with functional currencies other than theAustralian Dollar — exposes the Company to the risk of changes in foreign exchange rates. Variations in the value of these foreign operations arising
as a result of exchange differences are reflected in the foreign currency translation reserve in equity.
Where it is considered appropriate, the Company takes out economic hedges against larger foreign exchange denominated revenue streams(primarily New Zealand Dollar, US dollar and US dollar correlated). The primary objective of hedging is to ensure that, if practical, the consolidated
capital ratios are neutral to the effect of changes in exchange rates.

41

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISKLIQUIDITY RISK AND FUNDING POSITION
For information related to the liquidity risk and funding position refer to the ANZ 2018 Group Annual Report (Note 16 Financial Risk Management),
available at https://shareholder.anz.com/annual-report-shareholder-review.
RESIDUAL CONTRACTUAL MATURITY ANALYSIS OF THE COMPANY’S LIABILITIESThe table below provides residual contractual maturity analysis of financial liabilities at 30 September within relevant maturity groupings. The tablebelow excludes “Due to controlled entities” liabilities of $88.4 billion (2017: $88.9 billion) as the contractual maturity is linked to the repayment ofunderlying assets which are managed on a pool basis which is continuously reviewed. All outstanding Debt Issuance and Subordinated Debt is
profiled on the earliest date on which the Company may be required to pay. All at-call liabilities are reported in the “Less than 3 month” category. Anyother items without a specified maturity date are included in the “After 5 years” category. The amounts represent principal and interest cash flows - sothey may differ from equivalent amounts reported on balance sheet. It should be noted that this is not how the Company manages its liquidity risk.
The management of this risk is detailed in the ANZ 2018 Group Annual Report (Note 16 Financial Risk Management), available athttps://shareholder.anz.com/annual-report-shareholder-review.
Less than
3 months$m

3 to 12months$m

1 to 5
years
$m

After
5 years
$m

Total
$m

Settlement balances owed by ANZ

9,867

-

-

-

9,867

Collateral received

6,002

-

-

-

6,002

440,725

65,446

7,918

116

514,205

316

-

-

-

316

1

Debt issuances

4,563

17,94667,787

19,826110,122

Derivative liabilities (trading)2

58,784---58,784

Receive leg(13,221)(26,116)(66,671)(30,071)(136,079)

Pay leg

13,19325,12264,31630,005

132,636

Receive leg(50,237)(13,492)(10,249)(1,469)(75,447)

Pay leg

50,47913,626

10,763

1,634

76,502Less than
3 months$m

3 to 12months$m

1 to 5
years
$m

After
5 years
$m

Total
$m

8,219

-

-

-

8,219

2018

Deposits and other borrowings
Liability for acceptances

Derivative assets and liabilities (balance sheet management)- Funding- Other balance sheet management

2017
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings

5,238

-

-

-

5,238

410,672

70,91014,819145

496,546

Liability for acceptances

312

-

-

-

312

Debt issuances1

3,030

12,242

59,67320,751

95,696

Derivative liabilities (trading)2

48,561---

48,561

Receive leg(12,433)(14,536)(66,440)(24,247)(117,656)

Pay leg

12,174

14,254

66,67024,579117,677

Receive leg(24,186)(6,277)(10,876)(4,368)(45,707)

Pay leg

24,312

6,522

12,587

4,868

48,289Derivative assets and liabilities (balance sheet management)- Funding- Other balance sheet management1.

2.

Any callable wholesale debt instruments have been included at their next call date. Balance includes subordinated debt instruments that may be settled in cash or in equity, at the option of the Company,
and perpetual investments at next call date.
The full mark-to-market of derivative liabilities held for trading purposes is included in the ‘less than 3 months’ category.

At 30 September 2018 $164,944 million (2017: $150,339 million) of the Company’s undrawn facilities and $38,539 million (2017: $36,952 million) of its
issued guarantees mature in less than 1 year, based on the earliest date on which the Company may be required to pay.

42

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe Company carries a significant number of financial instruments on the balance sheet at fair value. The fair value is the best estimate of the pricethat would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

VALUATION
The Company has an established control framework, including appropriate segregation of duties, to ensure that fair values are accurately determined,
reported and controlled. The framework includes the following features: products are approved for transacting with external customers and counterparties only where fair values can be appropriately determined; quoted market prices used to value financial instruments are independently verified with information from external pricing providers; fair value methodologies and inputs are evaluated and approved by a function independent of the party that undertakes the transaction;
 movements in fair values are independently monitored and explained by reference to underlying factors relevant to the fair value; and valuation adjustments (such as funding valuation adjustments, credit valuation adjustments and bid-offer adjustments) are independently
validated and monitored.
If the Company holds offsetting risk positions, then the Company uses the portfolio exemption in AASB 13 Fair Value Measurement (AASB 13) tomeasure the fair value of such groups of financial assets and financial liabilities. We measure the portfolio based on the price that would be received tosell a net long position (an asset) for a particular risk exposure, or to transfer a net short position (a liability) for a particular risk exposure.
Fair value designation
We designate certain loans and advances and certain deposits and other borrowings and debt issuances as fair value through profit or loss:
 where they contain a separable embedded derivative which significantly modifies the instruments’ cash flow; or in order to eliminate an accounting mismatch which would arise if the asset or liabilities were otherwise carried at amortised cost. This mismatcharises as we measure the derivative financial instruments (which we acquired to mitigate interest rate risk of the assets or liabilities) at fair value
through profit or loss.
Our approach ensures that we recognise the fair value movements on the assets or liabilities in profit or loss in the same period as the movement on
the associated derivatives.
We may also designate certain loans and advances and certain deposits and other borrowings and debt issuances as fair value through profit or loss
where they are managed on a fair value basis to align the measurement with how the instruments are managed.

FAIR VALUE APPROACH AND VALUATION TECHNIQUESWe use valuation techniques to estimate the fair value of assets and liabilities for recognition, measurement and disclosure purposes where no quoted
price in an active market exists for that asset or liability. This includes the following:
Asset or Liability

Fair Value Approach

Financial instruments classified as:

Valuation techniques are used that incorporate observable market inputs for financial
instruments with similar credit risk, maturity and yield characteristics. Equity
instruments that are not traded in active markets may be measured using comparable
company valuation multiples.

- Trading securities- Securities sold short- Derivative financial assets and liabilities- Available-for-sale assets
Financial instruments classified as:- Net loans and advances- Deposits and other borrowings

Discounted cash flow techniques are used whereby contractual future cash flows of
the instruments are discounted using wholesale market interest rates, or market
borrowing rates for debt with similar maturities or yield curve appropriate for theremaining term to maturity.

- Debt issuances
Assets held for sale

Valuation based on the expected sale price before transaction costs.

43

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe following tables set out the classification of financial asset and liability categories according to measurement bases together with their carrying
amounts as reported on the balance sheet.
2018
2017

Note

At
amortised
cost
$m

At
fair
value
$m

Total
$m

At
amortised
cost
$m

At
fair
value
$m

Total
$m

7

80,227-80,227

1,666

-

1,666

63,399-63,399

5,006

-

5,006

Financial assets
Cash and cash equivalents
Settlement balances owed to ANZ

9,184

-

9,184

7,685

8

-

29,51929,519-35,60635,606

Derivative financial instruments

9-64,44864,448-57,03657,036

Available-for-sale assets

10-64,72864,728-58,50658,506Net loans and advances

11

1475,419452,40816

452,424

Collateral paid
Trading securities

Regulatory deposits

475,418

-

7,685

264

-

264

495

-

495

Due from controlled entities

90,170-90,17091,208-91,208Other financial assets

2,023

-

2,023

1,917

-

-

-

-

1,748

1,748

817,648

622,118

152,912775,030

Assets held for sale

658,952

Total

158,696-

1,917

Financial liabilities
Settlement balances owed by ANZ

9,867

-

9,867

8,219

-

8,219

Collateral received

6,002

-

6,002

5,238

-

5,238

Deposits and other borrowings

13

Derivative financial instruments

9511,937-55

511,992

494,16273494,235

65,63865,638-56,83056,830Due to controlled entities

88,383-88,383

88,882

Payables and other liabilities

3,942

1,060

5,002

3,930

Debt issuances
Total

14

-

88,882

1,753

5,683

97,184

1,442

98,626

83,743

1,752

85,495717,315

68,195785,510684,174

60,408744,582

FAIR VALUE HIERARCHY
The Company categorises assets and liabilities carried at fair value into a fair value hierarchy as required by AASB 13 based on the observability of
inputs used to measure the fair value:
 Level 1 – valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
 Level 2 – valuations using inputs other than quoted prices included within Level 1 that are observable for a similar asset or liability, either directly
or indirectly; and Level 3 – valuations where significant unobservable inputs are used to measure the fair value of the asset or liability.

44

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
The following table presents assets and liabilities carried at fair value in accordance with the fair value hierarchy:
Fair value measurements
Quoted market price(Level 1)

Using observable
inputs (Level 2)

2018
$m

2017
$m

2018
$m

23,96932,998

5,550

2,608

630

424

63,76456,527

Using unobservable
inputs (Level 3)

2017
$m

2018
$m

Total

2017
$m

2018
$m

2017
$m

-

-

29,51935,6065485

64,44857,036

AssetsTrading securities1
Derivative financial instruments
1

61,65553,958

1,996

4,504

1,077

44

64,72858,506Net loans and advances (measured at fair value)

-

-

1

16

-

-

1

16

Assets held for sale

-

-

-

1,748

-

-

-

1,748

86,25487,38071,311

65,403

1,131

129

158,696

152,912

-

-

55

73

-

-

55

73

Available-for-sale assets

Total
Liabilities
Deposits and other borrowings (designated at fair value)
Derivative financial instruments

1,666

250

63,92956,50443

76

65,63856,830

Payables and other liabilities2

1,048

1,587

12

166

-

-

1,060

1,753

Debt issuances (designated at fair value)
Total
1.

2.

-

-

1,442

1,752

-

-

1,442

1,752

2,714

1,837

65,43858,49543

76

68,19560,408Of the assets and liabilities held at the end of 2018, during the year, we transferred: $676 million (2017: nil) from Level 1 to Level 3 following a change in the valuation approach used to measure the investment in Bank of Tianjin;
 $783 million (2017: nil) from Level 2 to Level 1 following increased trading activity to support the quoted prices; There was no material transfer from Level 1 to Level 2 (2017: $408 million).
Transfers into and out of levels are measured at the beginning of the reporting period in which the transfer occurred.
Payables and other liabilities relates to securities sold short, which we classify as held for trading and measured at fair value through profit or loss.

FAIR VALUE MEASUREMENT INCORPORATING UNOBSERVABLE MARKET DATA
Level 3 fair value measurements
The net balance of Level 3 is an asset of $1,088 million (2017: $53 million). The assets and liabilities which incorporate significant unobservable inputs
primarily include: equities for which there is no active market or traded prices cannot be observed;
 structured credit products for which credit spreads and default probabilities relating to the reference assets and derivative counterparties cannot
be observed;
 other derivatives referencing market rates that cannot be observed primarily due to lack of market activity.
Movement in the Level 3 balance is due to transfer of our available-for-sale investment in Bank of Tianjin to Level 3 following a change in the valuation
approach used to measure the asset.
There were no other material transfers in or out of Level 3 during the period.
Bank of Tianjin (BoT)
A revised valuation technique was applied to the investment in BoT as the Company considers that, in light of persistent illiquidity, the share price of
BoT is not representative of fair value. The investment is valued based on comparative price-to-book (P/B) multiples (a P/B multiple is the ratio of themarket value of equity to the book value of equity). The extent of judgement applied in determining the appropriate multiple and comparator groupfrom which the multiple is derived are non-observable inputs which have resulted in the Level 3 classification. The application of this valuation
approach resulted in a $349 million increase in the carrying value of the investment during the period to $1,025 million. The increase has beenrecognised as an unrealised gain in the available-for-sale revaluation reserve within shareholders’ equity and accordingly, there is no impact from thisrevaluation on the Income Statement for the year ended 30 September 2018.

45

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
Sensitivity to Level 3 data inputs
When we make assumptions due to significant inputs not being directly observable in the market place (Level 3 inputs), then changing theseassumptions changes the Company’s estimate of the instrument’s fair value. Favourable and unfavourable changes are determined by changing the
primary unobservable parameter used to derive the valuation.
Bank of Tianjin (BoT)The valuation of the BoT investment is sensitive to the selected unobservable input, being the P/B multiple. If the P/B multiple was increased or
decreased by 10% it would result in a $102 million increase or decrease to the fair value of the investment, which would be recognised inshareholders’ equity.
Other
The remaining Level 3 balance is immaterial and changes in the Level 3 inputs have a minimal impact on net profit and net assets of the Company.
Deferred fair value gains and losses
Where fair values are determined using unobservable inputs, the Company does not immediately recognise the difference between the transaction
price and the amount we determine based on the valuation technique (day one gain or loss) in profit or loss. After initial recognition, we recognise thedeferred amount in profit or loss on a straight line basis over the life of the transaction or until all inputs become observable.
The day one gains and losses deferred are not material.

FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
The following table sets out the Company’s basis of estimating fair values of financial instruments carried at amortised cost:
Financial Asset and Liability

Fair Value Approach

Net loans and advances to banks

Discounted cash flows using prevailing market rates for loans with similar credit
quality.

Net loans and advances to customers

Present value of future cash flows, discounted using a curve that incorporates
changes in wholesale market rates, the Company’s cost of wholesale funding and thecustomer margin, as appropriate.

Deposit liability without a specified maturity or at call

The amount payable on demand at the reporting date. We do not adjust the fairvalue for any value we expect the Company to derive from retaining the deposit for a
future period.

Interest bearing fixed maturity deposits and otherborrowings and acceptances with quoted market rates

Market borrowing rates of interest for debt with a similar maturity are used to
discount contractual cash flows to derive the fair value.

Debt issuances

Calculated based on quoted market prices or observable inputs as applicable. If
quoted market prices are not available, we use a discounted cash flow model using ayield curve appropriate for the remaining term to maturity of the debt instrument.
The fair value reflects adjustments to credit spreads applicable to the Company forthat instrument.

46

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
The financial assets and financial liabilities listed in the table below are carried at amortised cost on the Company’s balance sheet. While this is thevalue at which we expect the assets will be realised and the liabilities settled, the Company provides an estimate of the fair value of the financial assets
and financial liabilities at balance date in the table below.

At amortised cost

Categorised into fair value hierarchy
Quoted market price(Level 1)

Fair value (total)

With significant nonobservable inputs(Level 3)

Using observable
inputs (Level 2)

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

Net loans and advances1

475,418

452,408--

28,352

25,172447,259

427,282475,611452,454

Due from controlled entities2

90,17091,208----90,17091,20890,17091,208

Total

565,588543,616--

28,352

25,172537,429

518,490565,781543,662

Deposits and other borrowings

511,937

494,162--

512,049494,291--

512,049494,291

Debt issuances

97,184

83,74331,36530,841

66,52953,969--97,89484,810Financial assets

Financial liabilities

2

Due to controlled entities

88,383

88,882----

88,383

88,882

88,383

88,882

Total

697,504

666,787

31,36530,841

578,578

548,260

88,383

88,882

698,326

667,983

1.

2.

We have reviewed the fair value of Net loans and advances previously presented as Level 2. In line with broader industry practice Net loans and advances other than Loans to Banks are now presented as
Level 3Carrying value assumed to approximate fair value for balances with controlled entities.

KEY JUDGEMENTS AND ESTIMATESThe Company evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degreeof judgement and estimation in determining the carrying values of financial assets and liabilities at the balance sheet date.
The majority of valuation models the Company uses employ only observable market data as inputs. However, for certain financial
instruments, we may use data that is not readily observable in current markets. If we use unobservable market data, then we need toexercise more judgement to determine fair value depending on the significance of the unobservable input to the overall valuation.
Generally, we derive unobservable inputs from other relevant market data and compare them to observed transaction prices whereavailable.
When establishing the fair value of a financial instrument using a valuation technique, the Company considers valuation adjustments indetermining the fair value. We may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation
adjustments – refer Note 9 Derivative Financial Instruments) to the techniques used to reflect the Company’s assessment of factors thatmarket participants would consider in setting fair value.

47

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
17. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS
SECURITY FOR ASSETS
The following disclosure excludes the amounts presented as collateral paid and received in the Balance Sheet that relate to derivative liabilities andderivative assets respectively. The terms and conditions of those collateral agreements are included in the standard Credit Support Annex that forms
part of the International Swaps and Derivatives Association Master Agreement.

ASSETS CHARGED AS SECURITY FOR LIABILITIESAssets charged as security for liabilities include the following types of instruments:
 Securities provided as collateral for repurchase transactions. These transactions are governed by standard industry agreements.
 Specified residential mortgages provided as security for notes and bonds issued to investors as part of the Company’s covered bond programs.
 Collateral provided to central banks.
 Collateral provided to clearing houses.
The carrying amount of assets pledged as security are as follows:
2018
$m

2017
$m

Securities sold under arrangements to repurchase1

39,33235,454

Residential mortgages provided as security for covered bonds

19,612

19,604

Other

1,191

1,487

1.

The amounts disclosed as securities sold under arrangements to repurchase include both: assets pledged as security which continue to be recognised on the Company's balance sheet; and assets repledged, which are included in the disclosure below.

COLLATERAL ACCEPTED AS SECURITY FOR ASSETSThe Company has received collateral associated with various financial instruments. Under certain transactions the Company has the right to sell, or to
repledge, the collateral received. These transactions are governed by standard industry agreements.
The fair value of collateral we have received and that which we have sold or repledged is as follows:
2018
$m

2017
$m

Fair value of assets which can be sold or repledged

35,36029,418Fair value of assets sold or repledged

23,27019,78748

NOTES TO THE FINANCIAL STATEMENTS

18. OFFSETTING
We offset financial assets and financial liabilities in the balance sheet (in accordance with AASB 132 Financial Instruments: Presentation) when there is: a current legally enforceable right to set off the recognised amounts in all circumstances; and an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
If the above conditions are not met, the financial assets and liabilities are presented on a gross basis.
The Company does not have any arrangements that satisfy the conditions necessary to offset financial assets and financial liabilities within the balance
sheet. The following table identifies financial assets and financial liabilities which have not been offset but are subject to enforceable master netting
agreements (or similar arrangements) and the related amounts not offset in the balance sheet. We have not taken into account the effect of overcollateralisation.
Amount subject to master netting agreement or similar

2018

Amounts not
Total amounts
subject torecognised in master netting
the agreement orBalance Sheetsimilar
$m
$m

Total
$m

Financial
instruments$mFinancialcollateral(received)/pledged$mNetamount$m

Derivative assets

64,448(2,423)62,025(52,723)(5,042)

4,260

Reverse repurchase, securities borrowing andsimilar agreements1

34,623(4,337)30,286(398)(29,888)-

Total financial assets

99,071(6,760)92,311(53,121)(34,930)

4,260

Derivative financial liabilities(65,638)

2,706(62,932)

52,723

7,037(3,172)

Repurchase, securities borrowing and similar
agreements2(37,581)

11,997(25,584)

398

25,186-

Total financial liabilities(103,219)

14,703(88,516)

53,12132,223(3,172)

Amount subject to master netting agreement or similar

2017

Amounts not
Total amounts
subject torecognised in master netting
the agreement orBalance Sheetsimilar
$m
$m

Total
$m

Financial
instruments$mFinancialcollateral(received)/pledged$mNetamount$m

Derivative assets

57,036(2,138)54,898(46,268)(4,598)

4,032

Reverse repurchase, securities borrowing andsimilar agreements1

28,305(4,652)

23,653(819)(22,834)-

Total financial assets

85,341(6,790)78,551(47,087)(27,432)

4,032

Derivative financial liabilities(56,830)

2,238(54,592)

46,2685,774(2,550)

Repurchase, securities borrowing and similar
agreements2(33,768)

8,822(24,946)819

24,127-

Total financial liabilities(90,598)

11,060(79,538)

47,087

29,901(2,550)

1.

Reverse repurchase agreements:
 with less than 90 days to maturity are presented in the Balance Sheet within cash and cash and cash equivalents; or with 90 days or more to maturity are presented in the Balance Sheet within net loans and advances.
2.
Repurchase agreements are presented in the Balance Sheet within deposits and other borrowings.

49

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
19. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill1

Balance at start of year

Other Intangibles

Total

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

69

102

1,783

2,110

-

2

1,852

2,214

-

-

386

396

-

-

386

396

-

-

(787)

(541)

-

(2)

(787)

(543)

-

-

(17)

(17)

-

-

(17)

(17)

Additions
Amortisation expense

Software2

Impairment expense
3

Impairment on reclassification to held for sale

-

(32)

-

(153)

-

-

-

(185)

Foreign currency exchange difference

4

(1)

8

(12)

-

-

12

(13)

Balance at end of year

73

69

1,373

1,783

-

-

1,446

1,852

Cost

73

69

6,289

5,883

39

39

6,401

5,991

Accumulated amortisation/impairment

n/a

n/a

(4,916)(4,100)

(39)

(39)

(4,955)(4,139)Carrying amount

73

69

1,373

1,783

-

-

1,446

1,852

1.
2.

3.

Goodwill excludes notional goodwill in equity accounted investments.
ANZ has accelerated the amortisation of certain software assets predominately relating to its International business. This follows a recent review of the International business along with a number ofdivestments announced or completed this year. Accelerated amortisation expense of $240 million ($195 million post-tax) attributable to these assets has been recorded in the 2018 financial year.
In 2017 this relates to the sale of the Retail Asia business.

RECOGNITION AND MEASUREMENT
The table below details how we recognise and measure different intangible assets:
Intangible

Goodwill

SoftwareDefinition

Excess amount the Company has paid inacquiring a business over the fair value lesscosts of disposal of the identifiable assets andliabilities acquired.

Purchases of “off the shelf” software assets arecapitalised as assets.

Carrying value

Internal and external costs incurred in building
software and computer systems costing greater than
$20 million are capitalized as assets.
Those less than $20 million are expensed in the year
in which the costs are incurred.

Cost less any accumulated impairment losses.

Initially, measured at cost.

Allocated to the cash generating unit to which
the acquisition relates.

Subsequently, carried at cost less accumulated
amortisation and impairment losses.
Costs incurred in planning or evaluating software
proposals or in maintaining systems after
implementation are not capitalised.

Useful life

Indefinite.
Goodwill is reviewed for impairment at least
annually or when there is an indication of
impairment.

Depreciation method

Not applicable.

Except for major core infrastructure, amortised overperiods between 3-5 years.
Major core infrastructure amortised over periods
between 7 or 10 years.
Straight-line method.

50

NOTES TO THE FINANCIAL STATEMENTS

19. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

KEY JUDGEMENTS AND ESTIMATESManagement judgement is used to assess the recoverable value of goodwill, and other intangible assets, and the useful economic lifeof an asset (or if an asset has an indefinite life). We reassess the recoverability of the carrying value at each reporting date.
At each balance date, software and other intangible assets, including those not ready for use, are assessed for indicators of impairment.
In the event that an asset’s carrying amount is determined to be greater than its recoverable amount, the carrying value of the asset iswritten down immediately.
In addition, the expected useful economic life of intangible assets, including software assets, are assessed on an annual basis. The
assessment requires management judgement, and in relation to our software assets, a number of factors can influence the expectedeconomic useful lives. These factors include changes to business strategy, significant divestments and the underlying pace oftechnological change. In the current year, the assessment of useful economic life of software assets resulted in accelerated
amortisation of certain software assets in the Institutional and Australia divisions of $240 million.

20. OTHER PROVISIONS
2018
$m

2017
$m

Customer remediation

556

115

Restructuring costs

94

61

Non-lending losses, frauds and forgeries

75

73

Other

113

141

Total other provisions

838

390

Customer
remediation$m

Restructuring
costs
$m

Non-lending
losses, frauds
and forgeries
$m

Other
$m

Total
$m

Balance at start of year

115

61

73

141

390

New and increased provisions made during the year

525

146

11

99

781

Provisions used during the year

(60)

(98)

(8)

(65)

(231)

Unused amounts reversed during the year

(24)

(15)

(1)

(62)

(102)

Balance at end of year

556

94

75

113

838

51

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
20. OTHER PROVISIONS (continued)
Customer remediation
Customer remediation refers to the Company’s activities in relation to compensating customers for past matters associated with products andservices provided.
Restructuring costs
Provisions for restructuring costs arise from activities related to material changes in the scope of business undertaken by the Company or themanner in which that business is undertaken and include employee termination benefits. Costs relating to on-going activities are not provided
for and are expensed as incurred.
Non-lending losses, frauds and forgeries
Non-lending losses include losses arising from specific legal actions not directly related to amounts of principal outstanding for loans andadvances and losses arising from forgeries, frauds and the correction of operational issues. The amounts recognised are the best estimate of theconsideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties that surround theevents and circumstances that affect the provision.
Other
Other provisions comprise various other provisions including loyalty programs, workers compensation, make-good provisions associated withleased premises and contingent liabilities recognised as part of a business combination.

RECOGNITION AND MEASUREMENTThe Company recognises provisions when there is a present obligation, an outflow of economic resources is probable, and the amount of
the provision can be measured reliably.
The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date, taking into
account the risks and uncertainties surrounding the obligation. Where a provision is measured using the estimated cash flows required tosettle the present obligation, its carrying amount is the present value of those cash flows..

KEY JUDGEMENTS AND ESTIMATESThe Company holds provisions for various obligations including customer remediation, restructuring costs and surplus lease space,
non-lending losses, fraud and forgeries and litigation related claims. These provisions involve judgements regarding the outcome of
future events, including estimates of expenditure required to satisfy such obligations. Where relevant, expert legal advice has beenobtained and, in light of such advice, provisions and/or disclosures as deemed appropriate have been made.
In relation to customer remediation, determining the amount of the provisions, which represent management’s best estimate of thecost of settling the identified matters, requires the exercise of significant judgement. It will often be necessary to form a view on anumber of different assumptions, including, the number of impacted customers, the average refund per customer and the associatedremediation costs. Consequently, the appropriateness of the underlying assumptions is reviewed on a regular basis against actual
experience and other relevant evidence and adjustments are made to the provisions where appropriate.

52

NOTES TO THE FINANCIAL STATEMENTS

21. SHAREHOLDERS’ EQUITYSHAREHOLDERS’ EQUITY

Ordinary share capital

2018
$m

2017
$m

27,53329,416

Reserves:
Foreign currency translation reserve

(230)

(75)

Share option reserve

92

87

Available-for-sale revaluation reserve

(24)

(66)

Cash flow hedge reserve

106

90

Total reserves

(56)

36

Retained earnings

26,37722,396

Total shareholders’ equity

53,854

51,848ORDINARY SHARE CAPITAL
The table below details the movement in ordinary shares for the period.

2018

Balance at start of the year
1

Bonus option plan

2

2017

Number ofshares$m

Number ofshares$m

2,937,415,327

29,416

2,927,476,660

29,162

2,891,060-

2,880,009-

Dividend reinvestment plan--

7,058,658

198

Group employee share acquisition scheme

-

(3)

-

56

(66,688,269)(1,880)--2,873,618,118

27,5332,937,415,327

29,416

3

Share buy-back

Balance at end of year
1.

The Company issued 1.4 million shares under the Bonus Option Plan (BOP) for the 2018 interim dividend (1.5 million shares for the 2017 final dividend; 1.4 million shares for the 2017 interim dividend; 1.5
million shares for the 2016 final dividend).
No new shares were issued under the Dividend Reinvestment Plan (DRP) for the 2018 interim dividend (nil shares for the 2017 final dividend; nil shares for the 2017 interim dividend; 7.1 million shares for the2016 final dividend) as the shares were purchased on-market and provided directly to the shareholders participating in the DRP. On-market purchases for the DRP in the September 2018 financial year were$392 million (September 17 full year: $176 million).
3.
On 22 June 2018, the Company announced that it had increased its existing on-market buy-back of shares from $1.5 billion to $3.0 billion. The Company bought back $1,880 million worth of shares during
the 2018 financial year resulting in 66.7 million shares being cancelled during the year.
2.

53ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
21. SHAREHOLDERS’ EQUITY (continued)

RECOGNITION AND MEASUREMENT
Ordinary shares

Ordinary shares have no par value. They entitle holders to receive dividends, or proceeds available
on winding up of the Company, in proportion to the number of fully paid ordinary shares held.
They are recognised at the amount paid per ordinary share net of directly attributable costs. Everyholder of fully paid ordinary shares present at a meeting in person, or by proxy, is entitled to: on a show of hands, one vote; and on a poll, one vote, for each share held.

Treasury shares

Treasury shares are shares in the Company which: the ANZ Employee Share Acquisition Plan purchases on market and have not yet distributed, or the Company issues to the ANZ Employee Share Acquisition Plan and have not yet been
distributed.
Treasury shares are deducted from share capital and excluded from the weighted average numberof ordinary shares used in the earnings per share calculations.

Reserves:
Foreign currency translation
reserve

Includes differences arising on translation of assets and liabilities into Australian dollars when thefunctional currency of a foreign operation (including subsidiaries and branches) is not Australian
dollars. In this reserve, we reflect any offsetting gains or losses on hedging these exposures,
together with any tax effect.

Cash flow hedge reserve

Includes fair value gains and losses associated with the effective portion of designated cash flow
hedging instruments, net of deferred taxes to be realised when the position is settled.

Available-for-sale revaluation
reserve

Includes the changes in fair value and exchange differences on our revaluation of available-for-salefinancial assets, net of deferred taxes to be realised upon disposal of the asset.

Share option reserve

Includes amounts which arise on the recognition of share-based compensation expense.

54

NOTES TO THE FINANCIAL STATEMENTS

22. CAPITAL MANAGEMENTCAPITAL MANAGEMENT STRATEGY
ANZ’s capital management strategy aims to protect the interests of depositors, creditors and shareholders. We achieve this through an Internal Capital
Adequacy Assessment Process (ICAAP) whereby ANZ conducts detailed strategic and capital planning over a 3 year time horizon. The process
involves:
 forecasting economic variables, financial performance of ANZ’s divisions and the financial impact of new strategic initiatives to be implemented
during the planning period;
 performing stress tests under different economic scenarios to determine the level of additional capital (‘stress capital buffer’) needed to absorb
losses that may be experienced under an economic downturn; reviewing capital ratios and targets across various classes of capital against ANZ’s risk profile; and developing a capital plan, taking into account capital ratio targets, current and future capital issuances requirements and options around capital
products, timing and markets to execute the capital plan under differing market and economic conditions.
The capital plan is approved by the Board and updated as required. The Board and senior management are provided with regular updates of ANZ’scapital position. Any material actions required to ensure ongoing prudent capital management are submitted to the Board for approval. Throughout
the year, ANZ maintained compliance with all the regulatory requirements related to Capital Adequacy in the jurisdictions in which it operates.

REGULATORY ENVIRONMENTAs ANZ is an Authorised Deposit-taking Institution (ADI) in Australia, it is regulated by APRA under the Banking Act 1959 (Cth). ANZ must comply withthe minimum regulatory capital requirements, prudential capital ratios and specific reporting levels that APRA sets and which are consistent with theglobal Basel III capital framework. This is the common framework for determining the appropriate level of bank regulatory capital as set by the BaselCommittee on Banking Supervision (BCBS).
For reporting purposes as part of the ANZ 2018 Annual Report, Capital Adequacy Ratios are presented for the Level 2 ADI and are not presented for
the Company as a standalone entity. Refer to Note 23 Capital Management in the ANZ 2018 Group Annual Report for details of the Capital Adequacy
Ratios, which can be found at https://shareholder.anz.com/annual-report-shareholders-review.

55

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
23. SHARES IN CONTROLLED ENTITIES
Incorporated in

Nature of business

2018
$m

2017
$m

Laos

Banking

51

51

ANZ Bank (Lao) Ltd
ANZ Bank (Taiwan) Ltd

TaiwanBanking849

849

ANZ Bank (Vietnam) Ltd

VietnamBanking

205

205

ANZ Capel Court Ltd

Australia

Securitisation Manager

18

18

ANZ Capital Hedging Pty Ltd

Australia

In liquidation

200

200

ANZ Centre Chattels Trust

Australia

Property

167

167

ANZ Centre Trust

Australia

Property

550

550

ANZ Equities (Nominees) Pty Ltd

Australia

Custodial Services

10

10

ANZ Funds Pty Ltd

Australia

Holding Company

12,053

9,698

Guam

Banking

17

17

ANZ Lenders Mortgage Insurance Pty Ltd

Australia

Mortgage Insurance

398

398

ANZ Properties (Australia) Pty Ltd

Australia

Property

6

6

ANZ Rewards No.2 Pty Ltd

Australia

Credit Card Loyalty Program

40

40

ANZ Securities (Holdings) Pty Ltd

Australia

Holding Company

36

36

India

IT Services

25

25

ANZ Guam, Inc

ANZ Support Services India Private Ltd
1

Australia

Holding Company

2,563

4,034

Australia and New Zealand Bank (China) Company Ltd

China

Banking

1,121

1,121

Australia and New Zealand Banking Group (PNG) Ltd

Papua New Guinea

Banking

40

40

Chongqing Liangping ANZ Rural Bank Company Ltd

China

Banking

5

5

Guam

Holding Company

24

24

Australia

Non-operating

43

43

ANZ Wealth Australia Ltd

Citizens Bancorp
E S & A Holdings Pty Ltd
Esanda Finance Corporation Ltd

Australia

Non-operating

5

15

Looking Together Pty Ltd

Australia

Non-operating

6

5

ACN 003 042 082 Ltd

Australia

Holding Company

158

258

PT Bank ANZ Indonesia (99% ownership)

Indonesia

Banking

Shares in controlled entities
1.

262

269

18,852

18,084

During the year ended 30 September 2018, the carrying amount was impaired by $597 million following the calculation of the fair value of ANZ Wealth Australia Ltd’s subsidiaries being sold, and a net$874 million of capital was returned to the Company.

RECOGNITION AND MEASUREMENTThe Company’s subsidiaries are those entities it controls through being exposed to, or having rights to, variable returns from the entity andbeing able to affect those returns through its power over the entity. The Company assesses whether it has power over those entities by
examining the Company’s existing rights to direct the relevant activities of the entity. Investments in controlled entities are carried at costless any accumulated impairment losses.
At least at each reporting date, the Company reviews investments in controlled entities for any indication of impairment. If an indication of
impairment exists, then the Company determines the recoverable amount of the controlled entity using the higher of:the controlled entity’s fair value less cost of disposal; and

its value-in-use.

We use a discounted cash flow methodology, and other methodologies (such as capitalisation of earnings methodology), to determine therecoverable amount.

56

NOTES TO THE FINANCIAL STATEMENTS

24. TRANSFERS OF FINANCIAL ASSETSIn the normal course of business the Company enters into transactions where it transfers financial assets directly to third parties or to Structured
Entities (SEs). These transfers may give rise to the Company fully, or partially derecognising those financial assets depending on the Company’s
exposure to the risks and rewards or control over the transferred assets. If the Company retains substantially all of the risk and rewards of a transferredasset, the transfer does not qualify for derecognition and the asset remains on the Company’s balance sheet in its entirety.

SECURITISATIONSNet loans and advances include residential mortgages securitised under the Company’s securitisation programs which are assigned to bankruptcy
remote SEs to provide security for obligations payable on the notes issued by the SEs. This includes mortgages that are held for potential repurchaseagreements (Repos) with central banks. The holders of the issued notes have full recourse to the pool of residential mortgages which have been
securitised and the Company cannot otherwise pledge or dispose of the transferred assets.
In some instances the Company is also the holder of the securitised notes. In addition, the Company is entitled to any residual income of the SEs andsometimes enters into derivatives with the SEs. The Company retains the majority of the risks and rewards of the residential mortgages and continues
to recognise the mortgages as financial assets. The obligation to pay this amount to the SE is recognised as a financial liability of the Company.
The Company is exposed to variable returns from its involvement with these securitisation SEs and has the ability to affect those returns through its
power over the SEs activities. The SEs are therefore consolidated by the Company when preparing consolidated Group financial statements.

COVERED BONDS
The Company operates various global covered bond programs to raise funding in its primary markets. Net loans and advances include residential
mortgages assigned to bankruptcy remote SEs associated with these covered bond programs. The mortgages provide security for the obligations
payable on the issued covered bonds.
The covered bond holders have dual recourse to the issuer and the cover pool of assets. The issuer cannot otherwise pledge or dispose of thetransferred assets, however, subject to legal arrangements it may repurchase and substitute assets as long as the required cover is maintained.
The Company is required to maintain the cover pool at a level sufficient to cover the bond obligations. In addition the Company is entitled to any
residual income of the covered bond SEs and enters into derivatives with the SEs. The Company retains the majority of the risks and rewards of theresidential mortgages and continues to recognise the mortgages as financial assets. The obligation to pay this amount to the SEs is recognised as afinancial liability of the Company.
The Company is exposed to variable returns from its involvement with the covered bond SEs and has the ability to affect those returns through its
power over the SEs activities. The SEs are therefore consolidated by the Company when preparing consolidated Group financial statements. The
covered bonds issued externally are included within debt issuances.

REPURCHASE AGREEMENTS
If the Company sells securities subject to repurchase agreements under which substantially all the risks and rewards of ownership remain with theCompany, then those assets are considered to be transferred assets that do not qualify for derecognition. An associated liability is recognised for theconsideration received from the counterparty.
The table below sets out the balance of assets transferred that do not qualify for derecognition, along with the associated liabilities:
Securitisations1,2

Covered bonds

Repurchase agreements

2018
$m

2017
$m

2018
$m

2017
$m

2018
$m

2017
$m

Current carrying amount of assets transferred

64,76565,03019,612

19,60439,33235,454

Carrying amount of associated liabilities

64,76565,03019,612

19,60437,581

33,768

1.
2.

The balances relate to transfers to internal structured entities.
The securitisation noteholders have recourse only to the pool of residential mortgages which have been securitised. The carrying value of securitised assets and the associated liabilities approximates theirfair value.

57

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
25. ASSETS AND LIABILITIES HELD FOR SALE
At 30 September 2018, there were no assets or liabilities that have been reclassified to held for sale. The assets held for sale balance in 2017 comprised
Investments in associates (SRCB) of $1,748 million. This sale was completed in the 2018 financial year.
 Shanghai Rural Commercial Bank (SRCB)
On 3 January 2017, the Company announced that it had agreed to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB). The sale wascompleted in the 2018 financial year.
 Asia Retail and Wealth Business
ANZ Group announced that it had agreed to sell Retail and Wealth businesses in Singapore, Hong Kong, China, Taiwan and Indonesia to Singapore’s
DBS Bank on 31 October 2016. The Company is only impacted by branch operations which existed in Singapore and Hong Kong and the sale ofthese branches was completed prior to 30 September 2017.

INCOME STATEMENT IMPACT RELATING TO ASSETS AND LIABILITIES HELD FOR SALE
During 2018, the Company recognised the following impacts in relation to assets and liabilities held for sale: $13 million gain relating to the completion of the sale related activities of the Asia Retail and Wealth business.
 $247 million net gain relating to SRCB comprising a $289 million gain on release of reserves, $56 million of foreign exchange losses and othercosts, and a $14 million adjustment for tax.
During 2017, the Company recognised the following impacts in relation to assets and liabilities held for sale: $219 million loss relating to the reclassification of the Asia Retail and Wealth business to held for sale comprising of $185 million of software andgoodwill impairment charges and $34 million of various other charges.
 $333 million loss relating to reclassification of SRCB to held for sale, comprising $219 million impairment to the investment, $12 million of foreignexchange losses, and $102 million of tax expenses.
The net result of these disposals is included in other income (refer to Note 2 Operating Income).

KEY JUDGEMENTS AND ESTIMATES
A significant level of judgement is used by the Company to determine: whether an asset or group of assets is classified and presented as held for sale or as a discontinued operation; and the fair value of the assets and liabilities classified as being held for sale.
Management is required to exercise significant judgement when assessing the fair value less costs to sell for assets and liabilities held
for sale. The judgemental factors include determining: costs to sell, allocation of goodwill, indemnities provided under the sale contract
and consideration received - particularly where elements of consideration are contingent in nature. Any impairment we record is basedon the best available evidence of fair value compared to the carrying value before the impairment. The final sale price may be different
to the fair value we estimate when recording the impairment. Management regularly assess the appropriateness of the underlying
assumptions against actual outcomes and other relevant evidence and adjustments are made to fair value where appropriate. We
expect that the sales will complete within 12 months after balance date, subject to the relevant regulatory approvals and customaryterms of sale for such assets..

58

NOTES TO THE FINANCIAL STATEMENTS

26. SUPERANNUATION AND POST EMPLOYMENT BENEFIT OBLIGATIONS
Set out below is a summary of amounts recognised in the Balance Sheet in respect of the defined benefit superannuation schemes:
2018
$m

2017
$m

Defined benefit obligation and scheme assets
Present value of funded defined benefit obligation(1,246)(1,225)

Fair value of scheme assets

1,385

1,328

Net defined benefit asset

139

103

Net liabilities arising from defined benefit obligations included in payables and other liabilities

(15)

(19)

As represented in the Balance Sheet
Net assets arising from defined benefit obligations included in other assets

154

122

Net defined benefit asset

139

103

Weighted average duration of the benefit payments reflected in the defined benefit obligation (years)

16.8

16.8

As at the most recent reporting dates of the schemes, the aggregate surplus of net market value of assets over the value of accrued benefits on afunding basis was $10 million (2017: deficit of $16 million). In 2018, the Company made defined benefit contributions totalling $2 million (2017: $1
million). It expects to make around $2 million next financial year.

GOVERNANCE OF THE SCHEMES AND FUNDING OF THE DEFINED BENEFIT SECTIONS
The main defined benefit superannuation schemes in which the Company participates operate under trust law and are managed and administeredon behalf of the members in accordance with the terms of the relevant trust deed and rules and all relevant legislation. These schemes have corporate
trustees, which are wholly owned subsidiaries of the Company. The trustees are the legal owners of the assets, which are held separately from theassets of the Company and are responsible for setting investment policy and agreeing funding requirements with the employer through the triennial
actuarial valuation process.
The defined benefit section of the ANZ Australian Staff Superannuation Scheme and ANZ UK Staff Pension Scheme are the two largest defined benefit
plans and have been closed to new members since 1987 and 2004 respectively. These plans did not have a material deficit, or surplus, at the lastfunding valuations. The Company has no present liability under the schemes’ trust deeds to fund a deficit (measured on a funding basis). A contingent
liability of the Company may arise if any of these schemes were wound up.

RECOGNITION AND MEASUREMENT
Defined benefit superannuation schemes
For the Company’s defined benefit schemes, an independent actuary calculates the liability and expenses related to providing benefits toemployees under each defined benefit scheme. They use the Projected Unit Credit Method to value the liabilities. The balance sheet
includes: a defined benefit liability if the obligation is greater than the fair value of the schemes assets; and an asset (capped to its recoverable amount) if the fair value of the assets is greater than the obligation.
In each reporting period, the movements in the net defined benefit liability are recognised as follows: the net movement relating to the current period’s service cost, net interest on the defined benefit liability, past service costs and othercosts (such as the effects of any curtailments and settlements) as operating expenses;
 remeasurements of the net defined benefit liability (which comprise actuarial gains and losses and return on scheme assets, excludinginterest income included in net interest) directly in retained earnings through other comprehensive income; and contributions of the Company directly against the net defined benefit position.
Defined contribution superannuation schemes
The Company operates a number of defined contribution schemes. It also contributes (according to local law, in the various countries inwhich it operates) to Government and other plans that have the characteristics of defined contribution plans. The Company’s contributions
to these schemes are recognised as personnel expenses when they are incurred.

59

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
26. SUPERANNUATION AND POST EMPLOYMENT BENEFIT OBLIGATIONS (continued)

KEY JUDGEMENTS AND ESTIMATES
The main assumptions we use in valuing defined benefit obligations are listed in the table below. A change to any assumptions, orapplying different assumptions, could have a significant effect on the Statement of Other Comprehensive Income and Balance Sheet.

Sensitivity analysis
change in significant
assumptions
2018

2017

2.65 - 3.7

2.5 - 3.8

3.75

3.7

2.0 - 3.0/
2.25

2.0 - 3.0/
2.2

– Males (years)

25.5 - 29.0

25.4 - 28.9

– Females (years)

28.7 - 31.0

28.6 - 30.9

2018
$m

2017
$m

0.5% increase

(131)

(104)

0.5% increase

109

86

1 year increase

56

44

Assumptions
Discount rate (% p.a.)
Future salary increases (% p.a.)

Increase/(decrease) in
defined benefit obligation

Future pension indexation
In payment (% p.a.)/In deferment (% p.a)Life expectancy at age 60 for current pensioners

27. EMPLOYEE SHARE AND OPTION PLANS
The Company operates a number of employee share and option schemes under the ANZ Employee Share Acquisition Plan and the ANZ Share Option
Plan.

ANZ EMPLOYEE SHARE ACQUISITION PLAN
ANZ Employee Share Acquisition Plan schemes that operated during the 2017 and 2018 years were the Employee Share Offer and the Deferred Share
Plan.
Employee Share Offer

Eligibility

Most permanent employees employed in either Australia or New Zealand with three years continuous service for themost recent financial year.

Grant

Up to AUD1,000 in Australia (and AUD800 in New Zealand) ANZ shares each financial year, subject to Board approval.

Allocation value

One week Volume Weighted Average Price (VWAP) of ANZ shares traded on the ASX in the week leading up to andincluding the date of grant.

Australia

ANZ ordinary shares are granted to eligible employees for nil consideration. The shares vest on grant and are held in
trust for three years from grant date, after which time they may remain in trust, be transferred to the employee’s nameor sold. Dividends are automatically reinvested in the Dividend Reinvestment Plan.

New ZealandShares are granted to eligible employees on payment of NZD one cent per share. Shares vest subject to satisfaction ofa three year service period, after which they may remain in trust, be transferred to the employee’s name or sold.
Unvested shares are forfeited if the employee resigns or is dismissed for serious misconduct. Dividends are either paidin cash or reinvested into the Dividend Reinvestment Plan.

Expensing value(fair value)

In Australia, the fair value of the shares is expensed in the year shares are granted, as they are not subject to forfeiture.
In New Zealand, the fair value is expensed on a straight-line basis over the three year vesting period.
The expense is recognised as a share-based compensation expense with a corresponding increase in share capital.

FY 2018

541,982 shares were granted on 1 December 2017 at an issue price of $28.67.

FY 2017

Zero shares were granted in the 2017 financial year.

60

NOTES TO THE FINANCIAL STATEMENTS

27. EMPLOYEE SHARE AND OPTION PLANS (continued)
Deferred Share Plani) Chief Executive Officer (CEO) and Group Executive Committee (ExCo)
EligibilityGroup CEO and ExCo.

Grant

50% of the CEO’s Annual Variable Remuneration (AVR) and 33% of ExCo’s Variable Remuneration (VR) received asdeferred shares.

Conditions
Deferred evenly over four years from grant date.
ii) ANZ Incentive Plan (ANZIP) and Business Unit Incentive Plans (BUIPs) – for grants from 1 October 2017
Eligibility

Employees participating in ANZ’s standard VR arrangements.

Grant

If VR is at or exceeds AUD150,000, then 60% of incentive amounts exceeding AUD80,000 (subject to a minimum
deferral amount of AUD42,000) is deferred as deferred shares.
Deferred evenly over three years from grant date.

Conditionsiii) ANZ Employee Reward Scheme (ANZERS) and BUIPs – for grants up to 30 September 2017
Eligibility

Employees participating in ANZ’s standard Short Term Incentive (STI) arrangements.

Grant

Half of all incentive amounts exceeding AUD100,000 (subject to a minimum deferral amount of AUD25,000)
received as deferred shares.

Conditions

Deferred evenly over two years from grant date.

iv) Total Incentives Performance Plan (TIPP) – for grants up to 30 September 2017
Eligibility

Employees participating in the Institutional TIPP.

Grant

60% of incentive amounts exceeding AUD80,000 (subject to a minimum deferral amount of AUD18,000) received asdeferred shares.
Deferred evenly over three years from grant date.

Conditionsv) Long Term Incentives (LTIs)
Eligibility

Selected employees.

Grant

100% deferred shares.

Conditions

Vest three years from grant date.

vi) Exceptional circumstances
Remuneration foregone

In exceptional circumstances, we grant deferred shares to certain employees when they start with the Company tocompensate them for remuneration they have foregone from their previous employer. The vesting period generallyaligns with the remaining vesting period of the remuneration they have foregone, and therefore varies between
grants.

Retention

We may grant deferred shares to high performing employees who are regarded as a significant retention risk to theCompany.

vii) Further information
Downward adjustment

Cessation

Deferred shares remain at risk and the Board has the discretion to adjust the number of deferred shares downwards
to zero at any time before the vesting date. The Company’s downward adjustment provisions are detailed in
section 4.3.4 of the 2018 Remuneration Report in the ANZ 2018 Group Annual Report.
Unless the Board decides otherwise, employees forfeit their unvested deferred shares if they resign, are terminatedon notice, or are dismissed for serious misconduct. The deferred shares may be held in trust beyond the deferral
period.

Dividends

Dividends are paid in cash or reinvested in the Dividend Reinvestment Plan.

Instrument

Deferred share rights may be granted instead of deferred shares in some countries as locally appropriate (seedeferred share rights section).

Allocation value

All deferred shares are issued based on the VWAP of ANZ shares traded on the ASX in the week leading up to andincluding the date of grant.

Expensing value (fair value)

We expense the fair value of deferred shares on a straight-line basis over the relevant vesting period and we
recognise the expense as a share-based compensation expense with a corresponding increase in share capital.
2,232,563 deferred shares were granted with a weighted average grant price of $29.31. 2,632 deferred shares were
adjusted downward to zero, based on Board discretion.
2,016,835 deferred shares were granted with a weighted average grant price of $28.03. No deferred shares were
adjusted downward to zero, based on Board discretion.

FY 2018 grants
FY 2017 grants

61

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)
Expensing of the ANZ Employee Share Acquisition Plan
Expensing value(fair value)

The fair value of shares we granted during 2018 under the Employee Share Offer and the Deferred Share Plan,
measured as at the date of grant of the shares, is $80.9 million (2017: $56.7 million) based on 2,774,545 shares (2017:
2,016,835) at VWAP of $29.17 (2017: $28.09).

ANZ SHARE OPTION PLAN
Allocation

We may grant selected employees options/rights which entitle them to acquire fully paid ordinary ANZ shares at a
fixed price at the time the options/rights vest. Voting and dividend rights will be attached to the ordinary shares
allocated on exercise of the options/rights.
Each option/right entitles the holder to one ordinary share subject to the terms and conditions imposed on grant.
Exercise price of options, determined in accordance with the rules of the plan, is generally based on the VWAP of theshares traded on the ASX in the week leading up to and including the date of grant. For rights, the exercise price is nil.

Rules

Prior to the exercise of the option/right if the Company changes its share capital due to a bonus share issue, pro-rata
new share issue or reorganisation the following adjustments are required: Issue of bonus shares - When the holder exercises their option, they are also entitled to be issued the number ofbonus shares they would have been entitled to had they held the underlying shares at the time of the bonus
issue;
 Pro-rata share offer - We will adjust the exercise price of the option in the manner set out in the ASX Listing Rules;
and Reorganisation - In respect of rights, if there is a bonus issue or reorganisation of the Company’s share capital,
then the Board may adjust the number of rights or the number of underlying shares so that there is no advantage
or disadvantage to the holder.
Holders otherwise have no other entitlements to participate: in any new issue of the Company’s securities before they exercise their options/rights; or in a share issue of a body corporate other than ANZ (such as a subsidiary).
For equity grants made after 1 November 2012, any portion of the award which vests may, at the Board’s discretion,
be satisfied by a cash equivalent payment rather than shares.

Expensing

We expense the fair value of options/rights on a straight-line basis over the relevant vesting period and we recognise
the expense as a share-based compensation expense with a corresponding increase in share options reserve.

Cessation

The provisions that apply if the employee’s employment ends are in section 7.2 of the 2018 Remuneration Report in
the ANZ 2018 Group Annual Report.

Downward adjustment

The Company’s downward adjustment provisions are detailed in section 4.3.4 of the 2018 Remuneration Report in
the ANZ 2018 Group Annual Report.

Option Plans that operated during 2018 and 2017i) Performance Rights
Allocation

We grant performance rights to selected employees as part of the Company’s incentive plans. Performance rights
provide the holder with the right to acquire ANZ shares at nil cost, subject to a three year vesting period and Total
Shareholder Return (TSR) performance hurdles. Further details on the performance hurdles are in section 4.3.3 of the2018 Remuneration Report in the ANZ 2018 Group Annual Report.

FY 2018 and FY 2017
grantsDuring the 2018 year, we granted 1,023,239 performance rights (2017: 944,419). No performance rights were adjusted
downward to zero in 2018 and 2017, based on Board discretion.

62

NOTES TO THE FINANCIAL STATEMENTS

27. EMPLOYEE SHARE AND OPTION PLANS (continued)ii) Deferred Share Rights (no performance hurdles)
Allocation

Deferred share rights provide the holder with the right to acquire ANZ shares at nil cost after a specified
vesting period. We adjust the fair value of rights for the absence of dividends during the restriction period.

Satisfying vestings

Any portion of the award of share rights may be satisfied by a cash equivalent payment rather than shares at
the Board’s discretion. All share rights were satisfied through a share allocation, other than 108,783 deferredshare rights (2017: 67,573) for which Board discretion was exercised.

Downward adjustment

Board discretion was also exercised to adjust downward 1,638 deferred share rights to zero in 2018 and 3,835
in 2017.

FY 2018 and FY 2017 grants

During the 2018 year 2,546,333 deferred share rights (no performance hurdles) were granted (2017:
2,547,377).

Options, Deferred Share Rights and Performance Rights on Issue
As at 30 October 2018, there were 657 holders of 4,204,281 deferred share rights on issue and 159 holders of 2,865,941 performance rights on issue.
Options/Rights Movements
This table shows the options/rights over unissued ANZ shares and their related weighted average (WA) exercise prices as at the beginning and end of
2018 and the movements during 2018:
Number of options/rights
Options/
Options/
Closing
Opening
Options/
Options/rightsrightsbalancebalancerightsrightsexpiredexercised
30 Sep 2018
1 Oct 2017
grantedforfeited1
WA exercise price

7,113,784

3,569,572(2,043,209)(1,558)(1,490,016)

7,148,573

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00
$28.43WA closing share price
WA remaining contractual life

2.1 years

WA exercise price of all exercisable
options/rights outstanding$0.00

Outstanding exercisable options/rights

67,666This table shows the options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2017
and the movements during 2017:
Options/
Options/
Closing
Opening
Options/
Options/rightsrightsbalancebalancerightsrightsexpiredexercised
30 Sep 2017
1 Oct 2016
grantedforfeited1
Number of options/rights
WA exercise price

6,424,117

3,491,796(1,815,732)(629)(985,768)

7,113,784

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

WA closing share price
WA remaining contractual life
WA exercise price of all exercisable
options/rights outstanding
Outstanding exercisable options/rights
1.

$29.502.4 years$0.00
143,839

Refers to any circumstance where equity can be forfeited (for example on cessation, downward adjustment and performance conditions not met).

All of the shares issued as a result of the exercise of options/rights during 2017 and 2018, were issued at a nil exercise price.
As at the date of the signing of the Directors’ Report on 30 October 2018: no options/rights over ordinary shares have been granted since the end of 2018; and no shares have been issued as a result of the exercise of options/rights since the end of 2018.

63

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)
Fair Value Assumptions
When determining the fair value, we apply the standard market techniques for valuation, including Monte Carlo and/or Black Scholes pricing models.
We do so in accordance with the requirements of AASB 2 Share-based Payments. The models take into account early exercise of vested equity, nontransferability and internal/external performance hurdles (if any).
The table below shows the significant assumptions we used as inputs into our fair value calculation of instruments granted during the period. We
present the values as weighted averages, but the specific values we use for each allocation are the ones we use for the fair value calculation.
2018
Performance
RightsPerformance
Rights

0.0

0.0

0.00

0.00

Share closing price at grant date ($)

29.24

29.21

27.95

28.18

Expected volatility of ANZ share price (%)1

20.0

20.0

24.9

25.0

Equity term (years)

2.4

5.0

2.3

5.0

Vesting period (years)

2.1

3.0

2.1

3.0

Exercise price ($)

1.

2017
Deferred
Share
RightsDeferred
Share
RightsExpected life (years)

2.1

3.0

2.1

3.0

Expected dividend yield (%)

5.75

5.75

6.49

6.46

Risk free interest rate (%)

1.65

1.95

1.76

1.86

Fair value ($)

26.03

12.24

24.59

13.73

Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the rights. The measure of volatility used in the model is the annualised standard
deviation of the continuously compounded rates of return on the historical share price over a deferred period of time preceding the date of grant. This historical average annualised volatility is then used toestimate a reasonable expected volatility over the expected life of the rights.

SATISFYING EQUITY AWARDS
All shares underpinning equity awards may be purchased on market, reallocated or be newly issued shares, or a combination.
The equity we purchased on market during the 2018 financial year (either under the ANZ Employee Share Acquisition Plan and the ANZ Share Option
Plan, or to satisfy options or rights) for all employees amounted to 3,936,773 shares at an average price of $29.00 per share (2017: 2,704,206 shares at
an average price of $27.83 per share).

64

NOTES TO THE FINANCIAL STATEMENTS

28. RELATED PARTY DISCLOSURESKEY MANAGEMENT PERSONNEL COMPENSATIONKey Management Personnel (KMP) are defined as all directors and those executives who report directly to the CEO: with responsibility for the strategic direction and management of a major income generating division; or who control material income and expenses.
KMP compensation included within total personnel expenses in Note 3 Operating Expenses as follows:
20181
$000

20171
$000

19,48421,002

Post-employment benefits

333

1,046

Other long-term benefits

150

169

Short-term benefits

Termination benefits

454

563

Share-based payments

8,910

14,926

Total

29,33137,7061.

Includes former disclosed KMP until the end of their employment.

KEY MANAGEMENT PERSONNEL LOAN TRANSACTIONS
Loans made to KMP are made in the ordinary course of business and on normal commercial terms and conditions that are no more favourable thanthose given to other employees or customers, including: the term of the loan, security required and the interest rate. The aggregate of loans made,guaranteed or secured to KMP, including their related parties, were as follows:
2018
$000

2017
$000

Loans advanced1

12,71014,497

2

477

550

Interest charged
1.

Balances are at the balance sheet date (for KMP in office at balance sheet date) and at termination date (for KMP who ceased employment during the year).
2.
Interest is for all KMP’s during the period.

KEY MANAGEMENT PERSONNEL HOLDINGS OF ANZ SECURITIESKMP, including their related parties, held subordinated debt, shares, share rights and options over shares in the Company directly, indirectly or
beneficially as shown below:

Shares, options and rights
Subordinated debt

2018
Number1

2017
Number1

2,293,271

2,233,182

13,152

17,152

 For KMP who ceased employment during the year, the balances are calculated as at their termination date.

OTHER TRANSACTIONS OF KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIESAll other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions. Thesetransactions generally involve providing financial and investment services, including services to eligible international assignees ensuring they areneither financially advantaged nor disadvantaged by their relocation. All such transactions that have occurred with KMP and their related parties havebeen trivial or domestic in nature. In this context, we disclose only those transactions considered of interest to the users of the financial report inmaking and evaluating decisions about the allocation of scarce resources.

65

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
28. RELATED PARTY DISCLOSURES (continued)
ASSOCIATESDuring the course of the financial year, the Company conducted transactions with all associates on terms equivalent to those made on an arm’s
length basis as shown below:

Amounts receivable from associates

2018
$000

2017
$000

34,36476,247

Amounts payable to associates

608

587

Interest income from associates

1,704

2,728

Interest expense to associates
Other expenses paid to associates

-

18

6,735

8,424

-

748

Costs recovered from associates

There have been no material guarantees given or received by the Company to or from associates. No outstanding amounts between the Company
and associates have been written down or recorded as allowances, as they are considered fully collectible by the Company.

SUBSIDIARIESWe disclose material controlled entities in Note 23 Shares in Controlled Entities. During the financial year, subsidiaries conducted transactions witheach other and with associates on terms equivalent to those on an arm’s length basis. As of 30 September 2018, we consider all outstanding amounts
on these transactions to be fully collectible.
Transactions between the Company and its subsidiaries include providing a wide range of banking and other financial facilities. Details of amounts
paid to, or received from, related parties, in the form of dividends or interest, are set out in Note 2 Operating Income.
Other intragroup transactions include providing management and administrative services, staff training, data processing facilities, transfer of tax losses,
and the leasing of property plant and equipment.

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSPROPERTY RELATED COMMITMENTS
2018
$m

2017
$m

1,533

1,818

Lease rentals
Land and buildings

112

145

1,645

1,963

Due within 1 year

321

394

Due later than 1 year but not later than 5 years

769

908

Due later than 5 years

555

661

1,645

1,963

Furniture and equipment
Total lease rental commitments1

Total lease rental commitments
1.

1

Total future minimum sublease payments we expect to receive under non-cancellable subleases at 30 September 2018 is $81 million (2017: $91 million). During the year, we received sublease payments of$29 million (2017: $28 million) and netted them against rent expense.

66

NOTES TO THE FINANCIAL STATEMENTS

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
CREDIT RELATED COMMITMENTS AND CONTINGENCIES
2018

2017

$m

$m

Contract amount of:
Undrawn facilities

164,944

150,339

Guarantees and letters of credit

16,36318,062

Performance related contingencies

22,176

18,890Total

203,483

187,291

UNDRAWN FACILITIESThe majority of undrawn facilities are subject to customers maintaining specific credit and other requirements or conditions. Many of these facilities
are expected to be only partially used, and others may never be used at all. As such, the total of the nominal principal amounts is not necessarily
representative of future liquidity risks or future cash requirements. Based on the earliest date on which the Company may be required to pay, the total
undrawn facilities of $164,944 million (2017: $150,339 million) mature within 12 months.
GUARANTEES, LETTERS OF CREDIT AND PERFORMANCE CONTINGENCIES
Guarantees and contingent liabilities relate to transactions that the Company has entered into as principal – including: guarantees, standby letters ofcredit and documentary letters of credit.
Documentary letters of credit involve the Company issuing letters of credit guaranteeing payment in favour of an exporter. They are secured against
an underlying shipment of goods or backed by a confirmatory letter of credit from another bank.
Performance related contingents are liabilities that oblige the Company to make payments to a third party if the customer fails to fulfil its nonmonetary obligations under the contract.
To reflect the risk associated with these transactions, we apply the same credit origination, portfolio management and collateral requirements that weapply to loans. The contract amount represents the maximum potential amount that we could lose if the counterparty fails to meet its financial
obligations. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. Basedon the earliest date on which the Company may be required to pay, the total guarantees and letters of credit of $16,363 million (2017: $18,062 million)
and total performance related contingencies of $22,176 million (2017: $18,890 million) mature within 12 months.

OTHER CONTINGENT LIABILITIESAs at 30 September 2018, the Company had contingent liabilities in respect of the matters outlined below. Where relevant, expert legal advice has
been obtained and, in the light of such advice, provisions and/or disclosures as deemed appropriate have been made. In some instances we have notdisclosed the estimated financial impact of the individual items either because it is not practicable to do so or because such disclosure may prejudice
the interests of the Company.
BANK FEES LITIGATION
A litigation funder commenced a class action against the Company in 2010, followed by a second similar class action in March 2013. The applicants
contended that certain exception fees (honour, dishonour and non-payment fees on transaction accounts and late payment and over-limit fees on
credit cards) were unenforceable penalties and that various of the fees were also unenforceable under statutory provisions governing unconscionableconduct, unfair contract terms and unjust transactions. A further action, limited to late payment fees only, commenced in August 2014.
The penalty and statutory claims in the March 2013 class action failed and the claims have been dismissed. The August 2014 action was discontinued
in October 2016.
The original claims in the 2010 class action have been dismissed. In 2017, a new claim was added to the 2010 class action, in relation to the Company’s
entitlement to charge certain periodical payment non-payment fees.

67

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
BENCHMARK/RATE ACTIONSIn July and August 2016, class action complaints were brought in the United States District Court against local and international banks, including theCompany – one action relating to the bank bill swap rate (BBSW), and one action relating to the Singapore Interbank Offered Rate (SIBOR) and theSingapore Swap Offer Rate (SOR). The class actions are expressed to apply to persons and entities that engaged in US-based transactions in financial
instruments that were priced, benchmarked, and/or settled based on BBSW, SIBOR, or SOR. The claimants seek damages or compensation in amounts
not specified, and allege that the defendant banks, including the Company, violated US anti-trust laws, anti-racketeering laws, the Commodity
Exchange Act, and (in the BBSW case only) unjust enrichment principles. The Company is defending the proceedings. The matters are at an early stage.
In February 2017, the South African Competition Commission commenced proceedings against local and international banks including the Company
alleging breaches of the cartel provisions of the South African Competition Act in respect of trading in the South African rand. The potential civil penalty
or other financial impact is uncertain. The matter is at an early stage.
CAPITAL RAISING ACTIONSIn June 2018, the Commonwealth Director of Public Prosecutions commenced criminal proceedings against the Company and a senior employee
alleging that they were knowingly concerned in cartel conduct by the joint lead managers of the Company’s August 2015 underwritten institutional
equity placement of approximately 80.8 million ordinary shares. The matter is at an early stage. The Company and its senior employee are defending
the allegations.
In September 2018, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against the Company alleging
failure to comply with continuous disclosure obligations in connection with the Company’s August 2015 underwritten institutional equity placement.
ASIC alleges the Company should have advised the market that the joint lead managers took up approximately 25.5 million ordinary shares of theplacement. The matter is at an early stage. The Company is defending the allegations.
FRANCHISEE LITIGATIONIn February 2018, two related class actions were brought against the Company. The primary action alleges that the Company breached contractual
obligations and acted unconscionably when it lent to the applicant, and other 7-Eleven franchisees. The action seeks to set aside the loans to those
franchisees and claims unspecified damages. The second action seeks to set aside related mortgages and guarantees given to the Company. The
matters are at an early stage.
REGULATORY AND CUSTOMER EXPOSURESIn recent years there has been an increase in the number of matters on which ANZ engages with its regulators. There have been significant increases
in the nature and scale of regulatory investigations and reviews, enforcement actions (whether by court action or otherwise) and the quantum of fines
issued by regulators, particularly against financial institutions both in Australia and globally. The Company also instigates engagement with its
regulators. The nature of these interactions can be wide ranging and, for example, currently include a range of matters including responsible lending
practices, product suitability, wealth advice, pricing and competition, conduct in financial markets and capital market transactions and productdisclosure documentation. The Company has received various notices and requests for information from its regulators as part of both industry-wide
and Company-specific reviews and has also made disclosures to its regulators at its own instigation. There may be exposures to customers which are
additional to any regulatory exposures. These could include class actions, individual claims or customer remediation or compensation activities. The
outcomes and total costs associated with such reviews and possible exposures remain uncertain.
ROYAL COMMISSION
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017. The
Commission has been asked to submit its final report by 1 February 2019 (an interim report was released on 28 September 2018). The Commission is
likely to result in additional costs and may lead to further exposures, including exposures associated with further regulator activity or potential
customer exposures such as class actions, individual claims or customer remediation or compensation activities. The outcomes and total costs
associated with these possible exposures remain uncertain.
SECURITY RECOVERY ACTIONS
Various claims have been made or are anticipated, arising from security recovery actions taken to resolve impaired assets. These claims will bedefended.
WARRANTIES AND INDEMNITIESThe Company has provided warranties, indemnities and other commitments in favour of the purchaser and other persons in connection with various
disposals of businesses and assets and other transactions, covering a range of matters and risks. It is exposed to potential claims under thosewarranties, indemnities and commitments.

68

NOTES TO THE FINANCIAL STATEMENTS

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
CLEARING AND SETTLEMENT OBLIGATIONS
Under the following arrangements, the Company has a commitment to comply with rules which could result in a bilateral exposure and loss if amember institution fails to settle: the Australian Payments Nework Limited’s Regulations for the Australian Paper Clearing System, the Bulk Electronic
Clearing System, the Issuers and Acquirers Community and the High Value Clearing System (HVCS). The Company’s potential exposure arising fromthese arrangements is unquantifiable in advance.
Under the Austraclear System Regulations (Austraclear), and the CLS Bank International Rules, the Company has a commitment to participate in losssharing arrangements if a member institution fails to settle. The Company’s potential exposure arising from these arrangements is unquantifiable inadvance. For HVCS and Austraclear, the above obligation arises in only limited circumstances.
The Company is a member of various central clearing houses globally, including ASX Clear (Futures), London Clearing House (LCH) SwapClear, Korea
Exchange (KRX), Hong Kong Exchange (HKEX) and the Shanghai Clearing House. These memberships allow the Company to centrally clear derivative
instruments in line with cross-border regulatory requirements. Common to all of these memberships is the requirement for the Company to makedefault fund contributions. In the event of a default by another member, the Company could potentially be required to commit additional default
fund contributions which are unquantifiable in advance.
PARENT ENTITY GUARANTEESThe Company has issued letters of comfort and guarantees in respect of certain subsidiaries in the normal course of business. Under these letters andguarantees, the Company undertakes to ensure that those subsidiaries continue to meet their financial obligations, subject to certain conditions
including that the entity remains a controlled entity of the Company.
SALE OF GRINDLAYS BUSINESSESOn 31 July 2000, the Company completed the sale to Standard Chartered Bank (SCB) of ANZ Grindlays Bank Limited and the private banking businessof ANZ in the United Kingdom and Jersey, together with ANZ Grindlays (Jersey) Holdings Limited and its subsidiaries for USD1.3 billion in cash. The
Company provided warranties and certain indemnities relating to those businesses and, where it was anticipated that payments would be likely under
the warranties or indemnities, made provisions to cover the anticipated liabilities. The issue below has not adversely impacted the reported results. All
settlements and penalties to date have been covered within existing provisions.
In 1991 certain amounts were transferred from non-convertible Indian Rupee accounts maintained with Grindlays in India. These transactions may nothave complied with the provisions of the Foreign Exchange Regulation Act, 1973 (India). Grindlays, on its own initiative, brought these transactions to
the attention of the Reserve Bank of India. The Indian authorities served notices on Grindlays and certain of its officers in India and civil penalties havebeen imposed which are the subject of appeals. Criminal prosecutions are pending and will be defended. The amounts in issue are not material.

CONTINGENT ASSETSNATIONAL HOUSING BANKThe Company is pursuing recovery of the proceeds of certain disputed cheques which were credited to the account of a former Grindlays customer inthe early 1990s.
The disputed cheques were drawn on the National Housing Bank (NHB) in India. Proceedings between Grindlays and NHB concerning the proceeds ofthe cheques were resolved in early 2002.
Recovery is now being pursued from the estate of the Grindlays customer who received the cheque proceeds. Any amounts recovered are to beshared between the Company and NHB.

69

ANZ 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
30. COMPENSATION OF AUDITORS
2018
$’000

2017
$’000

6,674

6,318

Audit-related services

4,152

3,668

Non-audit services2100
10,926220
10,206

1,642

1,645

Audit-related services

545

523

Non-audit services2

2-

KPMG Australia
Audit or review of financial reports
1

Total3
Overseas related practices of KPMG Australia
Audit or review of financial reports
1

Total

2,189

2,168

Total compensation of auditors

13,115

12,3741.

Comprises prudential and regulatory services of $2.41 million (2017: $3.11 million), comfort letters $0.45 million (2017: $0.55 million) and other $1.84 million (2017: $0.53 million).
The nature of the non-audit services includes general market insights, controls related assessments and training.
3.
Inclusive of goods and services tax.
2.

The Company’s policy allows KPMG Australia or any of its related practices to provide assurance and other audit-related services that, while outside thescope of the statutory audit, are consistent with the role of external auditor. These include regulatory and prudential reviews requested by regulatorssuch as APRA. Any other services that are not audit or audit-related services are non-audit services. The Policy allows certain non-audit services to beprovided where the service would not contravene auditor independence requirements. KPMG Australia or any of its related practices may not provide
services that are perceived to be in conflict with the role of the external auditor or breach auditor independence. These include consulting advice andsubcontracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately be required toexpress an opinion on its own work.

31. EVENTS SINCE THE END OF THE FINANCIAL YEAR
There have been no significant events from 30 September 2018 to the date of signing this report.

70

NOTES TO THE FINANCIAL STATEMENTS

ANZ 2018 ANNUAL REPORTDIRECTORS’ AND LEAD AUDITOR’S INDEPENDENCE DECLARATIONDIRECTORS’ DECLARATIONThe Directors of Australia and New Zealand Banking Group Limited declare that:a) in the Directors’ opinion, the financial statements and notes of the Company:i) are prepared in accordance with Part 7.8 of the Corporations Act 2001, including that they comply with the Australian Accounting Standards andthe applicable regulations of the Corporations Regulations 2001; andii) give a true and fair view of the financial position of the Company as at 30 September 2018 and of its performance for the year ended on that
date; andb) The auditor’s report lodged with the financial statements is a true copy of the report on the financial statements.
Signed in accordance with a resolution of the Directors.

David M Gonski, AC
ChairmanShayne C Elliott
Director

30 October 2018

LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE
CORPORATIONS ACT 2001
To the Directors of Australia and New Zealand Banking Group Limited
I declare that, to the best of my knowledge and belief, in relation to the audit of Australia and New Zealand Banking Group Limited for the financial
year ended 30 September 2018 there have been:i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; andii) no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG

Alison Kitchen
Partner
Melbourne
30 October 2018

71

INDEPENDENT AUDITOR’S REPORTTO THE SHAREHOLDERS OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDREPORT ON THE AUDIT OF THE FINANCIAL REPORTOPINION
We have audited the Financial Report of Australia and New Zealand Banking Group Limited (the Company).
In our opinion, the accompanying Financial Report of the Company is in accordance with part 7.8 of the Corporations Act 2001, including: giving a true and fair view of the Company’s financial position as at 30 September 2018 and of its financial performance for the year ended on that
date; and
 complying with Australian Accounting Standards and the relevant Corporations Regulations 2001.
The Financial Report comprises the: statement of financial position as at 30 September 2018;
 income statement, statement of comprehensive income, statement of changes in equity, and statement of cash flows for the year then ended; notes 1 to 31 including a summary of significant accounting policies; and Directors’ Declaration.

BASIS FOR OPINION
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.
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 are independent of the Company in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional andEthical 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 fulfilled our other ethical responsibilities in accordance with the Code.

KEY AUDIT MATTERS
The Key Audit Matters we identified are:

 Provision for credit impairment and disclosures for the expected impact of AASB 9 Financial Instruments applicable on 1 October 2018;
 Valuation of Financial Instruments held at Fair Value; Provision for Customer Remediation; and IT Systems and Controls.
Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current
period.
These 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 notprovide a separate opinion on these matters.

72

NOTES TO THE FINANCIAL STATEMENTS

KEY AUDIT MATTERS (continued)
PROVISION FOR CREDIT IMPAIRMENT ($2,780M) AND DISCLOSURES FOR THE EXPECTED IMPACT OF AASB 9 FINANCIAL INSTRUMENTS
APPLICABLE ON 1 OCTOBER 2018
Refer to the critical accounting estimates and judgements and disclosures in relation to credit impairment provisioning in Note 12, and to the disclosures inrelation to accounting standards not yet early adopted for the expected impact of AASB 9 Financial Instruments in Note 1 to the Financial Report.
The Key Audit Matter
The provision for credit impairment is a Key Audit Matter as the Company has significant credit risk exposure to a large number of counterparties
across a wide range of lending and other products, industries and geographies. The value of loans and advances on the balance sheet is significant
and there is a high degree of complexity and judgement involved for the Company in estimating individual and collective credit impairment
provisions against these loans. These features resulted in significant audit effort to address the risks around loan recoverability and the determinationof related provisions.
In preparation for adoption of AASB 9 Financial Instruments on 1 October 2018, the Company disclosed the expected impact of adoption. This added
effort to our FY18 audit given the complexity of the accounting standard and its expected pervasive impact on the industry. We focused on the
Company’s disclosure of the expected impact of measuring expected credit losses (ECLs) on loans and advances and the significant judgement
exercised by the Company. The Company’s models to calculate ECLs are inherently complex and judgement is applied in determining the correct
construct of the models. There are also a number of key assumptions made by the Company in applying the accounting standard requirements to themodels, including the selection and input of forward-looking information.
How the matter was addressed in our audit
Our audit procedures for the provision for credit impairment and disclosures for the expected impact of AASB 9 Financial Instruments applicable on 1
October 2018 included:
Provisions against specific individual loans (individual provision)
 Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposures that are monitored individually). We tested
the approval of new lending facilities against the Company’s lending policies, the performance of annual loan assessments, and controls over themonitoring of counterparty credit quality. This included testing controls over the identification of exposures showing signs of stress, either due tointernal factors specific to the counterparty or external macroeconomic factors, and testing the timeliness of and the accuracy of counterparty risk
assessments and risk grading against the requirements of the Company’s lending policies and regulatory requirements;
 Performing credit assessments of a sample of wholesale loans managed by the Company’s specialist workout and recovery team assessed as
higher risk or impaired, and a sample of other loans, focusing on larger exposures assessed by the Company as showing signs of deterioration, orin areas of emerging risk (assessed against external market conditions). We challenged the Company’s risk grading of the loan, their assessment ofloan recoverability and the impact on the credit provision. To do this, we used the information on the Company’s loan file, discussed the case withthe loan officer and management, and performed our own assessment of recoverability. This involved using our understanding of relevant
industries and the macroeconomic environment, engaging KPMG specialists where required, and comparing assumptions of inputs used by theCompany in recoverability assessments to externally sourced evidence, such as commodity prices, publicly available audited financial statements,
and comparable external valuations of collateral held; and For retail loans (smaller customer exposures not monitored individually), testing controls over the systems which record lending arrears, company
exposures into delinquency buckets based on the number of days loans are overdue, and calculate individual provisions. We tested automatedcalculation and change management controls and evaluated the Company’s oversight of the portfolios, with a focus on controls over delinquency
statistics monitoring. We tested a sample of the level of provisions held against different loan products based on the delinquency profile andchallenged assumptions made in respect of expected recoveries, primarily from collateral held.
Provisions estimated across loan portfolios (collective provision)
 Testing the Company’s processes to validate the models used to calculate collective provisions, and evaluating the Company’s model
methodologies against established market practices and criteria in the accounting standards;
 Testing the key controls within IT systems used to calculate the collective provision, specifically those relating to data management and thecompleteness and accuracy of data transfer from underlying source systems to the collective provision models; Testing the accuracy of key inputs into models by checking a sample of year-end balances to the general ledger, and repayment history and risk
ratings to source systems;
 Challenging the key assumptions in the models such as emergence periods, probability of default and loss given default, for a sample of retail andwholesale portfolios. We compared modelled estimates against actual losses incurred by the Company; and Re-performing, for a sample of retail and wholesale portfolios and using a KPMG-constructed calculation tool, the calculation of collective
provisions, to determine the accuracy of model output.

73

ANZ 2018 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT (continued)
KEY AUDIT MATTERS (continued)
We also challenged key assumptions in the components of the Company’s collective provision balance held above modelled provision estimates.
This included:
 Evaluating inputs to the concentration risk and economic cycle provisions by comparing underlying portfolio characteristics to recent loss
experience, current market conditions and specific risks inherent in the Company’s loan portfolios; Assessing the requirement for other additional provisions by considering model or data deficiencies identified by the Company’s model validation
processes; and Assessing the completeness of additional provisions by checking the consistency of risks identified in the portfolios to their inclusion in the
Company’s assessment.
AASB 9 Financial Instruments
We assessed the Company’s disclosures for the expected impact of AASB 9 Financial Instruments which is applicable on 1 October 2018. Together with
KPMG credit risk and economics specialists, our procedures included:
 Assessing the Company’s significant accounting policies against the requirements of the accounting standard; Assessing the Company’s ECL modelling methodology and for a sample of models testing key credit modelling assumptions incorporated in the
ECL models against the requirements of the standard and underlying accounting records;
 Assessing forward-looking economic assumptions and the development of economic scenarios against external economic information, and theapplication into the ECL models ; Testing data reconciliation controls between the ECL models and source systems;
 Testing the accuracy of the modelled calculations by re-performing the ECL calculations on a sample basis; Assessing the disclosures in the financial report against the requirements of Australian accounting standards.
VALUATION OF FINANCIAL INSTRUMENTS HELD AT FAIR VALUE:- ASSETS HELD AT FAIR VALUE $158,696M- LIABILITIES HELD AT FAIR VALUE $68,195M
Refer to the critical accounting estimates, judgements and disclosures of fair values in Note 16 to the Financial Report.
The Key Audit Matter
Financial instruments held at fair value on the Company’s balance sheet include available for sale assets, trading securities, derivative assets andliabilities, investments backing policy liabilities, certain policy liabilities, certain debt securities, and other assets and liabilities designated as measured
at fair value through profit or loss. The instruments are mainly risk management products sold to customers and used by the Company to manage its
own interest rate and foreign exchange risk.
The valuation of financial instruments held at fair value is considered a Key Audit Matter as: Financial instruments held at fair value are significant (19% of assets and 9% of liabilities);
 The significant volume and range of products transacted, in a number of international locations, increases the risk of inconsistencies in transaction
management processes that could lead to inaccurate valuation;
 Determining the fair value of trading securities and derivatives involves a significant level of judgement by the Company, increasing the risk oferror, and adding complexity to our audit. The level of judgement increases where internal models, as opposed to quoted market prices, are used
to determine fair value of an instrument, or where inputs to the internal models, such as discount rates and measures of volatility, are notobservable; and The valuation of certain derivatives held by the Company is sensitive to inputs including funding rates, probabilities of default and loss given
default, and industry practice is evolving as to how the impact of both funding and credit risk is incorporated within the valuation of certain
derivative instruments. This increased our audit effort in this area and necessitated the involvement of valuation specialists.
How the matter was addressed in our audit
Our audit procedures for the valuation of financial instruments held at fair value included: Testing access rights and change management controls for key valuation systems;
 Testing interface controls, notably the completeness and accuracy of data transfers between transaction processing systems, key systems used togenerate valuations and any related valuation adjustments, and the Company’s market risk management and finance systems to identify
inconsistencies in transaction management and valuation processes across products and locations; Testing the governance and approval controls, such as management review and approval of the valuation models, and approval of new products
against policies and procedures;

74

NOTES TO THE FINANCIAL STATEMENTS

KEY AUDIT MATTERS (continued)
 Testing the front office management review and approval of the daily financial instrument trading profit and loss reconciliations prepared by theCompany’s independent product control function;
 Testing the management review and approval of model construction and validation, aimed at assessing the validity and robustness of underlying
valuation models; and Testing the Company’s data validation controls, such as those over key inputs in generating the fair value to market data where fair values were
determined by front office teams.
We carried out testing over the valuation of financial instruments with both observable and unobservable inputs. Our specific testing involved
valuation specialists and included:
 Re-performing the valuation of ‘level 1’ and ‘level 2’ available for sale assets and trading securities, which are primarily government, semigovernment and corporate debt securities, by comparing the observable inputs, including quoted prices, to independently sourced market data; Using independent models, re-calculating the valuation of a sample, across locations, of derivative assets and liabilities where the fair value wasdetermined using observable inputs. This included comparing a sample of observable inputs used in the Company’s derivative valuations to
independently-sourced market data, such as interest rates, foreign exchange rates and volatilities;
 Where the fair value of derivatives and other financial assets and liabilities were determined using unobservable inputs (‘level 3’ instruments),
challenging the Company’s valuation model by testing the key inputs used to comparable data in the market, including the use of proxy
instruments and available alternatives. We compared the Company’s valuation methodology to industry practice and the criteria in theaccounting standards; and Evaluating the appropriateness of the Company’s valuation methodology for derivative financial instruments, having regard to current andemerging derivative valuation practices across a range of peer institutions, and against the required criteria in the accounting standards. We tested
adjustments made to valuations, particularly funding and credit valuation adjustments on un-collateralised derivatives. In particular, for a sample
of individual counterparties, across locations, we tested key inputs to the credit valuation adjustment calculation, including the probability ofdefault, against observable market data. Where proxies were used, we assessed the proxy against available alternatives, across a number oflocations.
PROVISION FOR CUSTOMER REMEDIATION ($556M)
Refer to the critical accounting estimates, judgements and disclosures in Notes 20 and 29 to the Financial Report.
The Key Audit Matter
The Company has assessed the need to recognise provisions in relation to certain customer remediation activities arising from both internal andexternal investigations, and reviews.
The provision for customer remediation activities is a Key Audit Matter due to the judgements required by us in assessing the Company’s
determination of: The existence of a present legal or constructive obligation arising from a past event using the conditions of the event against the criteria in theaccounting standards;
 The number of investigations and the quantum of amounts being paid arising from the present obligation;
 Reliable estimates of the amounts which may be paid arising from investigations, including estimates of related costs;
 The potential for legal proceedings, further investigations, and reviews from its regulators leading to a wider range of estimation outcomes for us
to consider.
How the matter was addressed in our audit
Our audit procedures for customer remediation provisions included:
 Obtaining an understanding of the Company’s processes for identifying and assessing the potential impact of the investigations into customer
remediation activities;
 Enquiring with the Company regarding ongoing legal, regulatory and investigation into other remediation activities;
 Reading the minutes and other relevant documentation of the Company’s Board of Directors, Board Committees, various management
committees, and attending the Company’s Audit and Risk Committee meetings;
 Inspecting correspondence with relevant regulatory bodies and the Company’s key submissions to the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry; For a sample of individual customer remediation matters, assessing the basis for recognition of a provision and associated costs against therequirements of the accounting standards. We did this by understanding and challenging the provisioning methodologies and underlying
assumptions;75

ANZ 2018 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT (continued)
KEY AUDIT MATTERS (continued)
 Testing completeness by evaluating where exposures may have arisen based upon our knowledge and experience of broader industry matters,
the Company's documentation and the current regulatory environment. We also checked these features of these exposures against the criteria
defining a provision or a contingency in the accounting standards;
 Assessing the appropriateness of the Company’s conclusions against the requirements of Australian Accounting Standards where estimates wereunable to be reliably made for a provision to be recognised; Evaluating the related disclosures against the requirements of Australian Accounting Standards.
IT SYSTEMS AND CONTROLSThe Key Audit Matter
As a major Australian bank, the Company’s businesses utilise a large number of complex, interdependent Information Technology (IT) systems toprocess and record a high volume of transactions. Controls over access and changes to IT systems are critical to the recording of financial informationand the preparation of a financial report which provides a true and fair view of the Company’s financial position and performance. The IT systems andcontrols, as they impact the financial recording and reporting of transactions, is a key audit matter and our audit approach could significantly differ
depending on the effective operation of the Company’s IT controls. KPMG IT specialists were used throughout the engagement as a core part of ouraudit team.
How the matter was addressed in our audit
We tested the control environment for key IT applications (systems) used in processing significant transactions and recording balances in the generalledger. We also tested automated controls embedded within these systems. Our audit procedures included: Testing the governance controls used by the Company’s technology teams to monitor system integrity, by checking matters impacting theoperational integrity of core systems for escalation and action in accordance with the Company’s policies; Testing the access rights given to staff by checking them to approved records, and inspecting the reports over the granting and removal of accessrights. We also looked for evidence of escalation of breaches; Testing preventative controls designed to enforce segregation of duties between users within particular systems;
 Testing the operating effectiveness of automated controls, principally relating to the automated calculation of financial transactions. We tested
the inputs used within automated calculations to source data and also tested the accuracy of the calculation logic for a sample of transactions
within each identified control; and Testing the operating effectiveness of automated reconciliation controls, both between systems and intra-system. We checked a sample ofidentified breaks in reconciliations were recorded on exception reports, and subsequently investigated and cleared by the Company.

RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL REPORTThe Directors are responsible for:
 preparing a Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and part 7.8 of the Corporations Act
2001
 implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material
misstatement, whether due to fraud or error
 assessing the Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This
includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend toliquidate the Company or to cease operations, or have no realistic alternative but to do so.

76

NOTES TO THE FINANCIAL STATEMENTS

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL REPORTOur objective is: 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 Australian Auditing Standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They 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/ar2.pdf. This description forms part of our Auditor’s Report.

KPMG

Alison Kitchen
Partner
Melbourne
30 October 201877