Australia and New Zealand Banking Group Limited
ABN 11 005 357 522

THE COMPANY
2017 Financial Report
30 September 2017

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

3
4
5
6
7

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

8
11
13
14
15
16
17
17
18
22
23
24
26
26
31
42
47
48
49
50
51
52
53
55
56
56
58
63
64
68
68

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

69
69
70

2

FINANCIAL STATEMENTS
INCOME STATEMENT

Note
2
2

2017
$m
25,613(15,017)2016$m
26,387(15,622)2
2
2

10,596
5,987
158
60

10,765
5,677
198
347

16,801

16,987

Operating expenses1

3(7,623)(8,357)

Profit before credit impairment and income tax
Credit impairment charge

12

9,178
(881)

8,630
(1,539)Profit before income tax
Income tax expense

4

8,297
(2,063)

7,091(1,404)

6,234

5,687

For the year ended 30 September
Interest income
Interest expense
Net interest income
Other operating income1
Net funds management and insurance income
Share of associates’ profit
Operating income

Profit for the year1.

In 2017, a change was made to the classification of certain fees payable. These items have been reclassified from other operating income to operating expenses to moreaccurately reflect the nature of these items. Comparatives have been restated accordingly (2016: $17 million)

The notes appearing on pages 8 to 68 form an integral part of these financial statements.

3

FINANCIAL STATEMENTS (continued)
STATEMENT OF COMPREHENSIVE INCOME
2017

2016

$m

$m

6,234

5,687

2

(98)

(57)

(476)

-

(126)

(272)

(31)

Income tax attributable to the above items

8

33

Share of associates’ other comprehensive income1-

13

Other comprehensive income net of tax

(319)

(685)

Total comprehensive income for the year

5,915

5,002

For the year ended 30 September
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve:
Exchange differences taken to equity
Exchange differences transferred to Income Statement
Other reserve movements

1

Share of associates’ other comprehensive income includes an available-for-sale revaluation reserve gain of $nil million (2016: $13 million) that may be reclassified
subsequently to profit or loss.

The notes appearing on pages 8 to 68 form an integral part of the financial statements.

4

FINANCIAL STATEMENTS (continued)
BALANCE SHEET

2017
$m

2016
$m

63,3995,006
7,685
35,60657,03658,506452,424
495
1,748
91,20818,084
20
23
932
1,852
928
2,427

61,994
3,983
10,87835,05975,872
55,721
446,531671
106,797
18,117
1,974
116
887
2,214
967
2,181

Total assets

797,379

823,962

Liabilities
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Derivative financial instruments
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Payables and other liabilities
Employee entitlements
Other provisions
Debt issuances
Total liabilities

8,219
5,238
494,235
56,83088,882
94
71
5,683
394
390
85,495745,531

9,079
5,882
479,963
76,243
103,416
62
78
5,566
397
435
92,582773,703

51,84850,25929,41636
22,39629,162344
20,753

51,84850,259As at 30 September
AssetsCash and cash equivalents
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Assets held for sale
Due from controlled entities
Shares in controlled entities
Investments in associates
Current tax assets
Deferred tax assets
Goodwill and other intangible assets
Premises and equipment
Other assets

Note
7

8
9
10
11
25
22
23

19

13
9

14

Net assets
Shareholders' equity
Ordinary share capital
Reserves
Retained earnings
Total shareholders' equity

20
20
20

The notes appearing on pages 8 to 68 form an integral part of these financial statements.

5

FINANCIAL STATEMENTS (continued)
CASH FLOW STATEMENT
2017
$m
6,234

2016
$m
5,687

Provision for credit impairment
Depreciation and amortisation
Loss on sale of premises and equipment
Net derivatives/foreign exchange adjustment
Profit on Esanda Dealer Finance divestment
Reclassification of Shanghai Rural Commercial Bank to held for sale
Sale of Asia Retail and Wealth businesses
Other non-cash movements

881
775(2,099)
231
248
(114)

1,539
1,177
12
(1,420)(66)(214)

Net(increase)/decrease in operating assets:
Collateral paid
Trading securities
Net loans and advances
Net intra-group loans and advances
Other assets

3,045(1,696)(13,772)
1,111
(270)

(3,157)203(9,503)
2,053
(779)

29,131
(837)
(505)
657
16,78623,02014,708
(794)
(554)
690
3,895
9,582

(15,151)
11,512(5,472)(353)(9,464)(26,035)
8,771
6,682
(531)
(11,113)

16,210(21,462)(4,235)(176)(9,663)
3,893
61,994(2,488)63,39928,506(24,289)(4,589)(372)(1,903)64,836(939)
61,994

For the year ended 30 September
Profit after income tax
Adjustments to reconcile to net cash provided by/(used in) operating activities:

Net increase/(decrease) in operating liabilities:
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Other liabilities
Total adjustments
Net cash provided by operating activities1
Cash flows from investing activities
Available-for-sale assets:
Purchases
Proceeds from sale or maturity
Esanda Dealer Finance divestment
Sale of Asia Retail and Wealth businesses
Other assets
Net cash (used in) investing activities
Cash flows from financing activities
Debt issuances:
Issue proceeds
Redemptions
Dividends paid
Share buy-back
Net cash (used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year1.

Net cash provided by operating activities includes income taxes paid of $2,155 million (2016: $2,104 million).

The notes appearing on pages 8 to 68 form an integral part of the financial statements.

6

FINANCIAL STATEMENTS (continued)
STATEMENT OF CHANGES IN EQUITY

As at 1 October 2015

Ordinary
share
capital$m
28,611

Profit or loss

Reserves1$m

Retainedearnings$m

Total
shareholders’equity$m939

20,13849,688
5,687

-

-

5,687

(606)

(79)

(685)

-

(606)

5,608

5,002

-

-

(5,001)(5,001)

-

-

413

19

-

19

-

-

138

(8)

8

344

20,75350,259
6,234

Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity holders in their capacity as equity holders:
Dividends paid
Dividend reinvestment plan

413

Other equity movements:
Share-based payments/(exercises)-

Group employee share acquisition scheme

138

Transfer of options/rights lapsed
As at 30 September 2016

29,162

Profit or loss

-

-

-

6,234

(316)

(3)

(319)

-

(316)

6,231

5,915

-

-

(4,609)(4,609)Dividend reinvestment plan

374

-

-

374

Group share buy-back2

(176)

-

-

(176)

Other comprehensive income for the year-

Total comprehensive income for the year
Transactions with equity holders in their capacity as equity holders:-

Dividends paid

Other equity movements:-

Group employee share acquisition scheme

56

Other items
As at 30 September 2017

-

-

56

-

8

21

29

29,41636

22,396

51,8481.

Further information on individual reserves is disclosed in Note 20 Shareholders’ Equity to the financial statements.

2.

Following the issue of $176 million shares under the Dividend Reinvestment Plan for the 2017 interim dividend, the Company repurchased $176 million of shares via an onmarket share buy-back.

The notes appearing on pages 8 to 68 form an integral part of the financial statements.

7

NOTES TO THE FINANCIAL STATEMENTS
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 2017. The Company is incorporated and domiciled in Australia. The address of theCompany’s registered office and its principal place of business is ANZ Centre, 833 Collins Street, Docklands, Victoria,
Australia 3008.
On 2 November 2017, the Directors resolved to authorise the issue of these financial statements.
In the prior financial years, disclosures pertaining to the Company were presented in the consolidated financial
statements of the Group as part of the Annual Report. In 2017 we have made the following changes:






presenting these financial statements separately from the consolidated financial statements of the Group;
re-organising disclosures into common themes that are aligned with how we manage our business;relocating information about the Company’s recognition and measurement policies and key judgements andestimates to be disclosed within the relevant notes to the financial statements;
removing certain immaterial disclosures; andaggregating prior year numbers in certain disclosures.

All material information relevant to the understanding of users is included in these financial statements.
This section of the financial statements:outlines the basis upon which the Company’s financial statements have been prepared; anddiscusses any new accounting standards or regulations that directly impact financial statement disclosure
requirements.

BASIS OF PREPARATIONThis financial report is a general purpose (Tier 1) financial report (as defined under the Corporations law) prepared bya ‘for profit’ entity, in accordance with Australian Accounting Standards (AASs) and other authoritative
pronouncements of the Australian Accounting Standards Board (AASB), and the International Financial ReportingStandards (IFRS) and interpretations published by the International Accounting Standards 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 AustralianFinancial Services Licensees.
The consolidated financial statements of the Group can be found as part of the 2017 Annual Report at
https//shareholder.anz.com/annual-report-shareholder-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 to the nearest million dollars ($m), unless otherwise stated, as allowed under theAustralian 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 have stated at their fair value:






derivative financial instruments and in the case of fair value hedging, a fair value adjustment is made on theunderlying hedging exposure;available-for-sale financial assets;financial instruments held for trading;other financial assets and liabilities designated at fair value through profit and loss; andother assets held for sale where the fair value less cost of disposal is less than their carrying value.

In accordance with AASB 119 Employee Benefits defined benefit obligations are measured using the Projected Unit
Credit Method.

8

NOTES TO THE FINANCIAL STATEMENTS (continued)
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 the reporting 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 currencytranslation 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 aspart of the fair value gain or loss on these items. We include any translation differences on non-monetary items
classified as available-for-sale financial assets in the available-for-sale revaluation reserve in equity.

KEY JUDGEMENTS AND ESTIMATES
In the process of applying the accounting policies, management has made a number of judgements and applied
estimates and assumptions about future events. Further information on the key judgements and estimates that we
consider material to the financial statements are contained within the relevant notes to the financial statements.
ACCOUNTING STANDARDS NOT EARLY ADOPTED
A number of new standards, amendments to standards and interpretations have been published but are notmandatory for the financial statements for the year ended 30 September 2017, and have not been applied by theCompany in preparing these financial statements.
We have identified four standards where this applies to the Company and further details are set out below.
AASB 9 Financial Instruments (AASB 9)AASB 9 was issued in December 2014. When operative, this standard will replace AASB 139 Financial Instruments:
Recognition and Measurement (AASB 139) and includes requirements for impairment, classification and measurement
and general hedge accounting.
Impairment
AASB 9 replaces the incurred loss model under AASB 139 with a forward-looking expected loss model. This model will
be applied to financial assets measured at amortised cost, debt instruments measured at fair value through othercomprehensive income, lease receivables, and certain loan commitments and financial guarantees. Under AASB 9, a
three-stage approach is applied to measuring expected credit losses (ECL) based on credit migration between thestages as follows:Stage 1: At initial recognition, a provision equivalent to 12 months ECL is recognised.
Stage 2: Where there has been a significant increase in credit risk since initial recognition, a provisionequivalent to full lifetime ECL is required.
Stage 3: Similar to the current AASB 139 requirements for individual impairment provisions, lifetime ECL isrecognised for loans where there is objective evidence of impairment.

ECL are probability weighted and determined by evaluating a range of possible outcomes, taking into account thetime value of money, past events, current conditions and forecasts of future economic conditions.
Classification and measurement
There are three measurement classifications under AASB 9: amortised cost, fair value through profit or loss (FVTPL)
and, for financial assets, fair value through other comprehensive income (FVOCI). Financial assets are classified into
these measurement classifications taking into account the business model within which they are managed, and theircontractual cash flow characteristics.
The classification and measurement requirements for financial liabilities under AASB 9 are largely consistent withAASB 139 with the exception that for financial liabilities designated as measured at fair value, gains or losses relating
to changes in the entity’s own credit risk are included in other comprehensive income. This part of the standard wasearly adopted by the Company from 1 October 2013.
General hedge accounting
AASB 9 introduces general hedge accounting requirements which more closely align with risk management activities
undertaken when hedging financial and non-financial risks.

9

NOTES TO THE FINANCIAL STATEMENTS (continued)
1. ABOUT THE FINANCIAL STATEMENTS (continued)
Transition and impact
Other than noted above under classification and measurement, AASB 9 has a date of initial application for theCompany of 1 October 2018.
The classification and measurement, and impairment requirements will be applied retrospectively by adjusting the
opening balance sheet at the date of initial application, with no requirement to restate comparative periods. The
Company does not intend to restate comparatives.
AASB 9 provides an accounting policy choice to continue with AASB 139 hedge accounting given the International
Accounting Standards Board’s ongoing project on macro hedge accounting. The Company’s current expectation is that
it will continue to apply the hedge accounting requirements of AASB 139.
The Company is in the process of the assessing the impact of application of AASB 9 and is not yet able to reasonably
estimate the impact on its financial statements.
AASB 15 Revenue from Contracts with Customers (AASB 15)
AASB 15 was issued in December 2014 and is not effective for the Company until 1 October 2018. AASB 15 contains
new requirements for the recognition of revenue.
The standard requires identification of distinct performance obligations within a contract and allocation of thetransaction price of the contract to those performance obligations. Revenue is recognised as each performanceobligation is satisfied. Variable amounts of revenue can only be recognised if it is highly probable that a significant
reversal of the variable amount will not be required in future periods.
Although a significant proportion of the Company’s revenue is outside the scope of AASB 15, certain revenue streams
are in the scope of the standard. The Company is in the process of assessing the impact of the application of AASB 15
and is not yet able to reasonably estimate the impact on its financial statements.
AASB15 may be applied under different transition approaches which could impact (a) revenue recognised in future
periods and (b) the opening adjustment to retained earnings at the relevant date of initial application. The Company
has not yet determined which transition approach it will adopt.
AASB 16 Leases (AASB 16)
The final version of AASB 16 was issued in February 2016 and is not effective for the Company until 1 October 2019.
AASB 16 requires a lessee to recognise its:right to use the underlying leased asset, as a right-of-use asset; andobligation to make lease payments as a lease liability.

AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases.
The Company is in the process of the assessing the impact of application of AASB 16 and is not yet able to reasonably
estimate the impact on its financial statements.
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 isexpected that the timing of profit recognition will change.
The Company is not yet able to reasonably estimate the impact of AASB 17 on its financial statements.

10

NOTES TO THE FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME
2017

2016

$m

$m

Net interest income
Interest income by type of financial asset
Financial assets not at fair value through profit or loss

20,546

21,102

Trading securities

739

851

Available-for-sale assets

985

842

Financial assets designated at fair value through profit or loss-

3

Interest income - external

22,27022,798Interest income - controlled entities

3,343

3,589

Interest income

25,613

26,387(10,961)(11,339)

(111)

(146)

Interest income by type of financial liability
Financial liabilities not classified at fair value through profit or loss
Securities sold shortFinancial liabilities designated at fair value through profit or loss

(78)

(100)

Interest expense - external(11,150)(11,585)

Interest expense - controlled entities(3,781)(4,037)(86)-

Interest expense(15,017)(15,622)

Net interest income

10,596

10,765Major bank levy

Other operating incomei) Fee and commission income
Lending fees1

652

670

Non-lending fees and commissions2

2,211

2,125

Fee and commission income - external

2,863

2,795

Fee and commission income - controlled entities

1,197

1,252

Fee and commission income

4,060

4,047

Fee and commission expense(1,019)(936)

Net fee and commission income

3,041

3,111

ii) Other income
Net foreign exchange earnings and other financial instruments income

852

671

2,299

2,010

Gain on cessation of equity accounting of investment in Bank of Tianjin (BoT)-

29

Gain on the Esanda Dealer Finance divestment-

66

Derivative Credit Valuation Adjustment (CVA) methodology change

-

(196)

Derivative valuation adjustments

201

(51)

Loss on sale of Asia Retail and Wealth businesses

(219)

-

Reclassification of Shanghai Rural Commercial Bank to held for sale

(231)

-

44

37

Other income

2,946

2,566

Other operating income3

5,987

5,677

Funds management income

74

75

Insurance premium income

43

48

Commission income

41

75

Net funds management and insurance income

158

198

Dividends received from controlled entities

Other

Net funds management and insurance income

Share of associates' profit
Operating income

60

347

16,801

16,9871.

Lending fees excludes fees treated as part of the effective yield calculation in interest income.

2.

In 2017, a change was made to the classification of certain fees payable. These items have been reclassified from other operating income to operating expenses to moreaccurately reflect the nature of these items. Comparatives have been restated accordingly (2016: $17 million).

3.

Total other operating income includes external dividend income from BoT of $26.4 million (2016: $26.3 million).

11

NOTES TO THE FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME (continued)

RECOGNITION AND MEASUREMENTNET INTEREST INCOME
INTEREST INCOME AND EXPENSE
We recognise interest income and expense for all financial instruments, including those classified as held for trading,available-for-sale assets or designated at fair value, in profit or loss using the effective interest rate method. Thismethod uses the effective interest rate of a financial asset or financial liability to calculate its amortised cost.
The effective interest rate is the rate that discounts the stream of estimated future cash receipts or payments overthe expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of thefinancial asset or liability. For assets subject to prepayment, we determine their expected life on the basis of historicalbehaviour of the particular asset portfolio - taking into account contractual obligations and prepayment experience.
We recognise fees and costs, which form an integral part of the financial instrument (for example loan origination fees
and costs), using the effective interest method. This is presented as part of interest income or expense depending onwhether 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’) was introduced in 2017 and is effective from 1 July 2017.
The 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 is included as a component of net interest income. This is presented
within interest expense in the Income Statement.

OTHER OPERATING INCOME
FEE AND COMMISSION INCOME
We recognise fees or commissions:that relate to the execution of a significant act (for example, advisory or arrangement services, placement
fees and underwriting fees) when the significant act has been completed; andcharged for providing ongoing services (for example, maintaining and administering existing facilities) as
income over the period the service is provided.

NET FOREIGN EXCHANGE EARNINGS AND OTHER FINANCIAL INSTRUMENTS INCOME
We recognise the following as net foreign exchange earnings and other financial instruments income:






exchange rate differences arising on the settlement of monetary items and translation differences onmonetary items translated at rates different to those at which they were initially recognised or included in aprevious financial report;
fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting
hedges that we use to manage interest rate and foreign exchange risk on funding instruments;
the ineffective portions of fair value hedges, cash flow hedges and net investment hedges;
fair value movements on financial assets and financial liabilities designated at fair value through profit or loss
or held for trading; andimmediately upon sale or repayment of a hedged item, the unamortised fair value adjustments in items
designated as fair value hedges and amounts accumulated in equity related to designated cash flow hedges.

DIVIDENDS RECEIVED FROM CONTROLLED ENTITIESDividends 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 proceedsof disposal net of disposal costs. This is recognised in other income in the year in which the significant risks andrewards transfer to the buyer.

NET FUNDS MANAGEMENT AND INSURANCE INCOME
FUNDS MANAGEMENT INCOME
We recognise the fees we charge to policyholders in connection with life insurance and life investment contracts when
we have provided the service.
INSURANCE PREMIUM INCOME
We recognise:premiums with a regular due date as income on an accruals basis;
unpaid premiums as income and include them as receivables in the balance sheet only during the grace
periods in the contract, or for longer only where secured by the surrender value of the policy; andpremiums with no due date (such as one off premiums) in income when the premiums are received.

We show these insurance premiums net of any reinsurance premium, which we account for on the same basis as theunderlying direct insurance premium.

SHARE OF ASSOCIATES’ PROFITThe equity method is applied to accounting for associates in the financial statements. Under the equity method theCompany’s share of the after tax results of associates is included in the Income Statement and the Statement ofComprehensive Income.
12

NOTES TO THE FINANCIAL STATEMENTS (continued)
3. OPERATING EXPENSESi) Personnel
Salaries and related costs
Superannuation costs
Other

2017

2016

$m

$m

3,288

3,580

266

279

227

236

3,781

4,095

Rent

409

387

Other

275

301

Premises expenses

684

688

662

1,041

Licences and outsourced services

413

417

Other

216

253

1,291

1,711

55

249

Advertising and public relations

192

199

Professional fees

397

364

Freight, stationery, postage and telephone

204

211

Personnel expensesii) Premisesiii) Technology
Depreciation and amortisation
1

Technology expensesiv) Restructuringv) Other

Other

1,019

840

Other expenses

1,812

1,614

Operating expenses

7,623

8,357

1.

In 2017, certain fees payable have been reclassified from other operating income to operating expenses to more accurately reflect the nature of these items. Comparatives
have been restated accordingly (2016: $17 million).

RECOGNITION AND MEASUREMENTOPERATING EXPENSES
Operating expenses are recognised as services are provided to the Company over the period in which an asset isconsumed or once a liability is incurred.
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 theCompany expects to pay when the liabilities are settled.
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 orconstructive obligation to pay this amount (as a result of past service provided by the employee) and the obligation
can be reliably measured.
Personnel expenses also include share-based payments which may be cash or equity settled. We calculate the fairvalue of equity settled remuneration at grant date, which is then amortised over the vesting period, with acorresponding increase in share capital or the share option reserve as applicable. When we estimate the fair value, wetake 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 not met, for example an employee fails to satisfy the minimum service period specified in theaward on resignation, termination or notice of dismissal for serious misconduct. However, we do not reverse theexpense if the award does not vest due to the failure to meet a market-based performance condition.
Further information on share-based payment schemes operated by the Company during the current and prior year isincluded in Note 27 Employee Share and Option Plans.

13

NOTES TO THE FINANCIAL STATEMENTS (continued)
4. INCOME TAX
INCOME TAX EXPENSE
Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense recognised in the
profit or loss:
2017
$m

2016
$m

Profit before income tax

8,297

7,091

Prima facie income tax expense at 30%

2,489

2,127

Share of associates’ profit

(18)

(104)

Reclassification of SRCB to held for saleTax effect of permanent differences:172-

Tax provisions no longer required

-

(73)

Interest on convertible instruments

69

70

Overseas tax differential

27

10

(690)

(603)

-

(9)

Rebatable and non-assessable dividends
Gain on cessation of equity accounting for BoT
Other

32

3

2,081

1,421

(18)

(17)

Income tax expense

2,063

1,404

Current tax expense

1,997

1,630

(18)

(17)

Subtotal
Income tax over provided in previous years

Adjustments recognised in the current year in relation to the current tax of prior years
Deferred tax expense/(income) relating to the origination and reversal of temporary differences
Income tax expense
Australia
Overseas

84

(209)

2,063

1,404

1,975

1,332

88

72

Income tax expense

2,063

1,404

Effective tax rate

24.9%

19.8%

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 thefollowing 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 the members of thetax-consolidated group. The Company (as head entity in the tax-consolidated group) recognises current tax liabilities
and assets of the tax-consolidated group.
Under a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised aspayable to or receivable by the Company and each member of the tax-consolidated group in relation to the tax
contribution amounts paid or payable between the Company and the other members of the tax consolidated group.
Members of the tax-consolidated group have also entered into a tax sharing agreement that provides for the
allocation of income tax liabilities between the entities were the head entity to default on its income tax payment
obligations.
UNRECOGNISED DEFERRED TAX ASSETS AND LIABILITIES
Unrecognised deferred tax assets related to unused realised tax losses (on revenue account) total $nil million (2016:$nil million). Unrecognised deferred tax liabilities related to additional potential foreign tax costs (assuming all
retained earnings in offshore branches are repatriated) total $38 million (2016: $67 million).

14

NOTES TO THE FINANCIAL STATEMENTS (continued)
4. INCOME TAX (continued)

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 the accounting and tax treatments of income and expenses (that is, taxable income). We recognise tax
expense in profit or loss except to the extent to which it relates to items recognised directly in equity and othercomprehensive income, in which case we recognise it directly in equity 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 areenacted at the reporting date. We recognise current tax as a liability (or asset) to the extent that it is unpaid (orrefundable).
DEFERRED TAX ASSETS AND LIABILITIESWe account for deferred tax using the balance sheet method. Deferred tax arises because accounting income is notalways the same as the taxable 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 is realised, 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 imposedby 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.

5. DIVIDENDS
ORDINARY SHARE DIVIDENDSDividends are provided for in the financial statements once determined, accordingly, the final dividend announced forthe current financial year is provided for and paid in the following financial year.
Amountper share

Total
dividend$m2015 final dividend paid

95.0 cents

2,7582016 interim dividend paid

80.0 cents

2,334

Dividends% of total

Financial Year 2016

Bonus option plan adjustment(91)

Dividends paid during the year ended 30 September 2016

5,001

Cash

91.7%

4,588

Dividend reinvestment plan

8.3%

413

Dividends paid during the year ended 30 September 2016

5,001

Financial Year 20172016 final dividend paid

80.0 cents

2,3422017 interim dividend paid

80.0 cents

2,349

Bonus option plan adjustment(82)

Dividends paid during the year ended 30 September 2017

4,609

Cash

91.9%

Dividend reinvestment plan

8.1%

4,235
374

Dividends paid during the year ended 30 September 2017

Dividends announced and to be paid after year-end
2017 final dividend (fully franked at 30%, New Zealand imputation credits NZD 10cents per share)

4,609

Payment date18 December 2017

Amountper share
80.0
cents

Total
dividend
$m
2,350

15

NOTES TO THE FINANCIAL STATEMENTS (continued)
5. DIVIDENDS (continued)
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 2017 final dividend, DRP
participation will be satisfied by an on-market purchase of shares (as approved by APRA) and BOP participation will besatisfied by an issue of ANZ ordinary shares. There will be no discount applied to the DRP and BOP price.
See Note 20 Shareholders’ Equity for details of shares the Company issued or purchased in respect of the DRP and
BOP.
DIVIDEND FRANKING ACCOUNT
2017

2016

Currency$m$mAustralian franking credits available at 30% (2016: 30%) tax rate

AUD

171

118

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

NZD

3,680

3,494

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;
andfranking credits/debits from the receipt/payment of dividends that have been recognised as tax
receivables/payables as at the end of the financial year.

The final proposed 2017 dividend will utilise the entire balance of $171 million franking credits available at 30
September 2017. Instalment tax payments on account of the 2018 financial year which will be made after 30
September 2017 will generate sufficient franking credits to enable the final 2017 dividend to be fully franked. The
extent to which future dividends will be franked will depend on a number of factors, including the level of profits
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 ordinary shares if the aggregate dividends exceed the Company’s after tax earnings (in calculating thoseafter tax earnings, we take into account any payments we made 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.
The terms of the ANZ Convertible Preference Shares limit payments of dividends on those securities if as a result of
the payment the Company becomes, or is likely to become, insolvent or breaches specified capital ratios or if APRA
objects to the payment.
If the Company fails to pay a dividend or distribution on its ANZ Convertible Preference Shares, ANZ Capital Notes or
ANZ Capital Securities on the scheduled payment date, it may (subject to a number of exceptions) be restricted fromresolving 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. Disaggregatedinformation 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 the Company.
Full details of the operating segments of the Group are provided in Note 7 Segment Reporting in the ANZ 2017 Annual
Report located at https://shareholder.anz.com/annual-report-shareholder-review.

16

NOTES TO THE FINANCIAL STATEMENTS (continued)
7. CASH AND CASH EQUIVALENTS
2017
$m

2016
$m

Coins, notes and cash at bank

1,096

1,008

Securities purchased under agreements to resell in less than 3 months

20,818

20,950

Balances with central banks

22,38924,114

Settlement balances owed to ANZ within 3 months

19,09615,922

Cash and cash equivalents

63,39961,994

2017

2016

$m

$m

Government securities

25,64722,557

Corporate and financial institution securities

5,060

5,502

Equity and other securities

4,899

7,000

Trading securities

35,60635,0598. TRADING SECURITIESRECOGNITION AND MEASUREMENT
Trading securities are financial instruments we either:acquire principally for the purpose of selling in the short-term; orhold 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; andsubsequently, 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 notvalued using quoted market prices. Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for further
details.

17

NOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value
Derivative financial instruments - held for trading

Assets2017$mLiabilities
2017$mAssets2016$mLiabilities
2016$m

55,261(54,937)

72,446(73,139)

Derivative financial instruments - designated in hedging
relationships

1,775(1,893)

3,426(3,104)

Derivative financial instruments

57,036(56,830)

75,872(76,243)

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 more than one variable;that require little or no initial net investment; andthat 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 follows:
Trading

Derivatives held in order to:

Designatedin Hedging
Relationships

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

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, currency risk and credit risk.
Hedges of other exposures relating to non-trading positions.

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

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

Futures

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

Swaps

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

Options

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

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

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

Foreign
Exchange

Currencies at current or determined rates of exchange.

Commodity

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

CreditCounterparty risk in the event of default.

18

NOTES TO THE FINANCIAL STATEMENTS (continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS – HELD FOR TRADINGThe majority of the Company’s derivative financial instruments are held for trading. The fair value of derivative
financial instruments held for trading are:Assets2017

Liabilities
2017

Assets2016

Liabilities
2016

$m

$m

$m

$m

Forward rate agreements

2

(1)

13

(14)

Futures contracts

97

(34)

25

(64)

Swap agreements

27,584(27,720)

46,665(45,454)

Options purchased

742

-

1,095

-

-

(1,365)-(2,077)28,425(29,120)

47,798(47,609)

Spot and forward contracts

14,132(13,731)

10,410(9,936)

Swap agreements

10,070(10,073)

10,916(13,251)

Options purchased

475

-

854

-

Fair Value
Interest rate contracts

Options sold
Total
Foreign exchange contracts

Options sold

-

(439)

-

(748)

Total

24,677(24,243)

22,180(23,935)

Commodity contracts

1,991(1,398)2,291(1,393)Credit default swaps
Structured credit derivative purchased

52

-

40

-

Other credit derivatives purchased

13

(110)

117

(125)

65

(110)

157

(125)

-

(58)

-

(50)

Credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold

103

(8)

20

(27)

Credit derivatives sold

103

(66)

20

(77)

Total

168

(176)

177

(202)

55,261(54,937)

72,446(73,139)

Derivative financial instruments - held for trading

19

NOTES 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
this hedging
arrangement

To hedge our exposure tochanges to the fair value of arecognised asset or liability or
unrecognised firm
commitment caused byinterest rate or foreign
currency movements.

To hedge our exposure tovariability in cash flows ofa recognised asset or
liability, a foreign exchange
component of a firm
commitment or a highly
probable forecast
transaction caused byinterest rate, foreign
currency or other pricemovements.

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

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

We recognise the effective
portion of changes in thefair value of derivatives
designated as a cash flow
hedge in the cash flow
hedge reserve.

We recognise the effective
portion of changes in the fairvalue of the hedging instrumentin the foreign currencytranslation reserve.



all changes in the fairvalue of the underlying
item relating to thehedged risk; andthe change in the fairvalue of derivatives.

Recognition of
ineffective
hedge portion

Recognised immediately in other operating income.

If a hedging
instrument
expires, or issold,terminated, or
exercised; orno longer
qualifies forhedge
accounting

When we recognise thehedged item in profit or loss,
we recognise the related
unamortised fair value
adjustment in profit or loss.
This may occur over time if
the hedged item is amortised
to profit or loss as part of theeffective yield over the period
to maturity.

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

The amount we defer in theforeign currency translation
reserve remains in equity andis transferred to profit or loss
only when we dispose of, orpartially dispose of, the foreign
operation.

Hedged item
sold or repaid

We recognise theunamortised fair value
adjustment immediately in
profit or loss.

Amounts accumulated inequity are transferred
immediately to profit or loss.

The gain or loss, or applicableproportion, we recognise inequity is transferred to profit
or loss on disposal or partial
disposal of a foreign operation.

The fair value of derivative financial instruments designated in hedging relationships are:Assets2017$mLiabilities
2017$mAssets2016$mLiabilities
2016$m

Fair Value

Hedge
accounting
type

Foreign exchange swap agreements

Fair value

1

-

2

-

Interest rate swap agreements

Fair value

1,287(1,555)2,522(2,464)

Interest rate futures contracts

Fair value

80

-

5

(12)

Interest rate swap agreements

Cash flow

361

(278)

897

(625)

Foreign exchange swap agreements

Cash flow

35

(49)

-

-

Foreign exchange spot and forward contracts

Cash flow-(5)

Foreign exchange spot and forward contracts

Net investment

11

(6)

-

(3)

1,775

(1,893)

3,426(3,104)

Derivative financial instruments - designated in
hedging relationships

20

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

Gain/(loss) recognised in other operating income
Hedged item
Hedging instrument
Ineffective portion of hedged instrument

Hedge
accounting
type

2017

2016

$m

$m

Fair value
Fair value
Cash flow

(43)

463

38

(424)

(20)

5

RECOGNITION AND MEASUREMENT
Recognition

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

Derecognition ofassets andliabilities

We remove derivative assets from our balance sheet when the contracts expire or wehave 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
the derivative is trading or is designated into a hedging relationship.

Trading

We recognise gains or losses from the change in the fair value of trading securities in
profit or loss as other operating income in the period in which they occur. Contracted
interest payments are included in interest income and expense.

Hedging

For an instrument designated into a hedging relationship the recognition of gains orlosses depends on the nature of the item being hedged. Refer to the previous table on
page 20 for profit or loss treatment depending on the hedge type.

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

the hedge is expected to be highly effective in achieving offsetting changes in fairvalue or cash flows attributable to the hedged risk during the period for which thehedge 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 leastat each reporting 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 of valuation 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.

21

NOTES TO THE FINANCIAL STATEMENTS (continued)
10. AVAILABLE-FOR-SALE ASSETSAVAILABLE-FOR-SALE ASSETS BY SECURITY TYPE AND CONTRACTUAL MATURITY AT 30 SEPTEMBER
2017

Security
type

PeriodGovernment
securities$m

Corporate
andFinancial
institution
securities

2016

$m

Equityandothersecurities
$m

Total
$m

Government
securities$m

Corporate
andFinancial
institution
securities$m

Equityandothersecurities
$m

Total
$m

Less than 3 months

5,424

768

-

6,192

2,487

372

-

2,859

Between 3 and 12 months

4,168

2,163

-

6,331

1,021

2,539

-

3,560

Between 1 and 5 years

15,656

10,726403

26,785

8,197

12,757566

21,520Greater than 5 years

16,079260

2,134

18,47323,124867

2,960

26,951

-

-

725

725

-

-

831

831

41,327

13,917

3,262

58,50634,82916,535

4,357

55,721

No maturity
Available-forsale assets

During the year, a net gain (before tax) in respect of available-for-sale (AFS) assets of $15 million (2016: $4 million)
was recognised in other operating income.
The carrying value of AFS equity securities is $725 million (2016: $831 million). This includes the Company’s $676
million (2016: $795 million) investment in the Bank of Tianjin (BoT) that ceased being classified as an associate in
March 2016.

RECOGNITION AND MEASUREMENT
AFS assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principallyfor trading purposes. They include both equity and debt securities. AFS assets are initially recognised at fair value
plus transaction costs and are revalued at least 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 orloss, being interest on debt, dividends received, foreign exchange on debt securities and impairment charges.
When we sell the asset, any cumulative gain, or loss, from the available-for-sale revaluation reserve is recognised in
profit or loss.
At each reporting date, we assess whether any AFS assets are impaired. We assess the impairment of any debt
securities if an event has occurred which will have a negative impact on the asset’s estimated cash flows. For equity
securities, we assess if there is a significant or prolonged decline in fair value below cost.
If an AFS asset is impaired, then we remove the cumulative loss related to that asset from the available-for-salerevaluation reserve. We then recognise it in profit or loss for:

debt instruments, as a credit impairment expense; andequity instruments, as a negative impact in other operating income.

We recognise any later reversals of impairment on debt securities in the profit or loss through the credit impairment
charge line. However, we do not make any reversals of impairment for equity securities. To the extent previously
impaired equity securities recover in value, gains are recognised directly in equity.

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

22

NOTES TO THE FINANCIAL STATEMENTS (continued)
11. NET LOANS AND ADVANCES
2017

2016

$m

$m

Overdrafts

6,155

6,805

Credit cards

8,639

9,340

Commercial bills

10,983

12,397

Term loans – housing

268,416

256,004

Term loans – non-housing

159,013

162,577

1,578

1,779

454,784

448,902

(149)

(261)

751

697

Other
Subtotal
Unearned income
Capitalised brokerage/mortgage origination fees
Customer liability for acceptances1-

321

Gross loans and advances

455,386

449,659

Provision for credit impairment (refer to Note 12)(2,962)(3,128)Net loans and advances

452,424

446,531

Within one year

67,60964,623After more than one year

384,815

381,908

Net loans and advances

452,424

446,531452,408

446,479

16

37

Residual contractual maturity:

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

-

15

452,424

446,531

Customer liability for acceptances has been recognised in other assets from 30 September 2017.

RECOGNITION AND MEASUREMENT
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market and are facilities the Company provides directly to customers or through third party channels.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the issue of theloan or advance, which are primarily brokerage/mortgage origination fees. These costs are amortised over theestimated life of the loan. Subsequently, we then measure 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 designatedon 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 and rewards of ownership of the asset to the customer or an unrelated third party. We include these facilitiesin ‘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 transferredassets remain on the Company’s balance sheet, however, if substantially all the risks and rewards are transferredthen the Company derecognises the asset.
If the risks and rewards are partially retained and control over the asset is lost, then the Company derecognises theasset. If control over the asset is not lost, then 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 asappropriate.

23

NOTES TO THE FINANCIAL STATEMENTS (continued)
12. PROVISION FOR CREDIT IMPAIRMENTPROVISION FOR CREDIT IMPAIRMENT - BALANCE SHEET
Off-balance sheet
credit related
commitments

Net loans andadvances
Provision for credit impairment

Total

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

Individual provision
Balance at start of year

942

740

15

19

957

759

New and increased provisions

1,467

1,958

1

-

1,468

1,958

Write-backs

(348)

(200)

-

-

(348)

(200)

Bad debts written off (excluding recoveries)(1,138)(1,416)--(1,138)(1,416)

Other1

(36)

(140)

-

(4)

(36)

(144)

Total individual provision

887

942

16

15

903

957

Collective provision
Balance at start of year

1,678

1,765

493

557

2,171

2,322

Charge/(release) to profit or loss

(24)

5

(42)

(48)

(66)

(43)

Other2

(29)

(92)

(17)

(16)

(46)

(108)

Total collective provision

1,625

1,678

434

493

2,059

2,171

Total provision for credit impairment

2,512

2,620

450

508

2,962

3,128

1.

Other individual provision includes the Esanda Dealer Finance divestment, an adjustment for exchange rate fluctuations and the impact of discount unwind on individual
provisions.

2.

Other collective provision includes the Esanda Dealer Finance divestment, Asia Retail and Wealth business divestment and an adjustment for exchange rate fluctuations.

CREDIT IMPAIRMENT CHARGE - INCOME STATEMENT
2017

2016

Credit impairment charge$m$m

New and increased provisions

1,468

1,958

Write-backs

(348)

(200)

Recoveries of amounts previously written-off

(173)

(176)

Individual credit impairment charge

947

1,582

Collective credit impairment charge/(release)

(66)

(43)

Total credit impairment charge

881

1,539

24

NOTES TO THE FINANCIAL STATEMENTS (continued)
12. PROVISION FOR CREDIT IMPAIRMENT (continued)

RECOGNITION AND MEASUREMENTThe Company recognises two types of impairment provisions for its loans and advances:

Individual provisions for significant assets that are assessed to be impaired; andCollective provisions for portfolios of similar assets that are assessed collectively for impairment.

The accounting treatment for each of them is detailed below:
Individually
Assessment
If any impaired loans and advances exceed
specified thresholds and an impairment event
has been identified, then we assess the needfor a provision individually.

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

Impairment

Loans and advances are assessed as impaired
if we have objective evidence that we may notrecover principal or interest payments (that is,a loss event has been incurred) and we canreliably measure the impairment.

We estimate the provision on the basis ofhistorical loss experience for assets with credit
risk characteristics similar to others in therespective collective pool. We adjust thehistorical loss experience based on current
observable data – such as: changing economic
conditions, the impact of the inherent risk oflarge concentrated losses within the portfolio
and an assessment of the economic cycle.

Measurement

We measure impairment loss as the difference between the asset’s carrying amount andestimated 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 andadvances 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’s bankruptcy or similar legal release from the obligation to repay the loan oradvance. 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 the recovery 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 and collective basis.

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

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

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

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

25

NOTES TO THE FINANCIAL STATEMENTS (continued)
13. DEPOSITS AND OTHER BORROWINGS
The table below shows our total deposits and other borrowings by type:

2017
$m

2016
$m

Certificates of deposit

53,59759,626

Term deposits

146,445

147,754

On demand and short term deposits

209,260

190,621

Deposits not bearing interest

12,389

11,095

Deposits from banks and securities sold under repurchase agreements

57,94556,631

Commercial paper

14,59914,236

Deposits and other borrowings

494,235

479,963- to be settled within 1 year

479,809462,870- to be settled after 1 year

14,426

17,093

Deposits and other borrowings

494,235

479,963494,162

479,8857378494,235

479,963

Residual contractual maturity:

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 costand recognise their interest expense using the effective interest rate method; andmanaged on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded
derivative, we designate them as fair value through profit or loss.

Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for details of the split between amortised costand 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. Anyremaining amount of fair value gain or loss we recognise directly in profit or loss. Once we have recognised anamount in other comprehensive income, we do not later reclassify it to profit 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 repurchaseagreement, we recognise the difference between the sale price and the repurchase price and charge it to interest
expense in the Income Statement.

14. DEBT ISSUANCESThe Company uses a variety of funding programmes to issue senior debt (including covered bonds) and subordinateddebt. The difference between senior debt and subordinated debt is that holders of senior debt take priority overholders of subordinated debt owed by the relevant issuer, and subordinated debt will be repaid by the relevant issuer
only after the repayment of claims of depositors, other creditors and the senior debt holders.
2017
$m

2016
$m

Senior debt

54,04656,766

Covered bonds

14,95915,109Total unsubordinated debt

69,00571,875Subordinated debt
- Additional Tier 1 capital

7,995

9,020

- Tier 2 capital

8,495

11,687

Total subordinated debt

16,49020,707

Total debt issued

85,49592,58226

NOTES TO THE FINANCIAL STATEMENTS (continued)
14. DEBT ISSUANCES (continued)
TOTAL DEBT ISSUED BY CURRENCY
The table below shows the Company’s issued debt by currency of issue, which broadly represents the debt holders’base location.
2017
$m

2016
$m

USD

United States dollars

37,50337,894

EUR

Euro

16,36418,000

AUD

Australian dollars

21,60924,055NZD

New Zealand dollars

1,570

1,773

JPY

Japanese yen

3,199

4,043

CHF

Swiss francs

710

749

GBP

Pounds Sterling

854

1,744

HKD

Hong Kong dollars

1,136

1,188

Other

Chinese yuan, Norwegian kroner, Turkish lira, Singapore dollars, Canadian dollars, Mexican
peso and South African rand

2,550

3,136

85,49592,582- to be settled within 1 year

10,493

18,798- to be settled after 1 year

73,41472,061

Total debt issued
Residual contractual maturity:- no maturity date (instruments in perpetuity)
Total debt issued

1,588

1,723

85,49592,582SUBORDINATED DEBT
Subordinated debt qualifies as regulatory capital for the Company and is classified as either Additional Tier 1 (AT1)
capital or Tier 2 capital for APRA’s capital adequacy purposes depending on their terms and conditions:

AT1 capital - perpetual capital instruments such as:o ANZ Convertible Preference Shares (ANZ CPS);o ANZ Capital Notes (ANZ CN);o ANZ Capital Securities (ANZ CS).
Tier 2 capital - all other perpetual or term subordinated notes.

AT1 CAPITAL
All outstanding AT1 capital instruments (other than CPS3) are Basel III fully compliant instruments (refer to Note 21
Capital Management for further information about Basel III). For CPS3, APRA has granted the Company transitional
Basel III capital treatment until 1 September 2019. CPS3, and notes issued under the ANZ CN and ANZ CS rank
equally with each other.
Distributions on the AT1 capital instruments are non-cumulative and subject to the issuer’s absolute discretion andcertain payment conditions (including regulatory requirements). Distributions on CPS3 and ANZ CN are franked in linewith the franking applied to ANZ ordinary shares.
Where specified, the AT1 capital instruments provide the issuer with an early redemption or conversion option on a
specified date and in certain other circumstances (such as tax or regulatory event). This option is subject to APRA’sprior written approval.
Where specified, the AT1 capital instruments will immediately convert into a variable number of ANZ ordinary shares(based on the average market price of the shares immediately prior to conversion less a 1% discount, subject to a
maximum conversion number) if:

The Company and its consolidated subsidiaries Common Equity Tier 1 capital ratio is equal to or less than
5.125% - known as a Common Equity Capital Trigger Event; orAPRA notifies the Company that, without the conversion or write-off of certain securities or a public sector
injection of capital (or equivalent support), it considers that the Company would become non-viable – known
as a Non-Viability Trigger Event.

The AT1 capital instruments (other than the ANZ CS) mandatorily convert into a variable number of ANZ ordinary
shares (based on the average market price of the shares immediately prior to conversion less a 1% discount):

on a specified date; oron an earlier date under certain circumstances.

However the mandatory conversion is deferred for a specified period if certain conversion tests are not met.

27

NOTES TO THE FINANCIAL STATEMENTS (continued)
14. DEBT ISSUANCES (continued)
The tables below show the key details of the Company’s AT1 capital instruments on issue at 30 September in both thecurrent and prior year:

ANZ Convertible Preference Shares (ANZ CPS)
CPS2

CPS3

IssuerIssue date

ANZ
17 December 2009

ANZ
28 September 2011

Issue amount$1,968 million
On 27 September 2016, ANZ boughtback and cancelled $900 million of CPS2,
and reinvested the proceeds into CN4.
The remaining CPS2 was bought backand cancelled on 15 December 2016

$1,340 million
On 28 September 2017, ANZ boughtback and cancelled $767 million of CPS3,
and either reinvested the proceeds into
CN5 or returned the cash proceeds toinvestors.

Face value
Dividend frequency$100
Quarterly in arrears$100
Semi-annually in arrears

Dividend rate

Floating rate: (90 day Bank Bill rate
+3.1%)x(1-Australian corporate tax
rate)

Floating rate: (180 day Bank Bill rate
+3.1%)x(1-Australian corporate tax
rate)

Issuer’s early redemption orconversion option
Mandatory conversion dateCommon equity capital trigger
event
Non-viability trigger event
Cash dividend payments treated asinterest expense
Carrying value 2017 (net of issue
costs)

N/A

1 March 2018 and each subsequentsemi-annual dividend payment date
1 September 2019

No

Yes

No

No

$8 million (2016: $75 million)$47 million (2016: $51 million)$nil million (2016: $1,068 million)$573 million (2016: $1,340 million)No

ANZ Capital Notes (ANZ CN)
CN1

CN2

CN3

IssuerANZ

ANZ

ANZ, acting through its
New Zealand branch

Issue dateIssue amount
Face value

7 August 2013
$1,120 million$100
Semi-annually inarrears

31 March 2014
$1,610 million$100
Semi-annually inarrears

5 March 2015
$970 million$100
Semi-annually inarrears

Distribution rate

Floating rate: (180 day
Bank Bill rate
+3.4%)x(1-Australian
corporate tax rate)

Floating rate: (180 day
Bank Bill rate
+3.25%)x(1Australian corporate
tax rate)

Floating rate: (180 day
Bank Bill rate
+3.6%)x(1-Australian
corporate tax rate)

Issuer’s early redemption or conversion option

1 September 2021

24 March 2022

24 March 2023

Mandatory conversion dateCommon equity capital trigger event
Non-viability trigger event

1 September 2023
Yes
Yes

24 March 2024
Yes
Yes

24 March 2025
Yes
Yes

Carrying value 2017 (net of issue costs)$1,116 million(2016: $1,115 million)$1,604 million(2016: $1,602 million)$963 million(2016: $962 million)

Distribution frequency

28

NOTES TO THE FINANCIAL STATEMENTS (continued)
14. DEBT ISSUANCES (continued)
ANZ Capital Notes (ANZ CN) (continued)
CN4

CN5

IssuerIssue dateIssue amount
Face value
Distribution frequency

ANZ
27 September 2016
$1,622 million$100
Quarterly in arrears

ANZ
28 September 2017$931 million$100
Quarterly in arrears

Distribution rate

Floating rate: (90 day
Bank Bill rate
+4.7%)x(1-Australian
corporate tax rate)

Floating rate: (90 day
Bank Bill rate
+3.8%)x(1-Australian
corporate tax rate)

Issuer’s early redemption or conversion option
Mandatory conversion dateCommon equity capital trigger event
Non-viability trigger event

20 March 2024
20 March 2026
Yes
Yes

20 March 2025
20 March 2027
Yes
Yes

Carrying value 2017 (net of issue costs)$1,608 million(2016: $1,604 million)$925 million(2016: $0 million)

ANZ Capital Securities (ANZ CS)
Issuer

ANZ, acting through its London branch

Issue date

15 June 2016

Issue amountUSD 1,000 million

Face value

Minimum denomination of USD 200,000 and an integral multiple of USD 1,000 above
that

Interest frequency

Semi-annually in arrears

Interest rate

Fixed at 6.75% p.a. until 15 June 2026. Reset on 15 June 2026 and each 5 year
anniversary to a floating rate: 5 year USD mid-market swap rate + 5.168%

Issuer’s early redemption option

15 June 2026 and each 5 year anniversary

Common equity capital trigger
event

Yes

Non-viability trigger event

Yes

Carrying value 2017 (net of issue
costs)$1,206 million (2016: $1,329 million)

29

NOTES TO THE FINANCIAL STATEMENTS (continued)
14. DEBT ISSUANCES (continued)
TIER 2 CAPITAL
The convertible term subordinated notes are Basel III fully compliant instruments. If a Non-Viability Trigger Eventoccurs, the convertible term subordinated notes will immediately convert into ANZ ordinary shares (based on the
average market price of the shares immediately prior to conversion less a 1% discount, subject to a maximum
conversion number).
APRA has granted transitional Basel III capital treatment for:

all other term subordinated notes until their first call date; and

the USD 300 million perpetual subordinated notes until the end of the transitional period (December 2021).

The table below shows the Tier 2 capital subordinated notes the Company holds at 30 September in both the current
and prior year:

Interest
rate

NonViability
Trigger
Event

2017
$m

2016
$m

Basel III transitional subordinated notes (perpetual)
USD
300m
Perpetual
Each semi-annual interest payment date

Floating

No

382

394

Basel III transitional subordinated notes (term)
EUR
750m
2019
N/A

Fixed

No

1,205

1,225

AUD

500m

2022

2017

Floating

No

-

500

AUD

1,509m2022

2017

Floating

No

-

1,507

USD

750m

2022

2017

Fixed

No

-

981

AUD

750m

2023

2018

Floating

No

Currency

Face value

Maturity

Next optional call date – subject to
APRA’s prior approval

Total Basel III transitional subordinated notes

750

750

2,337

5,357

Basel III fully compliant convertible subordinated notes (term)
AUD
750m
2024
2019

Floating

Yes

750

750

USD

800m

2024

N/A

Fixed

Yes

1,065

1,164

CNY

2,500m

2025

2020

Fixed

Yes

478

491

SGD

500m

2027

2022

Fixed

Yes

478

493

AUD

200m

2027

2022

Fixed

Yes

199

199

JPY

20,000m

2026

N/A

Fixed

Yes

226

264

AUD

700m

2026

2021

Floating

Yes

699

700

USD

1,500m

2026

N/A

Fixed

Yes

1,816

2,011

JPY

10,000m

2026

2021

Fixed

Yes

112

129

JPY

10,000m

2028

2023

Fixed

Yes

111

129

AUD

225m

2032

2027

Fixed

Yes

224

-

Total Basel III fully compliant subordinated notes

6,158

6,330

Total Tier 2 capital

8,495

11,687

RECOGNITION AND MEASUREMENT
Debt issuances are measured at amortised cost, except where designated at fair value through profit and loss. Where
the Company enters into a hedge accounting relationship, the fair value attributable to the hedged risk is reflected inadjustments to the carrying value of the debt. Interest expense is recognised using the effective interest rate method.
Subordinated debt with capital-based conversion features (i.e. Common Equity Capital Trigger Event or Non-Viability
Trigger Events) are considered to contain embedded derivatives that we account for separately at fair value throughprofit and loss. The embedded derivatives have no value as of the reporting date given the remote nature of those
triggering events.

30

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENTRISK MANAGEMENT FRAMEWORK AND MODELINTRODUCTION
The use of financial instruments is fundamental to the Company’s businesses of providing banking and other financial
services to our customers. The associated financial risks (primarily credit, market, and liquidity risks) are a significant
portion of the Company’s principal risks.
We disclose details of all principal risks impacting the Company, and further information on the Company’s risk
management activities, in the Our Approach to Risk Management section of the Directors’ Report in the ANZ 2017
Annual Report available at https//shareholder.anz.com/annual-report-shareholder-review.
This note details the Company’s financial risk management policies, processes and quantitative disclosures in relation
to the key financial risks:
Principal financial risks

Key sections applicable to this risk

OverviewAn overview of our Risk Management Framework

Credit risk
Credit risk is the risk of financial loss from acustomer, or counterparty, failing to meettheir financial obligations – including thewhole and timely payment of principal,
interest and other receivables.

Credit risk overview, management and control
responsibilities



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

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

Market risk overview, management and control
responsibilities

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

Equity securities classified as available-for-saleForeign currency risk – structural exposures

Liquidity and funding risk
Liquidity and funding risk is the risk that theCompany is unable to meet its payment
obligations when they fall due; or does nothave the appropriate amount, tenor andcomposition of funding and liquidity to fundincreases in its assets.

Liquidity risk and funding position

Residual contractual maturity analysis of theCompany’s liabilities

31

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
RISK MANAGEMENT FRAMEWORK AND MODEL (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 2017 Annual Report available athttps//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 theCompany’s risk management policies. The BRC reports regularly to the Board 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 theCompany is prepared to accept in pursuit of its strategic objectives and business plan; andthe 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 the relevant policies, standards andprocedures. 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 androbust control environment in which all employees understand their roles and obligations. At the Company, risk iseveryone’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; andhas an independent reporting line to the BRC to enable the appropriate escalation of issues of concern.

The Internal Audit Function reports directly to the Board Audit Committee (BAC). Internal Audit provides:

an independent evaluation of the Company’s RMF annually and undertakes a comprehensive review every
three years;
assurance on the appropriateness, effectiveness and adequacy of the risk management framework, which
includes assurance the framework is operating effectively; andrecommendations to improve the framework and/or work practices to strengthen the effectiveness of day to
day operations.

32

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISKCREDIT RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Granting credit facilities to customers is one of the Company’s major sources of income. As this activity is also a
principal risk, the Company dedicates considerable resources to its management. The Company assumes credit risk ina wide range of lending and other activities in diverse markets and in many jurisdictions. Credit risks arise fromtraditional 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 wemeasure, monitor and manage the credit 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; andapproves credit transactions beyond the discretion of executive management.

We quantify credit risk through an internal credit rating system (masterscales) to ensure consistency across exposure
types and to provide a consistent framework for reporting and analysis. The system uses models and other tools tomeasure the following for customer exposures:
Probability of Default (PD)Expressed by a Customer Credit Rating (CCR), reflecting the Company’s
assessment of a customer’s ability to service and repay debt.

Exposure at Default (EAD)

The expected amount of loan outstanding at the time of default

Loss in the Event of Default (LGD)

Expressed by a Security Indicator (SI) ranging from A to G. The SI is calculated
by reference to the percentage of loan covered by security which the Company
can realise if a customer defaults. The A-G scale is supplemented by a range ofother SIs which cover such factors as cash cover and sovereign backing. For
some 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 fromthese 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 thefollowing assessment approaches:
Large and more complex lending

Retail and some small business lending

Rating models provide a consistent and structured
assessment, with judgement required around the useof out-of-model factors. We handle credit approval ona dual approval basis, jointly with the business writerand an independent credit officer.

Automated assessment of credit applications using a
combination of scoring (application and behavioural), policy
rules and external credit reporting information. If theapplication does not meet the automated assessment
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, the Company’s CCRs are mapped to external rating agency scales as follows:
Internal Rating

ANZ Customer Requirements

Moody’s
RatingStandard &Poors Rating

Strong credit
profileDemonstrated superior stability in their operating andfinancial performance over the long-term, and whose
capacity is not significantly vulnerable to foreseeable
events.

Aaa – Baa3

AAA – BBB-

Satisfactory risk

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

Ba1 – Ba3

BB+ – BB-

Sub-standard but
not past due nor
impaired

Demonstrated some operational and financial instability,with variability and uncertainty in profitability andliquidity projected to continue over the short andpossibly medium term.

B1 - Caa

B+ - CCC

33

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
MAXIMUM EXPOSURE TO CREDIT RISKFor financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In
certain circumstances there may be differences between the carrying amounts reported on the balance sheet and theamounts reported in the tables below. Principally, these differences arise in respect of financial assets that are subject
to risks other than credit risk, such as equity instruments which are primarily subject to market 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:

2017
$m

2016
$m

2017
$m

2016
$m

Maximum exposure
to credit risk
2017
2016
$m
$m

452,424

446,531

(450)

(508)

452,874

447,039

Cash and cash equivalents

63,39961,994

1,096

1,008

62,30360,986

Settlement balances owed to ANZ3

5,006

3,983

5,006

3,983

-

-

Collateral paid

7,685

10,878

-

-

7,685

10,878

Trading securities

35,60635,059

4,653

6,541

30,95328,518Derivative financial instruments

57,03675,872--57,03675,872Available-for-sale assets

58,50655,721

725

832

57,78154,889Regulatory deposits

495

671

-

-

495

671

Other financial assets4

2,040

1,717

-

-

2,040

1,717

Total other financial assets

229,773245,895

11,48012,364

218,293

233,531

Subtotal

682,197

692,426

11,03011,856

671,167

680,570

Undrawn and contingent facilities2,5187,291

194,521450

508

186,841

194,013

Total

869,488886,947

11,48012,364

858,008

874,583

Reported

Excluded1/Other2

On-balance sheet positions
Net loans and advances2
Other financial assets:

Off-balance sheet positions

1.

Excluded comprises bank notes and coins and cash at bank within liquid assets and equity instruments within trading securities, available-for-sale financial assets.Equity
securities and precious metal exposures recognised as trading securities have been excluded in 2017 as they do not have credit exposure. Comparatives have been restatedaccordingly.

2.

Other relates to the transfer of individual and collective provisions for credit impairment, related to off-balance sheet facilities held in net loans and advances. The provisions
are transferred for the purposes of showing the maximum exposure to credit risk by relevant facility type in this and the following tables.

3.

Settlement balances owed to ANZ relating to trade dated assets which do not carry credit risk and thus are excluded.

4.

Other financial assets mainly comprise accrued interest, insurance receivables and acceptances.

5.

Undrawn facilities and contingent facilities includes guarantees, letters of credit and performance related contingencies.

34

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
CREDIT QUALITY
The table below provides an analysis of the credit quality of the maximum exposure to credit risk split by:neither past due nor impaired financial assets by credit quality;
past due but not impaired assets by ageing; andrestructured and impaired assets presented as gross amounts and net of individual provisions.
Net loans andadvances2017$mOther financial
assets

2016
$m

2017
$m

Off-balance sheet
credit related
commitments

2016
$m

2017
$m

2016
$m

Total

2017
$m

2016
$m

Neither past due nor impaired
Strong credit profile
Satisfactory risk1
Sub-standard but not past due or impaired

322,737 343,830 216,908 231,552 154,741 161,559 694,386 736,941
101,948
75,4391,285
1,660
30,50030,498 133,733 107,597
14,59814,803
100
308
1,532
1,919
16,23017,030Subtotal

439,283 434,072 218,293 233,520 186,773 193,976 844,349 861,568

Past due but not impaired≥ 1 < 30 days
≥ 30 < 60 days
≥ 60 < 90 days
≥ 90 days

7,231
1,841
1,005
2,706

6,697
1,678
924
2,512

-

-

-

-

7,231
1,841
1,005
2,706

6,697
1,678
924
2,512

Subtotal

12,783

11,811----

12,783

11,811

Restructured and impaired
Impaired loans
Restructured items2

1,624
71

1,851
247

-

-

-

-

1,624
71

1,851
247

-

-

-

-

84

52

84

52

-

-

-

11

-

-

-

11

1,695

2,098

-

11

84

52

1,779

2,161

Non-performing commitments andcontingencies
Other
Gross impaired financial assets
Individual provisions
Subtotal restructured and net impaired
Total

(887)
(942)
(16)
(15)
(903)
(957)
808
1,156
11
68
37
876
1,204
452,874 447,039 218,293 233,531 186,841 194,013 858,008 874,583

1.

Movement in credit profile in 2017 was due to the implementation of ANZ’s revised Capital Mortgage model, which re-rated the Australian mortgage portfolio.

2.

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.

35

NOTES 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 besimilarly 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 toprotect 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

Agriculture, forestry, fishingand mining
Business services
Construction
Electricity, gas and watersupplyEntertainment, leisure andtourism
Financial, investment andinsurance
Government and official
institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
Gross Total
Provision for credit
impairment
Subtotal
Unearned income
Capitalised
brokerage/mortgage
origination fees
Maximum exposure tocredit risk

Off-balance sheet
credit related
commitments

Other financial
assets

Total

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

17,346

18,075528

704

13,45014,64031,32433,419

7,044
5,273

6,762
5,654

137
37

168
57

6,319
5,209

6,565
5,364

13,50010,51913,495
11,075

4,800

4,848

752

1,264

4,537

4,438

10,08910,55010,67910,424

317

530

3,151

3,112

14,147

14,06634,256

34,661

145,767

168,545

27,69019,703

207,713

222,909

846

1,020

61,44053,055

2,016

2,421

64,30256,496

14,838282,823
30,595
11,1509,805
11,013
14,316454,784

14,637
275,756
31,072
10,951
10,839
11,105
13,419449,223

1,902
1,038
559
187
959
2,225
2,445
218,293

2,582
1,037
1,074
251
1,398
2,136
730
233,531

29,92645,856
11,065
4,974
5,598
16,542
10,958187,291

34,50152,45812,453
5,250
5,367
20,678
7,571
194,52146,666
329,717
42,21916,311
16,362
29,78027,719860,368

51,720329,251
44,59916,452
17,60433,91921,720877,275(2,512)(2,620)

-

-

(450)

(508)

(2,962)(3,128)452,272(149)

446,603(261)

218,293-

233,531-

186,841-

194,013-857,406(149)

874,147
(261)

751

697

-

-

-

-

751

697

452,874

447,039

218,293

233,531

186,841

194,013858,008

874,58336

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
COLLATERAL MANAGEMENT
We use collateral for on and off-balance sheet exposures to mitigate credit risk if a counterparty cannot meet its
repayment obligations from its expected cashflows. For some products, the collateral provided by customers isfundamental 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.
The nature of collateral or security held for the relevant classes of financial assets is as follows:
Loans – housing andpersonal

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

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

Trading securities,
Available-for-saleassets, Derivatives
and Other financial
assetsFor trading securities, we do not seek collateral directly from the issuer orcounterparty. However, the collateral 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 andsettle 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 to thecounterparty by the Company when our position is out of the money).

The table below shows the estimated value of collateral we hold and the net unsecured portion of credit exposures:
Credit exposure
2017
2016
$m
$m

Total value of
Unsecured portion ofcollateralcredit exposure
2017
2016
2017
2016
$m
$m
$m
$m

Net loans and advances

452,874

447,039364,745355,936

88,12991,103

Other financial assets

218,293

233,531

22,70528,427

195,588

205,104

Off-balance sheet positions

186,841

194,013

31,69634,007

155,145

160,006

Total

858,008

874,583

419,146

418,370

438,862456,21337

NOTES 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 andcorrelation 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 reportson them daily. This detailed framework allocates individual limits to manage and control exposures using risk factors
and profit and loss limits.
Management, measurement and reporting of market risk, the management of market risk is undertaken in two broad
categories:
Traded Market Risk

Non-Traded Market Risk

Risk of loss from changes in the value of financial
instruments due to movements in price factors forboth physical and derivative trading positions.
Principal risk categories monitored are:Risk of loss associated with the management of nontraded interest rate risk, liquidity risk and foreignexchange exposures. This includes interest rate riskin the banking book. This risk of loss arises fromadverse changes in the overall and relative level ofinterest rates for different tenors, differences in theactual versus expected net interest margin, and thepotential valuation risk associated with embedded
options in financial instruments and bank products.

1 Currency risk – potential loss arising fromchanges in foreign exchange rates or theirimplied volatilities.
2 Interest rate risk – potential loss from changes
in market interest rates or their implied
volatilities.
3 Credit spread risk – potential loss arising frommovement in margin or spread relative to abenchmark.
4 Commodity risk – potential loss arising fromchanges in commodity 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 and volatilities over:

the previous 500 business days, to calculate standard VaR; anda 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 tenday period. Back testing is used to ensure 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 on any given day.

38

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK (continued)
TRADED AND NON-TRADED MARKET RISKTRADED MARKET RISK

The table below shows the traded market risk VaR on a diversified basis by risk categories:
30 September 2017High for Low for Average
As at
year
year for year
$m
$m
$m
$m

30 September 2016
High for Low for Average
As at
year
year for year
$m
$m
$m
$m

Traded value at risk 99% confidence
Foreign exchange

4.3

10.0

2.6

5.1

4.4

11.4

2.5

5.3

Interest rate
CreditCommodity

5.6
4.1
2.2

18.9
5.1
3.8

4.7
1.6
1.4

7.2
3.2
2.1

4.7
3.0
2.5

17.6
4.0
2.8

3.9
2.0
1.1

8.3
2.9
1.7

EquityDiversification benefit1
Total VaR
1.

-

0.5

-

0.2

0.5

2.0

0.1

0.2

(6.1)
10.1

n/a
20.8

n/a
6.3

(7.6)
10.2

(6.3)
8.8

n/a
23.2

n/a
5.7

(6.2)
12.2

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 thehigh and low VaR reported for the Company as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from thetable.

NON-TRADED MARKET RISK

Balance sheet risk management
The principal objectives of balance sheet risk management are to maintain acceptable levels of interest rate andliquidity risk to mitigate the negative impact of movements in interest rates on the earnings and market value of theCompany’s banking book, while ensuring the Company maintains sufficient liquidity to meet its obligations as they falldue.
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 therepricing dates of interest bearing assets and liabilities; and the investment of capital and other non-interest bearing
liabilities in interest bearing assets. Interest rate risk is reported using VaR and scenario analysis (based on theimpact of a 1% rate shock). The table below shows VaR figures for non-traded interest rate risk for the combined
Company as well as Australia, New Zealand and Asia Pacific, Europe and Americas (APEA) geographies which arecalculated separately.
30 September 2017High for Low for Average
As at
year
year for year
$m
$m
$m
$m

30 September 2016
High for Low for Average
As at
year
year for year
$m
$m
$m
$m

31.6
0.0
13.7

37.5
0.1
18.6

25.9
0.0
13.5

31.3
0.1
15.3

38.4
0.1
14.6

40.6
0.1
16.8

28.0
0.0
14.0

33.7
0.1
15.3

(13.3)

n/a

n/a

(9.3)

(9.2)

n/a

n/a

(13.2)

32.0

43.7

31.3

37.4

43.9

43.9

29.4

35.9

Non-traded value at risk 99% confidence
Australia
New Zealand
APEA
Diversification benefit1
Total VaR
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 VaR reported for the Group as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted
from the table.

39

NOTES 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 Group’s market risk exposures. We
model an 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 allwholesale and customer rates.
The table below shows the outcome of this risk measure for the current and previous financial years, expressed as apercentage of reported net interest income. A positive number signifies that a rate increase is positive for net interest
income over the next 12 months.
Impact of 1% rate shock
As at period end
Maximum exposure
Minimum exposure
Average exposure (in absolute terms)

2017

2016

0.14%
1.20%
0.13%
0.53%

0.85%
0.91%
0.01%
0.40%

EQUITY SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE
Our available-for-sale financial assets contain equity investment holdings which predominantly comprise investments
we hold for longer-term strategic reasons. The market risk impact on these equity investments is not captured by theCompany’s VaR processes for traded and non-traded market risks. Therefore, the Company regularly reviews thevaluations of the investments within the portfolio and assesses whether the investments are impaired based on therecognition and measurement policies set out in Note 10 Available-for-sale Assets.
FOREIGN CURRENCY RISK – STRUCTURAL EXPOSURES
Our investment of capital in foreign operations — for example, branches, subsidiaries or associates with functional
currencies other than the Australian 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 theforeign 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 primaryobjective of hedging is to ensure that, if practical, the consolidated capital ratios are neutral to the effect of changes
in exchange rates. During the current and prior years, we had selective hedges in place. Further detail on the
Company’s hedging relationships is disclosed in Note 9 Derivative Financial Instruments.
LIQUIDITY AND FUNDING RISKLIQUIDITY RISK AND FUNDING POSITION
For information related to the liquidity risk and funding position refer to the 2017 ANZ Annual Report (Note 16
Financial Risk Management), available at https://shareholder.anz.com/annual-report-shareholder-review.

40

NOTES TO THE FINANCIAL STATEMENTS (continued)
15. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK (continued)
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. All outstanding Debt Issuance and Subordinated Debt is profiled on the earliest date on which theCompany may be required to pay. All at-call liabilities are reported in the “Less than 3 month” category. Any otheritems without a specified maturity date are included in the “After 5 years” category. The amounts represent principal
and interest cash flows - so they may differ from equivalent amounts reported on balance sheet. It should be notedthat this is not how the Company manages its liquidity risk. The management of this risk is detailed in the 2017 ANZAnnual Report (Note 16 Financial Risk Management), available at https://shareholder.anz.com/annual-reportshareholder-review.

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

Less than
3 months$m

3 to 12months$m

1 to 5
years
$m

After
5 years
$m

Total
$m

8,219

-

-

-

8,219

5,238

-

-

-

5,238

410,672

70,91014,819145

496,546

312

-

-

-

312

Debt issuances1,2

3,030

12,242

59,67320,751

95,696

Derivative liabilities (trading)3

48,561---

48,561(12,433)(14,536)(66,440)(24,247)(117,656)

12,174

14,254

66,67024,579117,677(24,186)(6,277)(10,876)(4,368)(45,707)24,312

6,522

12,587

4,868

48,289Less than
3 months$m

3 to 12months$m

1 to 5
years
$m

After
5 years
$m

Total
$m

Settlement balances owed by ANZ

9,079

-

-

-

9,079

Collateral received

5,882

-

-

-

5,882

402,61161,517

17,542

463

482,133

321

-

-

-

321

Debt issuances

8,596

18,42554,49322,191

103,705

Derivative liabilities (trading)3

65,086---65,086(26,326)(21,615)(70,816)(25,136)(143,893)

26,417

20,89869,04725,038141,400(18,913)(6,951)(9,980)(5,833)(41,677)

18,991

7,307

11,581

7,386

45,265Derivative assets and liabilities (balance sheet management)- fundingReceive leg
Pay leg- other balance sheet management
Receive leg
Pay leg

2016

Deposits and other borrowings
Liability for acceptances
1,2

Derivative assets and liabilities (balance sheet management)- fundingReceive leg
Pay leg- other balance sheet management
Receive leg4
Pay leg41.

Any callable wholesale debt instruments have been included at their next call date.

2.

Includes subordinated debt instruments that may be settled in cash or in equity, at the option of the Company, and perpetual investments at next call date.

3.

The full mark-to-market of derivative liabilities held for trading purposes is included in the ‘less than 3 months’ category.

4.

Prior year’s profile has been restated to ensure comparability.

At 30 September 2017 $150,339 million (2016: $161,178 million) of the Company’s undrawn facilities and $36,952
million (2016: $33,343 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.

41

NOTES 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 ofa financial instrument is the price that would be received to sell an asset, or paid to transfer a liability, in an orderlytransaction between market participants at the measurement date.
VALUATION OF FINANCIAL INSTRUMENTS
The Company has an established control framework, including an appropriate segregation of duties, to ensure thatfair 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 canbe appropriately determined;
when using quoted market prices to value an instrument, these are independently verified from externalsources;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; andvaluation adjustments (such as FVA, CVA and bid-offer) 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) to measure the fair value of such groups of financial assets and financial liabilities. We
measure the portfolio based on the price that would be received to sell a net long position (an asset) for a particularrisk exposure, or to transfer a net short position (a liability) for a particular risk exposure.
FAIR VALUE APPROACH AND VALUATION TECHNIQUESWe use valuation techniques to estimate the fair value of financial assets and liabilities for recognition, measurementand disclosure purposes where no quoted price for the instrument exists. For those purposes, we use the following
approaches:
Financial Asset or Liability
Financial instruments classified as:
 trading securities
 securities short sold
 derivative financial assets and liabilities,and available-for-sale assets

Fair Value Approach
In instances where there is no quoted market price, modelledvaluation techniques are used that incorporate observable market
inputs for securities with similar credit risk, maturity and yieldcharacteristics; and/or current market yields for similar instruments.

Net loans and advances, deposits and otherborrowings and debt issuances

Discounted cash flow techniques in which contractual future cash
flows of the instrument are discounted using discount rates
incorporating wholesale market rates, or market borrowing rates, fordebt with similar maturities or with a yield curve appropriate for theremaining term to maturity.

Non-financial instrument component ofassets held for sale

Valuation based on the agreed foreign currency sales price combinedwith the applicable foreign exchange rate less an estimate of thecosts to dispose of the assets.

42

NOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe following tables set out the classification of financial asset and liability categories according to measurement
bases together with their carrying amounts as reported on the balance sheet.
2017
Fair value
details refer
Note
Financial assets
Cash and cash equivalents
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Due from controlled entities
Other financial assets
Total
Financial liabilities
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Derivative financial instruments
Due to controlled entities
Payables and other liabilities
Debt issuances
Total

8
9
10
11

13
9

At
amortisedcost$m

At fairvalue$m63,3995,006
7,685
452,408
495
91,2081,917
622,118
8,219
5,238
494,162
88,882
3,930
83,743684,174

2016

Total
$m

At
amortisedcost$m

At fair
value
$m

Total
$m

35,60657,03658,50616
151,164

63,3995,006
7,685
35,60657,03658,506452,424
495
91,2081,917
773,282

61,994
3,983
10,878446,479671
106,797
1,606
632,408

35,05975,872
55,721
52
166,704

61,994
3,983
10,87835,05975,872
55,721
446,531671
106,797
1,606
799,11273
56,8301,753
1,752
60,4088,219
5,238
494,235
56,83088,882
5,683
85,495744,582

9,079
5,882
479,885
103,416
3,498
90,390692,15078
76,243
2,068
2,192
80,5819,079
5,882
479,963
76,243
103,416
5,566
92,582772,731

FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE ON THE BALANCE SHEETThe Company categorises financial 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 asimilar asset or liability, either directly or indirectly; andLevel 3 – valuations using inputs for the asset or liability that are not based on observable market data
(unobservable inputs).

43

NOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy:
Fair value measurements
Quoted market
price(Level 1)

Using
unobservable
inputs (Level 3)

Using observable
inputs (Level 2)

Total

2017

2016

2017

2016

2017

2016

2017

2016

$m

$m

$m

$m

$m

$m

$m

$m

32,99832,945

2,608

2,114

-

35,60635,059424

450

56,52775,32485

98

57,03675,872

53,95851,094

4,504

4,590

44

37

58,50655,721
52

Financial assets
Trading securities1
Derivative financial instruments
Available-for-sale assets1-

Net loans and advances (measured at fair value)

-

-

16

37

-

15

16

Assets held for sale2

-

-

1,748

-

-

-

1,748

-

84,48965,40382,065150 152,912

166,704

-

73

78

250

365

56,50475,780

1,587

1,982

166

86

Total

87,380129

Financial liabilities
Deposits and other borrowings (designated at fairvalue)
Derivative financial instruments
Payables and other liabilities (measured at fairvalue)3-

Debt issuances (designated at fair value)
Total
1.

1,837

-

1,752

2,192

2,347

58,495

78,136

76

-

73

78

98

56,83076,243

-

1,753

2,068

-

1,752

2,192

98

60,40880,58176

During the period we transferred $408 million (2016: $415 million) from Level 1 to Level 2 following reduced trading activity in the associated securities.
We deem transfers into and out of Level 1 and Level 2 to have occurred as at the beginning of the reporting period in which the transfer occurred.

2.

The amount classified as Assets held for sale relates to non-financial instruments required to be measured at fair value less costs to sell in accordance with AASB
5 Non-current Assets Held for Sale and Discontinued Operations.

3.

Payables and other liabilities relates to securities short sold, which we classify as held for trading and measured at fair value through profit or loss.

Level 3 fair value measurements
The net balance of Level 3 financial instruments is an asset of $53 million (2016: $52 million). The financial
instruments which incorporate significant unobservable inputs primarily include:

structured credit products for which credit spreads and default probabilities relating to the reference assets
and derivative counterparties cannot be observed; andother derivatives, including reverse mortgage swaps for which the mortality rate cannot be observed.

There have been no significant movements or changes in the composition of the balance of Level 3 instruments that
the Company carries at fair value during the current or prior periods.

Sensitivity to Level 3 data inputs
If we make assumptions due to significant inputs not being directly observable in the market place (Level 3 inputs),
then changing these assumptions changes the Company’s estimate of the instrument’s fair value. The majority oftransactions in this category are ‘back-to-back’ in nature — that is, the Company either acts as a financial
intermediary or hedges the market risks. As a result, changes in the Level 3 inputs generally have minimal impact on
net profit and net assets of the Company.
Deferred fair value gains and losses
If we use unobservable data that is significant to the fair value of a financial instrument at initial recognition then we
do 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 the day one gainor loss in profit or loss over the life of the transaction on a straight line basis or until all inputs become observable.
The day one gains and losses we defer are not significant. They predominately relate to derivative financial
instruments. This is consistent with the low level of derivative transactions that the Company enters into which
incorporate significant unobservable inputs.

44

NOTES TO THE FINANCIAL STATEMENTS (continued)
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
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 may significantly modify the instruments cash
flows; orin order to eliminate an accounting mismatch which would arise if the asset or liabilities were otherwise
carried at amortised cost. This mismatch arises 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 thesame 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 asfair value through profit or loss where they are managed on a fair value basis to align the measurement with how the
instruments are managed.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
The following sets out the Company’s basis of estimating fair values of the above financial instruments carried atamortised cost:

Financial Asset and Liability

Fair Value Approach

Net loans and advances to banks

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

Net loans and advances to customers

Present value of future cash flows, discounted using a curve thatincorporates 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 the fair value for any value we expect the Company toderive from retaining the deposit for a future period.

Interest bearing fixed maturity deposits andother borrowings and acceptances with quoted
market prices

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

Debt issuances

Calculated based on quoted market prices or observable inputs asapplicable. If quoted market prices are not available, we use a
discounted cash flow model using a yield curve appropriate forthe remaining term to maturity of the debt instrument. The fairvalue reflects adjustments to credit spreads applicable to theCompany for that instrument.

45

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

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

Using observable
inputs (Level 2)

Fair value (total)

With significant nonobservable inputs(Level 3)

2017
$M

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

452,408

446,479--

434,842427,282

17,612

19,563452,454446,845452,408

446,479--

434,842427,282

17,612

19,563452,454446,845

Deposits and otherborrowings

494,162

479,885--494,291

480,219--494,291

480,219

Debt issuances

83,74390,39030,84133,14453,96957,758--84,81090,902

Total

577,905

570,275

30,84133,144548,260

537,977--

579,101

571,121

Financial assets
Net loans andadvances
Total
Financial liabilities

KEY JUDGEMENTS AND ESTIMATESThe Company evaluates the material accuracy of the valuations incorporated in the financial statements as they caninvolve a high degree of 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, forcertain financial instruments, we may use data that is not readily observable in current markets. If we use
unobservable market data, then we need to exercise more judgement to determine fair value depending on thesignificance of the unobservable input to the overall valuation. Generally, we derive unobservable inputs from otherrelevant market data and compare them to observed transaction prices where available.
When establishing the fair value of a financial instrument using a valuation technique, the Company considers
valuation adjustments in determining 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 thetechniques used to reflect the Company’s assessment of factors that market participants would consider in setting fairvalue.

46

NOTES TO THE FINANCIAL STATEMENTS (continued)
17. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY
FOR ASSETS
The following disclosure excludes the amounts presented as collateral paid and received in the Balance Sheet that
relate to derivative liabilities and derivative assets respectively. The terms and conditions of those collateralagreements are included in the standard Credit Support Annex that forms part of the International Swaps andDerivatives 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 theCompany’s covered bond programs.
Collateral provided to central banks.
Collateral provided to clearing houses.

The amortised cost of assets pledged as security are as follows:
2017
$m

2016
$m

Securities sold under arrangements to repurchase1

35,454

26,234

Covered bonds

19,60422,001

Other

1,487

1,390

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 theCompany 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:
2017
$m

2016
$m

Fair value of assets which can be sold or repledged

29,41831,130Fair value of assets sold or repledged

19,787

14,13347

NOTES TO THE FINANCIAL STATEMENTS (continued)
18. OFFSETTING
We offset financial assets and 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; andan 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 andfinancial liabilities within the balance sheet. The following table identifies financial assets and financial liabilities whichhave not been offset but are subject to enforceable master netting agreements (or similar arrangements) and therelated amounts not offset in the balance sheet. We have not taken into account the effect of over collateralisation.
Amount subject to master netting agreement
or similar
Amounts not
Total amounts subject to masterrecognised in the
netting
Balanceagreement ofSheetsimilar
2017

Total

Financialcollateral
Financial (received)/
instruments
pledgedNet
amount

$m

$m

$m

$m

$m

$m

Derivative assets

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

4,032

Reverse repurchase, securities borrowing
and similar agreements1

28,305(4,652)

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

Total financial assets

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

4,032

Derivative financial liabilities(56,830)

2,238(54,592)

46,2685,774(2,550)

Repurchase, securities borrowing andsimilar agreements2(33,768)

8,822(24,946)819

24,127-

Total financial liabilities(90,598)

11,060(79,538)

47,087

29,901(2,550)

Amount subject to master netting agreement
or similar
Amounts not
Total amounts subject to masterrecognised in the
netting
Balanceagreement or
Sheetsimilar
2016

Total

Financialcollateral
Financial (received)/
instruments
pledgedNet
amount

$m

$m

$m

$m

$m

$m

Derivative assets

75,872(2,376)73,496(62,296)(5,143)

6,057

Reverse repurchase, securities borrowing
and similar agreements1

29,713(10,873)

18,840(707)(18,133)-

Total financial assets

105,585(13,249)

92,336(63,003)(23,276)

6,057

Derivative financial liabilities(76,243)

2,010(74,233)

62,296

8,244(3,693)

Repurchase, securities borrowing andsimilar agreements2(24,646)

11,258(13,388)707

12,681-

Total financial liabilities(100,889)

13,268(87,621)63,00320,925(3,693)

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.

48

NOTES TO THE FINANCIAL STATEMENTS (continued)
19. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill1

Balance at start of year
Additions
Amortisation expense
Impairment expense
Impairment on reclassification of Retail Asia and
Wealth businesses to held for sale
Foreign currency exchange difference

Software

Other Intangibles

Total

2017

2016

2017

2016

2017

2016

2017

2016

$m

$m

$m

$m

$m

$m

$m

$m

102

109

2,110

2,711

2

10

2,214

2,830

-

-

400
(937)

(2)

-

-

396
(541)

(8)

396
(543)

(945)

-

-

(17)

(23)

-

-

(17)

(23)

(32)

-

(153)

-

-

-

(185)

-

400

(1)

(7)

(12)

(41)

-

-

(13)

(48)

Balance at end of year

69

102

1,783

2,110

-

2

1,852

2,214

Cost

69

102

5,883

5,806

39

66

5,991

5,974

Accumulated amortisation/impairmentn/an/a (4,100)(3,696)(39)(64) (4,139)(3,760)Carrying amount

69

102

1,783

2,110

-

1,852

2,214

1.

2

Goodwill excludes notional goodwill in equity accounted investments.

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

Goodwill
Excess amount the Company
has paid in acquiring abusiness over the fair valueless costs of disposal of theidentifiable assets andliabilities acquired.

SoftwarePurchases of off the shelf software
assets are capitalised as assets.

Other Intangible Assets
Customer list of acquired
business.

Internal and external costs
incurred in building software andcomputer systems costing greaterthan $20 million.
Those less than $20 million are
expensed in the year in which thecosts are incurred.

Carrying
value

Cost less any accumulated
impairment losses.
Allocated to the cash
generating unit to which theacquisition relates.

Useful life

Indefinite.
Goodwill is reviewed for
impairment at least annuallyor when there is an indicationof impairment.

Depreciation
methodNot applicable.

Initially, measured at cost.
Subsequently, carried at cost lessaccumulated amortisation andimpairment losses.
Costs incurred in planning or
evaluating software proposals orin maintaining systems after
implementation are notcapitalised.
Except for major core
infrastructure, amortised overperiods between 3-5 years.

Initially, measured at fairvalue at acquisition.
Subsequently, carried at fairvalue less accumulated
amortisation and impairment
losses.

Customer list amortised over
10 years.

Major core infrastructureamortised over periods between 7
or 10 years.
Straight-line method.

Straight-line method.

KEY JUDGEMENTS AND ESTIMATESManagement judgement is used to assess the recoverable value of goodwill, and other intangible assets, and the useful
economic life of an asset (or if an asset has an indefinite life). We reassess the recoverability of the carrying value ateach reporting date.
At each balance date, software and other intangible assets are assessed for indicators of impairment. In addition,
software and intangible assets not ready for use are tested annually for 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 is written down
immediately.
49

NOTES TO THE FINANCIAL STATEMENTS (continued)
20. SHAREHOLDERS’ EQUITYSHAREHOLDERS’ EQUITY - SUMMARY

Ordinary share capital

2017
$m

2016
$m

29,41629,162

(75)

(18)

87

79

(66)

13

90

270

Reserves
Foreign currency translation reserve
Share option reserve
Available-for-sale revaluation reserve
Cash flow hedge reserve
Total reserves

36

344

Retained earnings

22,396

20,753

Total shareholders’ equity

51,84850,259ORDINARY SHARE CAPITAL
The table below details the movement in ordinary shares for the period.
2017
Number ofsharesBalance at start of the year

2,927,476,660

2016
Number ofshares$m

29,162 2,902,714,361

28,611$m

Bonus option plan

2,880,009-

3,516,214-

Dividend reinvestment plan

13,159,331

374

15,916,983

413

Group share option scheme--

18,062-

Group employee share acquisition scheme1-56

5,311,040

138

Share buy-back(6,100,673)

(176)

-

-

Balance at end of year

2,937,415,327

29,416 2,927,476,660

29,162

1.

The Company issued 7.5 million shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2017 interim dividend (8.6 million shares for the 2016 final
dividend;9.7 million shares for the 2016 interim dividend) and nil shares to satisfy obligations under the Company’s Employee Share acquisition plans during 2017 (2016: 5.3
million shares). Following the provision of 7.5 million shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2017 interim dividend, the Company
repurchased 6.1 million of shares via an on-market share buy-back resulting in 6.1 million shares being cancelled. As at 30 September 2017, there were 7,312,763 Treasury
Shares outstanding (2016; 10,806,633).

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. Every holder of fully paid ordinary shares present at a meetingin person, or by proxy, is entitled to:Treasury shareson a show of hands, one vote; andon a poll, one vote, for each share held.

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
number of ordinary shares used in the earnings per share calculations.

50

NOTES TO THE FINANCIAL STATEMENTS (continued)
20. SHAREHOLDERS’ EQUITY (continued)

RECOGNITION AND MEASUREMENT (continued)
Reserves:
Foreign currencytranslation reserve

Includes differences arising on translation of assets and liabilities into Australian dollars
when the functional 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 designatedcash flow hedging instruments, net of deferred taxes to be realised when the position issettled.

Available-for-salerevaluation reserve

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

Share option reserve

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

21. CAPITAL MANAGEMENTCAPITAL MANAGEMENT STRATEGY
ANZ’s capital management strategy aims to protect the interests of depositors, creditors and shareholders. We
achieve this through an Internal Capital Adequacy Assessment Process (ICAAP) whereby ANZ conducts detailed
strategic and capital planning over a 3 year time horizon. The process involves:forecasting economic variables, financial performance of ANZ’s divisions and the financial impact of new
strategic initiatives to be implemented during the planning period;
performing stress tests under different economic scenarios to determine the level of additional capital (‘stresscapital buffer’) needed to absorb losses that may be experienced under an economic downturn;reviewing capital ratios and targets across various classes of capital against ANZ’s risk profile; anddeveloping a capital plan, taking into account capital ratio targets, current and future capital issuances
requirements and options around capital products, timing and markets to execute the capital plan under
differing market and economic conditions.

The capital plan is approved by the Board and updated as required. The Board and senior management are provided
with regular updates of ANZ’s capital position. Any actions required to ensure ongoing prudent capital management
are submitted to the Board for approval. Throughout the year, ANZ maintained compliance with all the regulatory
requirements related to Capital Adequacy in the jurisdictions in which it operates.
REGULATORY ENVIRONMENTAs ANZ is an Authorised Deposit-taking Institution (ADI) in Australia, it is regulated by APRA under the Banking Act
1959 (Cth). ANZ must comply with the minimum regulatory capital requirements, prudential capital ratios and specificreporting levels that APRA sets and which are consistent with the global Basel III capital framework. This is thecommon framework for determining the appropriate level of bank regulatory capital as set by the Basel Committee on
Banking Supervision (“BCBS”).
For reporting purposes as part of the ANZ 2017 Annual Report, Capital Adequacy Ratios are presented only for the
Level 2 ADI and are not presented for the Company as a standalone entity. Refer to Note 22 Capital Management in
the 2017 ANZ Annual Report for details of the Capital Adequacy Ratios, which can be found athttps://shareholder.anz.com/annual-report-shareholders-review.

51

NOTES TO THE FINANCIAL STATEMENTS (continued)
22. CONTROLLED ENTITIESThe ultimate parent of the Group isAustralia and New Zealand Banking Group Limited
All controlled entities are 100% owned, unless otherwise noted.
The material controlled entities of the Group are:
ANZ Bank (Lao) Limited1
ANZ Bank (Taiwan) Limited1
ANZ Bank (Vietnam) Limited1
ANZ Capel Court Limited
ANZ Commodity Trading Pty Ltd
ANZ Funds Pty. Ltd.
ANZ Bank (Europe) Limited1
ANZ Bank (Kiribati) Limited1 (75% ownership)
ANZ Bank (Samoa) Limited1
ANZ Bank (Thai) Public Company Limited1
ANZcover Insurance Private Ltd1ANZ Holdings (New Zealand) Limited1
ANZ Bank New Zealand Limited1
ANZ Investment Services (New Zealand) Limited1
ANZ New Zealand (Int’l) Limited1
ANZNZ Covered Bond Trust1,4
ANZ Wealth New Zealand Limited1
ANZ New Zealand Investments Limited1
OnePath Life (NZ) Limited1
UDC Finance Limited1
ANZ International (Hong Kong) Limited1
ANZ Asia Limited1
ANZ Bank (Vanuatu) Limited2
ANZ International Private Limited1
ANZ Singapore Limited1
ANZ Royal Bank (Cambodia) Limited1 (55% ownership)
Votraint No. 1103 Pty Limited
ANZ Lenders Mortgage Insurance Pty. Limited
ANZ Residential Covered Bond Trust4
ANZ Wealth Australia Limited
OnePath Custodians Pty Limited
OnePath Funds Management Limited
OnePath General Insurance Pty Limited
OnePath Life Australia Holdings Pty Limited
OnePath Life Limited
Australia and New Zealand Banking Group (PNG) Limited1
Australia and New Zealand Bank (China) Company Limited1
Chongqing Liangping ANZ Rural Bank Company Limited1
Citizens Bancorp3
ANZ Guam Inc.3
ANZ Finance Guam, Inc3
ACN 003 042 082 Limited
Share Investing Limited
PT Bank ANZ Indonesia1 (99% ownership)

Incorporated in

Nature of Business

Australia

Banking

Laos
TaiwanVietnam
Australia
Australia
Australia
United Kingdom
Kiribati
Samoa
ThailandSingapore
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New ZealandHong Kong
Hong Kong
VanuatuSingapore
Singapore
Cambodia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Papua New Guinea
China
China
Guam
Guam
Guam
Australia
Australia
Indonesia

Banking
Banking
Banking
Securitisation Manager
Finance
Holding Company
Banking
Banking
Banking
Banking
Captive-Insurance
Holding Company
Banking
Funds Management
FinanceFinance
Holding Company
Funds Management
Insurance
Finance
Holding Company
Banking
Banking
Holding Company
Merchant Banking
Banking
Investment
Mortgage Insurance
Finance
Holding Company
TrusteeFunds Management
Insurance
Holding Company
Insurance
Banking
Banking
Banking
Holding Company
Banking
Finance
Holding Company
Online Stockbroking
Banking

Audited by overseas KPMG firms — either as part of the Group audit, or for standalone financial statements as required.
Audited by Law Partners.
3. Audited by Deloitte Guam.
4. Not owned by the Company. Control exists as the Company retains substantially all the risks and rewards of the operations.
1.
2.

ACQUISITION AND DISPOSAL OF CONTROLLED ENTITIESThe Company did not acquire, or dispose of, any material entities during the year ended 30 September 2017 or theyear ended 30 September 2016. ANZ Capital Hedging Pty Ltd (listed as a material entity for the year ended 30
September 2016) has been removed as a material entity for the year ended 30 September 2017 as its operations
have been transferred to other parts of the Group and it is in the process of being liquidated.

52

NOTES TO THE FINANCIAL STATEMENTS (continued)
22. CONTROLLED ENTITIES (continued)
RECOGNITION AND MEASUREMENTThe Company’s subsidiaries are those entities it controls through being exposed to, or having rights to, variable
returns from the entity and being 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 cost less any accumulated impairment losses.
Value-in-Use – Investment in ANZ Wealth Australia Limited
Due to various strategic options being considered for ANZ Wealth Australia Limited and its subsidiaries we haveundertaken a value in use assessment excluding ANZ Lenders Mortgage Insurance, ANZ Share Investing and ANZ
Financial Planning businesses and compared this to the carrying value of the investment. The value-in-use is in excessof the investment and confirms our conclusion that the investment is not impaired. The valuation is based on theembedded value which represents the present value of future profits and releases of capital arising from the businessin-force at the valuation date, and adjusted net assets. It is determined using best estimate assumptions withfranking credits included at 70% of face value. Projected cash flows have been discounted using capital asset pricing
model risk discount rates of 7.75% and 9.50%.

23. INVESTMENTS IN ASSOCIATES
Significant associates of the Company are:Name of entity

Principal activity

Shanghai Rural Commercial Bank1

Rural commercial bank

Aggregate other individually immaterial associates
Total carrying value of associates
1.

Ordinary shareinterest
2017
2016

Carrying amount
$m
2017
2016

20%

20%

-

1,955

n/a

n/a

20

19

20

1,974

During 2017 Shanghai Rural Commercial Bank (SRCB) was reclassified as held for sale. Refer to Note 25 Assets Held for Sale for further details.

IMPAIRMENT ASSESSMENT
On 3 January 2017, the Company announced that it had agreed to sell its 20% stake in Shanghai Rural Commercial
Bank (SRCB). On 18 September 2017 the Company announced a revision to the 3 January arrangement in which
Baoshan Iron & Steel Co. Ltd (Bao) replaced Shanghai Sino-Poland Enterprise Management Development Corporation
Limited to join China COSCO Shipping Corporation Limited (COSCO) to acquire the Company’s 20% stake in SRCB.
Under the updated arrangement, COSCO and Bao will each acquire a 10% stake in SRCB. The key financial terms of
the revised sale agreement are unchanged from the transaction announced previously. The sale is subject tocustomary closing conditions and regulatory approvals and is expected to be completed by late 2017. Based on theagreed purchase price less costs of disposal, an impairment of $219 million was recorded against the carrying value
to reflect the recoverable amount of the investment which has been transferred to held for sale assets (refer to Note
25 Assets Held for Sale). This impairment and subsequent foreign exchange translation adjustments have beenrecognised in other operating income (refer to Note 2 Operating Income).

53

NOTES TO THE FINANCIAL STATEMENTS (continued)
23. INVESTMENTS IN ASSOCIATES (continued)
FINANCIAL INFORMATION ON SIGNIFICANT ASSOCIATES
Set out below is the summarised financial information of each associate that is significant to the Company. The
summarised financial information is based on the associates’ IFRS financial information.

Principal place of business and country of incorporation

Shanghai Rural
Commercial Bank
People's Republicof China
2017
2016
$m
$m

Summarised results
Operating income

-

3,390

Profit for the year

-

1,338

Other comprehensive income/(loss)-

59

Total comprehensive income

-

1,397

Less: Total comprehensive income attributable to non–controlling interests

-

(36)

Total comprehensive income attributable to owners of associate

-

1,361

Summarised financial position
Total assets1- 129,081

Total liabilities1- 119,027

Total Net assets1-

Less: Non–controlling interests of associate

-

(281)

Net assets attributable to owners of associate

-

9,773

1,955

1,981

10,054

Reconciliation to carrying amount of Group's interest in associate2
Carrying amount at the beginning of the year
Company's share of total comprehensive income
Dividends received from associateCompany's share of other reserve movements of associate and foreign currency translation reserve
adjustments
Impairment charge
Less: carrying value transferred to assets held for sale asset (Note 25)
Carrying amount at the end of the year

58

273

-

(41)

(46)

(258)

(219)

-

(1,748)

-

-

1,955

1.

Includes market value adjustments (including goodwill) the Company made at the time of acquisition (and adjustments for any differences in accounting policies).

2.

For SRCB this includes movements up to the cessation of equity accounting.

RECOGNITION AND MEASUREMENT
An associate is an entity over which the Company has significant influence of its operating and financial policies but
does not control. The Company accounts for associates using the equity method. Its investments in associates arecarried at cost plus the post-acquisition share of changes in the associate’s net assets less accumulated impairments.
Dividends the Company receives from associates are recognised as a reduction in the carrying amount of theinvestment. The Company includes goodwill relating to the associate in the carrying amount of the investment. It
does not individually test for impairment the goodwill incorporated in the associates carrying amount.
At least at each reporting date, the Company reviews investments in associates for any indication of impairment. If an
indication of impairment exists, then the Company determines the recoverable amount of the associate using thehigher of:

the associate’s fair value less cost of disposal; andits value-in-use.

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

54

NOTES TO THE FINANCIAL STATEMENTS (continued)
24. TRANSFERS OF FINANCIAL ASSETSIn the normal course of business the Company enters into transactions where it transfers financial assets directly tothird 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 transferred asset, thetransfer does not qualify for derecognition and the asset remains on the Company’s balance sheet in its entirety.
SECURITISATIONSNet loans and advances include residential mortgages securitised under the Company’s securitisation programs which
are assigned to bankruptcy remote SEs to provide security for obligations payable on the notes issued by the SEs.
This includes mortgages that are held for potential repurchase agreements (Repos) with central banks. The holders of
the issued notes have full recourse to the pool of residential mortgages which have been securitised and the Company
cannot otherwise pledge or dispose of the transferred assets.
In some instances the Company is also the holder of the securitised notes. In addition, the Company is entitled to any
residual income of the SEs and sometimes enters into derivatives with the SEs. The Company retains the majority of
the risks and rewards of the residential mortgages and continues to recognise the mortgages as financial assets. The
obligation to pay this amount to the SE is recognised as a financial liability of the Company.
The Company is exposed to variable returns from its involvement with these securitisation SEs and has the ability toaffect 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. Substantially allof the assets assigned to the bankruptcy remote SEs associated with these covered bond programs, consist ofequitable interests of the SE trustee in mortgage loans secured by residential real estate. 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 the transferred assets, however, subject to legal arrangements it may repurchase and substituteassets 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 the residential mortgages and continues to recognise themortgages as financial assets. The obligation to pay this amount to the SEs is recognised as a financial liability of theCompany.
The Company is exposed to variable returns from its involvement with the covered bond SEs and has the ability toaffect 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 withindebt issuances.
REPURCHASE AGREEMENTS
If the Company sells securities subject to repurchase agreements under which substantially all the risks and rewardsof ownership remain with the Company, then those assets are considered to be transferred assets that do not qualify
for derecognition. An associated liability is recognised for the consideration received from the counterparty.
STRUCTURED FINANCE ARRANGEMENTS
The Company arranges funding for certain customer transactions through structured leasing and commodity
prepayment arrangements. At times, other financial institutions participate in the funding of these arrangements. Thisparticipation involves a proportionate transfer of the rights to the lease receivable or financing arrangement. The
participating banks have limited recourse to the leased assets or financed commodity and related proceeds. In somecircumstances the Company continues to be exposed to some of the risks of the transferred lease receivable orfinancing arrangement through a derivative or other continuing involvement. When this occurs, the Company does
not derecognise the lease receivable or loan. Instead, the Company recognises an associated liability representing its
obligations to the participating financial institutions.
The table below sets out the balance of assets transferred that do not qualify for derecognition, along with theassociated liabilities:
Securitisations1,2

Covered bonds

Repurchaseagreements

Structured financearrangements

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

2017
$m

2016
$m

Current carrying amount of assets
transferred

65,03073,546

19,60422,00135,454

26,234-164

Carrying amount of associated liabilities

65,03073,546

19,60422,001

33,76824,646-

164

1.

The balances relate to transfers to internal structured entities.

2.

The securitisation noteholders have recourse only to the pool of residential mortgages which have been securitised. The carrying value of securitised assets and theassociated liabilities approximates their fair value.

55

NOTES TO THE FINANCIAL STATEMENTS (continued)
25. ASSETS HELD FOR SALE
The Company announced the following strategic divestments in line with the Company’s strategy to simplify thebusinesses and improve capital efficiency. At 30 September 2017, the assets held for sale comprised Investments inassociates (SRCB) of $1,748 million which is measured at the lower of its carrying amount and fair value less costs ofdisposal.
 Shanghai Rural Commercial Bank
On 3 January 2017, the Company announced that it had agreed to sell its 20% stake in Shanghai Rural Commercial
Bank (SRCB). On 18 September 2017 the Company announced a revision to the 3 January arrangement in which
Baoshan Iron & Steel Co. Ltd. (Bao) replaced Shanghai SinoPoland Enterprise Management Development
Corporation Limited to join China COSCO Shipping Corporation Limited (COSCO) to acquire the Company’s 20%
stake in SRCB. Under the updated arrangement, COSCO and Bao will each acquire a 10% stake in SRCB. The key
financial terms of the revised sale agreement are unchanged from the transaction announced previously. The sale issubject to customary closing conditions and regulatory approvals and is expected to be completed by late 2017.
 Asia Retail and Wealth Business
The Company announced that it had agreed to sell Retail and Wealth businesses in Singapore, Hong Kong, China,
Taiwan and Indonesia to Singapore’s DBS Bank on 31 October 2016. The Company is only impacted by branch
operations which existed in Singapore and Hong Kong and the sale of these branches was completed prior to 30
September 2017.
IMPAIRMENT LOSSES AND OTHER CHARGES RELATING TO ASSETS HELD FOR SALE
During the year ended 30 September 2017, the Company recognised the following impacts in relation to assets andliabilities held for sale:$219 million loss relating to the reclassification and completion of the Asia Retail and Wealth sale comprisingof $185 million of software and goodwill impairment charges and $34 million of various other charges net ofrecoveries and sale premium.
$333 million of charges relating to the Company’s investment in SRCB, comprising $219 million impairment to
the investment, $12 million of foreign exchange losses, and $102 million of tax expenses.

The net result of these disposals is included in other income and income tax expense (refer to Note 2 Operating
Income and Note 4 Income Tax).

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.
Any impairment we record is based on the best available evidence of the fair value compared to the carrying value
before the impairment. The final sale price the Company may achieve will depend on a number of factors and may bedifferent to the fair value we estimate when recording the impairment. We expect that the sales will complete within
12 months after balance date, subject to the relevant regulatory approvals and customary terms of sale for such
assets.

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:
2017
$m

2016
$m

(1,225)(1,297)

1,328

1,391

103

94

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

(19)

(15)

Net assets arising from defined benefit obligations included in other assets

122

109

Total

103

94

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

16.8

16.8

Defined benefit obligation and scheme assets
Present value of funded defined benefit obligation
Fair value of scheme assets
Total
As represented in the Balance Sheet

56

NOTES TO THE FINANCIAL STATEMENTS (continued)
26. SUPERANNUATION AND POST EMPLOYMENT BENEFIT OBLIGATIONS (continued)
As at the most recent reporting dates of the schemes, the aggregate deficit of net market value of assets over thevalue of accrued benefits on a funding basis was $16 million (2016: $45 million). In 2017, the Company made defined
benefit contributions totalling $1 million (2016: $45 million). It expects to make around $2 million next financial year.
GOVERNANCE OF THE SCHEMES AND FUNDING OF THE DEFINED BENEFIT SECTIONS
The main defined benefit superannuation schemes in which the Company participates operate under trust law and aremanaged and administered on behalf of the members in accordance with the terms of the relevant trust deed andrules and all relevant legislation. These schemes have corporate trustees, which are wholly owned subsidiaries of theCompany. The trustees are the legal owners of the assets, which are held separately from the assets of the Company
and are responsible for setting investment policy and agreeing funding requirements with the employer through thetriennial actuarial valuation process.
The defined benefit section of the ANZ Australian Staff Superannuation Scheme has been closed to new members
since 1987 and it did not have a material deficit, or surplus, at the last full valuation at 31 December 2016. The
Company has no present liability under the schemes’ trust deed to fund a deficit (measured on a funding basis). A
contingent liability of the Company may arise if the scheme was wound up.

RECOGNITION AND MEASUREMENT
Defined benefit superannuation schemes
For the Company’s defined benefit scheme, an independent actuary calculates the liability and expenses related toproviding benefits to employees under the defined benefit scheme. They use the Projected Unit Credit Method tovalue the liabilities. The balance sheet includes:


a defined benefit liability if the obligation is greater than the fair value of the schemes assets; andan 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 other costs (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, excluding interest income included in net interest) directly in retained earnings through othercomprehensive 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 thevarious countries in which 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.

KEY JUDGEMENTS AND ESTIMATES
The main assumptions we use in valuing defined benefit assets and liabilities are listed in the table below. A change to
any assumptions, or applying different assumptions, could have a significant effect on the Statement of Other
Comprehensive Income and Balance Sheet.
Sensitivity analysis
change in significant
assumptions
2017

2016

2.5 - 3.8

2.2 - 3.0

3.7

3.6

2.0 - 3.0/ 2.2

2.0 - 2.9/ 2.1

2017
$m

2016
$m

0.5% increase

(104)

(131)

0.5% increase

86

109

1 year increase

44

57

Assumptions
Discount rate (% p.a.)
Future salary increases (% p.a.)
Future pension indexation
In payment (% p.a.)/In deferment (%p.a)
Life expectancy at age 60 for current
pensioners– Males (years)

25.4 - 28.9

22.6 - 28.8

– Females (years)

28.6 - 30.9

26.3 - 30.8

Increase/(decrease) in
defined benefit obligation

57

NOTES TO THE FINANCIAL STATEMENTS (continued)
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 2016 and 2017 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 the most recent financial year.
Grant

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

Allocationvalue

One week Volume Weighted Average Price (VWAP) of ANZ shares traded on the ASX in theweek leading up to and including 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 intrust, be transferred to the employee’s name or 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 of a three year service period, after which they may remain in trust, betransferred to the employee’s name or sold. Unvested shares are forfeited if the employee
resigns or is dismissed for serious misconduct. Dividends are either paid in cash or reinvested
into the Dividend Reinvestment Plan.

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

FY 2017

Zero shares were granted in the 2017 financial year.

FY 2016

626,121 shares were granted on 3 December 2015 at an issue price of $27.60.

Deferred Share Plani) Chief Executive Officer (CEO) and Group Executive Committee (ExCo)
EligibilityGroup CEO and ExCo.
Grant

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

Conditions

Deferred evenly over four years from grant date.

ii) ANZ Employee Reward Scheme1 (ANZERS) and Business Unit Incentive Plans (BUIPs)
Eligibility
Employees participating in ANZ’s standard Short Term Incentive (STI) arrangements.
Grant

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

Conditions

Deferred evenly over two years from grant date.

58

NOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)iii) Total Incentives Performance Plan (TIPP)
Eligibility
Employees participating in the Institutional TIPP.
Grant

60% of incentive amounts exceeding AUD80,000 (subject to a minimum deferral amountof AUD18,000) received as deferred shares.

Conditions

Deferred evenly over three years from grant date.

iv) Long Term Incentives (LTIs)
Eligibility
Selected employees.
Grant

100% deferred shares.

Conditions

Vest three years from grant date.

v) Exceptional circumstances
Remuneration
In exceptional circumstances, we grant deferred shares to certain employees when they
foregonestart with the Company to compensate them for remuneration they have foregone fromtheir previous employer. The vesting period generally aligns 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 asignificant retention risk to the Company.

vi) Further information
Downward
Deferred shares remain at risk and the Board can adjust the number of deferred sharesadjustment
downwards to zero at any time before the vesting date. The Company’s downward
adjustment provisions are detailed in section 3.3.4 of the 2017 Remuneration Report ofthe 2017 ANZ Annual Report.
Cessation

Unless the Board decides otherwise, employees forfeit their unvested deferred shares ifthey resign, are terminated on 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 aslocally appropriate (see deferred 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 and including 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 expensewith a corresponding increase in share capital.

FY 2017 grants

2,016,835 deferred shares were granted with a weighted average grant price of $28.03.
No deferred shares were adjusted downward to zero, based on Board discretion.

FY 2016 grants

5,797,450 deferred shares were granted with a weighted average grant price of $26.15.
Board discretion was exercised to adjust downward 9,397 deferred shares to zero.

1.

Allocations under the ANZ Incentive Plan (ANZIP) in November 2017 will be disclosed in the 2018 financial statements.

Expensing of the ANZ Employee Share Acquisition Plan
Expensing value
The fair value of shares we granted during 2017 under the Employee Share Offer and(fair value)
the Deferred Share Plan, measured as at the date of grant of the shares, is $56.7 million(2016: $171.3 million) based on 2,016,835 shares (2016: 6,423,571) at VWAP of$28.09 (2016: $26.67).

59

NOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)
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 anddividend rights will be attached to the ordinary shares allocated on exercise of theoptions/rights.
Each option/right entitles the holder to one ordinary share subject to the terms andconditions imposed on grant. Exercise price of options, determined in accordance with therules of the plan, is generally based on the VWAP of the shares traded on the ASX in theweek 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 abonus 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 of bonus 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 themanner set out in the ASX Listing Rules; andReorganisation - In respect of rights, if there is a bonus issue or reorganisationof 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 tothe holder.

Holders otherwise have no other entitlements to participate:

in any new issue of the Company securities before they exercise theiroptions/rights; orin 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 thanshares.
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 witha corresponding increase in share options reserve.

Cessation

The provisions that apply if the employee’s employment ends are in section 7.2 of the2017 Remuneration Report of the 2017 ANZ Annual Report.

Downward
adjustment

The Company’s downward adjustment provisions are detailed in section 3.3.4 of the 2017
Remuneration Report of the 2017 ANZ Annual Report.

60

NOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)
Option Plans that operated during 2017 and 2016i) Performance Rights
Allocation
We grant performance rights to selected employees as part of the Company’s incentive
plans. Performance rights provide the holder with the right to acquire ANZ shares at nil
cost, subject to a three year vesting period and Total Shareholder Return (TSR)
performance hurdles.
FY 2017 and FY
2016 grants

During the 2017 year, we granted 944,419 performance rights (2016: 1,570,627). No
performance rights were adjusted downward to zero in 2017 and 2016, based on Board
discretion.

iii) 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 ofdividends during the restriction period.
Satisfying vestings

Any portion of the award of share rights may be satisfied by a cash equivalent payment
rather than shares at the Board’s discretion. All share rights were satisfied through a shareallocation, other than 67,573 deferred share rights (2016: 5,297) for which Board
discretion was exercised.

Downward
adjustment

Board discretion was also exercised to adjust downward 3,835 deferred share rights tozero in 2017 and 4,583 in 2016.

FY 2017 and FY
2016 grants

During the 2017 year 2,547,377 deferred share rights (no performance hurdles) were
granted (2016: 1,211,021).

OPTIONS, DEFERRED SHARE RIGHTS AND PERFORMANCE RIGHTS ON ISSUE
As at 2 November 2017, there were 1,292 holders of 3,652,926 deferred share rights on issue and 174 holders of
3,425,497 performance rights on issue.
Options/Rights Movements
This table shows the options/rights over unissued ANZ shares and their related weighted average (WA) exercise
prices as at the beginning and end of 2017 and the movements during 2017:
Openingbalance

Number of options/rights
WA exercise price

Options/rights

Options/rights

Options/rights

Options/rightsClosingbalance

1 Oct 2016

grantedforfeited1

expiredexercised

30 Sep 2017

6,424,117$0.00

3,491,796$0.00(1,815,732)
$0.00

(629)
$0.00

(985,768)$0.00

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

7,113,784$0.00$29.502.4 years$0.00
143,839

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

61

NOTES TO THE FINANCIAL STATEMENTS (continued)
27. EMPLOYEE SHARE AND OPTION PLANS (continued)
This table shows the options/rights over unissued ANZ shares and their related weighted average exercise prices as at
the beginning and end of 2016 and the movements during 2016:

Number of options/rights
WA exercise price
WA closing share price
WA remaining contractual life
WA exercise price of all
exercisable options/rights
outstanding
Outstanding
exercisable
options/rights
2.

Openingbalance

Options/rights

Options/rights

Options/rights

Options/rightsClosingbalance

1 Oct 2015

grantedforfeited1

expiredexercised

30 Sep 2016

6,241,157$0.07

2,781,648$0.00(1,440,051)$0.00– (1,158,637)$0.37

6,424,117$0.00$25.31
3 years$0.00
163,244

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

Of the shares issued as a result of the exercise of options/rights during 2016, 18,062 were issued at an exercise priceof $23.71 per share. The balance and those issued in 2017 were issued at a nil exercise price.
As at the date of the signing of the Directors’ Declaration on 2 November 2017:

no options/rights over ordinary shares have been granted since the end of 2017; andshares issued as a result of the exercise of options/rights since the end of 2017 are 16,489 all with nil
exercise prices.

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, non-transferability 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.

Exercise price ($)
Share closing price at grant date ($)
Expected volatility of ANZ share price (%)1
Equity term (years)
Vesting period (years)
Expected life (years)
Expected dividend yield (%)
Risk free interest rate (%)
Fair value ($)
1.

Deferred
Share
Rights
0.00
27.95
24.9
2.3
2.1
2.1
6.49
1.76
24.59

2017
Performance
Rights
0.00
28.18
25.0
5.0
3.0
3.0
6.46
1.86
13.73

Deferred
Share
Rights
0.00
26.62
20.2
3.9
1.9
1.9
6.28
2.10
23.67

2016
Performance
Rights
0.00
26.73
20.5
5.0
3.0
3.0
6.28
2.08
9.12

Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the rights. The measure of volatility used in themodel 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 to estimate 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 2017 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 2,704,206 sharesat an average price of $27.83 per share (2016: 1,344,200 shares at an average price of $26.14 per share).

62

NOTES TO THE FINANCIAL STATEMENTS (continued)
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:
2017

20161

$000

$000

Short-term benefits

21,002

21,362

Post-employment benefits

1,046

1,216

Other long-term benefits

169

314

Termination benefits

563

2,418

Share-based payments

14,926

19,382

Total

37,70644,692

1.

Prior period includes the former Group CEO and former disclosed executives 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 thatare no more favourable than those given to other employees or customers, including: the term of the loan, security
required and the interest rate. The aggregate of loans made, guaranteed or secured to KMP, including their relatedparties, were as follows:
2017
$000

2016
$000

Loans advanced1

14,49740,890Interest charged2

550

1,719

1.

Balances are at the balance sheet date (for KMP in office at balance sheet date) and at termination date (for KMP no longer in office at balance sheet date).

2.

Interest is for all KMP’s during the period.

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

Shares, options and rights
Subordinated debt
1.

2017
Number1

2016
Number1

2,233,182
17,152

4,174,363
15,850For KMP that are no longer in office at balance sheet date, the balances are calculated as at their termination date.

OTHER TRANSACTIONS OF KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIESAll other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s
length transactions. These transactions generally involve providing financial and investment services, including
services to eligible international assignees ensuring they are neither financially advantaged nor disadvantaged bytheir relocation. All such transactions that have occurred with KMP and their related parties have been trivial ordomestic in nature. In this context, we disclose only those transactions considered of interest to the users of thefinancial report in making and evaluating decisions about the allocation of scarce resources.

63

NOTES TO THE FINANCIAL STATEMENTS (continued)
28. RELATED PARTY DISCLOSURES (continued)
ASSOCIATES
We disclose significant associates in Note 23 Investments in Associates. During the course of the financial year, theCompany conducted transactions with all associates on terms equivalent to those made on an arm’s length basis asshown below:
2017
$000

2016
$000

76,247

57,903

Amounts payable to associates

587

6,133

Interest income from associates

2,728

1,564

Amounts receivable from associates

Interest expense to associates

18

34

8,424

11,632

Dividend income from associates-

40,609Costs recovered from associates

748

3,105

Other expenses paid to associates

There have been no material guarantees given or received by the Company to or from associates. No outstanding
amounts between the Company and associates have been written down or recorded as allowances, as they are
considered fully collectible by the Company.
SUBSIDIARIESWe disclose material controlled entities in Note 22 Controlled Entities. During the financial year, subsidiaries
conducted transactions with each other and with associates on terms equivalent to those on an arm’s length basis.
As of 30 September 2017, 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, dataprocessing facilities, transfer of tax losses, and the leasing of property plant and equipment.

29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSPROPERTY RELATED COMMITMENTS
2017
$m

2016
$m

Contracts for outstanding capital expenditure

98

103

Total capital expenditure commitments for property

98

103

1,818
145

2,044
144

1,963
394
908
661

2,188

Due within 1 year
Due later than 1 year but not later than 5 years
Due later than 5 years
Total lease rental commitments1

1,963

2,188

Property capital expenditure

Lease rentals
Land and buildings
Furniture and equipment
Total lease rental commitments1

1.

403
982
803

Total future minimum sublease payments we expect to receive under non-cancellable subleases at 30 September 2017 is $91 million (2016: $114 million). During the year,
we received sublease payments of $28 million (2016: $22 million) and netted them against rent expense.

64

NOTES TO THE FINANCIAL STATEMENTS (continued)
29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
CREDIT RELATED COMMITMENTS AND CONTINGENCIES
2017
$m

2016
$m

Guarantees and letters of credit
Performance related contingencies

150,339
18,062
18,890161,178
15,633
17,710

Total

187,291

194,521

Contract amount of:
Undrawn facilities

UNDRAWN FACILITIESThe majority of undrawn facilities are subject to customers maintaining specific credit and other requirements orconditions. 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 $150,339 million (2016: $161,178 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 of credit and documentary letters of credit.
Documentary letters of credit involve the Company issuing letters of credit guaranteeing payment in favour of anexporter. They are secured against an underlying shipment of goods or backed by a confirmatory letter of credit fromanother bank.
Performance related contingencies are liabilities that oblige the Company to make payments to a third party if thecustomer fails to fulfil its non-monetary obligations under the contract.
To reflect the risk associated with these transactions, we apply the same credit origination, portfolio management andcollateral requirements that we apply 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. Based on the earliest date on
which the Company may be required to pay, the total guarantees and letters of credit of $18,062 million (2016:$15,633 million) and total performance related contingencies of $18,890 million (2016: $17,710 million) mature
within 12 months.
OTHER CONTINGENT LIABILITIESAs at 30 September 2017, the Company had contingent liabilities in respect of the matters outlined below. Where
relevant, expert legal advice has been obtained and, in the light of such advice, provisions and/or disclosures as
deemed appropriate have been made. In some instances we have not disclosed the estimated financial impact of theindividual items either because it is not practicable to do so or because such disclosure may prejudice the interests of
the Company.
BANK FEES LITIGATION
A litigation funder commenced a class action against the Company in 2010, followed by a second similar class actionin March 2013. The applicants contended that certain exception fees (honour, dishonour and non-payment fees ontransaction accounts and late payment and over-limit fees on credit cards) were unenforceable penalties and thatvarious of the fees were also unenforceable under statutory provisions governing unconscionable conduct, unfair
contract terms and unjust transactions. A further action, limited to late payment fees only, commenced in August
2014.
The penalty and statutory claims in the March 2013 class action failed and the claims have been dismissed. The
August 2014 action was discontinued in October 2016.
The original claims in the 2010 class action have been dismissed. A new claim has been added to the 2010 classaction, in relation to the Company’s entitlement to charge certain periodical payment non-payment fees.

65

NOTES TO THE FINANCIAL STATEMENTS (continued)
29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSBENCHMARK/RATE ACTIONSIn July and August 2016, class action complaints were brought in the United States District Court against local andinternational banks, including the Company – one action relating to the bank bill swap rate (BBSW), and one action
relating to the Singapore Interbank Offered Rate (SIBOR) and the Singapore Swap Offer Rate (SOR). The classactions are expressed to apply to persons and entities that engaged in US-based transactions in financial instrumentsthat were priced, benchmarked, and/or settled based on BBSW, SIBOR, or SOR. The claimants seek damages orcompensation in amounts not specified, and allege that the defendant banks, including the Company violated US antitrust laws, anti-racketeering laws, the Commodity Exchange Act, and (in the BBSW case only) unjust enrichment
principles. The Company is defending the proceedings. The matters are at an early stage.
In February 2017, the South African Competition Commission commenced proceedings against local and internationalbanks including the Company alleging breaches of the cartel provisions of the South African Competition Act inrespect of trading in the South Afican rand. The potential civil penalty or other financial impact is uncertain. The
matter is at an early stage.
REGULATORY REVIEWS AND CUSTOMER EXPOSURESIn recent years there have been significant increases in the nature and scale of regulatory investigations and reviews,
enforcement actions (whether by court action or otherwise) and the quantum of fines issued by regulators,
particularly against financial institutions both in Australia and globally. The nature of these investigations and reviews
can be wide ranging and, for example, currently include a range of matters including responsible lending practices,
product suitability, wealth advice, pricing and competition, conduct in financial markets and capital market
transactions. During the year, the Company has received various notices and requests for information from its
regulators as part of both industry-wide and Company-specific reviews. 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.
SECURITY RECOVERY ACTIONS
Various claims have been made or are anticipated, arising from security recovery actions taken to resolve impaired
assets over recent years. The Company will defend these claims.
CLEARING AND SETTLEMENT OBLIGATIONS
Under the following arrangements, the Company has a commitment to comply with rules which could result in abilateral exposure and loss if a member institution fails to settle: the Australian Payments Clearing Association
Limited’s Regulations for the Australian Paper Clearing System, the Bulk Electronic Clearing System, the Issuers andAcquirers Community and the High Value Clearing System (HVCS). The Company’s potential exposure arising fromthese arrangements is unquantifiable in advance.
Under the Austraclear System Regulations (Austraclear), and the CLS Bank International Rules, the Company has acommitment to participate in loss-sharing arrangements if a member institution fails to settle. The Company’s
potential exposure arising from these arrangements is unquantifiable in advance. For HVCS and Austraclear, theabove obligation arises in only limited circumstances.
The Company is a member of various central clearing houses globally, including ASX Clear (Futures), London Clearing
House (LCH) SwapClear, Korea Exchange (KRX), Hong Kong Exchange (HKEX) and the Shanghai Clearing House.
These memberships allow the Company to centrally clear derivative instruments in line with cross-border regulatory
requirements. Common to all of these memberships is the requirement for the Company to make default fundcontributions. 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 ofbusiness. Under these letters and guarantees, the Company undertakes to ensure that those subsidiaries continue tomeet their financial obligations, subject to certain conditions including that the entity remains a controlled entity of
the Company.

66

NOTES TO THE FINANCIAL STATEMENTS (continued)
29. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSSALE 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 business of 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 not have complied with the provisions of the Foreign Exchange Regulation Act, 1973
(India). Grindlays, on its own initiative, brought these transactions to the attention of the Reserve Bank of India. The
Indian authorities served notices on Grindlays and certain of its officers in India and civil penalties have been imposed
which are the subject of appeals. Criminal prosecutions are pending and will be defended. The amounts in issue are
not material.
REVOCATION OF DEED OF CROSS GUARANTEE IN RESPECT OF CERTAIN CONTROLLED ENTITIES
During the current year, ASIC replaced class order 98/1418 with a new legislative instrument ASIC Corporations(Wholly owned Companies) Instrument 2016/785. Under the new instrument, APRA regulated companies are noteligible to rely on the ASIC Class Order for relief from financial reporting obligations under Part 2M.3 of the
Corporations Act 2001 (Cth).
As Australia and New Zealand Banking Group Limited is regulated by APRA, the Company and the other entities whichwere party to a Deed of Cross Guarantee executed deeds of revocation and lodged those deeds with ASIC. Allcompanies, including Australia and New Zealand Banking Group Limited, were released from the Deed of Cross
Guarantee by 30 September 2017.
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 in the early 1990s.
The disputed cheques were drawn on the National Housing Bank (NHB) in India. Proceedings between Grindlays and
NHB concerning the proceeds of the cheques were resolved in early 2002.
Recovery is now being pursued from the estate of the Grindlays customer who received the cheque proceeds. Anyamounts recovered are to be shared between the Company and NHB.

67

NOTES TO THE FINANCIAL STATEMENTS (continued)
30. COMPENSATION OF AUDITORS

2017

2016

$’000

$’000

Audit or review of financial reports

6,318

5,617

Audit-related services1

3,668

2,975

220

172

10,206

8,764

1,645

1,662

523

507

-

-

Total

2,168

2,169

Total compensation of auditors

12,374

10,933

KPMG Australia

Non-audit services

2

Total

3

Overseas related practices of KPMG Australia
Audit or review of financial reports
Audit-related services1
Non-audit services

2

1.
2.
3.

Comprises prudential and regulatory services of $3.11 million (2016: $2.34 million), comfort letters of $0.55 million (2016: $0.80 million) and other $0.53 million (2016:$0.35 million).
The nature of the non-audit services includes general market insights and controls related assessments.
Inclusive of goods and services tax.

The Company’s policy allows KPMG Australia or any of its related practices to provide assurance and other auditrelated services that, while outside the scope of the statutory audit, are consistent with the role of external auditor.
These include regulatory and prudential reviews requested by regulators such 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 be provided
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 and subcontracting of operational activities normally
undertaken by management, and engagements where the auditor may ultimately be required to express an opinion
on its own work.

31. EVENTS SINCE THE END OF THE FINANCIAL YEAR
On 23 October 2017, the Company announced it had reached a confidential in-principle agreement with the Australian
Securities and Investments Commission (ASIC) to settle court action in respect of interbank trading and the bank billswap rate (BBSW). On 30 October 2017, ANZ informed the Court that agreement with ASIC had been concluded. The
financial impact to ANZ has been reflected in the financial statements. On 10 November 2017, there will be a hearing
to determine whether the Court is prepared to make the orders which ANZ and ASIC seek so as to give effect to thesettlement.
Other than the matter above, there have been no significant events from 30 September 2017 to the date of signing
this report.

68

DIRECTORS’ DECLARATION 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)ii)

are prepared in accordance with Part 7.8 of the Corporations Act 2001, including that they comply with theAustralian Accounting Standards and the applicable regulations of the Corporations Regulations 2001; andgive a true and fair view of the financial position of the Company as at 30 September 2017 and of its
performance for the year ended on that date; andb) The auditor’s report lodged with the financial statements is a true copy of the report on the financial statements.

Signed in accordance with a resolution of the Directors.

David M Gonski, AC
ChairmanShayne C Elliott
Director

2 November 2017

LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONSACT 2001
To the Directors of Australia and New Zealand Banking Group Limited
I declare that, to the best of my knowledge and belief, in relation to the audit of Australia and New Zealand Banking
Group Limited for the financial year ended 30 September 2017 there have been:
i)
ii)

KPMG

no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation
to the audit; andno contraventions of any applicable code of professional conduct in relation to the audit.

Alison Kitchen
Partner
Melbourne
2 November 2017

69

INDEPENDENT AUDITOR’S REPORTTO THE SHAREHOLDERS OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

Report on the audit of the Financial Report

OPINION
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 Group’s financial position as at 30 September 2017 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 2017;

income statement, statement of comprehensive income, statement of changes in equity, and statement of cash
flows for the year then ended;

notes 1 to 31 including summary of significant accounting policies; and

Directors’ Declaration.

BASIS FOR OPINION
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we haveobtained is sufficient and appropriate 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 and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (theCode) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethicalresponsibilities in accordance with the Code.
KEY AUDIT MATTERS
The Key Audit Matters we identified are:

Provision for Credit Impairment;Valuation of Financial Instruments held at Fair Value; 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 not provide a separate opinion on these matters.

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INDEPENDENT AUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL REPORT (continued)
PROVISION FOR CREDIT IMPAIRMENT ($2,962 MILLION)
Refer to the critical accounting estimates and judgements and disclosures in relation to credit impairment provisioningin Note 12 and Note 15 to the Financial Report.
The Key Audit Matter
The provision for credit impairment is a Key Audit Matter as the Company has significant credit risk exposure to alarge number of counterparties across a wide range of lending and other products, industries and geographies. The
value of loans and advances on the balance sheet is significant and there is a high degree of complexity andjudgement involved for the Company in estimating individual and collective credit impairment provisions against theseloans. These features resulted in significant audit effort to address the risks around loan recoverability and thedetermination of related provisions.
How the matter was addressed in our audit
Our audit procedures for the individual and collective provision for credit impairment included:
Provisions against specific individual loans (individual provision)
Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposures thatare monitored individually). We tested the approval of new lending facilities against the Company’s lending
policies, the performance of annual loan assessments, and controls over 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 timelinessof and the accuracy of counterparty risk assessments and risk grading against the requirements of theCompany’s lending policies and regulatory requirements;Performing credit assessments of a sample of wholesale loans managed by the Company’s specialist workout
and recovery team assessed as higher risk or impaired, and a sample of other loans, focusing on larger
exposures assessed by the Company as showing signs of deterioration, or in areas of emerging risk (assessedagainst external market conditions). We challenged the Company’s risk grading of the loan, their assessmentof loan recoverability and the impact on the credit provision. To do this, we used the information on the
Company’s loan file, discussed the case with the loan officer and management, and performed our own
assessment of recoverability. This involved using our understanding of relevant industries and themacroeconomic environment, engaging KPMG specialists where required, and comparing assumptions of
inputs 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;andFor retail loans (smaller customer exposures not monitored individually), testing controls over the systems
which record lending arrears, company exposures into delinquency buckets based on the number of days
loans are overdue, and calculate individual provisions. We tested automated calculation and change
management controls and evaluated the Company’s oversight of the portfolios, with a focus on controls overdelinquency statistics monitoring. We tested a sample of the level of provisions held against different loan
products based on the delinquency profile and challenged assumptions made in respect of expected
recoveries, primarily from collateral held.

71

INDEPENDENT AUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL REPORT (continued)
Provisions estimated across loan portfolios (collective provision)
Testing the Company’s processes to validate the models used to calculate collective provisions, and evaluating
the Company’s model methodologies against established market practices and criteria in the accounting
standards;

Testing the key controls within IT systems used to calculate the collective provision, specifically those relating
to data management and the completeness and accuracy of data transfer from underlying source systems to
the collective provision models;
Testing the accuracy of key inputs into models by checking a sample of year-end balances to the generalledger, and repayment history and risk ratings to source systems;
Challenging the key assumptions in the models such as emergence periods, probability of default and loss
given default, for a sample of retail and wholesale portfolios. We compared modelled estimates against actual
losses incurred by the Company; andRe-performing, for a sample of retail and wholesale portfolios and using a KPMG-constructed calculation tool,
the calculation of collective provisions, to determine the accuracy of model output.
We also challenged key assumptions in the components of the Company’s collective provision balance held above
modelled provision estimates. This included:

Evaluating inputs to the concentration risk and economic cycle provisions by comparing underlying portfolio
characteristics to recent loss experience, current market conditions and specific risks inherent in the
Company’s loan portfolios;
Assessing the requirement for other additional provisions by considering model or data deficiencies identified
by the Company’s model validation processes; andAssessing the completeness of additional provisions by checking the consistency of risks identified in theportfolios to their inclusion in the Company’s assessment.

Valuation of Financial Instruments held at Fair Value:

FINANCIAL ASSETS HELD AT FAIR VALUE $151,164 MILLIONFINANCIAL LIABILITIES HELD AT FAIR VALUE $60,408 MILLION

Refer to the critical accounting estimates and judgements and disclosures of fair values in Note 16 to the Financial
Report.
The Key Audit Matter
Financial instruments held at fair value on the Company’s balance sheet include available-for-sale assets, trading
securities, derivative assets and liabilities, certain debt securities, and other assets and liabilities designated asmeasured at fair value through profit or loss. The instruments are mainly risk management products sold tocustomers and used by the Company to manage its own interest rate and foreign exchange risk.
The valuation of financial instruments held at fair value is considered a Key Audit Matter as:






Financial instruments held at fair value are significant (19% of assets and 8% of liabilities);
The significant volume and range of products transacted, in a number of international locations, increases therisk 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 theCompany, increasing the risk of error, 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; andThe valuation of certain derivatives held by the Company is sensitive to inputs including funding rates,
probabilities of default and loss given default, and industry practice is evolving as to how the impact of both
funding and credit risk is incorporated within the valuation of certain derivative instruments. This increased
our audit effort in this area and necessitated the involvement of valuation specialists.

72

INDEPENDENT AUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL REPORT (continued)
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 to generate valuations and any related valuation adjustments, and theCompany’s market risk management and finance systems to identify inconsistencies in transaction
management and valuation processes across products and locations;
Testing the governance and approval controls, such as management review and approval of the valuation
models, and approval of new products against policies and procedures;
Testing the front office management review and approval of the daily financial instrument trading profit andloss reconciliations prepared by the Company’s independent product control function;
Testing the management review and approval of model construction and validation, aimed at assessing thevalidity and robustness of underlying valuation models; andTesting the Company’s data validation controls, such as those over key inputs in generating the fair value tomarket data where fair values were determined by front office teams.

We carried out testing over the valuation of financial instruments with both observable and unobservable inputs. Our
specific testing involved valuation specialists and included:







Re-performing the valuation of ‘level 1’ and ‘level 2’ available-for-sale assets and trading securities, which areprimarily government, semi-government 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 andliabilities where the fair value was determined using observable inputs. This included comparing a sample ofobservable 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; andEvaluating the appropriateness of the Company’s valuation methodology for derivative financial instruments,
having regard to current and emerging derivative valuation practices across a range of peer institutions, andagainst the required criteria in the accounting standards. We tested adjustments made to valuations,particularly funding and credit valuation adjustments on uncollateralised derivatives. In particular, for asample of individual counterparties, across locations, we tested key inputs to the credit valuation adjustment
calculation, including the probability of default, against observable market data. Where proxies were used, we
assessed the proxy against available alternatives, across a number of locations.

73

INDEPENDENT AUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL REPORT (continued)
IT SYSTEMS AND CONTROLS
Refer to the basis of preparation in Note 1 to the Financial Report
The Key Audit Matter
As a major Australian bank, the Company’s businesses utilise a large number of complex, interdependent Information
Technology (IT) systems to process and record a high volume of transactions. Controls over access and changes to IT
systems are critical to the recording of financial information and the preparation of a financial report which provides atrue 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 a core part of our audit team.
How the matter was addressed in our audit
We tested the control environment for key IT applications (systems) used in processing significant transactions andrecording balances in the general ledger. We also tested automated controls embedded within these systems. Our
audit procedures included:






Testing the governance controls used by the Company’s technology teams suppliers to monitor system
integrity, by checking matters impacting the operational integrity of core systems for escalation and action inaccordance with the Company’s policies;
Testing the access rights given to staff by checking them to approved records, and inspecting the reports overthe granting and removal of access rights. We also looked for evidence of escalation of breaches;
Testing preventative controls designed to enforce segregation of duties between users within particularsystems;
Testing the operating effectiveness of automated controls, principally relating to the automated calculation offinancial transactions. We tested the inputs used within automated calculations to source data and also tested
the accuracy of the calculation logic for a sample of transactions within each identified control; andTesting the operating effectiveness of automated reconciliation controls, both between systems and intrasystem. We checked a sample of identified breaks in reconciliations were recorded on exception reports, andsubsequently investigated and cleared by the Company.

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INDEPENDENT AUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL REPORT (continued)
RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL REPORTThe Directors are responsible for:

preparing a Financial Report that gives a true and fair view in accordance with Australian AccountingStandards and part 7.8 of the Corporations Act 2001;
implementing necessary internal control to enable the preparation of a Financial Report that gives a true andfair view and is free from material misstatement, whether due to fraud or error; andassessing the Company’s ability to continue as a going concern. 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; andto 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 fromfraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected toinfluence the economic decisions of users taken on the basis of this Financial Report.
A further description of our responsibilities for the audit of the Financial Report is located at the Auditing andAssurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms partof our Auditor’s Report.

KPMG

Alison Kitchen
Partner
Melbourne
2 November 201775