AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDABN 11 005 357 522

THE COMPANY
2019 Financial Report
30 September 20191

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 Investment Securities
11 Net Loans and Advances
12 Allowance for Expected Credit Provision
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 Impact of Adoption of New Standards and Other Changes
32 Events Since the End of the Financial Year

8
12
15
17
19
20
21
21
22
28
30
31
39
40
41
54
59
60
61
63
65
67
68
69
70
71
72
77
79
82
83
86

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

87
87
88

2

FINANCIAL REPORTFINANCIAL REPORTINCOME STATEMENT
2019
$m

20181
$m

Interest income2

27,59927,020Interest expense(17,452)(16,574)

For the year ended 30 September

Note

Net interest income

2

10,147

10,446

Other operating income

2

4,553

8,765

Net income from insurance business

2

7

18

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)

(1)

14,706

19,228(7,784)(8,267)

6,922

10,961

(714)

(629)

6,208

10,332(1,761)(1,808)

4,447

8,524

1.

On adoption of AASB 15, the Company reclassified certain items previously netted which are now presented gross in operating income and operating expenses. Comparative information has been restatedaccordingly which increased total operating income and total operating expenses by $146 million.
2.
Includes interest income calculated using the effective interest method of $23,678 million on financial assets measured at amortised cost or fair value through other comprehensive income (2018: $22,752
million on financial assets measured at amortised cost and available-for-sale assets).
The notes appearing on pages 8 to 86 form an integral part of these financial statements.

3

ANZ 2019 ANNUAL REPORTFINANCIAL REPORT (continued)
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September

2019
$m

2018
$m

Profit for the year

4,447

8,524

Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Investment securities - equity securities at FVOCI1

45-

Other reserve movements

98

27

Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve

209

(154)

Other reserve movements

915

177

Income tax attributable to the above items
Other comprehensive income/(loss) after tax

(301)
966

(124)
(74)

Total comprehensive income for the year

5,413

8,450

1.

On adoption of AASB 9 on 1 October 2018, the classification and measurement of financial assets were revised. Available-for-sale classification used in comparative periods ceases to exist under AASB 9 anda new classification of investment securities was introduced. Refer to Note 1 and 31 for further details. Comparative information has not been restated.

The notes appearing on pages 8 to 86 form an integral part of the financial statements.

4

FINANCIAL REPORTBALANCE SHEETAs at 30 September

Note

2019
$m

2018
$m

7

77,94980,227

3,442

1,666

AssetsCash and cash equivalents1
Settlement balances owed to ANZCollateral paid

13,4619,184

8

34,21729,5199116,544

64,448Investment securities

10

73,355-

Available-for-sale assets2

10-64,728Net loans and advances3,4

11

484,655

475,851215

264

88,87490,170

Trading securities
Derivative financial instruments
2,3Regulatory deposits
Due from controlled entities

15,467

18,852

Investments in associates

18

18

Current tax assets

254

266

1,245

1,071

1,367

1,446

Shares in controlled entities

23

Deferred tax assets
Goodwill and other intangible assets

19

971

898

Other assets4

2,798

2,603

Total assets

914,832

841,211

Settlement balances owed by ANZ

9,342

9,867

Collateral received

7,005

6,002

Premises and equipment

Liabilities

Deposits and other borrowings

13524,241

511,992

Derivative financial instruments

9117,340

65,63889,68388,383

118

85

67

49

6,621

5,002

450

421

Due to controlled entities
Current tax liabilities
4

Deferred tax liabilities

4

Payables and other liabilities
Employee entitlements
3,4

20

1,905

1,270

14

104,846

98,626

Total liabilities

861,618

787,335

Net assets

53,21453,876

26,413

27,533

Other provisions
Debt issuances

Shareholders' equity
Ordinary share capital

21

Reserves

21

840

(56)

Retained earnings4

21

25,961

26,399Total shareholders' equity

21

53,21453,8761.

Includes settlement balances owed to ANZ that meet the definition of cash and cash equivalents.
On adoption of AASB 9 on 1 October 2018, the classification and measurement of financial assets were revised. Available-for-sale classification used in comparative periods ceases to exist under AASB 9 anda new classification of investment securities was introduced. Refer Note 1 and 31 for further details. Comparative information has not been restated.
3.
On adoption of AASB 9 on 1 October 2018, the Company increased the collectively assessed provisions by $727 million ($583 million in Net loans and advances, $1 million in Investment securities, and $143
million in Provisions). Comparative information has not been restated. Refer to Note 1 and 31 for further details.
4.
Comparative information has been restated for the adoption of AASB 15 and other reclassification adjustments to enhance comparability with current period presentation. Refer Note 1 and 31 for further
details2.

The notes appearing on pages 8 to 86 form an integral part of the financial statements.

5

ANZ 2019 ANNUAL REPORTFINANCIAL REPORT (continued)
CASH FLOW STATEMENT
For the year ended 30 September
Profit after income tax

2019
$m
4,447

20181
$m
8,524

Adjustments to reconcile to net cash provided by/(used in) operating activities:
Allowance for expected credit losses
Depreciation and amortisation
Net derivatives/foreign exchange adjustment
Impairment of investment in Wealth Australia
Impairment of investment in ANZ Share Investing(Gain)/Loss on sale from divestments
Other non-cash movements

714
738
5,004
147
(273)
31

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

Net(increase)/decrease in operating assets:
Collateral paid
Trading securities
Net loans and advances
Net intra-group loans and advances
Other assets(3,839)(6,393)(3,740)5,301(85)(1,083)
8,913(20,619)(1,796)(525)

Net increase/(decrease) in operating liabilities:
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Other liabilities(1,109)
(642)
619
955

7,432
1,604
341
516

Total adjustments(2,572)

2,548

Net cash provided by operating activities2

1,875

11,072(22,583)
18,440
800
185
(132)

(18,853)
15,282
1,786
989

(648)
(3,938)(301)(1,097)

20,450(18,938)(4,481)(112)(1,120)(4,201)

21,962(11,921)(6,264)80,227

13,43763,3993,986
77,9493,391
80,227

Cash flows from investing activities
Investment securities/available-for-sale assets3:
Purchases
Proceeds from sale or maturity
Proceeds from IOOF secured notes
Proceeds from divestments, net of cash disposed
Net movement in shares in controlled entities
Other assets
Net cash (used in) investing activities
Cash flows from financing activities
Debt issuances4:
Issue proceeds
Redemptions
Dividends paid5
On market purchase of treasury shares
Share buy-back
Net cash (used in)/provided by financing activities
Net (decrease)/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 year

(4,585)(114)(1,880)3,462

1.

As a result of restatements impacting prior period balance sheet items, certain items in the Cash Flow Statement have been restated accordingly. Refer Note 31 for further information
Net cash provided by operating activities includes income taxes paid of $1,875 million (2018: $2,648 million).
On adoption of AASB 9 on 1 October 2018, the classification and measurement of financial assets were revised. Available-for-sale classification used in comparative periods ceases to exist under AASB 9 and a
new classification of investment securities was introduced. Refer Note 1 and 31 for further details.
4.
Non-cash changes in debt issuances includes fair value hedging losses of $2,106 million (2018: $1,168 million gain) and foreign exchange losses of $3,290 million (2018: foreign exchange losses $4,487
million).
5.
Cash outflow for shares purchased to satisfy the dividend reinvestment plan are classified in Dividends paid.
The notes appearing on pages 8 to 86 form an integral part of the financial statements.
2.
3.

6

FINANCIAL REPORTFINANCIAL REPORT (continued)
STATEMENT OF CHANGES IN EQUITY

As at 1 October 2017

Ordinaryshare capital$m
29,416

Reserves$m

Retainedearnings$m

Total
shareholders’equity$m

36

22,396

51,848Impact on transition to AASB 15

-

-

22

22

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
-

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

(4,585)(4,585)(1,880)--(1,880)

(3)

-

-

(3)

-

3

21

24

27,533(56)

26,39953,876

Impact on transition to AASB 9

-

5

(483)

(478)

Profit for the year

-

-

4,447

4,447

Other comprehensive income for the year

-

894

72

966

Total comprehensive income for the year

-

894

4,519

5,413

-

-

(4,481)(4,481)(1,120)--(1,120)Group share buy-back1
Other equity movements:
Group employee share acquisition scheme
Other items
As at 30 September 2018

Transactions with equity holders in their capacity as equity holders:
Dividends paid2
Group share buy-back1
Other equity movements:
Group employee share acquisition scheme

-

-

-

-

Other items

-

(3)

7

4

26,413840

25,961

53,214As at 30 September 2019
1.

2.

The Company has completed a $3.0 billion on-market share buy-back of ANZ ordinary shares purchasing $1,120 million worth of shares in 2019 (2018: $1,880 million) resulting in 42.0 million shares being
cancelled in 2019 (2018: 66.7 million).
No new shares were issued under the Dividend Reinvestment Plan (DRP) for the 2019 interim dividend (nil shares for the 2018 final dividend; nil shares for the 2018 interim dividend) as the shares werepurchased on-market and provided directly to the shareholders participating in the DRP. On-market share purchases for the DRP in the September 2019 full year were $432 million (Sep 18 full year: $392
million).

The notes appearing on pages 8 to 86 form an integral part of the financial statements.

7

ANZ 2019 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
2019. 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 2019, 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 amount is significant in size (quantitative factor); the information 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); or the information relates to an aspect of the Company’s operations that is important to its future performance (qualitative factor) and;
 the information is required under legislative requirements of the Corporations Act 2001, the Banking Act 1959 (Cth) or by the Company’s principal
regulators, including the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).
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 Commercial 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 2019 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; financial instruments held for trading; financial assets and liabilities designated at fair value through profit and loss;
 available-for-sale financial assets (prior to 1 October 2018); and financial assets at fair value through other comprehensive income (applicable from 1 October 2018);
In accordance with AASB 119 Employee Benefits defined benefit obligations are measured using the Projected Unit Credit Method.

8

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 investment securities measured at fair value through othercomprehensive income (applicable from 1 October 2018) and non-monetary items classified as available-for-sale financial assets in the available-forsale revaluation reserve in equity (applicable prior to 1 October 2018).

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 ADOPTED IN THE PERIODAASB 9 FINANCIAL INSTRUMENTS (AASB 9)
The Company has applied AASB 9 effective from 1 October 2018 (with the exception of the ‘own credit’ requirements relating to financial liabilities
designated as measured at fair value, which were early adopted by the Company effective from 1 October 2013). In addition, the Company chose to
early adopt AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation (AASB 2017-6) effectivefrom 1 October 2018. AASB 9 provides an accounting policy choice, which the Company has taken in the current period, to continue to apply the
AASB 139 hedge accounting requirements until the International Accounting Standards Board’s ongoing project on macro hedge accounting iscompleted.
AASB 9 and AASB 2017-6 stipulate new requirements for the impairment of financial assets, classification and measurement of financial assets andfinancial liabilities and general hedge accounting. Details of the key requirements are outlined within the Financial Assets and Financial Liabilities
sections in following notes, and a reconciliation of the transitional impact of adopting the standard at 1 October 2018 is set out in Note 31.
AASB 15 REVENUE FROM CONTRACTS WITH CUSTOMERS (AASB 15)
The Company adopted AASB 15 from 1 October 2018 which resulted in changes in accounting policies. The standard requires identification of distinct
performance obligations within a contract, and allocation of the transaction price of the contract to those performance obligations. Revenue is thenrecognised 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. In accordance with the transitional provisions of AASB 15, the Company has
adopted the full retrospective transition approach. Under this approach, the cumulative effect of initially applying the standard has been recognised
as an adjustment to opening retained earnings as at 1 October 2017 and comparative information for the 2018 reporting period has been restated.
The adoption of AASB 15 resulted in the following changes in accounting policy: Recognition of trail commission revenue: trail commission revenue previously recognised over time is now recognised at the time the Company
initially distributes the underlying product to the customer where it is highly probable the revenue will not need to be reversed in future periods.
This policy change resulted in an increase to the opening balances of Other assets $32 million, Deferred tax liabilities $10 million and Retained
earnings $22 million as at 1 October 2017 to recognise revenue that qualifies for upfront recognition under AASB 15 but was not previously
recognised under AASB 118 Revenue (AASB 118). The change did not impact net profit or earnings per share in the comparative periods.
 Presentation: Certain credit card loyalty costs and other costs will be presented as operating expenses where the Company has assessed that it isacting as principal (rather than an agent). Previously these costs were presented as a reduction of other operating income. In addition, certain
incentives received from card scheme providers related to card marketing activities will be presented as operating income where the Company
has assessed that it is acting as principal (rather than an agent). Previously these incentives were presented as a reduction of operating expenses.
The presentation of these costs under AASB 15 increased other operating income and operating expenses by $146 million in 2018. The changes
did not impact net profit or earnings per share in the comparative periods.

9ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS (continued)
1. ABOUT THE FINANCIAL STATEMENTS (continued)
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 2019, and have not been applied by the Company in preparing these financial statements. Further details of theseare set out below.
GENERAL HEDGE ACCOUNTINGAASB 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 currently applies the hedge
accounting requirements of AASB 139.
AASB 16 LEASES (AASB 16)
AASB 16 is effective for the Company from 1 October 2019 and replaces the previous standard AASB 117 Leases (AASB 117). AASB 16 primarily impacts
the Company’s property and technology leases which were previously classified as operating leases. Under AASB 117, operating leases were notrecognised on balance sheet and rent payments were expensed over the lease term.
Under AASB 16, lessees must recognise all leases (except for lease of low value assets and short term leases) on balance sheet under a single
accounting model. Accordingly, the Company will recognise its right to use an underlying leased asset over the lease term as a right-of-use (ROU)
asset, and its obligation to make lease payments as a lease liability. In the income statement, the Company will recognise depreciation expense on the
ROU asset and interest expense on the lease liability. As a result, lease expenses will be higher in the early periods of a lease and lower in the later
periods of the lease compared to the previous standard where expenses were constant over the lease term. Cumulative expenses over the life of alease will not change.
The Company will apply the modified retrospective transition approach whereby initial lease liabilities are recognised based on the present value ofremaining lease payments as of the transition date. The initial ROU asset recognised for certain large commercial and retail leases will be measured as
if AASB 16 had always been applied to the leases. For all other leases, the initial ROU asset will be measured as equal to the initial lease liability. Basedon this transition approach, the Company expects to recognise an increase in liabilities of $2.2 billion and an increase in assets of $2.1 billion. This is
expected to result in a reduction to opening retained earnings of $66 million and an increase in deferred tax assets of $37 million as of 1 October 2019.
Comparative information from prior periods will not be restated.
The implementation of AASB 16 requires management to make certain key judgements including the determination of lease terms, discount rates
and identifying arrangements that contain a lease. These estimates may be refined as the Company finalises its implementation of the standard in thefirst half of the 2020 financial year.
AASB 17 INSURANCE CONTRACTS (AASB 17)
The final version of AASB 17 was issued in July 2017 and is not effective for the Company until 1 October 2021. It will replace AASB 4 Insurance
Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. AASB 17 establishes principles for the recognition,measurement, presentation and disclosure of insurance contracts.
The measurement, presentation and disclosure requirements under AASB 17 are significantly different from current accounting standards. Although
the overall profit recognised in respect of insurance contracts will not change, it is expected that the timing of profit recognition will change.
The impact of AASB 17 is not expected to have a material impact on the Company.
AASB INTERPRETATION 23 UNCERTAINTY OVER INCOME TAX TREATMENTS (INTERPRETATION 23)
In July 2017 the AASB issued Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation clarifies application of recognition andmeasurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments.
Interpretation 23 will apply to the Company from 1 October 2019, and is not expected to have a material impact on the Company.
REVISED CONCEPTUAL FRAMEWORKIn June 2019 the AASB issued a revised Conceptual Framework for Financial Reporting. The new Framework includes updated definitions and criteria
for the recognition and derecognition of assets and liabilities. Additionally it introduces new concepts on measurement, including factors to consider
when selecting a measurement basis. The revised Conceptual Framework will apply to the Company from 1 October 2020 and is not expected to havea material impact on the Company.

10ANZ 2019 ANNUAL REPORT

1. ABOUT THE FINANCIAL STATEMENTS (continued)
ACCOUNTING STANDARDS NOT EARLY ADOPTED (continued)
INTEREST RATE BENCHMARK REFORM
Interbank offered rates (IBORs), such as LIBOR, are a key reference rate for derivatives, loans and securities for global financial markets. In response toconcerns about the transparency and liquidity of IBOR rates, regulators in a number of jurisdictions across the globe are well advanced in developing
benchmark rates to phase out and replace IBORs, these projects are collectively known as ‘IBOR Reform’. The International Accounting Standards
Board (IASB) is also considering the financial reporting implications of IBOR reform which is expected to impact elements of financial instrument
accounting, including hedge accounting, loan modifications, fair value methodologies and disclosures.
The IASB project is split into two phases: Phase 1 deals with pre-replacement issues (issues affecting financial reporting in the period before thereplacement of IBOR’s); and Phase 2 deals with replacement issues (issues affecting financial reporting when existing IBOR’s are replaced).
In September 2019, the IASB issued a final standard, Interest Rate Benchmark Reform—Amendments to IFRS 9, IAS 39 and IFRS 7 which focuses on‘pre-rate replacement issues’ and provides exceptions to specific hedge accounting requirements under IAS 39 and IFRS 9 so that entities will be able
to apply those hedge accounting requirements under an assumption that the interest rate benchmark is not altered as a result of the interest ratebenchmark reform. In October 2019, AASB adopted these amendments in AASB 2019-3 Amendments to Australian Accounting Standards – Interest
Rate Benchmark Reform.
Although the Company anticipates the new standard, once adopted, will provide certain relief in relation to hedge accounting requirements, for 30
September 2019 reporting purposes, it has considered the existing portfolio of hedge accounted relationships in light of:the significant uncertainty surrounding the method and timing of transition away from IBORs; andongoing application and reliance in capital markets on IBOR’s for financial instrument pricing.

As result of the above factors, the Company has concluded that continuation of hedge accounting relationships for potentially impacted hedge
relationship remains appropriate.
The Company is considering the new standard which is effective on 1 October 2020 but may be adopted earlier.

11

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME
2019
$m

2018
$m1

Net interest income
Interest income by type of financial asset
Financial assets designated at fair value through other comprehensive income
Investment securities/Available-for-sale assets
Financial assets at amortised cost
Trading securities
Interest income - externalInterest income - controlled entities
Interest income

1,329
22,349627
24,305
3,294
27,5991,232
21,520881
23,633
3,387
27,020Interest 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 - externalInterest expense - controlled entities
Interest expense
Major bank levy
Net interest income(13,191)(104)(81)(13,376)(3,713)(17,089)(363)
10,147(12,148)(239)(69)(12,456)(3,763)(16,219)(355)
10,446

546
2,241
76
25
2,888
905
3,793
(999)
2,794

597
2,189
57
(80)
2,763
1,279
4,042
(904)
3,138

896
873
69
(147)
28
40
1,759
4,553
7
(1)
14,706

1,178
4,773
246
(597)
28
(1)
5,627
8,765
18
(1)
19,228Other operating incomei) Fee and commission income
Lending fees
Non-lending fees
Commissions
Funds management income
Fee and commission income - external
Fee and commission income - controlled entities
Fee and commission income
Fee and commission expense
Net fee and commission incomeii) Other income
Net foreign exchange earnings and other financial instruments income2
Dividends received from controlled entities3
Gain/(Loss) on divestments
Write down of investment in Wealth Australia (AWA)3
Write down of ANZ Share Investing
Dividend income on equity securities
Other
Other income4
Other operating income
Net income from insurance business
Share of associates' (loss) / profit
Operating income5
1.

On adoption of AASB 15, the Company reclassified certain items previously netted which are now presented gross in operating income and operating expenses. Comparative information has been restatedaccordingly which increased total operating income by $146 million.
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. The impact has been presented net in the income statements.
4.
Total other income includes external dividend income from Bank of Tianjin of $27 million (2018: $27 million).
5.
Includes customer remediation of $226 million for 2019 (2018: $310 million).
2.

12

NOTES TO THE FINANCIAL STATEMENTS

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, assets measured at fairvalue through other comprehensive income (applicable from 1 October 2018), available-for-sale assets (applicable prior to 1 October 2018)or designated at fair value, through profit or loss in net interest income. For assets held at amortised cost, the Company uses the effective
interest rate method to calculate amortised cost. The effective interest rate is the rate that discounts the stream of estimated future cash
receipts or payments over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amountof the financial asset or liability. For assets subject to prepayment, we determine their expected life on the basis of historical behaviour ofthe 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’) applies a rate of 0.06% to certain liabilities of the Company. The Company has
determined that the levy represents a finance cost for the Company and $363 million (2018: $355 million) is presented in interest expensein the Income Statement.
OTHER OPERATING INCOME
Fee and Commission Revenue
We recognise fee and commission revenue arising from contracts with customers: (a) over time when the performance obligation issatisfied across more than one reporting period or (b) at a point in time when the performance obligation is satisfied immediately or issatisfied within one reporting period.
 Lending fees exclude fees treated as part of the effective yield calculation of interest income. Lending fees include certain guarantee andcommitment fees where the loan or guarantee is not likely to be drawn upon and other fees charged for providing customers a distinct
good or service that are recognised separately from the underlying lending product (including annual package fees that provide benefits
on other ANZ products).
 Non lending fees includes fees associated with deposit and credit card accounts, interchange fees and fees charged for specificcustomer transactions such as international money transfers. Where the Company provides multiple goods or services to a customer
under the same contract, the Company allocates the transaction price of the contract to those performance obligations based on therelative stand-alone selling price of each performance obligation. Revenue is recognised as each performance obligation is satisfied.
 Commissions represent fees from third parties where ANZ acts as an agent by arranging a third party (e.g. an insurance provider) to
provide goods and services to a customer. In such cases, ANZ is not primarily responsible for providing the underlying good or service tothe customer. If the Company collects funds on behalf of a third party when acting as an agent, the Company only recognises the net
commission it retains as revenue. When the commission is variable based on factors outside the control of the Company (e.g. a trail
commission), revenue is only recognised if it is highly probable that a significant reversal of the variable amount will not be required infuture periods.
 Funds management income represent fees earned from customers for providing financial advice and fees for asset management
services and advice provided to investment funds. Revenue is recognised either at the point the financial advice is provided or over theperiod in which the asset management services are delivered. Performance fees associated with funds management activities are only
recognised when it becomes highly probable the performance hurdle will be achieved.
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 foreign exchange
risk on funding instruments not designated as accounting hedges;

13

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME (continued)

RECOGNITION AND MEASUREMENT the ineffective portions of fair value hedges, cash flow hedges and net investment hedges;
 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.
 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 (applicable prior to 1 October 2018) when an available-for-saleasset is sold; amounts released from the FVOCI reserve (applicable from 1 October 2018) when a debt instrument classified as measured at FVOCI issold; the gain or loss on derecognition of financial assets or liabilities measured at amortised cost.
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.
SHARE OF ASSOCIATES’ PROFITThe equity method is applied to accounting for associates. Under the equity method the Company’s share of the after tax results ofassociates is included in the Income Statement and the Statement of Comprehensive Income.
NET INCOME FROM INSURANCE BUSINESSWe recognise: premiums received (net of reinsurance premiums paid) are recognised based on an assessment of the likely pattern in which risk will
emerge over the term of the policies written. This assessment is undertaken periodically and updated in accordance with the latest
pattern of risk emergence; and claims incurred are recognised net of reinsurance, on an accruals basis once the liability to the policy owner has been establishedunder the terms of the contract and through actuarial assumptions of future claims.

14

NOTES TO THE FINANCIAL STATEMENTS

3. OPERATING EXPENSES
2019
$m

2018
$m 1

3,141

3,233

252

258

2

161

163

Personnel

3,554

3,654

Rent

383

395

Other

268

264

Premises651

659

Depreciation and amortisation3

639

922

Licences and outsourced services

477

457

Other

185

204

1,301

1,583

56

210

Advertising and public relations

188

160

2

Professional fees

482

497

Freight, stationery, postage and communication

173

179

Royal Commission legal costs

15

55

Other

1,364

1,270

Other expenses

2,222

2,161

7,784

8,267

Personnel
Salaries and related costs2
Superannuation costs
Other

Premises

Technology (excluding personnel)

Technology (excluding personnel)
Restructuring
Other

2

2

Operating expenses
1.

On adoption of AASB 15, the Company reclassified certain items previously netted which are now presented gross in operating income and operating expenses. Comparative information has been restatedaccordingly which increased total operating expense by $146 million for 2018.
Includes customer remediation expenses of $380 million for 2019 (2018: $255million).
3.
2018 includes an accelerated amortisation expense of $240 million.
2.

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.

15

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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.

16

NOTES TO THE FINANCIAL STATEMENTS

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:
2019
$m

2018
$m

Profit before income tax

6,208

10,332

Prima facie income tax expense at 30%

1,862

3,100

-

(84)

Tax effect of permanent differences:
Sale of Shanghai Rural Commercial Bank (SRCB)Tax provisions no longer required

(8)

(39)

Non deductible interest on debt instruments

81

67

Overseas tax rate differential

(40)

(6)

Rebatable and non-assessable dividends(262)(1,606)

Provision for foreign tax on dividend repatriation

34

28

Wealth Australia divestment adjustments

74

354

Other

39

13

Subtotal

1,780

1,827

Income tax over provided in previous years

(19)

(19)

Income tax expense

1,761

1,808

Current tax expense

1,901

2,037

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

(19)

(19)

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

(121)

(210)

1,761

1,808

Australia

1,583

1,695

Overseas

178

113

Income tax expense

1,761

1,808

Effective tax rate

28.4%

17.5%

Income tax expense

17

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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 $6 million (2018: $nil). Unrecognised deferred tax
liabilities related to additional potential foreign tax costs (assuming all retained earnings in offshore branches are repatriated) total $13 million (2018:$10 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.

18

NOTES TO THE FINANCIAL STATEMENTS

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$m

80 cents
80 cents

2,350
2,317

Financial Year 20182017 final dividend paid
2018 interim dividend paid
Bonus option plan adjustment(82)

Dividends paid during the year ended 30 September 2018

4,585

Cash

91.5%

4,193

Dividend reinvestment plan

8.5%

392
4,585

Dividends paid during the year ended 30 September 2018
Financial Year 20192018 final dividend paid

80 cents

2,295

2019 interim dividend paid

80 cents

2,267

Bonus option plan adjustment(81)

Dividends paid during the year ended 30 September 2019

4,481

Cash

90.4%

Dividend reinvestment plan

9.6%

4,049
432

Dividends paid during the year ended 30 September 2019

Dividends announced and to be paid after year-end
2019 final dividend (partially franked at 70% for Australian tax, New Zealand
imputation credit NZD 9 cents per share)

4,481

Payment dateAmountper share

Total
dividend$m

18 December 201980 cents

2,268

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 2019 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

2019
$m

2018
$m

Australian franking credits available at 30% tax rate

AUD

35

97

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

NZD

4,068

3,868

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.

19

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
5. DIVIDENDS (continued)
The proposed final 2019 dividend will utilise the entire balance of $35 million franking credits available at 30 September 2019. Instalment tax
payments on account of the 2020 financial year which will be made after 30 September 2019 will generate sufficient franking credits to enable thefinal 2019 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 2019 Group Annual Report located athttps://shareholder.anz.com/annual-report-shareholder-review.

FINANCIAL ASSETS
Outlined below is a description of how we classify and measure financial assets relevant to the subsequent note disclosures.

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 solely payments of principal and interest only and which are held
in a business model whose objective is to collect their cash flows;
 FVOCI: Financial assets with contractual cash flows that comprise solely payments of principal and interest only and which are held in abusiness model whose objective is to collect their cash flows or to sell the assets; and FVTPL: Any other financial assets not falling into the categories above are measured at FVTPL.
Fair Value Option for Financial Assets
A financial asset may be irrevocably designated FVTPL on initial recognition when the designation eliminates or significantly reduces an accounting
mismatch that would otherwise arise.

20

NOTES TO THE FINANCIAL STATEMENTS

7. CASH AND CASH EQUIVALENTS
2019
$m

2018
$m

934

912

Securities purchased under agreements to resell in less than 3 months

24,93927,631

Balances with central banks

24,21832,009Settlement balances owed to ANZ within 3 months

27,85819,675

Cash and cash equivalents

77,94980,227

2019
$m

2018
$m

Coins, notes and cash at bank

8. TRADING SECURITIES

Government securities

22,993

21,545

Corporate and financial institution securities

4,995

4,302

Equity and other securities

6,229

3,672

Trading securities

34,21729,519RECOGNITION 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.

21

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS
Assets2019$m

Liabilities
2019$m

Assets2018$m

Liabilities
2018$m

113,369(114,413)

62,813(63,177)

3,175(2,927)

1,635(2,461)

116,544(117,340)

64,448(65,638)

Fair Value
Derivative financial instruments - held for trading
Derivative financial instruments - designated in hedging relationships
Derivative financial instruments

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 risks in the Company that are not in a designated hedge accounting relationship (balance
sheet management).
 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 or sell an asset in the future for a price agreed on thetransaction 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 exchange a 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.

22

NOTES TO THE FINANCIAL STATEMENTS

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

Assets2019$m

Liabilities
2019$m

Assets2018$m

Liabilities
2018
$m

80

(84)

6

(7)

Interest rate contracts
Forward rate agreements
Futures contracts

32

(99)

48

(31)

Swap agreements

82,258(81,074)

32,873(33,510)

Options purchased

1,451

-

780

-

-

(2,317)-(1,408)83,821(83,574)

33,707(34,956)

Spot and forward contracts

13,723(13,599)

14,057(13,221)

Swap agreements

13,591(15,151)

12,276(11,609)

Options purchased

394

-

461

-

-

(501)

-

(649)

Total

27,708(29,251)

26,794(25,479)

Commodity contracts

1,806(1,555)2,258(2,684)

Options sold
Total
Foreign exchange contracts

Options sold

Credit default swaps
Structured credit derivatives purchased

16

-

22

-

Other credit derivatives purchased

4

(10)

8

(29)

20

(10)

30

(29)

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

-

(19)

-

(26)

14

(4)

24

(3)

14

(23)

24

(29)

34

(33)

54

(58)

113,369(114,413)

62,813(63,177)23

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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, a firm
commitment or a highly probable
forecast transaction caused byinterest rate, foreign currency andother price movements.

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

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.

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.

As outlined in Note 1, ANZ has continued to apply the AASB 139 hedge accounting requirements until the International Accounting Standards Board’s
ongoing project on macro hedge accounting is completed. However, new hedge disclosures are required for 2019 and onwards under AASB 7
Financial Instruments: Disclosures (AASB 7) which are presented below. The presentation of derivatives information for 2018 has not been amended.
The fair value of derivative financial instruments designated in hedging relationships are:

Fair value hedges
Foreign exchange swap agreements
Foreign exchange spot and forward contracts
Interest rate swap agreements
Interest rate futures contracts
Cash flow hedges
Interest rate swap agreements
Foreign exchange swap agreements
Foreign exchange spot and forward contracts
Net investment hedges
Foreign exchange spot and forward contracts
Derivative financial instruments - designated in
hedging relationships

Nominal amount$m

Assets2019$m

Liabilities
2019$m

Assets2018$m

Liabilities
2018
$m

21
581
84,195
3,139

1
1,752
-

(9)
(2,479)
(27)

1
1
1,211
47

(2,251)(1)

49,409
2,934
159

1,347
75
-

(311)
(91)
(1)

330
44
1

(148)
(52)
-

540

-

(9)

-

(9)

140,978

3,175(2,927)

1,635(2,461)24

NOTES TO THE FINANCIAL STATEMENTS

9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The maturity profile of the nominal amounts of our hedging instruments held at 30 September 2019 is:Less than 3

3 to 12

1 to 5

After

Average ratemonths$mmonths
$m

years
$m

5 years
$m

Total
$m

Interest Rate
HKD/AUD FX Rate

1.97%
5.38

3,195
602

14,463-

48,727-

20,949-87,334602

Interest Rate
AUD/USD FX Rate
USD/EUR FX Rate

2.10%
0.72
0.91

596

7,429

39,6301,754

49,409

40

120

1,652

1,281

3,093

TWD/AUD FX Rate

21.41

111

429

-

-

540

Nominal Amount
Fair value hedges
Interest rate
Foreign exchange
Cash flow hedges
Interest rate
Foreign exchange1
Net investment hedges
Foreign exchange
1.

Hedges of foreign exchange risk cover multiple currency pairs. The table reflects the larger currency pairs only.

The impact of ineffectiveness from our designated hedge relationships by type of hedge relationship and type of risk being hedged are:

Change invalue ofhedging
instrument$m

2019
Fair value hedges1
Interest rate
Foreign exchange
Cash flow hedges1
Interest rate
Foreign exchange
Net investment hedges1
Foreign exchange
1.

IneffectivenessChange inHedge
value ofineffectivenesshedgedrecognised in
item
profit and loss$m$m

Amount reclassified
from the cash flow
hedge reserve or
FCTR to profit and
loss
$m

158
(36)

(155)
36

3
-

-

850
20

(840)
(20)

10
-

1
2

(35)

35

-

-

All hedging instruments are held within Derivative Financial Instruments.

Hedge ineffectiveness recognised is classified within Other operating income. Reclassification adjustments to the Statement of Comprehensive
Income are recognised within Net interest income.
Hedged items in relation to the Company’s fair value hedges at 30 September 2019 are as follows:
Accumulated fair value
hedge adjustments on
the hedged item

Carrying amount

Fixed rate loans and advances

Balance sheet
presentation
Hedged risk
Net loans and advances Interest rate

Fixed rate debt issuance

Debt issuances

AssetsLiabilities

AssetsLiabilities

$m

$m

$m

$m

1,242

-

12

-

Interest rate-

(49,928)-(1,412)

Fixed rate investment securities (FVOCI)1 Investment securities

Interest rate

41,362

-

1,662

-

Equity securities at FVOCI1

Foreign exchange

581

-

52

-

43,185(49,928)

1,726(1,412)Total
1.

Investment securities

The carrying amount of debt and equity instruments at fair value through other comprehensive income does not include the fair value hedge adjustment as the hedge assets are measured at fair value. The
accounting for the hedge relationship results in transfer of the hedge adjustment out of other comprehensive income into the Income Statement.

The cumulative amount of fair value hedge adjustments relating to ceased hedge relationships remaining on the Balance Sheet is $5 million.

25

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Hedged items in relation to the Company’s cash flow and net investment hedges for 30 September 2019 are as follows:

Hedged risk

Cash flow
hedge reserve
Continuing Discontinued
hedgeshedges$m$m

Foreign currencytranslation reserve
Continuing Discontinued
hedgeshedges$m$m

Cash Flow hedges
Floating rate loans and advancesInterest rate

1,252

33

-

-

Floating rate customer deposits

Interest rate

(274)

(24)

-

-

Foreign currency debt issuance

Foreign exchange

14

-

-

-

Foreign currency investment securities

Foreign exchange

6

-

-

-

Highly probable forecast transactions

Foreign exchange

3

-

-

-

Foreign exchange

-

-

36

(149)

Net investment hedges
Foreign operations

The table below details the reconciliation of the cash flow hedge reserve by risk type:Interest Rate$m

Foreign Currency
$m

Total
$m

Balance at 1 October 2018

106

-

106

Fair value gains

840

20

860

Transferred to income statement

1

2

3

Income taxes and others

(257)

(5)

(262)

Balance at 30 September 2019

690

17

707

Hedges from net investments in a foreign operation resulted in a $35 million decrease in the foreign currency translation reserve during the year.
There were no reclassifications from FCTR to the income statement during the year.

2018 Disclosure
The impact recognised in profit or loss arising from derivative financial instruments designated in hedge accounting relationships, are as follows:
Hedge
accounting type
Gain/(loss) recognised in other operating income
Hedged item
Hedging instrument
Ineffective portion of hedged instrument

Fair value
Fair value
Cash flow

2018
$m
934
(949)
13

26

NOTES TO THE FINANCIAL STATEMENTS

9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

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 credit valuation adjustment (CVA) to reflect the counterparty risk and/or event of default; 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 24 for profit or loss treatment
depending on the hedge type.
Sources of hedge ineffectiveness may arise from basis risk and differences in discounting between thehedged items and the hedging instruments. The hedging instruments are discounted using OvernightIndex Swaps discount curves which are not applied to the hedged items.

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.

27

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
10. INVESTMENT SECURITIES
2019
$m

2018
$m

Investment securities measured at fair value through other comprehensive income- debt securities

67,400-- equity securities

1,168

-

4,787

-

Available-for-sale assets- debt securities-

63,644- equity securities

-

1,084

Investment securities measured at amortised cost
- debt securities 1

Total
1.

64,72873,355

Includes allowance for expected credit losses of $1 million.

2019 Investment securities

Less than 3months$m

3 to 12months 1 to 5 years After 5 years No maturity
$m
$m
$m
$m

Total
$m

Government securities

6,582

13,04922,632

11,368-53,631

Corporate and financial institution securities

1,024

1,883

13,385351-

16,643

Other securities

-

-

183

1,730

-

1,913

Equity securities

-

-

-

-

1,168

1,168

7,606

14,932

36,20013,4491,168

73,355Government securities

5,725

6,729

24,455

11,569-48,478

Corporate and financial institution securities

Total
2018 Available-for-sale assets

850

2,221

10,364--

13,435

Other securities

-

-

159

1,572

-

1,731

Equity securities

-

-

-

-

1,084

1,084

6,575

8,950

34,97813,141

1,084

64,728Total

During the year, the Company recognised a net gain (before tax) in Other operating income from the recycling of gains previously deferred in equityof $26 million (2018: $70 million) in respect of investment securities (applicable from 1 October 2018) and available-for-sale assets (prior to 1 October
2018).
The carrying value of equity securities classified as FVOCI/AFS equity securities is $1,168 million (2018: $1,084 million). This includes the Company’s$1,106 million (2018: $1,025 million) investment in the Bank of Tianjin (BoT).

28

NOTES TO THE FINANCIAL STATEMENTS

10. INVESTMENT SECURITIES (continuing)

RECOGNITION AND MEASUREMENT
Policy applicable from 1 October 2018
Investment securities are those financial assets in security form (i.e. transferable debt or equity instruments) that are not held for trading
purposes. By way of exception, bills of exchange (a form of security/transferable instrument) which are used to facilitate the Bank’s
customer lending activities are classified as Loans and advances (rather than Investment Securities) to better reflect the substance of thearrangement.
Non-traded equity investments may be designated at FVOCI on an instrument by instrument basis. If this election is made, gains or losses
are not reclassified from other comprehensive income to profit or loss on disposal of the investment. However, gains or losses may bereclassified within equity.
Assets disclosed as investment securities are subject to the general classification and measurement policy for Financial Assets outlined at
the commencement of the Company’s financial asset disclosures on page 20. Additionally, expected credit losses associated with
“Investment securities - debt securities at amortised cost” and “Investment securities - debt securities at fair value through comprehensive
income” are recognised and measured in accordance with the accounting policy outlined in Note 12. For “Investment securities – debt
securities at fair value through other comprehensive income” the allowance for ECL is recognised in the FVOCI reserve in equity with acorresponding charge to profit or loss.
Policy applicable prior to 1 October 2018
Available for sale (AFS) assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principally fortrading purposes. They include both equity and debt securities. AFS assets are initially recognised at fair value plus transaction costs and arerevalued at least bi-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, foreignexchange 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 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.

29

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
11. NET LOANS AND ADVANCES
2019
$m

2018
$m

Overdrafts

6,265

6,047

Credit cards

7,788

8,379

6,159

6,861

Term loans – housing

265,810

273,908

Term loans – non-housing

199,659

180,965

Commercial bills

Other

1,454

1,494

Subtotal

487,135

477,654

(144)

(165)

Unearned income

585

710

Gross loans and advances (including assets classified as held for sale)

487,576

478,199

Allowance for expected credit losses (refer to Note 12)1,2(2,921)(2,348)Net loans and advances

484,655

475,851

Within one year

83,84876,744After more than one year

400,807399,107

Net loans and advances

484,655

475,851

483,858

475,850797

1484,655

475,851

Capitalised brokerage/mortgage origination fees

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.

2.

On adoption of AASB 9 on 1 October 2018, the Company increased the collectively assessed provisions by $583 million. Comparative information has not been restated. Refer to Note 1 and 31 forfurther details.
$432 million of individually and collectively assessed provisions for credit impairment attributable to off-balance sheet credit related commitments at 30 September 2018 were reclassified from Net loans
and advances at amortised cost to Other provisions to enhance comparability with current period presentation.

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.
From 1 October 2018, assets disclosed as net loans and advances are subject to the general classification and measurement policy for
Financial Assets outlined at the commencement of the Company’s Financial Asset disclosures on page 20. Additionally, expected credit
losses associated with loans and advances at amortised cost are recognized and measured in accordance with the accounting policy
outlined in Note 12.

30

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSESALLOWANCE FOR EXPECTED CREDIT LOSSESAs described in Notes 1 and 31, the Company adopted AASB 9 effective from 1 October 2018 which resulted in the application of an expected credit
loss (ECL) model for measuring impairment of financial assets and amendments to the presentation of credit impairment information for the current
year. Comparative information has not been restated.
The following tables present the movement in the allowance for ECL (including allowance for ECL reclassified as held for sale) for the year.

Net loans and advances - at amortised cost
Allowance for ECL is included in Net loans and advances.

As at 1 October 2018
Transfer between stages
New and increased provisions (net of releases)
Write-backs
Bad debts written off (excluding recoveries)
Foreign currency translation and other movements1
As at 30 September 20191.

Stage 3
Stage 1
$m
729
139
(136)

Stage 2
$m
1,199
(270)
246

Collectively
assessed
$m
308
(90)
143

Individuallyassessed
$m
695
221
995
(331)
(953)
6
633

Total
$m
2,931
1,248
(331)
(953)
26
2,921

14
746

6
1,181

361

Stage 3
Collectively Individuallyassessedassessed
$M
$M
-

Total
$M
1
1

Includes the impact of discount unwind on individually assessed allowance for ECL.

The movement in expected credit losses is consistent with the movement in corresponding gross balances.

Investment securities - debt securities at amortised cost
Allowance for ECL is included in Investment securities.

As at 1 October 2018
Transfer between stages
New and increased provisions (net of releases)
Write-backs
Bad debts written off (excluding recoveries)
Foreign currency translation and other movements
As at 30 September 2019

Stage 1$M
1
1

Stage 2
$M-

Investment securities - debt securities at FVOCIAllowance for ECL does not change the carrying amount which remains at fair value. Instead, the allowance for ECL is recognised in Other
Comprehensive Income (OCI), with a corresponding charge to profit or loss.
Stage 3As at 1 October 2018
Transfer between stages
New and increased provisions (net of releases)
Write-backs
Bad debts written off (excluding recoveries)
Foreign currency translation and other movements
As at 30 September 2019

Stage 1$m
4
1
5

Stage 2$m-

Collectively
assessed$m-

Individuallyassessed
$m
-

Total
$m
4
1
5

31

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)
ALLOWANCE FOR EXPECTED CREDIT LOSSES
Off-balance sheet commitments - undrawn and contingent facilities
Allowance for ECL is included in Provisions.
Stage 3As at 1 October 2018
Transfer between stages
New and increased provisions (net of releases)
Write-backs
Bad debts written off (excluding recoveries)
Foreign currency translation and other movements
As at 30 September 2019

Stage 1
$m
408
21
(33)
9
405

Collectively
assessed
$m
8
1
5
14

Stage 2
$m
141
(23)
7
1
126

Individuallyassessed
$m
18
1
(1)
(6)
12

Total
$m
575
(21)
(1)
4
557

2018 Provision for credit impairment disclosures under AASB 139
The below disclosure does not reflect the adoption of AASB 9 and are prepared under the requirements of the previous AASB 139.

Net loans andadvances

Off-balance sheet
credit related
commitments

2018
$m

2018
$m

2018
$m

Balance at start of year

887

16

903

New and increased provisions

1,175

12

1,187

Provision for credit impairment

Total

Individual provision

Write-backs

(337)

-

(337)

Bad debts written off (excluding recoveries)(1,031)-(1,031)Other1
Total individual provision

1

(10)

(9)

695

18

713

1,625

434

2,059

14

(27)

(13)

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

14

7

21

Total collective provision

1,653

414

2,067

Total provision for credit impairment

2,348

432

2,780

Other

1.

2.

Other individual provision includes the impact of the sale completion of the Asia Retail and Wealth business divestment in 2018. It includes an adjustment for exchange rate fluctuations and the impact of
discount unwind on individual provisions.
Other collective provision includes the impact of the sale completion of the Asia Retail and Wealth business divestment, and an adjustment for exchange rate fluctuations.

32

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)
CREDIT IMPAIRMENT CHARGE - INCOME STATEMENT

Credit impairment charge/(release) analysis under AASB 9
2019$m
New and increased provisions (net of releases)1- Collectively assessed

11- Individually assessed

1,217

Write-backs(332)

Recoveries of amounts previously written-off(182)

Total credit impairment charge

714

1.

Includes the impact of transfers between collectively assessed and individually assessed.

The contractual amount outstanding on financial assets that were written off during the period ended 30 September 2019 and that are still subject toenforcement activity is $141 million.

2018 Credit impairment charge/(release) analysis under AASB 139
The below disclosures do not reflect the adoption of AASB 9 and is prepared under the requirements of the previous AASB 139.

2018$m
New and increased individual provisions1

1,187

Write-backs(337)

Recoveries of amounts previously written-off(208)

Individually assessed credit impairment charge

642Collectively assessed credit impairment charge/(release)(13)

Credit impairment charge

629

33

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENT
Policy applicable from 1 October 2018
EXPECTED CREDIT LOSS IMPAIRMENT MODEL
The measurement of expected credit losses reflects an unbiased, probability weighted prediction which evaluates a range of scenarios andtakes into account the time value of money, past events, current conditions and forecasts of future economic conditions.
Expected credit losses are either measured over 12 months or the expected lifetime of the financial asset, depending on credit
deterioration since origination, according to the following three-stage approach: Stage 1: At the origination of a financial asset, and where there has not been a significant increase in credit risk (SICR) since origination, an
allowance equivalent to 12 months ECL is recognised reflecting the expected credit losses resulting from default events that are possible
within the next 12 months from the reporting date. For instruments with a remaining maturity of less than 12 months, expected credit
losses are estimated based on default events that are possible over the remaining time to maturity.
 Stage 2: Where there has been a significant increase in credit risk since origination, an allowance equivalent to lifetime ECL is recognised
reflecting expected credit losses resulting from all possible default events over the expected life of a financial instrument. If credit risk
were to improve in a subsequent period such that the increase in credit risk since origination is no longer considered significant, theexposure returns to a Stage 1 classification and a 12 month ECL applies.
 Stage 3: Where there is objective evidence of impairment, an allowance equivalent to lifetime ECL is recognised.
Expected credit losses are estimated on a collective basis for exposures in Stage 1 and Stage 2, and on either a collective or individual basis
when transferred to Stage 3.
MEASUREMENT OF EXPECTED CREDIT LOSSECL is calculated as the product of the following credit risk factors at a facility level, discounted to incorporate the time value of money:
 Probability of default (PD) - the estimate of the likelihood that a borrower will default over a given period;
 Exposure at default (EAD) - the expected balance sheet exposure at default taking into account repayments of principal and interest,
expected additional drawdowns and accrued interest; and Loss given default (LGD) - the expected loss in the event of the borrower defaulting, expressed as a percentage of the facility's EAD,
taking into account direct and indirect recovery costs.
These credit risk factors are adjusted for current and forward looking information through the use of macro-economic variables.
EXPECTED LIFE
When estimating ECL for exposures in Stage 2 and 3, the Company considers the expected lifetime over which it is exposed to credit risk.
For non-retail portfolios, the Company uses the maximum contractual period as the expected lifetime for non-revolving credit facilities. For
non-retail revolving credit facilities, such as corporate lines of credit, the expected life reflects the Company’s contractual right to withdraw
a facility as part of a contractually agreed annual review, after taking into account the applicable notice period.
For retail portfolios, the expected lifetime is determined using behavioural term, taking into account expected prepayment behaviour andsubstantial modifications.
DEFINITION OF DEFAULT, CREDIT IMPAIRED AND WRITE-OFFS
The definition of default used in measuring expected credit losses is aligned to the definition used for internal credit risk management
purposes across all portfolios. This definition is also in line with the regulatory definition of default. Default occurs when there are indicatorsthat a debtor is unlikely to fully satisfy contractual credit obligations to the Company, or the exposure is 90 days past due.
Financial assets, including those that are well secured, are considered credit impaired for financial reporting purposes when they default.
When there is no realistic probability of recovery, loans are written off against the related impairment allowance on completion of theCompany’s internal processes and when all reasonably expected recoveries have been collected. In subsequent periods, any recoveries ofamounts previously written-off are credited to credit impairment charge in the income statement.

34

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENTMODIFIED FINANCIAL ASSETS
If the terms of a financial asset are modified or an existing financial asset is replaced with a new one for either credit or commercial reasons,an assessment is made to determine if the changes to the terms of the existing financial asset are considered substantial. This assessment
considers both changes in cash flows arising from the modified terms as well as changes in the overall instrument risk profile; for example,
changes in the principal (credit limit), term, or type of underlying collateral. Where a modification is considered non-substantial, the existing
financial asset is not derecognised and its date of origination continues to be used to determine SICR. Where a modification is considered
substantial, the existing financial asset is derecognised and a new financial asset is recognised at its fair value on the modification date, which
also becomes the date of origination used to determine SICR for this new asset.
SIGNIFICANT INCREASE IN CREDIT RISK (SICR)
Stage 2 assets are those that have experienced a significant increase in credit risk (SICR) since origination. In determining what constitutes a
SICR, the Company considers both qualitative and quantitative information:i.

Internal credit rating grade
For the majority of portfolios, the primary indicator of a SICR is a significant deterioration in the internal credit rating grade of a facility sinceorigination and is measured by application of thresholds.
For non-retail portfolios, a SICR is determined by comparing the Customer Credit Rating (CCR) applicable to a facility at reporting date to
the CCR at origination of that facility. A CCR is assigned to each borrower which reflects the probability of default of the borrower andincorporates both borrower and non-borrower specific information, including forward looking information. CCRs are subject to review atleast annually or more frequently when an event occurs which could affect the credit risk of the customer.
For retail portfolios, a SICR is determined by comparing each facility’s scenario weighted lifetime probability of default at the reporting
date to the scenario weighted lifetime probability of default at origination. The scenario weighted lifetime probability of default may
increase significantly if: there has been a deterioration in the economic outlook, or an increase in economic uncertainty; or there has been a deterioration in the customer’s overall credit position, or ability to manage their credit obligations.

ii. Backstop criteria
The Company uses 30 days past due arrears as a backstop criteria for both non-retail and retail portfolios. For retail portfolios only, facilities
are required to demonstrate three to six months of good payment behaviour prior to being allocated back to Stage 1.
FORWARD LOOKING INFORMATION
Forward-looking information is incorporated into both our assessment of whether a financial asset has experienced a significant increase incredit risk since its initial recognition and in our estimate of ECL. In applying forward looking information for estimating ECL, the Company
considers four probability-weighted forecast economic scenarios as follows:i.

Base case scenario
The base case scenario is ANZ’s view of the most likely future macro-economic conditions. It reflects management’s assumptions used forstrategic planning and budgeting, and also informs ANZ’s Internal Capital Adequacy Assessment Process (ICAAP) which is the process
ANZ applies in strategic and capital planning over a 3 year time horizon;

ii. Upside and iii. Downside scenarios
The upside and downside scenarios are fixed by reference to average economic cycle conditions (that is, they are not based on theeconomic conditions prevailing at balance date) and are based on a combination of more optimistic (in the case of the upside) andpessimistic (in the case of the downside) economic events and uncertainty over long term horizons; andiv. Severe downside scenario
The severe downside scenario is fixed by reference to average economic cycle conditions and accounts for the potentially severe impactof less likely extremely adverse economic conditions. It reflects macro-economic conditions of a downturn economic event with aprobability of occurrence once every 25 years.
The four scenarios are described in terms of macro-economic variables used in the PD, LGD and EAD models (collectively the ECL models)depending on the portfolio and country of the borrower. Examples of the variables include unemployment rates, GDP growth rates, house
price indices, commercial property price indices and consumer price indices.

35

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENT
Probability weighting of each scenario is determined by management considering the risks and uncertainties surrounding the base casescenario, as well as specific portfolio considerations where required.
The Group Asset and Liability Committee (GALCO) is responsible for reviewing and approving the base case forecast scenario and the Credit
and Market Risk Committee (CMRC) approves the probability weights applied to each scenario.
Where applicable, temporary adjustments may be made to account for situations where known or expected risks have not been adequately
addressed in the modelling process. CMRC is responsible for approving such adjustments.
ECL Sensitivity
The table below illustrates the impact on the Company’s ECL allowance under scenarios where a 100% weighting is applied to both upsideand downside scenarios with all other modelling assumptions remaining constant.
Total ECL$m

Impact$m

100% upside scenario

1,956

(878)

100% downside scenario

4,501

1,668

Policy applicable prior to 1 October 2018
The Company recognises two types of impairment provisions for its loans and advances: Individual provisions for significant assets that are assessed to be impaired; and Collective provisions for portfolios of similar assets that are assessed collectively for impairment.
The accounting treatment for each of them is detailed below:
IndividuallyCollectively

Assessment

If any impaired loans and advances exceed specified
thresholds and an impairment event has been
identified, then we assess the need for a provisionindividually.

To allow for any small value loans and advances where
losses may have been incurred but not yet identified,and individually significant loans and advances that
we do not assess as impaired, we assess themcollectively in pools of assets with similar credit risk
characteristics.

Impairment

Loans and advances are assessed as impaired if wehave objective evidence that we may not recoverprincipal or interest payments (that is, a loss event has
been incurred).

We estimate the provision on the basis of historicalloss experience for assets with similar credit risk
characteristics to others in the respective collective
pool. We adjust the historical loss experience based on
current observable data – such as: changing
economic conditions, the impact of the inherent riskof large concentrated losses within the portfolio andan assessment of the economic cycle.

Measurement

We measure impairment loss as the difference between the asset’s carrying amount and estimated future cash
flows discounted to their present value at the asset’s original effective interest rate. We record the result as an
expense in profit or loss in the period we identify the impairment and recognise a corresponding reduction in the
carrying amount of loans and advances through an offsetting provision.

Uncollectableamounts

If a loan or advance is uncollectable (whether partially or in full), then we write off the balance (and also any related
provision for credit impairment).
We write off unsecured retail facilities at the earlier of the facility becoming 180 days past due, or the customer’sbankruptcy 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.

Recoveries

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 individual andcollective basis.

36

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

KEY JUDGEMENTS AND ESTIMATES
Applicable from 1 October 2018
When estimating the allowance for expected credit losses for loans and advances, we used management’s judgement in respect of thematters outlined below.
Key Judgements
Determining whena significant
increase in credit
risk has occurred

In the measurement of ECL, judgement is involved in setting the rules to determine whether there has
been a significant increase in credit risk (SICR) since initial recognition of a loan, resulting in the financial
asset moving from ‘stage 1’ to ‘stage 2’. This is a key area of judgement as transition from stage 1 to stage
2 increases the ECL calculation from an allowance based on the probability of default in the next 12months, to an allowance for lifetime expected credit losses. Subsequent decreases in credit risk
combined with transition from stage 2 to stage 1 may similarly result in significant changes in the ECL
allowance.
The setting of precise trigger points requires judgement which may have a material impact upon thesize of the ECL allowance. The Company monitors the effectiveness of SICR criteria on an ongoing basis.

Measuring both12-month andlifetime credit
lossesThe PD, LGD, and EAD credit risk parameters used in determining ECL are point-in-time measuresreflecting the relevant forward looking information determined by management. Judgement is involved
in determining which forward-looking information variables are relevant for particular lending portfolios
and for determining each portfolio’s point-in-time sensitivity.
In addition, judgement is required where behavioural characteristics are applied in estimating the
lifetime of a facility to be used in measuring ECL. All other things being equal, an increase in the
expected behavioural life will increase the amount of ECL.

Forecasting
forward-looking
scenarios

Our forecast of forward looking information variables is established from a “base case” or most likely
scenario that is used internally by management for planning and forecasting purposes.
The expected outcomes of key economic drivers for the base case scenario as at 30 September, 2019 are
as follows:
Australia
The unemployment rate is expected to remain essentially flat and GDP growth to improve modestly
over the forecast period, with residential property values expected to improve after a period of
decline. Commercial property prices are expected to decline slightly through the forecast period.
Consumer price index growth is expected to rise from current levels.
Rest of world
GDP growth is forecast to taper lower in the near term due to uncertainty in the global outlook. Inflationis also expected to remain soft over the forecast period to 2020.

Probability
weighting of eachscenario

Probability weighting of each scenario is determined by management considering the risks anduncertainties surrounding the base case scenario, as well as specific portfolio considerations whererequired.

Management
temporaryadjustments

Management temporary adjustments to the ECL allowance are adjustments we use in circumstanceswhere we judge that our existing inputs, assumptions and model techniques do not capture all the risk
factors relevant to our lending portfolios. Emerging local or global macroeconomic, microeconomic or
political events, and natural disasters that are not incorporated into our current parameters, risk ratings,
or forward-looking information are examples of such circumstances.
The use of management temporary adjustments may impact the amount of ECL recognised.

37

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

KEY JUDGEMENTS AND ESTIMATES
Applicable prior to 1 October 2018
When we measured impairment of loans and advances, we used management’s judgement of the extent of losses at reporting date.

Key Judgements

IndividuallyCollectively

 Estimated future cash flows

 Estimated future cash flows

 Business prospects for the customer

 Historical loss experience of assets withsimilar risk characteristics

 Realisable value of any collateral Group’s position relative to other claimants
 Reliability of customer information

 Impact of large concentrated losses
inherent in the portfolio

 Assessment of the economic cycle
 Likely cost and duration of recovering loans
We regularly reviewed our key judgements and updated them to reflect actual loss experience.

FINANCIAL LIABILITIESOutlined below is a description of how we classify and measure financial liabilities relevant to the subsequent note disclosures.

CLASSIFICATION AND MEASUREMENT
Financial liabilities
Financial liabilities are measured at amortised cost, or fair value through profit or loss when they are held for trading. Additionally, financial
liabilities can be designated at FVTPL where:the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise;a group of financial liabilities are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk
management strategy; or

the financial liability contains one or more embedded derivatives unless:a) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract, orb) the embedded derivative is closely related to the host financial liability.

Where financial liabilities are designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included inother comprehensive income, except where doing so would create or enlarge an accounting mismatch in profit or loss. This section of AASB 9
was early adopted by the Company on 1 October 2013.

38

NOTES TO THE FINANCIAL STATEMENTS

13. DEPOSITS AND OTHER BORROWINGS
The table below shows our total deposits and other borrowings by type:
2019
$m

2018
$m

Certificates of deposit

34,952

41,867

Term deposits

173,641

164,182

On demand and short term deposits

214,002205,647

Deposits not bearing interest

15,765

14,562

Deposits from banks and securities sold under repurchase agreements

76,46870,992

Commercial paper

9,413

14,742524,241

511,992

522,125

504,182

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

2,116

7,810

524,241

511,992524,220

511,93721

55524,241

511,992

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.

39

ANZ 2019 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 Company. In thewinding up of the Company, the subordinated debt will be repaid by the Company, only after the repayment of claims of depositors, other creditors
and the senior debt holders.
2019
$m

2018
$m

Senior debt

71,767

68,951

Covered bonds

16,826

14,221

Total unsubordinated debt

88,593

83,172- Additional Tier 1 capital

7,838

7,461

- Tier 2 capital

8,415

7,993

Subordinated debt

Total subordinated debt

16,253

15,454

Total debt issued

104,846

98,626

For further information relating to debt issuances, refer to the ANZ 2019 Group Annual Report (Note 15 Debt Issuances) available athttps://shareholder.anz.com/annual-report-shareholder-review.

40

NOTES TO THE FINANCIAL STATEMENTS

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 key material risks.
We disclose details of all key material 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 2019 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:
Key material 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

The risk of financial loss resulting from:

Maximum exposure to credit risk

 a counterparty failing to fulfil its obligations; orCredit quality

 a decrease in credit quality of a counterparty resulting in afinancial loss.

Concentrations of credit riskCollateral management

Market riskMarket risk overview, management and control responsibilities

The risk to the Company’s earnings arising from:

Measurement of market riskTraded and non-traded market risk

Equity securities designated at FVOCI (from 1 October 2018) andavailable-for-sale (prior to 1 October 2018)

Foreign currency risk – structural exposuresLiquidity risk overview, management and control responsibilities

Key areas of measurement for liquidity risk

Liquidity risk outcomes

Residual contractual maturity analysis of the Company’s liabilities

Credit Risk incorporates the risks associated with us lending tocustomers who could be impacted by climate change or by changes
to laws, regulations, or other policies adopted by governments or
regulatory authorities, including carbon pricing and climate change
adaptation or mitigation policies.

 changes in any interest rates, foreign exchange rates, credit
spreads, volatility and correlations; or from fluctuations in bond, commodity or equity prices.
Liquidity and funding risk
The risk that the Company is unable to meet payment obligations as
they fall due, including: repaying depositors or maturing wholesale debt; or the Group having insufficient capacity to fund increases in assets.

41

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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 2019 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 Company’s Internal Audit Function reports directly to the Board Audit Committee (BAC). Internal Audit provides:
 an independent evaluation of the Company’s RMF annually that seeks to ensure compliance with, and the effectiveness of, the risk management
framework; facilitation of a comprehensive review every three years that seeks to ensure that the appropriateness, effectiveness and adequacy of the risk
management framework; and recommendations to improve the framework and/or work practices to strengthen the effectiveness of day to day operations.

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.

42

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
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 balance sheet exposure at default taking into account repayments of principal andinterest, expected additional drawdowns and accrued interest 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:
Credit Quality
Description

Internal CCR

ANZ Customer Requirements

Moody’s
RatingStandard & Poor’s
RatingStrong

CCR 0+ to 4-

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

CCR 5+ to 6-

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

Ba1 – B1

BB+ – B+Weak

CCR 7 to 8=

Demonstrated some operational and financial instability, withvariability and uncertainty in profitability and liquidity projected
to continue over the short and possibly medium term.

B2 - Caa

B - CCC

Defaulted

CCR 8- to 10

When doubt arises as to the collectability of a credit facility, thefinancial instrument (or “the facility”) is classified as defaulted.

N/A

N/A

The Company has adopted AASB 9 effective from 1 October 2018 which has resulted in changes to the classification and measurement of financial
assets, including the impairment of financial assets. The presentation of credit risk information for 2019 has been amended with no restatement ofcomparatives. Refer Notes 1 and 31 for further details on key requirements and impacts of the changes due to the adoption of AASB 9.
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:

43

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)

On-balance sheet positions
Net loans and advances
Other financial assets:
Cash and cash equivalents
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Investment securities2- debt securities at amortised costs- debt securities at FVOCI- equity securities at FVOCI
Available-for-sale assets2
Regulatory deposits
Due from controlled entities
Other financial assets3
Total other financial assets
Subtotal
Off-balance sheet positions
Undrawn and contingent facilities4
Total

Maximum exposure
to credit risk

Excluded1

Reported
2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

484,655

475,851--484,655

475,851

77,9493,442
13,461
34,217
116,544

80,227
1,666
9,184
29,51964,448

934
3,442
5,922
-

912
1,666
3,486
-

77,015
13,461
28,295116,544

79,315
9,184
26,03364,448

4,787
67,4001,168
215
88,8742,167
410,224
894,879

64,728264
90,1702,177
342,383
818,234

1,168
11,466
11,466

1,084
7,148
7,148

4,787
67,400215
88,874
2,167
398,758
883,41363,644264
90,1702,177
335,235
811,086

211,796
1,106,675

203,051
1,021,285

11,466

7,148

211,796
1,095,209

203,051
1,014,137

1.

Bank notes and coins and cash at bank within Cash and cash equivalents;Trade dated assets within Settlement balances owed to ANZ; Equity securities and precious metal exposures within Trading
securities;Equity securities within Investment securities (classified as Available-for-sale assets in 2018) were excluded as they do not have credit risk exposure.
On adoption of AASB 9 on 1 October 2018, the classification and measurement of financial assets were revised. Available-for-sale classification used in comparative periods ceases to exist under AASB 9 anda new classification of investment securities was introduced. Refer to Note 1 for further details. Comparative information has not been restated.
3.
Other financial assets mainly comprise accrued interest and acceptances.
4.
Undrawn facilities and contingent liabilities includes guarantees, letters of credit and performance related contingencies, net of collectively assessed allowance for expected credit losses.
2.

CREDIT QUALITY
An analysis of the Company’s credit risk exposure is presented in the following tables based on the Company’s internal rating by stage without taking
account of the effects of any collateral or other credit enhancements:
Net loans and advances
2019

StrongSatisfactory
Weak
Defaulted
Gross loans and advances at amortised cost
Allowance for ECL
Net loans and advances at amortised cost
Coverage ratio
Loans and advances at fair value through profit or loss
Unearned income
Capitalised brokerage/mortgage origination fees
Net carrying amountStage 1$m
330,531
95,2866,462
432,279(746)
431,533
0.17%

Stage 2$m
16,72023,717
7,770
48,207(1,181)47,026
2.45%

Stage 3
Collectively Individuallyassessedassessed
$m
$m
4,248
1,604
4,248
1,604
(361)
(633)
3,887
971
8.50%
39.46%

Total$m
347,251
119,003
14,232
5,852
486,338(2,921)
483,417
0.60%
797
(144)
585
484,655

44

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
Investment securities - debt securities at amortised cost
2019

StrongSatisfactory

Stage 3
Collectively Individuallyassessedassessed$m$m

Stage 1$m

Stage 2
$m

Total
$m

4,714

-

-

-

4,714

74

-

-

-

74

Weak

-

-

-

-

-

Defaulted

-

-

-

-

-

4,788

-

-

-

4,788

(1)

-

-

-

(1)

Net investment securities - debt securities at amortised cost

4,787

-

-

-

4,787

Coverage ratio

0.02%

-

-

-

0.02%

Stage 3
Collectively Individuallyassessedassessed
$m
$m

Total
$m

Gross investment securities - debt securities at amortised cost
Allowance for ECL

Investment securities - debt securities at FVOCI
2019

Stage 1$m

Stage 2$m

67,400---67,400Satisfactory

-

-

-

-

-

Weak

-

-

-

-

-

Defaulted

-

-

-

-

-

67,400---67,400

(5)

-

-

-

(5)

0.01%

0.00%

0.00%

0.00%

0.01%

StrongInvestment securities - debt securities at FVOCIAllowance for ECL recognised in other comprehensive income
Coverage ratio

45

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)

Other financial assets
2019$mStrong317,051

Satisfactory

9,138

Weak

382

Defaulted-

Total carrying amount

326,571

Off-balance sheet commitments - undrawn and contingent facilities
2019
Stage 3
Collectively Individuallyassessedassessed$m$m

Stage 1$m

Stage 2$m

Strong139,051

1,816

-

-

140,867

Satisfactory

19,546

2,923

-

-

22,469

271

793

-

-

1,064

-

-

96

38

134

158,868

5,532

96

38

164,534

(405)

(126)

(14)

(12)

(557)

158,463

5,406

82

26

163,977

0.25%

2.28%

14.58%

31.58%

Weak
Defaulted
Gross undrawn and contingent facilities subject to ECLAllowance for ECL included in Provisions
Net undrawn and contingent facilities subject to ECL
Coverage ratio

Total
$m

0.34%

Undrawn and contingent facilities not subject to ECL1

47,819Net undrawn and contingent facilities

211,796

1.

Commitments that can be unconditionally cancelled at any time without notice.

46

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
2018 Credit Risk Disclosures
The below disclosures do not reflect the adoption of AASB 9 and have been prepared under the requirements of the previous AASB 139.
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

Other financial
assetsOff-balance sheet
credit related
commitments

Total

2018
$m

2018
$m

2018
$m

2018
$m

350,031333,962

173,688

857,681

Satisfactory risk

98,222

1,185

27,996

127,403

Sub-standard but not past due or impaired

13,32188

1,337

14,746Sub-total

461,574

335,235

203,021

999,830≥ 1 < 30 days

7,454

-

-

7,454

≥ 30 < 60 days

2,062

-

-

2,062

≥ 60 < 90 days

1,133

-

-

1,133

Neither past due nor impaired
Strong credit profile

Past due but not impaired≥ 90 days

2,693

-

-

2,693

Sub-total

13,342--

13,342

1,382

-

-

1,382

248

-

-

248

Restructured and impaired
Impaired loans
1

Restructured items

-

-

48

48

Gross impaired financial assets

Non-performing commitments and contingencies

1,630

-

48

1,678

Individual provisions

(695)

-

(18)

(713)

Sub-total restructured and net impaired

935

-

30

965

475,851

335,235

203,051

1,014,137

Total
1.

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.

In 2019, the Company implemented a more market responsive collateral valuation methodology for the home loan portfolio in Australia which
increased the number of home loans being classified as impaired rather than past due. Comparative information has not been restated for the change
in methodology. Additionally, refinement to underlying processes and associated data resulted in the transfer of loans from past due and substandard categories into impaired assets. Comparative information has been restated with a transfer from past due of $99 million and from substandard of $27 million.

47

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

Agriculture, forestry, fishing and mining

20,163

19,658860

538

16,117

15,317

37,14035,513Business services

7,063

7,158

112

82

6,075

5,989

13,25013,229Construction

4,859

5,101

33

32

5,140

5,379

10,032

10,512

Electricity, gas and water supply

5,293

4,916

1,543

534

5,226

4,508

12,062

9,958

Entertainment, leisure and tourism

11,17010,652

652

305

2,877

3,118

14,69914,075

Financial, investment and insurance

52,33343,245

321,569

262,203

39,10735,326

413,009340,774

Government and official institutions

2,002

748

62,88663,225

1,637

2,043

66,52566,016

Manufacturing

19,33816,926

2,196

1,815

36,31933,29857,85352,039Personal lending

274,357

288,127

1,072

1,070

42,24642,982

317,675

332,179

Property services

34,19633,576

1,009

484

15,126

13,58450,33147,644Retail trade

10,771

10,959

131

105

5,737

5,458

16,63916,522

Transport and storage

11,955

10,204

966

459

6,844

6,606

19,765

17,269Wholesale trade

12,665

11,946

2,784

2,644

16,347

17,72531,79632,315

Other

20,97014,438

2,946

1,739

13,555

12,15037,471

28,327Gross total

487,135

477,654398,759

335,235

212,353

203,483

1,098,247

1,016,372

Provision for credit impairment(2,921)(2,348)

(1)

-

(557)

(432)

(3,479)(2,780)Subtotal

484,214475,306

398,758

335,235

211,796203,051

1,094,768

1,013,592

Unearned income

(144)

(165)

-

-

-

-

(144)

(165)

Capitalised brokerage/mortgage
origination fees

585

710

-

-

-

-

585

710

Maximum exposure to credit risk

484,655

475,851

398,758

335,235

211,796203,051

1,095,209

1,014,137

48

NOTES TO THE FINANCIAL STATEMENTS

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 cash flows. Where there is sufficient collateral, an expected credit loss is not recognised. This is largely the case for certain lending productsthat are secured by corresponding investment for which the margin loans are utilised and for reverse repurchase agreements. For some products, thecollateral provided by customers is fundamental to the product’s structuring, so it is not strictly the secondary source of repayment - for example,
lending secured by trade receivables is typically repaid by the collection of those receivables. During the period there was no change in our collateralpolicies.
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,
Investment securities (from1 October 2018), Availablefor-sale assets (prior to 1
October 2018), 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
facilities.

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

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

Net loans and advances

484,655

475,851

374,041

372,996

110,614102,855

Other financial assets

398,758

335,235

29,99830,166

368,760

305,069

Off-balance sheet positions

211,796203,051

33,98434,072

177,812

168,979

1,095,209

1,014,137

438,023437,234

657,186

576,903

Total

49

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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 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.

50

NOTES TO THE FINANCIAL STATEMENTS

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 201930 September 2018

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

As at
$m

High foryear$m

Low foryear$mAveragefor year$m

Foreign exchange

1.3

9.0

1.2

3.6

2.9

9.8

1.7

4.0

Interest rate

2.8

9.5

2.8

5.3

8.2

14.9

4.8

7.4

Credit

4.8

4.8

1.1

2.8

2.0

6.2

2.0

3.7

Commodity

1.5

4.0

1.1

1.8

3.5

4.4

1.1

2.9

Traded value at risk 99% confidence

-

-

-

-

-

-

-

-

Diversification benefit1

(4.9)

n/a

n/a

(5.9)

(9.1)

n/a

n/a

(7.8)

Total VaR

5.5

13.1

5.3

7.6

7.5

16.9

5.8

10.2

Equity1.

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 201930 September 2018

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

As at
$m

High foryear$m

Low foryear$mAveragefor year
$m

22.7

22.7

16.4

18.9

21.9

32.7

20.3

23.6

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

0.0

0.1

0.0

0.0

0.0

0.2

0.0

0.0

Asia Pacific, Europe & America

17.6

17.6

12.7

16.1

15.5

15.5

12.5

14.0

Diversification benefit1(10.7)

n/an/a(11.0)(11.8)

n/a

n/a

(9.6)

Total VaR

29.6

29.6

21.2

24.0

25.6

35.2

22.3

28.0

1.

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.

51

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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.

2019

20181

As at period end

1.01%

0.98%

Maximum exposure

1.01%

1.77%

Minimum exposure

0.02%

0.23%

Average exposure (in absolute terms)

0.42%

0.77%

Impact of 1% rate shock1.

Prior period numbers have been restated to reflect IRR model enhancements

EQUITY SECURITIES DESIGNATED AT FVOCI (FROM 1 OCTOBER 2018) AND AVAILABLE-FOR-SALE (PRIOR TO 1 OCTOBER 2018)
Our investment securities (from 1 October 2018) and available-for-sale assets (prior to 1 October 2018) 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 capturedby the Company’s VaR processes for traded and non-traded market 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
Investment securities.
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.

LIQUIDITY AND FUNDING RISKLIQUIDITY RISK AND FUNDING POSITION
For information related to the liquidity risk and funding position refer to the ANZ 2019 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 $89.7 billion (2018: $88.4 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 months” 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 2019 Group Annual Report (Note 16 Financial Risk Management), available athttps://shareholder.anz.com/annual-report-shareholder-review.

52

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK (continued)

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

9,313

29

-

-

9,342

Collateral received

7,005

-

-

-

7,005

447,479

74,6463,818

97526,0402019

Deposits and other borrowings
Liability for acceptances

293

-

-

-

293

7,579

13,95879,37013,207

114,114

108,457---

108,457

Receive leg(24,570)(22,462)(62,851)(15,524)(125,407)

Pay leg

23,832

20,392

58,62914,668

117,521

Receive leg(84,339)(24,538)(8,350)(1,583)(118,810)

Pay leg

84,52525,088

9,373

1,972

120,958

Less than
3 months$m

3 to 12months$m

1 to 5
years
$m

After
5 years
$m

Total
$m

9,867

-

-

-

9,867

Debt issuances1
Derivative liabilities (excluding those held for balance sheet management)2
Derivative assets and liabilities (balance sheet management)- Funding- Other balance sheet management

2018
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings

6,002

-

-

-

6,002

440,725

65,446

7,918

116

514,205

Liability for acceptances

316

-

-

-

316

Debt issuances1

4,563

17,94667,787

19,826110,122

Derivative liabilities (excluding those held for balance sheet management)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

76,502Derivative 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 debt instruments after 5 years.
The full mark-to-market of derivative liabilities not held for balance sheet management purposes is included in the “less than 3 months” category.

At 30 September 2019 $171,881 million (2018: $164,944 million) of the Company’s undrawn facilities and $40,472 million (2018: $38,539 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.

53

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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- Investment securities (from 1 October 2018)- Available-for-sale assets (prior to 1 October 2018)
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

54

NOTES TO THE FINANCIAL STATEMENTS

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.
2019
2018

Note

At
amortised
cost
$m

At
fair
value
$m

Total
$m

At
amortised
cost
$m

At
fair
value
$m

Total
$m

7

77,949-77,949

3,442

-

3,442

80,227-80,227

1,666

-

1,666

Financial assets
Cash and cash equivalents
Settlement balances owed to ANZ

13,461-

13,461

9,184

Trading securities

8-

34,21734,217-29,51929,519Derivative financial assets and liabilities

9-

116,544

116,544-

64,44864,448Investment securities

10

4,787

68,56873,355--

Available-for-sale assets

10

-

-

-

-

64,72864,728Net loans and advances

11483,858797

484,655

475,850

1

215

-

215

264

Due from controlled entities

86,907

1,967

88,874

Other financial assets

2,167

-

2,167

Collateral paid

Regulatory deposits

Total

672,786

222,093

-

-

9,184

475,851-

264

90,170-90,170

2,023

-

2,023

894,879

659,384

158,696

818,080

Financial liabilities
Settlement balances owed by ANZ

9,342

-

9,342

9,867

-

9,867

Collateral received

7,005

-

7,005

6,002

-

6,002

Deposits and other borrowings

13524,22021

524,241

511,93755

511,992

Derivative financial instruments

9-117,340

117,340-

65,63865,638Due to controlled entities

89,683-89,68388,383

Payables and other liabilities

4,231

2,390

6,621

3,942

100,199

4,647

104,846

97,184

1,442

98,626734,680

124,398

859,078

717,315

68,195785,510

Debt issuances
Total

14

-

88,383

1,060

5,002

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.

55

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FAIR VALUE HIERARCHY (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)2019$mUsing unobservable
inputs (Level 3)

2018
$m

2019
$m

2018
$m

Total

2019
$m

2018
$m

2019
$m

2018
$m

29,43923,969

4,778

5,550

-

-

34,21729,519351

630

116,137

63,76456

54

116,544

64,448AssetsTrading securities1
Derivative financial instruments
Investment securities2

67,182

228

Available-for-sale assets1,2-

61,655Net loans and advances (measured at fair value)-

Due from controlled entities

-

Total

1,158

68,568

-

1,996

-

1,077

-

64,728

-

797

1

-

-

1,967

-

-

-

797

1

-

1,967

-

96,972

86,254

123,907

71,311

1,214

1,131

222,093

158,696

-

-

21

55

-

-

21

55

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

868

1,666

116,42163,92951

43

117,340

65,638

Payables and other liabilities3

2,352

1,048

38

12

-

-

2,390

1,060

Debt issuances (designated at fair value)

1,009

-

3,638

1,442

-

-

4,647

1,442

Total

4,229

2,714

120,118

65,43851

43

124,398

68,1951.

2.

3.

During the year, there were no material transfers from Level 1 to Level 3 (2018: $676 million); Level 2 to Level 1 (2018: $783 million) and Level 1 to Level 2. Transfers into and out of levels aremeasured at the beginning of the reporting period in which the transfer occurred.
On adoption of AASB 9 on 1 October 2018, the classification and measurement of financial assets was revised. The available-for-sale classification used in comparative periods no longer exists
under AASB 9 and a new classification of investment securities was introduced. Comparative information has not been restated.
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 $1,163 million (2018: $1,088 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 mainly due to the revaluation of the Company’s investment in Bank of Tianjin.
There were no other material transfers in or out of Level 3 during the period.
Bank of Tianjin (BoT)The investment is valued based on comparative price-to-book (P/B) multiples (a P/B multiple is the ratio of the market value of equity to the bookvalue of equity). The extent of judgement applied in determining the appropriate multiple and comparator group from which the multiple is derived
are non-observable inputs which have resulted in the Level 3 classification.

56

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FAIR VALUE MEASUREMENT INCORPORATING UNOBSERVABLE MARKET DATA (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 $111 million (Sep 18: $102 million) increase or decrease to the fair value of the investment, which would berecognised in shareholders’ 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

Investment securities – debt securities at amortised cost

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

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 the customer 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 thefair value for any value we expect the Company to derive from retaining thedeposit for a future period.

Interest bearing fixed maturity deposits and other borrowings
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 modelusing a yield curve appropriate for the remaining term to maturity of the debt
instrument. The fair value reflects adjustments to credit spreads applicable to
the Company for that instrument.

57

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE (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)

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

483,858

475,850--

21,42528,352462,909447,259484,334

475,611

Financial assets
Net loans and advances
1

Investment securities

4,787

-

-

-

4,790

-

-

-

4,790

-

Due from controlled entities

86,907

90,170----86,907

90,17086,907

90,170

Total

575,552

566,020--

26,21528,352549,816

537,429

576,031565,781

Deposits and other borrowings

524,220

511,937--

524,383

512,049--524,383

512,049

Financial liabilities
Debt issuances

100,199

97,184

39,62031,36561,832

66,529--101,452

97,894Due to controlled entities

89,68388,383----89,68388,38389,68388,383

Total

714,102697,504

39,62031,365586,215

578,578

89,68388,383

715,518

698,326

1.

Investment securities under AASB 9 includes securities measured at amortised cost.

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.

58

NOTES TO THE FINANCIAL STATEMENTS

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:
2019
$m

2018
$m

Securities sold under arrangements to repurchase1

42,64039,332

Residential mortgages provided as security for covered bonds

20,052

19,612

Other

4,421

1,191

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:
2019
$m

2018
$m

Fair value of assets which can be sold or repledged

37,52635,360Fair value of assets sold or repledged

29,384

23,27059

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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

2019

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 financial assets

116,544(2,323)

114,221(102,761)(6,232)

5,228

Reverse repurchase, securities borrowing andsimilar agreements1

36,648(4,845)31,803(1,414)(30,389)-

Total financial assets

153,192(7,168)146,024(104,175)(36,621)

5,228

Derivative financial liabilities(117,340)

1,648(115,692)

102,761

9,803(3,128)

Repurchase, securities borrowing and similar
agreements2(40,826)

17,240(23,586)

1,414

22,172-

Total financial liabilities(158,166)

18,888(139,278)

104,175

31,975(3,128)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 financial 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)

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.

60

NOTES TO THE FINANCIAL STATEMENTS

19. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill1

Software

Total

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

Balance at start of year

73

69

1,373

1,783

1,446

1,852

Additions

10

-

412

386

422

386

-

-

(497)

(787)

(497)

(787)

-

-

(4)

(17)

(4)

(17)

Amortisation expense

2

Impairment expense
Foreign currency exchange difference

(1)

4

1

8

-

12

Balance at end of year

82

73

1,285

1,373

1,367

1,446

Cost

82

73

6,767

6,289

6,888

6,401

Accumulated amortisation/impairment

n/a

n/a

(5,482)(4,916)(5,521)(4,955)Carrying amount

82

73

1,285

1,373

1,367

1,446

1.
2.

Goodwill excludes notional goodwill in equity accounted investments.
2018 includes an accelerated amortisation expense of $240 million.

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

Definition

Carrying value

Goodwill

SoftwareExcess 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.
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.

61

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
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 at each reporting date. The
assessment requires management judgement, and in relation to our software assets, a number of factors can influence the expected
useful lives. These factors include changes to business strategy, significant divestments and the pace of technological change.

62

NOTES TO THE FINANCIAL STATEMENTS

20. OTHER PROVISIONS
2019
$m

2018
$m

ECL allowance on undrawn facilities1

557

432

Customer remediation

967

556

Restructuring costs

37

94

Non-lending losses, frauds and forgeries

63

75

Other

281

113

1,905

1,270

Non-lending
losses, frauds andforgeries
$m

Other
$m

Total other provisions
1.

Refer to Note 12 Allowance for Expected Credit Losses for movement analysis.

Customer
remediation Restructuring costs$m$mBalance at start of year

556

94

75

113

New and increased provisions made during the year

608

46

1

308

Provisions used during the year

(150)

(91)

(5)

(40)

Unused amounts reversed during the year

(47)

(12)

(8)

(100)

Balance at end of year

967

37

63

281

Customer remediation
Customer remediation includes provisions for expected refunds to customers, remediation project costs and related customer and regulatory
claims, penalties and litigation outcomes.
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 certain 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 workers compensation, make-good provisions associated with leased premises andcontingent liabilities recognised as part of a business combination.

63

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
20. OTHER PROVISIONS (continued)

RECOGNITION AND MEASUREMENTThe Company recognises provisions when there is a present obligation arising from a past event, an outflow of economic resources isprobable, 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 timing andoutcome of future events, including estimates of expenditure required to satisfy such obligations. Where relevant, expert legal advice
has been obtained 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, the associatedremediation project costs, and the implications of regulatory exposures and customer claims having regard to their specific facts andcircumstances. Consequently, the appropriateness of the underlying assumptions is reviewed on a regular basis against actual
experience and other relevant evidence including expert legal advice and adjustments are made to the provisions where appropriate.

64

NOTES TO THE FINANCIAL STATEMENTS

21. SHAREHOLDERS’ EQUITYSHAREHOLDERS’ EQUITY
2019
$m

2018
$m

26,413

27,533Foreign currency translation reserve

(21)

(230)

Share option reserve

89

92

FVOCI reserve

65

-

-

(24)

707

106

Ordinary share capital
Reserves:

Available-for-sale revaluation reserve
Cash flow hedge reserve
Total reserves

840

(56)

Retained earnings

25,961

26,399Total shareholders’ equity

53,21453,876

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

2019

Balance at start of the year
1

Bonus option plan

Dividend reinvestment plan2
Group employee share acquisition scheme

2018

Number ofshares$m

Number ofshares$m

2,873,618,118

27,5332,937,415,327

29,4162,999,796-

2,891,060

-

-

-

-

-

-

-

-

(3)

Share buy-back3(42,032,991)(1,120)(66,688,269)(1,880)

Balance at end of year

2,834,584,923

26,4132,873,618,118

27,533

1 The Company issued 1.4 million shares under the Bonus Option Plan (BOP) for the 2019 interim dividend and 1.6 million shares for the 2018 final dividend (1.4 million shares for the 2018 interim dividendand 1.5 million shares for the 2017 final dividend).
2 No new shares were issued under the Dividend Reinvestment Plan (DRP) for the 2019 interim dividend (nil shares for the 2018 final dividend; nil shares for the 2018 interim dividend) as the shares werepurchased on-market and provided directly to the shareholders participating in the DRP. On-market purchases for the DRP in the September 2019 financial year were $432 million (Sep 18 full year: $392
million).
3 The Company completed a $3.0 billion on-market share buy-back of ANZ ordinary shares purchasing $1,120 million in the September 2019 full year (Sep 18 full year: $1,880 million) resulting in 42.0 million
ANZ ordinary shares being cancelled in the September 2019 full year (Sep 18 full year: 66.7 million)

65

ANZ 2019 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 together with any tax effect.

Available-for-sale reserve(prior to 1 October 2018)

Includes the changes in fair value and exchange differences on the revaluation of available-for-salefinancial assets together with any tax effect.

FVOCI reserve (from 1
October 2018)

Includes changes in the fair value of certain debt securities and equity securities included within
Investment Securities together with any tax effect.
In respect of debt securities classified as measured at FVOCI, the FVOCI reserve records
accumulated changes in fair value arising subsequent to initial recognition, except for thoserelating to allowance for expected credit losses, interest income and foreign currency exchange
gains and losses which are recognised in profit or loss. As debt securities at FVOCI are recorded atfair value, the balance of the FVOCI reserve is net of the ECL allowance associated with such assets.
When a debt security measured at FVOCI is derecognised, the cumulative gain or loss recognised in
the FVOCI reserve in respect of that security is reclassified to profit or loss and presented in Other
Operating Income.
In respect of the equity securities classified as measured at FVOCI, the FVOCI reserve records
accumulated changes in fair value arising subsequent to initial recognition (including any related
foreign exchange gains or losses). When an equity security measured at FVOCI is derecognised, thecumulative gain or loss recognised in the FVOCI reserve in respect of that security is not recycled to
profit or loss.

Share option reserve

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

66

NOTES TO THE FINANCIAL STATEMENTS

22. CAPITAL MANAGEMENTCAPITAL MANAGEMENT STRATEGYThe Company’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 the Company conducts detailed strategic and capital planning over a 3 year time
horizon. The process involves:
 forecasting economic variables, financial performance of the Company’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 the Company’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 theCompany’s capital position. Any material actions required to ensure ongoing prudent capital management are submitted to the Board for approval.
Throughout the year, the Company maintained compliance with all the regulatory requirements related to Capital Adequacy in the jurisdictions inwhich 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). The Company mustcomply with the minimum regulatory capital requirements, prudential capital ratios and specific reporting levels that APRA sets and which areconsistent with the global Basel III capital framework. This is the common framework for determining the appropriate level of bank regulatory capitalas set by the Basel Committee on Banking Supervision (BCBS).
For reporting purposes as part of the ANZ 2019 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 2019 Group Annual Report for details of the Capital Adequacy
Ratios, which can be found at https://shareholder.anz.com/annual-report-shareholders-review.

67

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
23. SHARES IN CONTROLLED ENTITIES
Incorporated in

Nature of business

2019
$m

2018
$m

26

51

ANZ (Lao) Sole Company Ltd1

Laos

Banking2

ANZ Bank (Taiwan) Ltd

TaiwanDeregistered-

849

ANZ Bank (Vietnam) Ltd

VietnamBanking

205

205

ANZ Capel Court Ltd

Australia

Securitisation Manager

18

18

ANZ Capital Hedging Pty Ltd

Australia

Deregistered-

200

ANZ Centre Chattels Trust

Australia

Property

167

167

ANZ Centre Trust

Australia

Property

550

550

ANZ Equities (Nominees) Pty Ltd

Australia

Non-operating-

10

ANZ Funds Pty Ltd

Australia

Holding Company

11,87012,053

Guam

Banking

17

17

ANZ Lenders Mortgage Insurance Pty Ltd

Australia

Mortgage Insurance

398

398

ANZ Properties (Australia) Pty Ltd

Australia

Property

7

6

ANZ Rewards No.2 Pty Ltd

Australia

Credit Card Loyalty Program

40

40

ANZ Securities (Holdings) Pty Ltd

Australia

Holding Company

39

36

India

IT Services

25

25

Australia

Holding Company

538

2,563

Australia

Holding Company

56-

ANZ Guam, Inc

ANZ Support Services India Private Ltd
ANZ Wealth Australia Ltd

3

ANZi Holdings Pty Ltd
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

Banking55

Citizens Bancorp

Guam

Holding Company

24

24

Australia

Non-operating

43

43

E S & A Holdings Pty Ltd
Esanda Finance Corporation Ltd

Australia

Non-operating

5

5

Looking Together Pty Ltd

Australia

Non-operating

6

6

ACN 003 042 082 Ltd

Australia

Holding Company

5158

PT Bank ANZ Indonesia (99% ownership)

Indonesia

Banking262

262

15,467

18,852

Shares in controlled entities
1.
2.
3.

Formerly ANZ Bank (Lao) Ltd
In April 2019, ANZ Bank (Taiwan) Ltd merged with the Taiwan branch of the Company
ANZ Wealth Australia Ltd returned $2.1 billion of capital following the sale of its OnePath Insurance business in May 2019

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.

68

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. The holders of the issued notes have full recourse to the pool ofresidential 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 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
When the Company sells securities subject to repurchase agreements under which we retain substantially all the risks and rewards of ownership, thenthose assets do not qualify for derecognition. An associated liability is recognised for the consideration 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

2019
$m

2018
$m

2019
$m

2018
$m

2019
$m

2018
$m

Current carrying amount of assets transferred

65,94764,76520,052

19,61242,64039,332Carrying amount of associated liabilities

65,94764,76520,052

19,61240,82637,581

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.

69

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
25. ASSETS AND LIABILITIES HELD FOR SALE
At 30 September 2019 and 30 September 2018, there were no assets or liabilities that have been reclassified to held for sale.

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.
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.

70

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:
2019
$m

2018
$m

Defined benefit obligation and scheme assets
Present value of funded defined benefit obligation(1,353)(1,246)

Fair value of scheme assets

1,591

1,385

Net defined benefit asset

238

139

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

(17)

(15)

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

255

154

Net defined benefit asset

238

139

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

14.9

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 $38 million (2018: deficit of $10 million). In 2019, the Company made defined benefit contributions totalling $2 million (2018: $2
million). It expects to make contributions of 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.

71

ANZ 2019 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 effect the Statement of Other Comprehensive Income and Balance Sheet.

Sensitivity analysis
change in significant
assumptions
2019

2018

1.7 – 2.0

2.65 - 3.7

3.15

3.75

1.75 3.0/2.35

2.0 - 3.0/
2.25

2019
$m

2018
$m

0.5% increase

(101)

(131)

0.5% increase

74

109

1 year increase

65

56

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– Males (years)

25.6 – 28.6

25.5 - 29.0

– Females (years)

28.8 – 30.3

28.7 - 31.0

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 2019 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 AUD 1,000 in Australia (and AUD 800 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 equity.

2019 and 2018 grants

656,738 shares were granted on 3 December 2018 at an issue price of $26.91.
541,982 shares were granted on 1 December 2017 at an issue price of $28.67.

72

NOTES TO THE FINANCIAL STATEMENTS

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

Grant

50% of the CEO’s Annual Variable Remuneration (AVR) and 25% of ExCo’s Variable Remuneration (VR) received asdeferred shares.

Conditions
Deferred over four years from grant date.
ii) ANZIP (excluding the CEO and ExCo) and Business Unit Incentive Plans (BUIPs) - for grants from 1 October 2017
Eligibility

All employees excluding the CEO and ExCo.

Grant

If VR is at or exceeds AUD 150,000, then 60% of incentive amounts exceeding AUD 80,000 (subject to a minimum
deferral amount of AUD 42,000) is deferred as shares.
Deferred over three years from grant date.

Conditionsiii) Long Term Incentives (LTIs)
Eligibility

Selected employees.

Grant

100% deferred shares.

Conditions

Vest three years from grant date.

iv) 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.

v) Further information
Cessation

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 equity.
During the 2019 year, we granted 1,945,668 deferred shares (2018: 2,232,563) with a weighted average grant priceof $25.39 (2018: $29.31).
Deferred shares remain at risk and the Board has the discretion to adjust the number of deferred shares
downwards, including to zero at any time before the vesting date. ANZ’s downward adjustment provisions aredetailed in section 6.3 of the 2019 Remuneration Report.
Board discretion was exercised to adjust downward 9,810 deferred shares to zero in 2019 (2018: 2,632).

2019 and 2018 grants
Downward adjustment

73

ANZ 2019 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 2019 under the Employee Share Offer and the Deferred Share Plan,
measured as at the date of grant of the shares, is $67.7 million (2018: $80.9 million) based on 2,602,406 shares (2018:
2,774,545) at VWAP of $26.01 (2018: $29.17).

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 equity.

Cessation

The provisions that apply if the employee’s employment ends are in section 9.2.3 of the 2019 Remuneration Report in
the ANZ 2019 Group Annual Report.

Downward adjustment

The Company’s downward adjustment provisions are detailed in section 6.3 of the 2019 Remuneration Report in the
ANZ 2019 Group Annual Report.

Option Plans that operated during 2019 and 2018i) Performance Rights

1

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 period1 and Total
Shareholder Return (TSR) performance hurdles. Further details on the performance hurdles are in section 6.2.3a of the2019 Remuneration Report in the ANZ 2019 Group Annual Report.

Satisfying vesting

Any portion of the award of performance rights (that have met the performance hurdles) may be satisfied by a cash
equivalent payment rather than shares at the Board’s discretion. All performance rights were satisfied through a shareallocation, other than 47,195 performance rights (2018: none) for which Board discretion was exercised.

2019 and 2018 grants

During the 2019 year, we granted 885,810 performance rights (2018: 1,023,239).

Downward adjustment

Board discretion was exercised to adjust downward 59,012 performance rights to zero in 2019 (2018: none).

Four years for grants from 1 October 2019.

74

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 vesting

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 68,357 deferredshare rights (2018: 108,783) for which Board discretion was exercised.

2019 and 2018 grants

During the 2019 year, 2,078,427 deferred share rights (no performance hurdles) were granted (2018:
2,546,333).

Downward adjustment

Board discretion was exercised to adjust downward 11,824 deferred share rights to zero in 2019 (2018: 1,638).

Options, Deferred Share Rights and Performance Rights on Issue
As at 30 October 2019, there were 615 holders of 4,173,045 deferred share rights on issue and 142 holders of 2,486,001 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 of2019 and the movements during 2019:

Number of options/rights
WA exercise price

Options/rightsexpiredOptions/rightsexercised

Closingbalance
30 Sep 2019

(1,589,109)

0(1,835,163)

6,688,538

$0.00

$0.00

$0.00

$0.00

Openingbalance
1 Oct 2018

Options/rightsgrantedOptions/rightsforfeited1

7,148,573

2,964,237

$0.00

$0.00

$26.66

WA closing share price
WA remaining contractual life

1.9 years

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

Outstanding exercisable options/rights

181,581

This table shows the options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2018
and the movements during 2018:
Options/
Options/
Closing
Opening
Options/
Options/rightsrightsbalancebalancerightsrightsexpiredexercised
30 Sep 2018
1 Oct 2017
grantedforfeited1
Number of options/rights
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

WA closing share price
WA remaining contractual life1.

$28.43
2.1 years

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

Outstanding exercisable options/rights

67,666

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

All of the shares issued as a result of the exercise of options/rights during 2019 and 2018, were issued at a nil exercise price.
As at the date of the signing of the Directors’ Report on 30 October 2019: no options/rights over ordinary shares have been granted since the end of 2019; and 14,464 shares issued as a result of the exercise of options/rights since the end of 2019, all with nil exercise prices.

75

ANZ 2019 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.
2019
PerformancerightsPerformancerights

0.00

0.00

0.00

0.00

Share closing price at grant date ($)

25.83

25.52

29.24

29.21

Expected volatility of ANZ share price (%)1

20.0

20.0

20.0

20.0

Equity term (years)

2.5

4.8

2.4

5.0

Vesting period (years)

2.1

3.0

2.1

3.0

Expected life (years)

2.1

3.0

2.1

3.0

6

6

5.75

5.75

Risk free interest rate (%)

1.96

2.05

1.65

1.95

Fair value ($)

22.87

9.40

26.03

12.24

Exercise price ($)

Expected dividend yield (%)

1.

2018
Deferred
share
rightsDeferred
share
rightsExpected 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 2019 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 4,317,094 shares at an average price of $25.99 per share (2018: 3,936,773 shares at
an average price of $29.00 per share).

76

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:
20191
$000

20181
$000

15,784

19,497

Post-employment benefits

415

333

Other long-term benefits

213

150

Short-term benefits

Termination benefits

2,112

454

Share-based payments

6,184

8,910

Total

24,70829,344

1.

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. No amounts have been written
off during the period, or individual provisions raised in respect of these balances. The aggregate of loans made, guaranteed or secured to KMP,
including their related parties, were as follows:
2019
$000

2018
$000

Loans advanced1,2

13,536

12,541

3

285

477

Interest charged
1.

Balances are at the balance sheet date (for KMP in office at balance sheet date) or at the date of cessation of former KMP.
2.
Prior period has been restated to include credit card balances and exclude an available for redraw component of loan balances previously included within loans and advances.
3.
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
1.

2019
Number1

2018
Number1

1,892,754

2,293,271

11,802

13,152

Balances are at the balance sheet date (for KMP in office at balance sheet date) or at the date of cessation of former KMP.

DEPOSITS AND OTHER TRANSACTIONS OF KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIESThe aggregate of deposits with the Bank of KMP and their related parties was $42 million (2018: $44 million).
Other transactions with KMP and their related parties included amounts paid to the Company in respect of investment management service fees,
brokerage and bank fees and charges. The Company has reimbursed KMP for the costs incurred for certain administration and secretarial services
associated with the performance of their duties. These transactions are conducted on normal commercial terms and conditions and no morefavourable than those given to other employees or customers.

77

ANZ 2019 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:
2019
$000

2018
$000

-

34,364

Amounts payable to associates

697

608

Interest income from associates

-

1,704

Amounts receivable from associates

Other expenses paid to associates

7,624

6,735

There have been no material guarantees given or received. No amounts have been written-off during the period, or individual provisions raised in
respect of these balances.

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 2019, 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.

78

NOTES TO THE FINANCIAL STATEMENTS

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSCREDIT RELATED COMMITMENTS AND CONTINGENCIES
2019

2018

$m

$m

Contract amount of:
Undrawn facilities

171,881

164,944

Guarantees and letters of credit

20,375

16,363

Performance related contingencies

20,097

22,176

Total

212,353

203,483

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 $171,881 million (2018: $164,944 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 $20,375 million (2018: $16,363 million)
and total performance related contingencies of $20,097 million (2018: $22,176 million) mature within 12 months.

PROPERTY RELATED COMMITMENTS
2019
$m

2018
$m

1,699

1,533

Lease rentals
Land and buildings

58

112

1,757

1,645

Due within 1 year

304

321

Due later than 1 year but not later than 5 years

868

769

Due later than 5 years

585

555

1,757

1,645

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 2019 is $67 million (2018: $81 million). During the year, sublease payments we received
amount to $28 million (2018: $29 million) and were netted against rent expense.

79

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
OTHER CONTINGENT LIABILITIESAs at 30 September 2019, 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 (refer to note 20) and/or disclosures as deemed appropriate have been made. In someinstances we have not disclosed the estimated financial impact of the individual items either because it is not practicable to do so or because suchdisclosure may prejudice the interests of the Company.
REGULATORY AND CUSTOMER EXPOSURESIn recent years there has been an increase in the number of matters on which the Company engages with its regulators. There have also beensignificant increases in the nature and scale of regulatory investigations and reviews, civil and criminal enforcement actions (whether by court action
or otherwise), formal and informal inquiries, regulatory supervisory activities and the quantum of fines issued by regulators, particularly against
financial institutions both in Australia and globally. The Company has received various notices and requests for information from its regulators as partof both industry-wide and Company-specific reviews and has also made disclosures to its regulators at its own instigation. The nature of theseinteractions can be wide ranging and, for example, currently include a range of matters including responsible lending practices, product suitability
and distribution, interest and fees and the entitlement to charge them, customer remediation, wealth advice, insurance distribution, pricing,competition, conduct in financial markets and financial transactions, capital market transactions, anti-money laundering and counter-terrorism
financing obligations, reporting and disclosure obligations and product disclosure documentation. 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.
BANK FEES LITIGATION AND PERIODICAL PAYMENT REMEDIATION AND ASIC ACTION
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. The claims in the March 2013 class action failed and have been dismissed.
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. Part of the class of customers had already received remediation payments fromthe Company. An agreement to settle the claim was reached in December 2018. The settlement is subject to court approval.
In July 2019, ASIC commenced civil penalty proceedings against the Company in relation to the charging of fees for periodical payments in certain
circumstances between August 2003 and February 2016. ASIC seeks civil penalties in respect of alleged false or misleading representations andunconscionable conduct. ASIC also alleges that the Company engaged in misleading or deceptive conduct and breached certain statutory obligations
as a financial services licensee. The matter is at an early stage. The outcomes and total costs remain uncertain. The Company is defending theallegations.
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 or SIBOR. The claimants seek damages or compensation in amounts not
specified, and allege that the defendant banks, including the Company, violated US anti-trust laws and (in the BBSW case only) anti-racketeering laws,
the Commodity Exchange Act, and 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.

80

NOTES TO THE FINANCIAL STATEMENTS

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
FRANCHISEE LITIGATIONIn February 2018, two related class actions were brought against the Company alleging breaches of contract and unconscionable conduct in relation
to lending to 7-Eleven franchisees. An agreement to settle the claims against the Company was reached in March 2019. The settlement is subject tocourt approval.
ROYAL COMMISSION
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released its final report on 4 February 2019.
The findings and recommendations of the Commission are resulting in additional costs and may lead to further exposures, including exposuresassociated with further regulator activity or potential customer exposures such as class actions, individual claims or customer remediation orcompensation 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.
CLEARING AND SETTLEMENT OBLIGATIONSThe Company has a commitment to comply with rules governing various clearing and settlement arrangements which could result in a credit risk
exposure and loss if another member institution fails to settle its payment clearing activities. The Company’s potential exposure arising from thesearrangements is unquantifiable in advance.
The Company holds membership of central clearing houses, including ASX Clear (Futures), London Clearing House (LCH) SwapClear and RepoClear,
Korea Exchange (KRX), Hong Kong Exchange (HKEX) and the Clearing Corporation of India. 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 tomake default 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. Grindlays, on its own initiative, brought these transactions to theattention 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.

81

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
30. COMPENSATION OF AUDITORS
2019
$’000

2018
$’000

7,058

6,674

Audit-related services

2,642

4,152

Non-audit services2

114
9,814

100
10,926

1,924

1,642

Audit-related services

714

545

Non-audit services2

2

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

2,640

2,189

Total compensation of auditors

12,454

13,1151.

Comprises prudential and regulatory services of $2.56 million (2018: $2.41 million), comfort letters $0.45 million (2018: $0.45 million) and other $0.34 million (2018: $1.84 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.

82

NOTES TO THE FINANCIAL STATEMENTS

31. IMPACT OF ADOPTION OF NEW STANDARDS AND OTHER CHANGES
Impact of the transition to AASB 15 Revenue from Contracts with Customers (AASB 15)
The following table summarises changes to the balance sheet in the comparatives period resulting from the application of AASB 15, and otherreclassification adjustments to enhance comparability with current period presentation.
Impact ofapplication of
AASB 15$m

Other
reclassification
adjustment$m

Restated as at
30 Sep 18$m

475,419-432

475,851

2,571

32

-

2,603

Other non-impacted balance sheet line items

362,757--

362,757

Total assets

840,74732

432

841,211

39

10

-

49

Reported as
at 30 Sep 18$m
Net loans and advances1
Other assets2

Deferred tax liabilities2
Other provisions

1,3

432

1,270

Other non-impacted balance sheet line items

786,016838--

786,016

Total liabilities

786,89310432

787,335

Retained earnings

26,37722-

26,399Other non-impacted balance sheet line items

27,477--27,47753,85422-

53,8762

Total shareholders' equity
1.

2.

2

-

$432 million of individually and collectively assessed provisions for credit impairment attributable to off-balance sheet credit related commitments at 30 September 2018 were reclassified from Net loans
and advances at amortised cost to Other provisions to enhance comparability with current period presentation.
The Company adopted AASB 15 in this reporting period with comparatives restated. The impact of this policy change on the reported 30 September 2018 balance sheet was an increase in Other assets of$32 million, an increase in Deferred tax liabilities of $10 million and an increase in Retained earnings of $22 million, reflecting revenue that qualifies for upfront recognition under AASB 15 but was notpreviously recognised under AASB 118.

In addition to the balance sheet impact above, upon adoption of AASB 15 certain items previously netted are now presented gross in operating
income and operating expenses. This increased total operating income and total operating expenses by $122m for the 2019 financial year.
Comparative information has been restated which increased total operating income and total operating expenses by $146 million for the 2018
financial year.

Impact of the transition to AASB 9 Financial Instruments (AASB 9)
ALLOWANCE FOR EXPECTED CREDIT LOSSES
The table below reconciles the closing provisions for credit impairment of financial assets determined in accordance with AASB 139 Financial
Instruments: Recognition and Measurement, and provisions for credit impairment of loan commitments and financial guarantee contracts determined inaccordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets as at 30 September 2018, and the opening allowance for expectedcredit losses determined in accordance with AASB 9 as at 1 October 2018.
As at 30 Sep 18

As at 1 Oct 18

Provision for credit
impairment under
AASB 139 or AASB 137$m

Incremental
allowance for ECL
under AASB 9$m

Allowance for ECL
under AASB 9
$m

2,348

583

2,931

-

1

1

432

143

575

2,780

727

3,507

Investment securities - debt securities at FVOCI2

-

4

4

Total loss allowance recognised in other comprehensive income

-

4

4

Loans and advances - at amortised cost
Investment securities - debt securities at amortised cost
Off-balance sheet commitments - undrawn and contingent facilities

1

Total provisions for credit impairment
Loss allowances recognised in other comprehensive income1.

The individually and collectively assessed allowance for ECL for off-balance sheet commitments is included in Other provisions.
Allowance for ECL does not change the carrying amount which remains at fair value. Instead, the allowance for ECL is recognised in OCI, with a corresponding charge to profit or loss.

83

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
31. IMPACT OF ADOPTION OF NEW STANDARDS AND OTHER CHANGES (continued)
The following table summarises the adjustments arising on adoption of AASB 9.
BALANCE SHEET RECONCILIATIONAASB 139AASB 9measurement measurement
Reference
category
category
Trading securities
Investment securities:- debt securities at amortised
cost- debt securities at FVOCI- equity securities at FVOCI
Available-for-sale assets (AFS)
Net loans and advances- at amortised cost
- at FVTPL
Due from controlled entities- at amortised cost
- at FVPTLDeferred tax assets
Other non-impacted balance
sheet line items
Total assets
Current tax liabilities
Payables and other liabilities- at amortised cost
- at FVTPL
Other provisions
Debt issuances:- at amortised cost
- at FVTPL
Other non-impacted balance
sheet line items

1,2

FVTPL

29,519

(999)

-

-

28,520

2,6,7

N/A Amortised cost

-

2,477

1

(1)

2,477

1,2

N/A

FVOCI

-

62,823--62,823

2
2

N/A
AFS

FVOCI
N/A

64,728

1,086(64,728)

-

-

1,086
-

475,850(2,223)15(583)

473,059

1

1,564

(23)

-

1,542

90,170(1,800)--88,370

1,071

1,800
-

149
12

207

1,949
1,290

N/A

179,872---

179,872

N/A

841,211
85

-

154
30

(377)
-

840,988115

5 Amortised cost Amortised cost
5
FVTPL
FVTPL

3,942
1,060

-

(19)
-

-

3,923
1,060

6

N/A

1,270

-

-

143

1,413

4, 5 Amortised cost Amortised cost
4, 5
FVTPL
FVTPL

97,184
1,442(2,646)
2,646

101

-

94,5384,189

N/A

682,352---

682,352

787,335

-

112

143

787,590

3,6,7,83,8
5
5
1,2,4,6

1,3,4

Ordinary share capital
Retained earnings

Loans andAmortised costreceivables
FVTPL
FVTPL
Loans andAmortised costreceivables
FVTPL
FVTPL
N/A
N/A
N/A

Total liabilities
ReservesFVTPL

AASB 9 ReAASB 9
RevisedRestated
AASB 9 measurement
creditcarrying
as at reclassification(excl. impairment amount as
30 Sep 18
impact impairment)
impact at 1 Oct 18
$m
$m
$m
$m
$m

N/A

N/A

N/A

27,533---

27,533

1,2,6

(56)

-

2

3

(51)

1,3,4,5,6

26,399

-

40

(523)

25,916

Share capital and reserves
attributable to shareholders of
the Company

53,876

-

42

(520)

53,398

Total shareholders' equity

53,876

-

42

(520)

53,39884

NOTES TO THE FINANCIAL STATEMENTS

31. IMPACT OF ADOPTION OF NEW STANDARDS AND OTHER CHANGES (continued)
REFERENCE
1.

On initial application of AASB 9, a portfolio of bonds with a fair value of $1,000 million was transferred from Trading securities to Investment
securities - debt securities at FVOCI as the applicable business model was held to collect and sell. Cumulative fair value gains/(losses) on thisportfolio of $2 million (after-tax) were transferred from Retained earnings to the FVOCI reserve. Additionally, the reclassification resulted in a
reduction in deferred tax assets and current tax liabilities of $1 million.

2.

The Available-for-sale classification is no longer applicable under AASB 9. Accordingly, on transition:
$61,823 million of Available-for-sale debt instruments were reclassified to Investment securities - debt securities at FVOCI due to thebusiness model being held to collect and sell. There was no re-measurement impact associated with this reclassification;$1,818 million of Available-for-sale debt instruments were reclassified to Investment securities - debt securities at amortised cost due tothe business model being held to collect at 1 October 2018. This reclassification resulted in re-measurement of a $1 million increase to
the carrying amount arising from reversal of the previous available-for-sale revaluation reserve;the Company made irrevocable elections to designate $1,086 million of non-traded Available-for-sale equity securities as Investment
securities - equity securities at FVOCI; and

$1 million of Available-for-sale equity securities were reclassified to Trading securities.

3.

Certain loans with contractual cash flow characteristics that are not solely payments of principal and interest were reclassified from Net loans
and advances at amortised cost to Net loans and advances at FVTPL. The loans had an amortised cost carrying amount of $224 million and afair value of $201 million at 30 September 2018. The associated re-measurement of $23 million was recognised in Retained earnings offset by adecrease in current tax liabilities of $7 million. In addition, one of the loans was previously in a fair value hedge relationship which was
discontinued effective 1 October 2018. Accordingly, changes in the fair value due to changes in the hedged risk which were previously
recognised as a reduction to the carrying value of the loan amounting to $15 million were written back to Retained earnings offset by anincrease in current tax liabilities of $4 million.

4.

The Company elected to designate certain financial liabilities (bonds included within Debt issuances) as measured FVTPL effective from 1
October 2018 to reduce an accounting mismatch. The bonds had an amortised cost carrying amount of $879 million and a fair value of $824
million at 30 September 2018. The difference of $55 million (comprising a $109 million decrease in fair value before own credit, offset by a $54
million increase in fair value attributable to own credit) offset by a net tax impact of $17 million (increase in deferred tax asset of $17 million andan increase in current tax liability of $34 million) was recognised in Retained earnings.

5.

Certain capital notes with contractual cash flow characteristics that are not solely payments of principal and interest were reclassified from Duefrom controlled entities at amortised cost to Due from controlled entities at FVTPL. The capital notes had an amortised cost of $1,800 million
and a fair value of $1,949 million at 30 September 2018. In addition, the Company elected to designate debt issuances previously measured atamortised cost as measured at FVTPL effective from 1 October 2018 to reduce an accounting mismatch. The debt issuances had an amortised
cost carrying amount of $1,786 million (comprising $1,767 million recognised in Debt issuances plus $19 million relating to accrued interest
recognised in Payables and other liabilities) and a fair value of $1,923 million at 30 September 2018. The net re-measurement impact $12
million was recognised in Retained earnings offset by a $4 million increase in deferred tax liabilities.

6.

The initial application of the expected credit loss requirements of AASB 9, resulted in increases in allowances for credit impairment attributable
to the following: On-balance sheet loans and advances of $583 million reflected in Net loans and advances at amortised cost; Debt securities of $1 million reflected in Investment securities – debt securities at amortised cost; and Off-balance sheet credit related commitments of $143 million reflected in Other provisions.
The total impact of $727 million was recognised as a reduction to Retained earnings, offset by an increase of $207 million related to deferredtax. Additionally, loss allowances of $2 million (after-tax) attributable to Investment securities - debt securities at FVOCI have been recognised inReserves with a corresponding adjustment to Retained earnings. The debt securities remain at fair value on the face of the Balance Sheet.

7.

On initial application of AASB 9, a portfolio of Negotiable Certificates of Deposit with a carrying amount of $659 million was reclassified fromNet loans and advances at amortised cost to Investment securities - debt securities at amortised cost. There was no re-measurement impact
associated with this reclassification.

8.

On initial application of AASB 9, loans with a carrying amount and fair value of $1,340 million that were in the process of being syndicated werereclassified from Net loans and advances at amortised cost to Net Loans and advances at FVTPL on the basis that the applicable business modelis held-to-sell. There was no re-measurement impact associated with this reclassification.

85

ANZ 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS (continued)
32. EVENTS SINCE THE END OF THE FINANCIAL YEAR
On 17 October the Company announced it had agreed a revised price for the sale of its OnePath P&I business and ADGs to IOOF of $850 million, being
a $125 million reduction from the original sale price of $975 million announced in October 2017. The new price of $850 million includes ~$25 million
that ANZ has already received for the sale of ADGs in October 2018. The revised terms reflect changing market conditions and include lower overall
warranty caps as well as some changes to the strategic alliance arrangements. Subject to APRA approval, the Company expects the transaction tocomplete in the first quarter of calendar year 2020. The impact of the reduction in price has been reflected in the 2019 financial results.
Other than the matter above, there have been no significant events from 30 September 2019 to the date of signing this report.

86

NOTES TO THE FINANCIAL STATEMENTS

DIRECTORS’ 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 2019 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
Chairman30 October 2019

Shayne C Elliott
Director

LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE
CORPORATIONS ACT 2001
To the Directors of Australia and New Zealand Banking Group Limited declare that:
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 2019 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 201987

ANZ 2019 ANNUAL REPORTINDEPENDENT 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 2019 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 2019; income statement, statement of comprehensive income, statement of changes in equity, and statement of cash flows for the year then ended; notes 1 to 32 including a summary of significant accounting policies; andDirectors’ 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:

 Allowance for expected credit losses;
 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.

88

NOTES TO THE FINANCIAL STATEMENTS

KEY AUDIT MATTERS (continued)
ALLOWANCE FOR EXPECTED CREDIT LOSSES ($2,921M)
Refer to the critical accounting estimates and judgements and disclosures in relation to allowance for expected credit losses in Note 12 to the Financial Report.
The Key Audit Matter
AASB 9 Financial Instruments (AASB 9) was adopted by the Company on 1 October 2018. This is a key audit matter due to the significance of the loans
and advances balance to the financial statements and the inherent complexity of the Company’s Expected Credit Loss (ECL) models (ECL models)
used to measure ECL allowances. This new and complex accounting standard requires the Company to recognise ECLs on its loans and advances andoff-balance sheet positions; the Company developed new models which are reliant on data as well as a number of estimates including the impact ofmultiple economic scenarios and other assumptions such as defining a significant increase in credit risk (SICR). This involves significant judgement andestimates and takes into account forward looking information reflecting potential future economic events.
AASB 9 requires the Company to measure ECLs on a forward-looking basis reflecting a range of future economic conditions, including key forwardlooking assumptions such as forecast GDP and unemployment levels. Post-model adjustments to the ECL results are also made by the Company toaddress known ECL model limitations or emerging trends in the loan portfolios. We exercise significant judgement in challenging the economic
scenarios used and the judgemental overlays the Company applied to the ECL results.
The criteria selected to identify a SICR, such as a decrease in customer credit rating (CCR), are key areas of judgement within the Company’s ECL
methodology as these criteria determine if a forward-looking 12 month or lifetime allowance is recorded.
Separate from the ECL calculation, allowances for individually assessed loans exceeding specific thresholds are individually assessed by the Company.
These specific allowances are established based on the expected future cash repayments and estimated proceeds from the value of the collateral heldby the Company in respect of the loans.
How the matter was addressed in our audit
Our audit procedures for the allowance for ECL and disclosures for the year ended 30 September 2019 included assessing the Company’s significant
accounting policies against the requirements of the accounting standard. Additionally our procedures covered:
We tested key controls in relation to: The Company’s ECL model governance and validation processes;
 The Company’s assessment and approval of the forward looking macroeconomic assumptions and scenario weightings through challenge
applied by the Company’s internal governance processes;
 Reconciliation of the data used in the ECL calculation process to gross balances recorded within the general ledger as well as source systems;
 Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposures are monitored individually). We tested theapproval of new lending facilities against the Company’s lending policies, and controls over the monitoring of counterparty credit quality. This
included testing controls over the identification of exposures showing signs of stress, either due to internal 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 therequirements of the Company’s lending policies and regulatory requirements; and For retail loans, testing controls over the systems which record lending arrears, group exposures into delinquency buckets, and re-calculate
individual allowances. We tested automated calculation and change management controls and evaluated the Company’s oversight of theportfolios, with a focus on controls over delinquency monitoring. We tested a sample of the level of allowances held against different loan
products based on the delinquency profile and challenged assumptions made in respect of expected recoveries, including from collateral held.
We also tested relevant General Information Technology Controls (GITCs) over the key IT applications used by the Company in measuring ECL
allowances as detailed in the IT Systems and Controls key audit matter below.
In addition to controls testing, our procedures included: Performing credit assessments of a sample of wholesale loans controlled 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, assessment of loan
recoverability, valuation of security and the impact on the credit allowance. To do this, we used the information on the Company’s loan file,understood the facts and circumstances of the case with the loan officer, and performed our own assessment of recoverability. Exercising ourjudgment, our procedures included using our understanding of relevant industries and the macroeconomic environment and comparing data
and assumptions used by the Company in recoverability assessments to externally sourced evidence, such as commodity prices, publicly available
audited financial statements and comparable external valuations of collateral held. Where relevant we assessed the forecast timing of future cash
flows in the context of supporting valuations and approved business plans and challenged key assumptions implicit in the valuations; Obtaining an understanding of the Company’s processes to determine ECL allowances, evaluating the Company’s ECL model methodologies
against established market practices and criteria in the accounting standards;

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ANZ 2019 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT (continued)
KEY AUDIT MATTERS (continued)
 Working with KPMG Risk Consulting specialists, we assessed the accuracy of the Company’s ECL model predictions by re-performing, for a sample
of loans, the ECL allowance and comparing this to the amount recorded by the Company;
 Working with KPMG Economic specialists, we challenged the Company’s forward-looking macroeconomic assumptions and scenarios
incorporated in the Company’s ECL models. We compared the Company’s forecast GDP and unemployment rates to relevant publicly available
macro-economic information, and considered other known variables and information obtained through our other audit procedures to identify
contradictory indicators;
 Testing the implementation of the Company’s SICR methodology by re-performing the staging calculation for a sample of loans and comparing
our expectation to actual staging applied on an individual account level, taking into consideration movements in CCR; and Assessing the accuracy of the data used in the ECL models by confirming a sample of data fields such as account balance and CCR to relevant
source systems.
We also challenged key assumptions in the components of the Company’s post-model adjustments to the ECL allowance balance. This included:
 Evaluating underlying data used in concentration risk and economic cycle allowances 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 allowances considering the Company’s ECL model and data deficiencies identified by theCompany’s ECL model validation processes, and Assessing the completeness of additional allowance overlays by checking the consistency of risks we identified in the portfolios against theCompany’s assessment.
AASB 7 Financial Instruments: Disclosures
Assessing the appropriateness of the Company’s disclosures in the financial report using our understanding obtained from our testing against therequirements of the accounting standard.
VALUATION OF FINANCIAL INSTRUMENTS HELD AT FAIR VALUEASSETS HELD AT FAIR VALUE $222,093M
LIABILITIES HELD AT FAIR VALUE $124,398M
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 investment securities, trading securities, derivative assets andliabilities, certain debt securities, and other assets and liabilities designated as measured at fair value through profit or loss or fair value through othercomprehensive income. 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 (25% of assets and 14% 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; or where there are a greater number of variables, including trade economic details and modelling assumptions, which feed into theinternal models; and The valuation of certain derivatives held by the Company is sensitive to inputs including funding rates, probabilities of default and loss given
default. Both funding and credit risk are incorporated within the valuation of certain derivative instruments. This increased our audit effort in thisarea 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
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KEY AUDIT MATTERS (continued)
 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;
 Testing the front office management review and approval of the daily financial instrument trading profit and loss reconciliations prepared by theCompany’s independent markets and treasury control; 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’ investment securities 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 ($967M)
Refer to the critical accounting estimates, judgements and disclosures in Notes 20 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. This includes provisions for expected refunds to customers, remediation project costs and related customer andregulatory claims, penalties, and litigation outcomes.
The provision for customer remediation activities is a Key Audit Matter due to the number of investigations, the quantum of amounts involved, andthe judgements required by us in assessing the Group’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;
 Reliable estimates of the amounts which may be paid arising from investigations, including estimates of related costs and regulatory penalties;
 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 customer remediation payments,
related project costs and legal proceedings associated with compliance matters, investigations and reviews from its regulators;
 Enquiring with the Company regarding ongoing legal and regulatory matters, and investigation into other remediation activities;
 Enquiries with external legal counsel;
 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; For a sample of individual exposures, assessing the basis for recognition and measurement of a provision and associated costs against therequirements of the accounting standards. We did this by understanding and challenging the provisioning methodologies and underlying
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ANZ 2019 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 of compliance matters and customer complaints and the current regulatory environment. We also checkedfeatures 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 overaccess 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 and controls, 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 acore part of our audit team.
How the matter was addressed in our audit
We tested the technology control environment for key IT applications (systems) used in processing significant transactions and recording balances in
the general ledger. We also tested automated controls embedded within these systems which support the effective operation of technology-enabledbusiness processes. Our audit procedures included:
 Assessing the governance and higher-level controls in place across the IT Environment, including the approach to Company policy design, review
and awareness, and IT Risk Management practices; Design and operating effectiveness testing of controls across the User Access Management Lifecycle, including how users are on-boarded,
reviewed, and removed on a timely basis from critical IT applications and supporting infrastructure. We also looked at how privileged roles andfunctions are managed across each IT Application and the supporting infrastructure; Design and operating effectiveness testing of controls in place to enable Change Management including how changes are initiated, documented,
approved, tested and authorised prior to migration into the production environment of critical IT Applications. We also assessed theappropriateness of users with access to make changes to IT applications across the Company; Design and operating effectiveness testing of controls used by the Company’s technology teams to schedule system jobs and monitor system
integrity; Design and operating effectiveness testing of controls in place to support Program Development, including the implementation of revised
guidelines per the new ANZ Delivery Framework; and Design and operating effectiveness testing of automated business process controls include those that enforce segregation of duties conflicts
between toxic role combinations within IT applications, configurations in place to perform calculations, mappings, and flagging of financialtransactions, automated reconciliation controls, both between systems and intra-system and data integrity of critical system reporting used forsampling, data analysis and financial reporting across the audit.

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NOTES TO THE FINANCIAL STATEMENTSRESPONSIBILITIES 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 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; and 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.

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 201993