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RNS Number:5002S
National Australia Bank Ld
26 November 2003
PART 3
Financial report
81
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Statement of financial performance
Group Company
For the year ended Note 2003 2002 2001 2003 2002
September 30
$m $m $m $m $m
Interest income 4 17,100 16,475 19,919 11,979 11,438
Interest expense 5(b) (9,681 ) (9,253 ) (12,959 ) (7,928 ) (7,545 )
Net interest income 7,419 7,222 6,960 4,051 3,893
Premium and related 4, 57 949 1,134 1,074 - -
revenue
Investment revenue 4, 57 2,759 (988 ) (877 ) - -
Claims expense 5(b), 57 (958 ) (956 ) (599 ) - -
Change in policy 5(b), 57 (1,518 ) 1,637 1,318 - -
liabilities
Policy acquisition and 5(b), 57 (713 ) (751 ) (699 ) - -
maintenance expense
Investment management fees 5(b), 57 (75 ) (86 ) (89 ) - -
Net life insurance income 444 (10 ) 128 - -
Other banking and 4 5,010 7,006 4,749 6,230 3,260
financial services income
Mortgage servicing and 4 - 378 810 - -
origination revenue
Movement in the excess of 4 (160 ) (155 ) 510 - -
net market value over net
assets of life insurance
controlled entities
Significant revenue
Proceeds from the sale of 4, 5(a) - 2,671 5,314 - -
foreign controlled
entities
Personnel expenses 5(b) (3,416 ) (3,379 ) (3,725 ) (1,907 ) (1,851 )
Occupancy expenses 5(b) (556 ) (559 ) (587 ) (280 ) (276 )
General expenses 5(b) (2,382 ) (4,769 ) (2,158 ) (1,072 ) (1,052 )
Amortisation of goodwill 5(b) (98 ) (101 ) (167 ) - -
Charge to provide for 5(b), 17 (633 ) (697 ) (989 ) (373 ) (259 )
doubtful debts
Significant expenses
Restructuring costs 5(a), (b) - (580 ) - - (363 )
Cost of foreign controlled 5(a), (b) - (2,686 ) (2,929 ) - (138 )
entities sold
Impairment loss on 5(a), (b) - - (1,643 ) - -
mortgage servicing rights
Charge to provide for 5(a), (b) - - (1,436 ) - -
mortgage servicing rights
valuation adjustment
Impairment loss on 5(a), (b) - - (858 ) - -
goodwill
Profit from ordinary 5,628 4,341 3,979 6,649 3,214
activities before income
tax expense
Income tax expense 6 (1,681 ) (962 ) (1,891 ) (929 ) (712 )
relating to ordinary
activities
Net profit 3,947 3,379 2,088 5,720 2,502
Net loss/(profit) 16 (6 ) (5 ) - -
attributable to outside
equity interest - Life
insurance business
Net (profit) attributable (8 ) - - - -
to outside equity interest
- Other
Net profit attributable to 3,955 3,373 2,083 5,720 2,502
members of the Company
Other changes in equity
other than those resulting
from transactions with
owners as owners
Net credit to asset 35 9 9 8 - 3
revaluation reserve
Net credit/(debit) to 35 (1,251 ) (520 ) 1,380 (40 ) -
foreign currency
translation reserve
Net credit to retained 1(d), 36 1,151 - - 1,151 -
profits on initial
adoption of AASB 1044
"Provisions, Contingent
Liabilities and Contingent
Assets"
Total revenues, expenses (91 ) (511 ) 1,388 1,111 3
and valuation adjustments
attributable to members of
the Company and recognised
directly in equity
Total changes in equity 3,864 2,862 3,471 6,831 2,505
other than those resulting
from transactions with
owners as owners
Basic earnings per share 8 248.8 205.7 121.5
(cents)
Diluted earnings per share 8 243.6 202.5 122.8
(cents)
Dividends per ordinary
share (cents)
Interim 7 80 72 67
Final 7 83 75 68
82
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Statement of financial position
Group Company
As at September 30 Note 2003 2002 2003 2002
$m $m $m $m
Assets
Cash assets 9 5,032 6,294 779 1,515
Due from other financial institutions 10 10,383 15,876 7,820 12,579
Due from customers on acceptances 11 19,562 19,474 19,496 19,400
Trading securities 12 23,724 19,590 22,952 17,471
Trading derivatives 23,644 12,128 22,773 11,498
Available for sale securities 13 6,513 6,192 6,503 6,150
Investment securities 14 8,647 13,541 3,668 9,644
Investments relating to life 15 35,846 31,012 - -
insurance business
Loans and advances 16 247,959 231,300 165,746 143,607
Mortgage servicing rights 19 - 1,794 - -
Due from controlled entities - - 29,569 28,923
Shares in controlled entities, joint 20 1,445 1,199 12,250 11,926
venture entities and other securities
Regulatory deposits 21 225 129 93 38
Property, plant and equipment 22 2,498 2,640 1,166 1,201
Income tax assets 23 1,203 1,292 679 741
Goodwill 24 740 775 - -
Other assets 25 10,050 14,151 1,323 2,035
Total assets 397,471 377,387 294,817 266,728
Liabilities
Due to other financial institutions 26 45,128 43,279 41,466 39,983
Liability on acceptances 11 19,562 19,474 19,496 19,400
Trading derivatives 21,479 12,000 20,479 11,293
Deposits and other borrowings 27 210,146 206,864 144,683 134,885
Life insurance policy liabilities 28 32,457 30,425 - -
Income tax liabilities 29 1,537 1,609 562 814
Provisions 30 1,262 2,809 768 2,123
Due to controlled entities - - 17,025 16,563
Bonds, notes and subordinated debt 31 22,707 22,192 22,093 20,841
Other debt issues 32 1,743 1,866 367 460
Other liabilities 33 14,239 13,618 7,292 3,056
Total liabilities 370,260 354,136 274,231 249,418
Net assets 27,211 23,251 20,586 17,310
Equity
Contributed equity 34 9,728 9,931 8,753 9,931
Reserves 35 893 2,105 34 73
Retained profits 36 13,786 11,148 11,799 7,306
Total parent entity interest 24,407 23,184 20,586 17,310
Outside equity interest - Life 37 2,614 67 - -
insurance business
Outside equity interest - Other 37 190 - - -
Total equity 38 27,211 23,251 20,586 17,310
83
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Statement of cash flows
Group Company
For the year ended September 30 Note 2003 2002 2001 2003 2002
$m $m $m $m $m
Cash flows from operating
activities
Interest received 17,450 15,680 20,373 10,746 10,254
Interest paid (10,193 ) (9,304 ) (13,020 ) (6,681 ) (6,523 )
Dividends received 39 35 44 3,534 839
Fees and other income 3,026 6,182 6,882 999 3,697
received
Life insurance
Premiums received 6,546 10,378 7,157 - -
Investment and other revenue 1,857 2,024 1,985 - -
received
Policy payments (5,778 ) (8,483 ) (4,784 ) - -
Fees and commissions paid 312 (274 ) (288 ) - -
Personnel expenses paid (3,327 ) (3,637 ) (3,634 ) (1,847 ) (2,001 )
Occupancy expenses paid (489 ) (549 ) (504 ) (226 ) (251 )
General expenses paid (3,747 ) (3,176 ) (2,392 ) (1,184 ) (1,313 )
Income tax paid (1,830 ) (2,131 ) (2,245 ) (1,118 ) (481 )
Goods and services tax paid (52 ) (68 ) (102 ) (21 ) (60 )
Net decrease/(increase) in (4,345 ) 136 (4,400 ) (5,653 ) 789
trading securities
Net decrease/(increase) in 50 1,304 (763 ) - -
mortgage loans held for sale
Net cash provided/(used in) 43(a) (481 ) 8,117 4,309 (1,451 ) 4,950
by operating activities
Cash flows from investing
activities
Movement in available for
sale securities
Purchases (15,052 ) (14,765 ) (18,803 ) (15,047 ) (14,735 )
Proceeds from sale 3 90 26 - 84
Proceeds on maturity 13,500 14,543 15,247 13,761 14,530
Movement in investment
securities
Purchases (15,449 ) (40,653 ) (37,041 ) (11,327 ) (39,311 )
Proceeds on maturity 18,578 37,434 30,828 15,985 34,641
Net increase in investments (3,650 ) (2,148 ) (2,236 ) - -
relating to life insurance
business
Net increase in loans and (32,248 ) (27,415 ) (19,109 ) (28,766 ) (22,711 )
advances
Net decrease/(increase) in - - - (2,379 ) 8,951
amounts due from controlled
entities
Net decrease/(increase) in 428 212 (36 ) (323 ) (18 )
shares in controlled
entities, joint venture
entities and other securities
Payments for mortgage - (74 ) (2,700 ) - -
servicing rights
Proceeds from sale of - 98 - - -
mortgage servicing rights
Payments for acquisition of 43(e) (83 ) - (131 ) - -
controlled entities
Proceeds from sale of 43(f) 2,671 - 5,415 - -
controlled entities
Payments for property, plant (534 ) (791 ) (982 ) (298 ) (383 )
and equipment
Proceeds from sale of - 2,314 - - -
operating assets
Net proceeds from sale of 166 418 132 108 157
property, plant and equipment
Net decrease/(increase) in (113 ) (35 ) 23 (57 ) (18 )
regulatory deposits
Net decrease in other assets 2,762 10,057 291 2,231 6,528
Net cash used in investing (29,021 ) (20,715 ) (29,076 ) (26,112 ) (12,285 )
activities
Cash flows from financing
activities
Net increase in deposits and 17,063 18,840 11,793 15,662 13,526
other borrowings
Net proceeds from bonds, 10,136 6,738 6,986 9,383 6,808
notes and subordinated debt
Repayments of bonds, notes (7,017 ) (8,314 ) (4,537 ) (5,665 ) (6,234 )
and subordinated debt
Payments from provisions (340 ) (116 ) (221 ) (257 ) (32 )
Net proceeds from issue of 216 130 261 216 130
ordinary shares
Net proceeds from issue of 975 - - - -
Trust Preferred Securities
Payments made under on-market (1,565 ) (1,248 ) - (1,565 ) (1,248 )
buy-back of ordinary shares
Dividends paid (2,255 ) (1,948 ) (1,494 ) (2,255 ) (1,878 )
Net increase/(decrease) in (204 ) (5,892 ) 2,792 566 (5,195 )
other liabilities
Net cash provided by 17,009 8,190 15,580 16,085 5,877
financing activities
Net decrease in cash and cash (12,493 ) (4,408 ) (9,187 ) (11,478 ) (1,458 )
equivalents
Cash and cash equivalents at (21,109 ) (18,408 ) (10,037 ) (25,889 ) (26,385 )
beginning of year
Effects of exchange rate 3,889 1,707 (1,015 ) 4,500 1,954
changes on balance of cash
held in foreign currencies
Cash and cash equivalents of - - 1,831 - -
controlled entities sold
Cash and cash equivalents at 43(b) (29,713 ) (21,109 ) (18,408 ) (32,867 ) (25,889 )
end of year
84
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Notes to the financial statements
1 Principal accounting policies
This financial report is a general purpose financial report which is prepared in
accordance with the requirements of the Banking Act 1959 (Cth), Corporations Act
2001 (Cth), Australian Accounting Standards, Urgent Issues Group Consensus Views
and other authoritative pronouncements of the AASB.
The financial report also includes disclosures required by the United States SEC
in respect of foreign registrants. Other prescribed SEC disclosures, which are
not required to be included in the financial report, are presented elsewhere in
this annual financial report. Certain key terms used in this financial report
are defined in the glossary on page 215.
The preparation of the financial report requires management to make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses and the disclosed amount of contingent liabilities. Although the
Group has internal control systems in place to ensure that estimates can be
reliably measured, actual amounts may differ from those estimates. It is not
anticipated that such differences would be material.
(a) Historical cost
The financial report is based on historical cost and therefore does not reflect
changes in the purchasing power of money or current valuations of non-monetary
assets, except for:
* land and buildings which are reflected at directors'
valuation (refer to note 1(u));
* trading securities which are reflected at fair value (refer
to note 1(l));
* trading derivatives which are reflected at fair value (refer
to note 1(dd)); and
* the assets and liabilities of the Group's life insurance
business which are measured at net market value and net present value
respectively (refer to note 1(p), (w) and (z)).
(b) Currency of presentation
All amounts are expressed in Australian dollars unless otherwise stated.
(c) Rounding of amounts
In accordance with Australian Securities and Investments Commission Class Order
98/100 dated July 10, 1998, all amounts have been rounded to the nearest million
dollars, except where indicated.
(d) Changes in accounting policy
Provision for dividends
The Group has adopted the new Australian Accounting Standard AASB 1044 "
Provisions, Contingent Liabilities and Contingent Assets" for the first time
from October 1, 2002. A provision for dividends is now recognised at the time
the dividend is declared, determined or publicly recommended. Previously, the
Group recognised a provision for dividends in the reporting period to which the
dividend related, even though the dividend was declared or announced after the
end of that reporting period.
The effect of this change in accounting policy has been to increase opening
retained profits and decrease provision for dividends by $1,151 million.
There was no impact on net profit or basic and diluted earnings per share for
the year ended September 30, 2003.
(e) Reclassification of financial information
In order to provide users of the financial report with an enhanced level of
understanding of the Group's trading derivatives, the fair values of trading
derivative financial instruments have been disclosed as separate asset and
liability line items on the statement of financial position. As a result of
this change, reclassifications have been made to 2002 comparatives. Previously,
the fair values of trading derivative financial instruments were included in
other assets and other liabilities. Accordingly, $12,128 million previously
disclosed as other assets and $12,000 million previously disclosed as other
liabilities, have been reclassified to trading derivatives assets and
liabilities respectively.
Mortgage loans held for sale have been reclassified to other assets on the
statement of financial position. Previously, mortgage loans held for sale were
disclosed as a separate line item on the statement of financial position. This
reclassification has been made due to the Group's significantly reduced activity
in this area following the sale of HomeSide US in 2002.
(f) Comparative amounts
Comparative amounts have been reclassified to accord with changes in
presentation made in 2003, except where otherwise stated.
(g) Principles of consolidation
All entities which are controlled by the Company are consolidated in the
financial report. Control means the ability or power of the Company to dominate
decision making directly or indirectly in relation to the financial and
operating policies of another entity, to enable that other entity to operate
with it in pursuing its objectives.
All inter-entity balances, transactions and profits and losses are eliminated on
consolidation. Controlled entities prepare accounts for consolidation in
conformity with the Company's accounting policies.
Where controlled entities have been acquired or sold during the year, their
operating results have been included from the date of acquisition or to the date
of sale. Controlled entity acquisitions have been accounted for using the
purchase method of accounting.
Outside interest in the equity and results of the entities that are controlled
by the Company is shown as a separate item, 'outside equity interest', in the
consolidated financial statements.
Statutory funds of the Group's life insurance business have been consolidated
into the financial report as required by Australian Accounting Standard AASB
1038 "Life Insurance Business". The financial report consolidates all of the
assets, liabilities, revenues and expenses of the statutory funds and
non-statutory fund life insurance business irrespective of whether they are
designated as relating to policyholders or shareholders. In addition, where the
Group's life insurance statutory funds have the capacity to control managed
investment schemes in which they are the majority investor, the Group has
consolidated all of the assets, liabilities, revenues and expenses of these
managed investment schemes.
Joint venture entities are entities that are jointly controlled by the Group.
In the consolidated financial statements investments in joint venture entities,
including partnerships, are accounted for using equity accounting principles.
85
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Investments in joint venture entities are carried at the lower of the equity
accounted amount and recoverable amount. The Group's share of the joint venture
entities net profit or loss is recognised in the profit and loss account from
the date joint control commenced until the date joint control ceases. Other
movements in reserves are recognised directly in consolidated reserves.
(h) Foreign currency translation
All foreign currency monetary assets and liabilities are revalued at the rates
of exchange ruling at balance date. Unrealised profits and losses arising from
these revaluations are recognised immediately in the profit and loss account.
Foreign currency revenue and expense amounts are translated at average rates of
exchange for the year.
Differences arising on the translation of the financial report of the Group's
overseas operations which are considered to be economically self-sustaining are
included in the foreign currency translation reserve, after allowing for foreign
currency hedges. Differences arising on the translation of the financial report
of all other overseas controlled entities and overseas branches are recognised
immediately in the profit and loss account. Exchange profits and losses, in
respect of life insurance business, are recognised in the profit and loss
account.
Assets
(i) Cash assets
Cash assets are items readily convertible into cash and are generally repayable
on demand. Cash assets are brought to account at the face value or the gross
value of the outstanding balance where appropriate.
(j) Due from other financial institutions
Due from other financial institutions includes loans, nostro balances,
certificates of deposit and settlement account balances due from other financial
institutions. They are brought to account at the gross value of the outstanding
balance.
(k) Acceptances
The Group's liability under acceptances is reported in the statement of
financial position. The Group has equal and offsetting claims against its
customers which are reported as an asset. The Group's own acceptances
discounted are held as part of either the trading securities or loan portfolio
depending on whether, at the time of such discount, the intention was to hold
the acceptances for resale or until maturity, respectively.
(l) Trading securities
Trading securities are public and other debt securities which are purchased for
current resale in day-to-day trading operations. Trading securities are
recorded at fair value and unrealised profits or losses in respect of fair value
adjustments are recognised immediately in the profit and loss account.
The fair values of trading securities represent the quoted market value of those
securities.
Trading securities are recorded on a trade-date basis.
(m) Available for sale securities
Available for sale securities are public and other debt securities which are
purchased with the intention to be held for an indefinite period of time but not
necessarily to maturity. Such securities may be sold in response to various
factors including significant changes in interest rates, liquidity requirements
and regulatory capital considerations.
Available for sale securities are recorded at the lower of aggregate cost or
market value. Cost is adjusted for the amortisation of premiums and accretion
of discounts to maturity. Unrealised losses in respect of market value
adjustments and realised profits and losses on sale of available for sale
securities are recognised in the profit and loss account. The cost of
securities sold is calculated on a specific identification basis.
Available for sale securities are recorded on a trade-date basis.
(n) Investment securities
Investment securities are public and other debt securities, which are purchased
with the positive intent and ability to hold until maturity. Such securities
are recorded at original cost adjusted for the amortisation of premiums,
accretion of discounts to maturity and other than temporary diminutions in their
value. Unrealised losses relating to other than temporary diminutions in the
value of investment securities are recognised in the profit and loss account and
the recorded values of those securities adjusted accordingly. The sale of an
investment security would only be considered in those unusual and rare
situations when significant unforeseeable changes in circumstance may have
caused a change in intent without calling into question the Group's intent and
ability to hold other investment securities to maturity in the future (eg.
evidence of a significant deterioration in a security issuer's
creditworthiness). In any unusual and rare instances where investment
securities are sold prior to maturity, profits and losses on sale are taken to
the profit and loss account when realised.
Investment securities are recorded on a trade-date basis.
(o) Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase are retained within the
investment, available for sale or trading portfolios and accounted for
accordingly. Liability accounts are used to record the obligation to
repurchase. The difference between the sale and repurchase price represents
interest expense and is recognised in the profit and loss account over the term
of the repurchase agreement. Securities held under reverse repurchase agreements
are recorded as receivables. The difference between the purchase and sale price
represents interest income and is recognised in the profit and loss account over
the term of the reverse repurchase agreement.
(p) Investments relating to life insurance business
Investment assets held by the Group's life insurance business have been recorded
at net market value including an allowance for estimated realisation costs.
Where no quoted market values exist, the directors adopt various valuation
methods. In those cases, the values adopted are deemed equivalent to net market
value.
86
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Details of particular methods adopted are as follows:
* freehold land and leasehold properties are stated at values
not greater than independent valuations, which are carried out at regular
intervals not exceeding three years. As market value is adopted, building
depreciation is not provided for;
* ordinary and preference shares, equity options and
investments in unit trusts that are not controlled entities, are recorded at
their latest available market value or, where no quoted security exists, at
directors' valuations with reference to their net tangible assets;
* investments in controlled entities of life insurance
operations that do not have quoted market values are recorded at not greater
than independent valuation or where no independent valuation is available at
directors' valuations, or, for entities in voluntary liquidation, at net
tangible assets;
* investments in associates are recorded at directors'
valuation with reference to the life insurance entity's proportionate interest
in the market value of each associate;
* interest-bearing securities quoted on stock exchanges are
shown at prices quoted at balance date. Unquoted interest-bearing securities are
recorded at amounts based on valuations using rates of interest equivalent to
the yields obtainable on comparable quoted investments; and
* participations in lease transactions are included in
investment assets. The transactions are recorded at market value, based on the
net present value of the after-tax cash flows arising from the transactions.
Restrictions on assets
The assets and liabilities held in the statutory funds of the Australian life
insurance business are subject to the restrictions of the Life Insurance Act
1995 (Cth) and the constitutions of the life insurance entities. The main
restrictions are that the assets in a statutory fund can only be used to meet
the liabilities and expenses of that fund, to acquire investments to further the
business of the fund, or to make profit distributions when solvency and capital
adequacy requirements of the Life Insurance Act 1995 (Cth) are met. Therefore,
assets held in statutory funds are not available for use by other parts of the
Group's business other than any profits generated in the statutory funds.
(q) Loans and advances
Loans and advances include overdrafts, credit card lending, market rate
advances, bill financing, housing loans, lease finance, other term lending and
redeemable preference share finance. They are carried at recoverable amount
represented by the gross value of the outstanding balance adjusted for provision
for doubtful debts and unearned income. Unearned income represents interest not
yet earned on the Group's consumer instalment lending and leasing and is
calculated on an actuarial basis. Interest is recognised as revenue when
interest is earned.
(i) Bad and doubtful debts
Provision for doubtful debts provides for losses inherent in loans, and
off-balance sheet credit extensions such as letters of credit, guarantees and
undrawn commitments to extend credit.
The specific provision for doubtful debts is established to cover all identified
doubtful debts and is recognised when there is reasonable doubt over the
collectability of principal and interest in accordance with the loan agreement
('an impaired loan'). Amounts provided for are determined by specific
identification or by management's determination of probable losses for
individual loans that are considered impaired in relation to loan portfolios
where specific identification is impracticable. All bad debts are written off
against the specific provision for doubtful debts in the reporting period in
which they are classified as irrecoverable.
The Group has adopted a statistically-based provisioning methodology for its
general provision for doubtful debts. Under this methodology, the Group
estimates the level of losses inherent but not specifically identified in its
existing credit portfolios at balance date.
For retail lending (smaller-balance homogeneous loans), the general provision is
assessed at a portfolio level and is based on product loss rates, to make a
provision for losses inherent in the portfolio but not yet identified at balance
date. These rates are determined by reference to observed historical loss
experience for the relevant product types.
In respect of non-retail lending, the amount of the general provision is
determined by multiplying the customer's probability of default by the loss
given default. The probability of default is determined by the Group's internal
customer rating system. Internal ratings are assigned at the customer level.
This system utilises objective, verifiable external data, such as external
credit ratings, and is supplemented with an assessment of economic and industry
outlooks, conducted by the Group's discrete specialist economics unit. The loss
given default is the amount of an individual loan at risk having regard to the
level of collateral held against that facility. The level of collateral held is
determined on a loan-by-loan basis, based on the Group's assessment of the loan
security's value at the time of loan application and any subsequent valuations.
The operation of the statistically-based provisioning methodology is such that
when individual loans are impaired, a specific provision will be raised by
making a transfer from the general provision for doubtful debts. The general
provision for doubtful debts is then re-established based on the remaining
portfolios of credit exposures applying the above methodology.
All loans and off-balance sheet credit extensions are subject to continuous
management surveillance.
(ii) Asset quality
A loan is considered to be impaired when, based on current information and
events, the Group considers it is probable that it will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
The Group has disclosed certain components of its loan portfolios as impaired
assets according to the classifications discussed below (refer to note 18).
Non-accrual loans consist of:
* retail loans which are contractually past due 90 days with
security insufficient to cover principal and arrears of interest;
* non-retail loans which are contractually past due and there
is sufficient doubt about the ultimate collectability of principal and interest
to warrant the cessation of interest accruals; and
* impaired off-balance sheet credit exposures where current
circumstances indicate that losses may be incurred.
A specific provision is raised for all non-accrual loans.
87
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Restructured loans are those loans on which the original contractual terms have
been concessionally modified due to the financial difficulties of borrowers, and
on which interest continues to be accrued at a rate which is equal to or greater
than the Group's average cost of funds at the date of restructuring.
Assets acquired through security enforcement are those assets (primarily real
estate) acquired through actual foreclosure or in full or partial satisfaction
of loans.
(iii) Revenue recognition on non-accrual loans
When a loan is classified as non-accrual, interest income ceases to be
recognised in the profit and loss account on an accruals basis, as reasonable
doubt exists as to the collectability of interest and principal. Interest
charged on non-accrual loans in the current reporting period is reversed against
income.
Cash receipts in relation to non-accrual loans are recognised as interest income
to the extent that the cash receipts represent unaccrued interest except where
there is a contrary agreement with the borrower, or the receipts relate to
proceeds from the sale of security, or are scheduled principal repayments.
(iv) Leasing
Finance leases in which the Group is the lessor are included in loans and
advances and are accounted for using the finance method, whereby income
determined on an actuarial basis is taken to account over the term of the lease
in proportion to the outstanding investment balance. Where the Group is a
lessee, finance lease assets are capitalised and the corresponding liability is
recognised in other liabilities.
Leveraged leases with lease terms beginning on or after October 1, 1999 are
accounted for as finance leases. Investments in leveraged leases entered into
before October 1, 1999 are recorded at an amount equal to the equity
participation and are net of long-term debt for which there is no recourse to
the lessor in the event of default by the lessee. Income is taken to account on
an actuarial basis over the term of each lease. Where a change occurs in
estimated lease cash flows during the term of a lease, total lease profit is
recalculated and reallocated over the entire lease term. Net of tax income has
been grossed up at current rates to reflect the appropriate pre-tax equivalent
amount.
Lease rentals receivable and payable on operating leases are recognised in the
profit and loss account in periodic amounts over the effective lease term.
(r) Mortgage servicing rights
Mortgage servicing rights are the rights to receive a portion of the interest
coupon and fees collected from the mortgagor for performing specified servicing
activities. The total cost of loans originated or acquired is allocated between
the mortgage servicing rights and the mortgage loans without the servicing
rights, based on relative fair values. The value of servicing rights acquired
through bulk transactions is capitalised at cost.
Mortgage servicing rights are amortised in proportion to and over the period of
estimated net servicing revenue. They are evaluated for impairment by comparing
the carrying amount of the servicing rights to their fair value.
Fair value is estimated using market prices of similar mortgage servicing assets
and discounted future net cash flows, considering market prepayment rates,
historic prepayment rates, portfolio characteristics, interest rates and other
economic factors.
For purposes of measuring impairment, the mortgage servicing rights are
stratified by the predominant risk characteristics which include product types
of the underlying loans and interest rates of the mortgage. Impairment is
recognised through a valuation reserve for each impaired stratum and is
generally included in amortisation of mortgage servicing rights.
Following the sale of HomeSide US in 2002, the Group no longer holds this asset.
(s) Shares in controlled entities, joint venture entities and other
securities
Except where a life insurance controlled entity consolidates a controlled entity
(refer to note 1(p)), shares in controlled entities and other securities are
stated at original cost less any necessary provision for diminution in value.
Unrealised losses relating to diminution in the value of shares in controlled
entities and other securities are recognised in the profit and loss account.
Interests in joint venture entities are accounted for under the equity method of
accounting (refer to note 1(g)).
(t) Regulatory deposits
In several countries in which the Group operates, the law requires that
regulatory deposits be lodged with the local central bank at a rate of interest
generally below that prevailing in the market. The amount of the deposit and
the interest rate receivable are determined in accordance with the requirements
of the local central bank. Regulatory deposits are brought to account at the
gross value of the outstanding balance.
(u) Property, plant and equipment
Except for life insurance business investments, all land and buildings are
revalued annually by directors to reflect fair values. Directors' valuations
are based on advice received from independent valuers and regular independent
valuations. Revaluation increments are credited to the asset revaluation
reserve. Revaluation decrements are charged against the asset revaluation
reserve to the extent that they reverse previous revaluation increments and any
excess is recognised as an expense.
A provision for capital gains tax is only made when it is known that the
relevant asset will eventually be sold. This provision, when required, is made
against the asset revaluation reserve.
All other items of property, plant and are carried at the lower of cost, less
accumulated depreciation or amortisation, and recoverable amount. If the
carrying amount of property, plant and equipment exceeds its recoverable amount,
the asset is written-down to the lower value. Where a group of assets working
together supports the generation of cash inflows, recoverable amount is assessed
in relation to that group of assets. In assessing recoverable amounts, the
relevant cash flows have not been discounted to their present value unless
otherwise stated.
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The costs of developing, acquiring and enhancing internal-use software are
capitalised on a component or module basis and amortised over the estimated
useful life of the software, which ranges from three to ten years. The costs of
developing websites are capitalised and amortised over their useful life, except
for costs incurred during the planning and implementation stages, which are
expensed as incurred.
With the exception of land, all items of property, plant and equipment are
depreciated or amortised using the straight-line method at the rates appropriate
to its estimated useful life to the Group. For major classes of property, plant
and equipment, the annual rates of depreciation or amortisation are: buildings -
3.3%; leasehold improvements - up to 10%; furniture, fixtures and fittings and
other equipment - from 10% to 20%; personal computers and related application
software - 33.3%; and other data processing equipment and related application
software - from 10% to 33.3%.
Profit or loss on the sale of property, plant and equipment, which is determined
as the difference between the carrying amount of the property, plant and
equipment at the time of sale and the sale proceeds, is treated as revenue or
expense.
(v) Goodwill
Goodwill, representing the excess of the purchase consideration over the fair
value of the identifiable net assets acquired on the date of acquisition of a
non-life insurance controlled entity, is recognised as an asset. Goodwill is
amortised from the date of acquisition by systematic charges on a straight-line
basis to the profit and loss account over the period in which the benefits are
expected to arise, but not exceeding 20 years. The carrying value of goodwill
is reviewed at least annually. If the carrying value of goodwill exceeds the
value of the expected future benefits, the difference is charged to the profit
and loss account.
(w) Excess of net market value over net assets of life insurance
controlled entities
Where a life insurance entity within the Group consolidates a controlled entity,
any difference between the values consolidated line by line and the market value
of the controlled entity recorded in the life insurer's financial report is
shown as 'excess of net market value over net assets of life insurance
controlled entities'. This asset is disclosed within 'other assets' in the
statement of financial position.
The excess of net market value over net assets of life insurance controlled
entities represents:
* acquired goodwill to the extent it remains at balance date;
* increases in the value of goodwill of the controlled entity
since acquisition or establishment; and
* differences between the values assigned to the assets and
liabilities of the controlled entity within the Group financial report and those
in the financial report of the controlled entity, arising due to valuation
methodology differences.
The significant assumptions used in the valuation basis underlying the
directors' valuations are disclosed in note 25.
The excess is not amortised. Movements in the excess of net market value over
net assets of life insurance controlled entities are included in the Group's
revenue.
Liabilities
(x) Due to other financial institutions
Due to other financial institutions includes deposits, vostro balances and
settlement account balances due to other financial institutions. They are
brought to account at the gross value of the outstanding balance.
(y) Deposits and other borrowings
Deposits and other borrowings include non-interest-bearing deposits redeemable
at call, certificates of deposit, interest-bearing deposits, debentures and
other funds raised publicly by borrowing corporations. They are brought to
account at the gross value of the outstanding balance.
(z) Life insurance policy liabilities
Policy liabilities in the Group's statement of financial position and the change
in policy liabilities disclosed as an expense have been calculated using the
Margin on Services (MoS) methodology in accordance with guidance provided by the
Life Insurance Actuarial Standard Board's Actuarial Standard AS 1.03 "Valuation
of Policy Liabilities" (refer to note 1(mm)).
Policy liabilities for investment-linked business are calculated using the
accumulation method. The liability is generally the accumulation of amounts
invested by policyholders plus investment earnings less fees specified in policy
contracts. Deferred acquisition costs are offset against this liability.
Policy liabilities from non-investment-linked business are measured mainly using
the projection method which is the net present value of estimated future policy
cash flows. Future cash flows incorporate investment income, premiums,
expenses, redemptions and benefit payments (including bonuses). The
accumulation method may be used only where the result would not be materially
different to the projection method.
Unvested policyholder benefits represent amounts that have been allocated to
certain non-investment-linked policyholders that have not yet vested with
specific policyholders.
The measurement of policy liabilities is subject to actuarial assumptions.
Assumptions made in the calculation of policy liabilities at each balance date
are based on best estimates at that date. The assumptions include the benefits
payable under the policies on death, disablement or surrender, future premiums,
investment earnings and expenses. Best estimate means that assumptions are
neither optimistic nor pessimistic but reflect the most likely outcome. The
assumptions used in the calculation of the policy liabilities are reviewed at
each balance date. A summary of the significant actuarial methods and
assumptions used is contained in note 57.
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(aa) Provisions
Provisions are recognised when a legal or constructive obligation exists as a
result of a past event and it is probable that an outflow of economic benefits
will be required to settle the obligation. Provisions are not discounted to the
present value of their expected net future cash flows except where stated below.
(i) Employee entitlements
Employee entitlements to long service leave are accrued using an actuarial
calculation, based on legal and contractual entitlements and assessments having
regard to staff departures, leave utilisation and future salary increases. This
method does not differ significantly from calculating the amount using present
value techniques.
Wages and salaries, annual leave and other employee entitlements expected to be
paid or settled within 12 months of reporting date are measured at their nominal
amounts using remuneration rates that the Group expects to pay when the
liabilities are settled.
All other employee entitlements that are not expected to be paid or settled
within 12 months of the reporting date are measured at the present value of net
future cash flows.
(ii) Non-lending losses
Provision for non-lending losses are raised for losses incurred by the Group,
which do not relate directly to principal outstanding for loans and advances.
(iii) Restructuring costs
Provision for restructuring costs include provisions for expenses incurred but
not yet paid and future expenses that will arise as a direct consequence of
decisions already made. A provision for restructuring costs is only made where
the Group has made a commitment and entered into an obligation such that it has
no realistic alternative but to carry out the restructure and make future
payments to settle the obligation. Provision for restructuring costs is only
recognised when a detailed plan has been approved and the restructuring has
either commenced or been publicly announced. This includes the cost of staff
termination benefits and surplus leased space. Costs related to ongoing
activities are not provided for.
(iv) Surplus leased space
Surplus leased space is an onerous contract and a provision is recognised when
the expected benefits to be derived from the contract are less than the costs
that are unavoidable under the contract. This arises where premises are
currently leased under non-cancellable operating leases and either the premises
are not occupied, or are being sub-leased for lower rentals than the Group pays,
or there are no substantive benefits beyond a known future date. The provision
is determined on the basis of the present value of net future cash flows.
(bb) Bonds, notes and subordinated debt
Bonds, notes and subordinated debt issued by the Group are recorded at cost or
at cost adjusted for premium or discount amortisation.
(cc) Other debt issues
Other debt issues include perpetual floating rate notes, exchangeable capital
units and fixed rate securities issued by the Group. They are recorded at cost
or at cost adjusted for premium or discount amortisation.
(dd) Derivative financial instruments held or issued for trading purposes
Derivative financial instruments held or issued for trading purposes, also
referred to as trading derivatives, include swaps, futures, forward, option and
other contingent or exchange-traded contracts in the interest rate, foreign
exchange, credit derivatives and commodities markets. Trading derivatives are
measured at fair value and the resultant profits and losses are recognised in
other income. The fair value of trading derivatives is reported on a gross
basis as assets or liabilities, as appropriate.
The fair value of a derivative financial instrument represents the present value
of future expected cash flows arising from that instrument.
(ee) Derivative financial instruments held or issued for purposes other than
trading
The principal objective of using derivative financial instruments for purposes
other than trading is to maximise the level of net interest income, while
maintaining acceptable levels of interest rate, credit and liquidity risk, and
to facilitate the funding needs of the Group. To achieve this objective, a
combination of derivatives including swaps, futures, forward, option and other
contingent or exchange-traded contracts in the interest rate and foreign
exchange markets and credit derivatives may be used.
Hedging derivatives must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract. Accordingly, changes in the fair value of the hedging derivative must
be closely correlated with changes in the fair value of the underlying exposure
at inception of the hedge and over the term of the hedged exposure. The timing
of the impact of hedging derivatives on the profit and loss account is
consistent with the timing of the impact of the hedged items on the profit and
loss account.
The net revenue or expense on derivatives used to manage interest rate exposures
is recorded in net interest income on an accruals basis. If a derivative that is
used to manage an interest rate exposure is terminated early, any resulting gain
or loss is deferred within other assets or other liabilities and amortised to
net interest income over the remaining period originally covered by the
terminated contract. If the underlying interest rate exposure position ceases
to exist, any deferred gain or loss is recognised immediately in revenue.
Interest accruals, premiums and realised settlement amounts arising on
derivatives used to hedge exposures arising from anticipated future
transactions, are deferred within other assets or other liabilities until such
time as the accounting impact of the anticipated transaction is recognised in
the financial report. Such amounts only qualify for deferral where there is a
high probability of the future transaction materialising. If it becomes
apparent that the future transaction will not materialise, any deferred amounts
are recognised immediately in other revenue.
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Interest receivables and payables for interest rate swaps with the same
counterparty are reported on a net basis as other assets or other liabilities
where a legal right of set-off exists.
Margin deposits for exchange-traded derivatives are reported as other assets.
(ff) Trustee and funds management activities
The Group acts as trustee, custodian or manager of a number of funds and trusts,
including superannuation and approved deposit funds, and wholesale and retail
investment trusts. Where the Group does not have direct or indirect control of
these funds and trusts as defined by Australian Accounting Standard AASB 1024 "
Consolidated Accounts", the assets and liabilities are not included in the
consolidated financial statements of the Group. Where controlled entities, as
responsible entities or trustees, incur liabilities in respect of their
activities, a right of indemnity exists against the assets of the applicable
trusts and funds. As these assets are sufficient to cover liabilities, and it
is not probable that the controlled entities will be required to settle them,
the liabilities are not included in the consolidated financial statements.
Commissions and fees earned in respect of the Group's trust and funds management
activities are included in the profit and loss account (refer to note 1(ll)).
(gg) Securitisation
Through its Australian loan securitisation program, the Group packages and sells
loans (principally housing mortgage loans) as securities to investors through a
securitisation vehicle. The Group determines if this special purpose entity is
a controlled entity and if so the principles of consolidation outlined in note 1
(g) are applied. In such transactions, the Group receives fees for various
services provided to the program on an arm's length basis, including servicing
fees and management fees. Fee income is recognised in revenue on an accruals
basis in relation to the reporting period in which the costs of providing these
services are incurred.
Interest rate swaps and liquidity facilities are provided to the program by the
Group on an arm's length basis, in accordance with APRA guidelines.
The Group is entitled to any residual income of the program after all payments
due to investors and costs of the program have been met. Due to the significant
uncertainties inherent in estimating the underlying loan repayment rates and
interest margins with respect to the Australian loan securitisation program,
future cash flows cannot be reliably measured and no asset in relation to any
entitlement to residual income is recognised. The residual income is recognised
as revenue when receivable. Furthermore, due to this uncertainty in relation to
valuation of future cash flows, the assets are transferred at book value and no
profit or loss on sale of the loans is recognised.
This level of uncertainty was not inherent in the Group's securitisation
activities conducted in the US by HomeSide US. Refer to note 1(r) for the
Group's accounting policy with respect to mortgage servicing rights, which
ceased following the sale of Homeside US in 2002.
Revenue and expense recognition
(hh) Interest income
Interest income is reflected in the profit and loss account when earned on an
accruals basis (refer also to note 1(o), (q)(iii) and (q)(iv)).
(ii) Dividend income
Dividend income is recorded in the profit and loss account on an accruals basis
when the Group obtains control of the right to receive the dividend.
(jj) Loan-related fees and costs
Loan origination fees, if material, are recognised as revenue over the life of
the loan as an adjustment of yield. Commitment fees are deferred, and if the
commitment is exercised, recognised as revenue over the life of the loan as an
adjustment of yield or, if unexercised, recognised as revenue upon expiration of
the commitment. Where commitment fees are retrospectively determined and
nominal in relation to market interest rates on related loans, commitment fees
are recognised as revenue when charged. Where the likelihood of exercise of the
commitment is remote, commitment fees are recognised as revenue over the
commitment period. Loan-related administration and service fees are recognised
as revenue over the period of service. Credit card fees are recognised as
revenue over the card usage period. Syndication fees are recognised as revenue
after certain retention, timing and yield criteria are satisfied.
Direct loan origination costs, if material, are netted against loan origination
fees and the net amount recognised as revenue over the life of the loan as an
adjustment of yield. All other loan-related costs are expensed as incurred.
Loan origination fees and direct loan origination costs are recognised as
revenue as an adjustment of yield using the constant yield method of
amortisation. All other loan-related fees are recognised as revenue using the
straight-line method of amortisation.
(kk) Trading income
Trading income is brought to account when earned based on changes in net fair
value of financial instruments and recorded from trade date. Further
information is included in notes 1(h) foreign currency translation, 1(l) trading
securities and 1(dd) derivative financial instruments held or issued for trading
purposes.
(ll) Fees and commissions
Fees and commissions that relate to specific transactions or events are
recognised as revenue in the period that the services are provided. When they
are charged for services provided over a period, they are recognised as revenue
on an accruals basis.
(mm) Life insurance business revenue and expenses
The Group conducts its life insurance business through a number of controlled
entities including National Australia Financial Management Limited, MLC Lifetime
Company Limited, MLC (Hong Kong) Limited, MLC Limited, BNZ Life Insurance
Limited, National Australia Life Company Limited, PT MLC Life Indonesia,
Advance MLC Assurance Co. Limited.
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(i) Types of business
The Australian life insurance operations of the Group consist of
investment-linked business and non-investment-linked business, which are
conducted in separate statutory funds as required under the Life Insurance Act
1995 (Cth). The overseas life insurance operations of the Group consist
primarily of non-investment-linked business.
Investment-linked business relates to business where policyholders' investments
are made into the statutory funds and policyholders' returns are directly linked
to the investment performance of the assets in that fund. The policyholder
bears all the risks and rewards of the investment performance. The policyholder
has no direct access to the specific assets; however, the policy value is
calculated by reference to the market value of the statutory fund's assets.
Investment-linked business includes superannuation and allocated pension
business.
Non-investment-linked business refers to business where an insured benefit is
payable on the occurrence of a specified event such as death, injury or
disability caused by accident or illness or, in the case of an annuity, either
the continuance of the annuitant's life or the expiry of the annuity term. The
benefit payable is not directly referable to the market value of the fund's
assets. Non-investment-linked business includes traditional whole of life and
endowment policies (where the risks and rewards generally are shared between
policyholders and shareholders) and risk policies such as death, disability and
income insurance (where the shareholder bears all the financial risks).
(ii) Allocation of profit
Profits are brought to account in the statutory funds on a MoS basis. Under MoS,
profit is recognised as fees are received and services are provided to
policyholders. When fees are received but the service has not been provided,
the profit is not recorded at the point of sale. Losses are expensed when
identified.
Consistent with the principle of deferring unearned profit is the requirement to
defer expenditure associated with the deferred profit. MoS permits costs
associated with the acquisition of policies to be charged to the profit and loss
account over the period that the policy will generate profits. However, costs
may only be deferred to the extent that a policy is expected to be profitable
(refer to note 1(mm)(vii)).
Profit from investment-linked business is derived as the excess of the fees
earned by the shareholder for managing the funds invested, over operating
expenses and amortisation of policy acquisition costs.
Profit arising from policies comprising non-investment-linked business is based
on actuarial assumptions, and calculated as the excess of premiums and
investment earnings less claims, operating expenses and the amortisation of
acquisition costs that will be incurred over the estimated life of the policies.
The profit is systematically recognised over the estimated time period the
policy will remain in force.
Certain policies are entitled to share in the profits that arise from the
non-investment-linked business. This profit sharing is governed by the Life
Insurance Act 1995 (Cth) and the life insurance companies' constitutions. This
profit sharing amount is treated as an expense in the profit and loss account.
(iii) Premium revenue
Premiums are separated into their revenue and liability components. Premium
amounts earned by providing services and bearing risks including protection
business are treated as revenue. Other premium amounts received, net of initial
fee income, which are akin to deposits, are recognised as an increase in policy
liabilities. The initial fee, which is the difference between the premium
received and the initial surrender value, is recognised as premium revenue. For
the Group's investment-linked business, premiums are recognised as an increase
in policy liabilities.
Premiums with a regular due date are recognised as revenue on a due basis.
Premiums with no due date are recognised as revenue or an increase in policy
liabilities on a cash received basis. Premiums due before the end of the year
but not received at balance date are included as outstanding premiums in note
25. Premiums due after but received before the end of the year are accounted
for as premiums in advance.
(iv) Investment revenue
Dividend and interest income is brought to account on an accruals basis when the
life insurance controlled entity obtains control of the right to receive the
dividend or interest income.
Net realised and unrealised profits and losses represent changes in the
measurement of net market values in respect of all investments recognised at net
market value (refer to note 1(p)).
(v) Claims
Claims are recognised when the liability to a policyholder under a policy
contract has been established or upon notification of the insured event,
depending on the type of claim.
Claims incurred in respect of investment-linked business, which are in the
nature of investment withdrawals, are recognised as a reduction in policy
liabilities.
Claims incurred that relate to the provision of services and bearing of risks
are treated as expenses and are recognised on an accruals basis.
(vi) Basis of expense apportionment
All expenses charged to the profit and loss account are equitably apportioned to
the different classes of business in accordance with Division 2 of Part 6 of the
Life Insurance Act 1995 (Cth) as follows:
* expenses and other outgoings that related specifically to a
particular statutory fund have been directly charged to that fund;
* expenses and other outgoings (excluding commissions,
medical fees and stamp duty relating to the policies which are all directly
allocatable) have been apportioned between each statutory fund and shareholders'
fund. Expenses are apportioned between
classes of business by first allocating the expenses to major functions and
activities, including those of sales support and marketing, new business
processing and policyholder servicing, and then to classes of products using
relevant activity cost drivers, including commissions, policy counts, funds
under management and benchmark profit; and
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* investment income, profits and losses on sale of property,
plant and equipment, profits and losses on sale of investments, and appreciation
and depreciation of investments have been directly credited or charged to the
appropriate statutory fund or shareholders' fund.
Apportionment between policy acquisition, policy maintenance and investment
management has been made in line with principles set out in the Life Insurance
Actuarial Standard Board's Actuarial Standard AS 1.03 "Valuation of Policy
Liabilities".
(vii) Deferred acquisition costs
Policy acquisition costs are deferred, provided that the business generated
continues to be profitable. The deferred costs are reflected as a reduction in
policy liabilities and are amortised in the profit and loss account over the
expected duration of the relevant policies.
(nn) Superannuation
For accumulation benefit superannuation and pension plans (also known as defined
contribution plans), the superannuation expense recognised in the profit and
loss account represents the contributions payable to the plans. For defined
benefit plans, the superannuation expense recognised in the profit and loss
account is determined on an actuarial basis. Under this basis, actuarial gains
and losses are taken into account over the average remaining employment period
of plan members, generally between 10 and 15 years. The measurement of the
prepaid asset and the annual pension expense involves actuarial and economic
assumptions.
On acquisition of entities, surpluses and deficits in their sponsored defined
benefit plans at the date of acquisition are recognised on the Group's balance
sheet as a prepaid pension cost asset or an accrued pension cost liability,
respectively. The assets and liabilities of these plans are not consolidated as
the Group has no control over them. The Group also recognises a prepaid asset
for contributions the Group has made to the pension plans in excess of pension
expenses. Conversely, the Group recognises a liability where pension expenses
are in excess of contributions made by the Group to the pension plans. The
prepaid pension cost asset is subject to a recoverable amount test, having
regard to discounted cash flows.
(oo) Equity-based compensation
The Group operates a number of share-based compensation plans where shares are
issued to employees and directors as remuneration. The Group records an expense
where it has paid cash to the respective compensation plan trustee, who in turn
purchases the Company's shares on-market. Where the Company issues shares as
compensation, no expense is recorded in the profit and loss account.
The Group also operates an executive share option plan and performance rights
plan. No accounting entries are made in relation to options and performance
rights granted to executives until they are exercised, at which time the amounts
receivable from executives are recognised in the balance sheet as contributed
equity. No expense is recorded in the profit and loss account.
Details of equity-based compensation plans of the Group, including the fair
value of instruments granted, are provided in note 39.
(pp) Income tax
The Group adopts tax-effect accounting using the income statement liability
method.
The tax effect of timing differences, which occur where items are claimed for
income tax purposes in a period different from when they are recognised in the
financial statements, is included in the provision for deferred income tax or
future income tax benefits, as applicable, at the tax rate expected to apply
when the timing differences reverse. Any future income tax benefit relating to
timing differences is carried forward as an asset unless the benefits are not
assured beyond any reasonable doubt of being realised. Any future income tax
benefit relating to tax losses, is not carried forward as an asset unless the
benefits are virtually certain of being realised. In the statement of financial
position, future income tax benefits are disclosed within income tax assets and
the provision for deferred income tax is disclosed within income tax
liabilities.
Capital gains tax, if applicable, is provided for in determining the income tax
expense in the reporting period in which an asset is sold.
For life insurance business, taxation is not based on the concept of profit.
Special legislative provisions apply to tax policyholders and shareholders on
different bases. According to the class of business to which their policies
belong, policyholders have their investment earnings taxed at the following
rates in Australia:
* superannuation policies - 15%;
* annuity policies - 0%; or
* non-superannuation investment policies - 30%.
The life insurance business shareholders' funds are taxed at the company rate of
30% on fee income and profit arising from insurance risk policies, less
deductible expenses. For five years from July 1, 2000 (the date that the
current life company tax regime commenced), there is a transitional provision
that allows a one-third exemption from assessable income of fee income derived
from policies in force as at July 1, 2000.
(qq) Goods and services tax
Revenues, expenses and assets are recognised net of the amount of goods and
services tax or other value-added tax, except where the tax incurred is not
recoverable from the relevant taxation authority. In these circumstances, the
tax is recognised as part of the expense or the cost of acquisition of the
asset.
Receivables and payables are stated at an amount with tax included. The net
amount of tax recoverable from, or payable to, the relevant taxation authority
is included within other assets or other liabilities.
Cash flows are included in the statement of cash flows on a gross basis. The
tax component of cash flows arising from investing and financing activities
which is recoverable from, or payable to, the relevant taxation authority is
classified as operating cash flows.
(rr) Overseas classification
Amounts booked in branches and controlled entities outside Australia are
classified as overseas.
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2 Supplementary statement of financial position
Given the significant restrictions imposed by life insurance legislation,
regulations and the regulators thereunder, the directors consider it essential
that users of this financial report are able to easily separate the assets and
liabilities of the life insurance statutory funds from the assets and
liabilities of the life insurance shareholders' funds and all other assets and
liabilities of the Group. However, current Australian accounting requirements
do not allow for these statutory funds' assets and liabilities to be separated
and disclosed separately on the statement of financial position. In addition,
the requirements also prohibit any adjustment to comparative balances or the
inclusion of an adjusted comparative column, which if allowed would facilitate
comparability between periods.
To ensure that the assets and liabilities of the statutory funds are
identifiable and comparable between years, a supplementary statement of
financial position for the Group has been included for each year below, as at
September 30:
Note Group 2003 Total Group 2002 Total
excluding Life Group excluding Life Group
statutory insurance statutory insurance
funds statutory funds statutory
funds funds
$m $m $m $m $m $m
Assets
Cash assets 9 4,287 745 5,032 5,445 849 6,294
Due from other financial 10 10,383 - 10,383 15,876 - 15,876
institutions
Due from customers on 11 19,562 - 19,562 19,474 - 19,474
acceptances
Trading securities 12 23,724 - 23,724 19,590 - 19,590
Trading derivatives 23,644 - 23,644 12,128 - 12,128
Available for sale securities 13 6,513 - 6,513 6,192 - 6,192
Investment securities 14 8,647 - 8,647 13,541 - 13,541
Investments relating to life 15 - 35,846 35,846 59 30,953 31,012
insurance business (1)
Loans and advances 16 247,959 - 247,959 231,300 - 231,300
Mortgage servicing rights 19 - - - 1,794 - 1,794
Shares in controlled entities, 20 1,445 - 1,445 1,199 - 1,199
joint venture entities and
other securities
Regulatory deposits 21 225 - 225 129 - 129
Property, plant and equipment 22 2,486 12 2,498 2,640 - 2,640
Income tax assets 23 1,123 80 1,203 1,289 3 1,292
Goodwill 24 740 - 740 775 - 775
Other assets 25 9,675 375 10,050 13,213 938 14,151
Total assets 360,413 37,058 397,471 344,644 32,743 377,387
Liabilities
Due to other financial 26 45,128 - 45,128 43,279 - 43,279
institutions
Liability on acceptances 11 19,562 - 19,562 19,474 - 19,474
Trading derivatives 21,479 - 21,479 12,000 - 12,000
Deposits and other borrowings 27 210,146 - 210,146 206,864 - 206,864
Life insurance policy 28 - 32,457 32,457 - 30,425 30,425
liabilities (1)
Income tax liabilities 29 1,529 8 1,537 1,790 (181 ) 1,609
Provisions 30 1,221 41 1,262 2,809 - 2,809
Bonds, notes and subordinated 31 22,707 - 22,707 22,192 - 22,192
debt
Other debt issues 32 1,675 68 1,743 1,785 81 1,866
Other liabilities 33 13,577 662 14,239 12,156 1,462 13,618
Total liabilities 337,024 33,236 370,260 322,349 31,787 354,136
Net assets 23,389 3,822 27,211 22,295 956 23,251
Equity
Contributed equity 34 9,531 197 9,728 9,750 181 9,931
Reserves 35 893 - 893 2,105 - 2,105
Retained profits 36 12,706 1,080 13,786 10,373 775 11,148
Total parent entity interest 23,130 1,277 24,407 22,228 956 23,184
Outside equity interest - Life 37 69 2,545 2,614 67 - 67
insurance business (2)
Outside equity interest - 37 190 - 190 - - -
Other
Total equity 38 23,389 3,822 27,211 22,295 956 23,251
--------------------
(1) Included within statutory funds are assets and liabilities that relate
to foreign-domiciled life insurance entities held by the Group's life insurance
business shareholders' funds. These non-Australian life insurers do not have
statutory funds concepts.
(2) During 2003, the Group's life insurance statutory funds reorganised
their business operating model to increase the level of investments held through
registered schemes rather than directly held investments in debt and equity
securities. As the statutory funds are considered to have the capacity to
control certain of these registered schemes, the Group has consolidated them.
Refer to notes 1(g) and 43(e).
94
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3 Segment information
The following segment information is disclosed in accordance with Australian
Accounting Standard AASB 1005 "Segment Reporting" and US accounting standard,
SFAS 131 "Disclosures about Segments of an Enterprise and Related Information".
For the purposes of this note, a business/primary operating segment is defined
as a component of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in assessing performance. The Group results are based on
the business segments as reviewed separately by the chief operating decision
maker, the Managing Director and Chief Executive Officer, as well as other
members of senior management.
The Group's business is organised into five major operating segments: Financial
Services Australia, Financial Services Europe, Financial Services New Zealand,
Corporate & Institutional Banking (formerly Wholesale Financial Services), and
Wealth Management. Financial Services Australia, Europe and New Zealand are the
retailing arms of the Group and provide a full range of financial services to
customers. These Financial Services businesses are managed on a regional basis
across Australia, Europe and New Zealand. Corporate & Institutional Banking is
responsible for the Group's relationships with large corporations, institutions,
supranationals and government bodies worldwide. It comprises Corporate Banking,
Financial Institutions, Markets, Specialised Finance, National Custodian
Services and a Services unit. Wealth Management manages a diverse portfolio of
financial services businesses, comprising Investments, Insurance and Other
(Private Bank and Advice Solutions). The Group's 'Other' business segment
includes Finance, Technology, People and Culture, Risk Management, Corporate
Development and Office of the CEO, and are not considered to be separate
reportable operating segments.
Revenues and expenses directly associated with each business segment are
included in determining their result. Transactions between business segments
are based on agreed recharges between segments operating within the same country
and are at arm's length between segments operating in different countries.
The following changes to business segments were made in the 2003 year:
* the New Zealand and European capital management units were
previously reported in Financial Services New Zealand and Financial Services
Europe business segments, respectively. In the 2003 year, these units were
transferred to Group Funding (part of Other) to ensure consistency of capital
allocation methodology across business segments;
* European asset and liability management activities were
previously managed as part of Corporate & Institutional Banking and have now
been transferred to Financial Services Europe; and
* an update of the cost allocation model was undertaken as part of
the Group's 2003 planning process. This resulted in refinement of cost
allocations between Other and Financial Services Australia.
The 2002 business segment results, assets and liabilities have been restated to
reflect these changes. It is impracticable to restate the 2001 year business
segment results, assets and liabilities for these changes.
Business segments
Year ended Financial Financial Financial Corporate & Wealth Other Inter-segment Total
September 30, 2003 Services Services Services Institutional Management eliminations Group
Australia Europe New Banking
Zealand
$m $m $m $m $m $m $m $m
Net interest 3,519 2,368 651 807 117 (43 ) - 7,419
income (1)
Non-interest 1,900 815 316 1,099 4,269 159 - 8,558
income
Inter-segment 50 135 13 (9 ) 12 66 (267 ) -
revenue
Total revenue 5,469 3,318 980 1,897 4,398 182 (267 ) 15,977
after interest
expense (2)
Other expenses (2,798 ) (2,003 ) (494 ) (692 ) (3,931 ) (431 ) - (10,349 )
Inter-segment (5 ) (33 ) (21 ) (125 ) (140 ) 57 267 -
expenses
Total expenses (2,803 ) (2,036 ) (515 ) (817 ) (4,071 ) (374 ) 267 (10,349 )
excluding interest
expense
Profit/(loss) from 2,666 1,282 465 1,080 327 (192 ) - 5,628
ordinary
activities before
tax
Income tax (798 ) (416 ) (155 ) (225 ) (169 ) 82 - (1,681 )
(expense)/benefit
Net profit/(loss) 1,868 866 310 855 158 (110 ) - 3,947
Net profit/(loss) - - - (9 ) 16 1 - 8
attributable to
outside equity
interest
Net profit/(loss) 1,868 866 310 846 174 (109 ) - 3,955
attributable to
members of the
Company
Total assets (3) 143,203 59,475 25,532 171,679 49,971 7,157 (59,546 ) 397,471
Total liabilities 146,316 49,482 28,111 162,715 38,551 4,631 (59,546 ) 370,260
(3)
Acquisition of 382 120 58 8 29 - - 597
property, plant
and equipment and
intangible assets
Depreciation and 156 111 32 39 26 37 - 401
amortisation of
plant and
equipment
Amortisation of 3 62 1 - - 32 - 98
goodwill
Non-cash expenses 422 319 34 148 102 32 - 1,057
other than
depreciation and
amortisation
95
--------------------------------------------------------------------------------
Year ended Financial Financial Financial Corporate & Wealth Other Inter-segment Total
September 30, 2002 Services Services Services Institutional Management (4) eliminations Group
Australia Europe New Banking
Zealand
$m $m $m $m $m $m $m $m
Net interest income (1) 3,307 2,439 549 1,051 101 (225 ) - 7,222
Non-interest income (5) 1,726 865 281 905 792 2,806 - 7,375
Significant revenue (6) - - - - - 2,671 - 2,671
Inter-segment revenue 54 163 2 (18 ) (2 ) 55 (254 ) -
Total revenue after 5,087 3,467 832 1,938 891 5,307 (254 ) 17,268
interest expense (2)
Significant expenses (7) (261 ) (166 ) (20 ) (42 ) (29 ) (2,748 ) - (3,266 )
Other expenses (8) (2,633 ) (2,092 ) (426 ) (772 ) (779 ) (2,959 ) - (9,661 )
Inter-segment expenses 37 (31 ) (15 ) (154 ) (189 ) 98 254 -
Total expenses excluding(2,857 ) (2,289 ) (461 ) (968 ) (997 ) (5,609 ) 254 (12,927 )
interest expense
Profit/(loss) from 2,230 1,178 371 970 (106 ) (302 ) - 4,341
ordinary activities
before tax
Income tax (expense)/ (658 ) (391 ) (129 ) (183 ) 232 167 - (962 )
benefit (9)
Net profit/(loss) 1,572 787 242 787 126 (135 ) - 3,379
Net loss attributable to - - - - (6 ) - - (6 )
outside equity interest
Net profit/(loss) 1,572 787 242 787 120 (135 ) - 3,373
attributable to members
of the Company
Total assets 123,362 67,395 22,689 163,025 46,449 3,564 (49,097 ) 377,387
Total liabilities 123,854 56,282 22,782 160,125 37,406 2,784 (49,097 ) 354,136
Acquisition of property, 390 170 56 14 73 88 - 791
plant and equipment and
intangible assets
Depreciation and 196 128 34 14 28 19 - 419
amortisation of plant and
equipment
Amortisation of goodwill - 62 2 - - 37 - 101
Non-cash expenses other 509 562 23 284 110 52 - 1,540
than depreciation and
amortisation
Year ended Financial Financial Financial Corporate & Wealth Other Inter-segment Total
September 30, 2001 Services Services Services Institutional Management (10) eliminations Group
Australia Europe New Banking
Zealand
$m $m $m $m $m $m $m $m
Net interest income (1) 3,092 2,168 525 894 77 204 - 6,960
Non-interest income 1,662 977 266 1,050 1,246 1,065 - 6,266
Significant revenue (11) - - - - - 5,314 - 5,314
Inter-segment revenue 79 57 7 8 1 145 (297 ) -
Total revenue after 4,833 3,202 798 1,952 1,324 6,728 (297 ) 18,540
interest expense (2)
Significant expenses (12) - - - - - (6,866 ) - (6,866 )
Other expenses (2,859 ) (2,025 ) (354 ) (807 ) (495 ) (1,155 ) - (7,695 )
Inter-segment expenses 132 (32 ) (109 ) (135 ) (113 ) (40 ) 297 -
Total expenses excluding(2,727 ) (2,057 ) (463 ) (942 ) (608 ) (8,061 ) 297 (14,561 )
interest expense
Profit/(loss) from 2,106 1,145 335 1,010 716 (1,333 ) - 3,979
ordinary activities
before tax
Income tax (expense)/ (729 ) (396 ) (112 ) (271 ) 9 (392 ) - (1,891 )
benefit (13)
Net profit/(loss) 1,377 749 223 739 725 (1,725 ) - 2,088
Net loss attributable to - - - - (5 ) - - (5 )
outside equity interest
Net profit/(loss) 1,377 749 223 739 720 (1,725 ) - 2,083
attributable to members
of the Company
Total assets 110,309 68,770 20,499 154,757 43,548 34,843 (58,006 ) 374,720
Total liabilities 104,354 56,274 20,666 153,142 35,852 38,881 (58,006 ) 351,163
Acquisition of property, 605 201 57 29 221 56 - 1,169
plant and equipment and
intangible assets
Depreciation and 177 97 20 12 22 52 - 380
amortisation of plant and
equipment
--------------------------------------------------------------------------------
96
--------------------------------------------------------------------------------
Year ended Financial Financial Financial Corporate & Wealth Other Inter-segment Total
September 30, 2001 Services Services Services Institutional Management (10) eliminations Group
Australia Europe New Banking
Zealand
$m $m $m $m $m $m $m $m
Amortisation of goodwill - 62 1 - - 104 - 167
Non-cash expenses other 492 392 33 310 58 4,076 - 5,361
than depreciation and
amortisation (14)
--------------------
(1) Net interest income includes interest on capital
employed by business segments.
(2) Total revenue has been disclosed net of interest
expense. It is impracticable to disclose gross interest revenue on a business
segment basis due to the Group's business segmental management reporting
system's usage of net interest income as an operating measure rather than gross
interest income and gross interest expense.
(3) For Corporate & Institutional Banking, this amount
includes approximately $20 billion of funding raised on behalf of Asset &
Liability Management functions in Europe and New Zealand due to the nature of
the funding model in those regions and related legal entity structure.
(4) Includes the results of SR Investment, Inc. and its
controlled entity, HomeSide US, up to the date of their sale on October 1, 2002
(refer note 5(a)(i)).
(5) Non-interest income includes proceeds from sale of
operating assets of $2,314 million within the Other business segment (refer to
note 4, footnote (4)).
(6) Significant revenue represents the proceeds from
sale of SR Investment, Inc. (refer to note 5(a)(i)).
(7) Significant expenses includes the cost of assets
sold of SR Investment, Inc. of $2,686 million within the Other business segment
(refer to note 5(a)(i)).
(8) Other expenses includes the carrying value of
operating assets sold of $2,322 million within the Other business segment (refer
to note 4, footnote (4)).
(9) Income tax expense/(benefit) includes an income tax
benefit of $21 million attributable to the loss on sale of SR Investment, Inc.
within the Other business segment.
(10) Includes the results of Michigan National Corporation and
its controlled entities up to the date of their sale on April 1, 2001 (refer to
note 5(a)(ii)).
(11) Significant revenue represents the proceeds from sale of
Michigan National Corporation and its controlled entities (refer to note 5(a)
(ii)).
(12) Significant expenses comprises of the cost of assets sold
of Michigan National Corporation and its controlled entities of $2,929 million,
the impairment loss on mortgage servicing rights of $1,643 million, the charge
to provide for mortgage servicing rights valuation adjustment of $1,436 million
and the impairment loss on goodwill of $858 million (refer to note 5(a)(ii)).
(13) Income tax expense/(benefit) includes income tax expense
of $704 million attributable to the profit on sale of Michigan National
Corporation and its controlled entities within the Other business segment.
(14) Non-cash expenses other than depreciation and
amortisation includes the impairment loss on mortgage servicing rights of $1,643
million, the charge to provide for mortgage servicing rights valuation
adjustment of $1,436 million and the impairment loss on goodwill of $858 million
within the Other business segment (refer to note 5(a)).
Geographical segments
The Group has operations in Australia (the Company's country of domicile),
Europe, New Zealand, the US and Asia. The allocation of revenue and assets is
based on the geographical location in which transactions are booked. There are
no material inter-segment transactions.
Group
2003 2003 2002 2002 2001 2001
$m % $m % $m %
Total revenue
Australia 15,905 61.9 11,425 43.1 12,867 40.8
Australia - significant - - 2,671 10.1 5,314 16.9
revenue
Europe 6,239 24.3 6,422 24.2 6,829 21.7
New Zealand 2,608 10.2 2,194 8.3 2,332 7.4
US (1) 274 1.1 3,351 12.6 3,193 10.1
Asia 632 2.5 458 1.7 964 3.1
Total revenue 25,658 100.0 26,521 100.0 31,499 100.0
Total assets (2)
Australia 243,726 61.3 213,428 56.6 205,364 54.8
Europe 103,904 26.1 107,169 28.4 95,284 25.5
New Zealand 32,565 8.2 30,319 8.0 30,051 8.0
US 8,257 2.1 17,339 4.6 30,022 8.0
Asia 9,019 2.3 9,132 2.4 13,999 3.7
Total assets 397,471 100.0 377,387 100.0 374,720 100.0
97
--------------------------------------------------------------------------------
Group
2003 2003 2002 2002 2001 2001
$m % $m % $m %
Acquisition of property,
plant and equipment and
intangible assets
Australia 383 64.1 416 52.6 775 66.2
Europe 150 25.1 221 27.9 277 23.7
New Zealand 60 10.1 59 7.5 57 4.9
US - - 90 11.4 57 4.9
Asia 4 0.7 5 0.6 3 0.3
Acquisition of property, 597 100.0 791 100.0 1,169 100.0
plant and equipment and
intangible assets
--------------------
(1) Includes the results of Michigan National Corporation and its
controlled entities up to the date of their sale on April 1, 2001 (refer to note
5(a)(ii)).
(2) Includes statutory funds' assets of $37,058 million at September 30,
2003 (2002: $32,743 million, 2001: $33,161 million).
4 Revenue from ordinary activities
Group Company
Note 2003 2002 2001 2003 2002
$m $m $m $m $m
Interest income
Loans to customers (1) 14,961 13,821 15,259 9,207 7,994
Marketable debt securities 1,545 1,509 1,860 1,187 1,159
Other financial institutions 395 439 795 283 338
Controlled entities - - - 1,197 1,327
Other interest 199 706 2,005 105 620
17,100 16,475 19,919 11,979 11,438
Life insurance income
Premium and related revenue 57 949 1,134 1,074 - -
Investment revenue 57 2,759 (988 ) (877 ) - -
3,708 146 197 - -
Other banking and financial
services income
Dividends received from
Controlled entities - - - 3,495 806
Other entities 39 35 44 39 34
Profit on sale of property, 36 13 19 5 3
plant and equipment and other
assets (2)
Loan fees from banking 1,441 1,361 1,334 1,133 1,063
Money transfer fees 1,026 1,014 1,043 475 464
Trading income (3)
Foreign exchange derivatives 442 457 434 308 294
Trading securities 170 214 217 154 214
Interest rate derivatives 13 (108 ) 70 (5 ) (124 )
Foreign exchange income 12 15 12 1 -
Fees and commissions 1,158 1,118 998 479 471
Fleet management fees 85 56 54 - -
Proceeds from sale of - 2,314 - - -
operating assets (4)
Investment management fees 303 297 305 - -
(5)
Other income 285 220 219 146 35
5,010 7,006 4,749 6,230 3,260
Mortgage servicing and
origination revenue
Net mortgage servicing fees - 187 474 - -
Net mortgage origination - 191 336 - -
revenue
- 378 810 - -
Movement in the excess of net (160 ) (155 ) 510 - -
market value over net assets
of life insurance controlled
entities
Significant revenue
Proceeds from the sale of 5(a) - 2,671 5,314 - -
foreign controlled entities
Total revenue from ordinary 25,658 26,521 31,499 18,209 14,698
activities
98
--------------------------------------------------------------------------------
--------------------
(1) Included within interest income (loans to customers) is rental income
of $551 million (2002: $423 million, 2001: $409 million) and depreciation of
$403 million (2002: $299 million, 2001: $280 million) in relation to operating
leases where the Group is the lessor.
(2) For the Group, net profit on sale of property, plant and equipment and
other assets of $25 million (2002: $7 million, 2001: $1 million) is the
difference between the proceeds from sale of $166 million (2002: $418 million,
2001: $132 million) and their carrying value of $141 million (2002: $411
million, 2001: $131 million). Net profit on sale consists of gross profits of
$36 million (2002: $13 million, 2001: $19 million) and gross losses of $11
million (2002: $6 million, 2001: $18 million) as disclosed in note 5(b). For
the Company, net profit on sale of property, plant and equipment and other
assets of $4 million (2002: $1 million) is the difference between the proceeds
from sale of $108 million (2002: $157 million) and their carrying value of $104
million (2002: $156 million). Net profit on sale consists of gross profits of
$5 million (2002: $3 million) and gross losses of $1 million (2002: $2 million)
as disclosed in note 5(b).
(3) Under Australian Accounting Standard AASB 1032 "Specific Disclosures
by Financial Institutions", separate disclosure of trading income arising from
foreign exchange trading, securities trading and interest rate derivatives
trading is required. As the Group manages its trading positions utilising a
variety of instruments, fluctuations between the disclosed components may occur.
Foreign exchange derivatives includes trading income from cross currency
swaps, which includes an interest rate element.
(4) The operating assets of HomeSide US were sold to Washington Mutual
Bank, FA on March 1, 2002. Under the terms of the sale, HomeSide US received
proceeds of $2,314 million for the operating assets, which consisted primarily
of loans held for sale. The carrying value of the assets sold was $2,322
million.
(5) Fees and commissions as at September 30, 2002 and 2001, included
investment management fees which have been reclassified to investment management
fees.
5 Profit from ordinary activities before income tax expense
(a) Individually significant items included in profit from ordinary activities
before income tax expense
Group Company
2003 2002 2001 2003 2002
$m $m $m $m $m
Restructuring costs
Personnel - termination benefits - 327 - - 201
Occupancy - 68 - - 29
Write-off of property, plant and equipment - 132 - - 106
(1)
Other - 53 - - 27
Total restructuring costs - 580 - - 363
--------------------
(1) Includes write-off of redundant components of the Integrated Systems
Implementation application software assets of $54 million during 2002. These
components are redundant largely as a result of the move from a global business
model to a regional business model.
During 2002, the Group recognised restructuring costs of $580 million resulting
from the Positioning for Growth and other restructuring initiatives. The
majority of these costs are expected to be recovered by the end of 2004 from
annual productivity improvements and revenue enhancements. The Positioning for
Growth initiative comprises a fundamental reorganisation of the management and
organisational structure of the Group, including the appointment of a new senior
management team.
Personnel costs of $327 million provided for and expensed in 2002 related to
termination benefits for approximately 2,955 positions in management, support
and customer-facing roles. For 2003, payments of $147 million (2002: $101
million) were made in respect of approximately 1,317 positions (2002: 859
positions) made redundant. The reduction in staff numbers occurred in both
managerial and non-managerial positions in the following regions:
Australia Europe New United Asia Total
Zealand States
Original number of positions to be made 1,852 910 121 36 36 2,955
redundant
Number of positions made redundant during (707 ) (56 ) (51 ) (18 ) (27 ) (859 )
2002
Number of positions made redundant during (880 ) (360 ) (59 ) (11 ) (7 ) (1,317 )
2003
Number of positions to be made redundant 265 494 11 7 2 779
as at September 30, 2003
The remaining provision for restructuring costs raised in 2002 relates to future
payments for redundancies, occupancy and other costs. Future payments for
redundancies and other costs will be predominantly made in 2004, whilst future
payments for occupancy costs will be made in periods corresponding with the
relevant lease terms.
99
--------------------------------------------------------------------------------
Sale of foreign controlled entities
(i) SR Investment, Inc.
On October 1, 2002, the Group sold SR Investment, Inc. (the parent entity of
HomeSide US) to Washington Mutual Bank, FA. Controlled entities other than
HomeSide US were excluded from the sale. The Group received proceeds on sale of
$2,671 million (US$1,453 million) for assets with a cost of $2,686 million,
resulting in a profit on sale of $6 million after all disposal costs, including
income tax. The results of SR Investment, Inc. and its controlled entities are
included in the Group's financial performance up to and including the year ended
September 30, 2002. The assets and liabilities of SR Investment, Inc. and its
controlled entities were included in the Group's financial position up to and
including the year ended September 30, 2002.
The financial performance, financial position and cash flows of SR Investment,
Inc. and its controlled entities up to the date of sale, and therefore included
in the results of the Group, were as follows:
2003 2002 2001
$m $m $m
Financial performance
Net interest income - 14 (77 )
Non-interest income - 2,737 871
Charge to provide for doubtful debts - (46 ) (62 )
Other expenses - (2,693 ) (527 )
Significant expenses - - (3,937 )
Profit/(loss) from ordinary activities before income tax - 12 (3,732 )
expense
Income tax benefit relating to ordinary activities - 86 246
Net profit/(loss) - 98 (3,486 )
Financial position
Total assets (1) - 4,072 12,576
Total liabilities (1) - 1,805 10,072
Net assets - 2,267 2,504
--------------------
(1) Under US GAAP, the majority of these assets and liabilities were
considered to be held for resale as at Septemeber 30, 2002. Refer to note 43(f)
for details of the assets and liabilitites sold on October 1, 2002.
Cash flows
Net cash provided by/(used in) operating activities - 3,320 (4,321 )
Net cash provided by/(used in) investing activities - (221 ) 3,256
Net cash provided by/(used in) financing activities - (3,708 ) 2,084
Net increase/(decrease) in cash and cash equivalents - (609 ) 1,019
(ii) Michigan National Corporation
On April 1, 2001, the Group sold Michigan National Corporation and its
controlled entities to ABN AMRO North America, Inc., a controlled entity of ABN
AMRO NV. The Group received proceeds on sale of $5,314 million from the sale of
assets with a cost of $2,929 million, resulting in a profit on sale of $2,385
million before tax.
Michigan National Corporation and its controlled entities contributed $132
million net profit to the Group in the 2001 year up to the date of sale. The
net asset position of these entities at the date of sale was $2,591 million.
The net cash outflow of these entities in the 2001 year to the date of sale was
$451 million, which is reflected in the Group's cash flows.
Impairment loss on mortgage servicing rights
In July 2001, the directors of the Company determined that the carrying value of
the mortgage servicing rights asset held by HomeSide US exceeded the fair value.
An impairment loss of $888 million was recognised to reflect the asset at its
fair value. This impairment was the result of hedging positions which were
adversely impacted by extreme volatility in US interest rate markets.
In September 2001, the directors of the Company determined that a second
impairment loss on mortgage servicing rights was required in order to reflect
the mortgage servicing rights asset at its fair value. This impairment loss of
$755 million was the result of an incorrect interest rate assumption discovered
in an internal model used to determine the fair value of HomeSide US mortgage
servicing rights.
100
--------------------------------------------------------------------------------
Charge to provide for mortgage servicing rights valuation adjustment
On September 2, 2001, the directors of the Company decided to value HomeSide US
at its estimated market sale value, rather than as an ongoing part of the Group,
after reviewing its position within the Group's current core strategies of
banking and wealth management. As a result of this decision, the carrying value
of the HomeSide US core asset, mortgage servicing rights, was revalued and a
provision for mortgage servicing rights valuation adjustment of $1,436 million
was recognised in order to reflect the mortgage servicing rights asset at its
estimated market sale value.
Impairment loss on goodwill
In conjunction with the directors' decision to value HomeSide US on an estimated
market sale value basis, the decision was made that the carrying value of
goodwill which arose on the acquisition of HomeSide US was in excess of its
recoverable amount. Accordingly, an impairment loss of $858 million was
recognised, in order to reduce the carrying value of this goodwill to $nil.
(b) Expenses included in profit from ordinary activities before income tax
expense
Group Company
2003 2002 2001 2003 2002
$m $m $m $m $m
Interest expense
Deposits and other borrowings 7,416 6,867 9,213 5,432 4,926
Other financial institutions 1,449 1,271 1,907 1,326 1,181
Bonds, notes and subordinated debt 671 944 1,647 598 802
Controlled entities - - - 562 620
Other debt issues 145 171 192 10 16
Total interest expense 9,681 9,253 12,959 7,928 7,545
Life insurance expenses
Claims expense 958 956 599 - -
Change in policy liabilities 1,518 (1,637 ) (1,318 ) - -
Policy acquisition and maintenance expense 713 751 699 - -
Investment management fees 75 86 89 - -
Total life insurance expenses 3,264 156 69 - -
Personnel expenses
Salaries 2,379 2,438 2,618 1,352 1,297
Related personnel expenses
Superannuation 243 130 155 111 93
Payroll tax 170 158 159 95 93
Fringe benefits tax 33 46 30 29 41
Charge to provide for
Annual leave 41 27 35 18 10
Long service leave and retiring allowances 46 43 54 42 41
Performance-based compensation 230 221 237 131 130
Restructuring costs - 4 27 - 4
Other expenses 274 312 410 129 142
3,416 3,379 3,725 1,907 1,851
Significant restructuring costs (1)
Termination benefits - 104 - - 79
Charge to provide for termination benefits - 223 - - 122
Total personnel expenses 3,416 3,706 3,725 1,907 2,052
101
--------------------------------------------------------------------------------
Group Company
2003 2002 2001 2003 2002
$m $m $m $m $m
Occupancy expenses
Depreciation of buildings and amortisation of 67 79 83 40 40
leasehold assets
Operating lease rental expense 276 269 277 171 162
Maintenance and repairs 78 79 91 22 20
Electricity, water and rates 82 88 94 24 26
Other expenses 53 44 42 23 28
556 559 587 280 276
Significant restructuring costs (1)
Charge to provide for surplus leased space - 68 - - 29
Total occupancy expenses 556 627 587 280 305
General expenses
Depreciation and amortisation of plant and 334 340 297 185 158
equipment
Loss on sale of property, plant and equipment 11 6 18 1 2
and other assets (2)
Operating lease rental expense 61 53 45 46 35
Charge to provide for
Non-lending losses 100 112 69 34 39
Diminution in value of shares in entities (3) - 13 13 1 47
Fees and commissions 137 172 264 81 85
Communications, postage and stationery 407 473 507 165 185
Computer equipment and software 289 222 258 178 125
Advertising 176 192 191 110 123
Professional fees 349 272 320 188 165
Travel 83 50 65 40 26
Bureau charges 57 68 53 21 22
Carrying value of operating assets sold (4) - 2,322 - - -
Motor vehicle expenses 37 29 30 9 9
Insurance 29 14 12 9 7
Other expenses 312 431 16 4 24
2,382 4,769 2,158 1,072 1,052
Significant restructuring costs (1)
Write-off of property, plant and equipment (5) - 132 - - 106
Other - 53 - - 27
Total general expenses 2,382 4,954 2,158 1,072 1,185
Amortisation of goodwill
Australia 3 8 1 - -
European banks 62 62 62 - -
Bank of New Zealand 33 31 31 - -
HomeSide US - - 48 - -
Michigan National Corporation - - 25 - -
Total amortisation of goodwill 98 101 167 - -
Charge to provide for doubtful debts
General (6) 633 697 989 373 259
Other significant expenses (1)
Cost of foreign controlled entities sold - 2,686 2,929 - 138
Impairment loss on mortgage servicing rights - - 1,643 - -
Charge to provide for mortgage servicing rights - - 1,436 - -
valuation adjustment
Impairment loss on goodwill - - 858 - -
--------------------
(1) Refer to note 5(a).
(2) Refer to note 4, footnote (2).
(3) Includes provision for diminution in value of investments held by
National Australia Investment Capital Limited in 2002 and in Mondex and Peakhour
Pty Ltd in 2001.
102
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(4) The operating assets of HomeSide US were sold to Washington Mutual Bank,
FA on March 1, 2002. Under the terms of the sale, HomeSide US received proceeds
of $2,314 million for the operating assets, which consisted primarily of loans
held for resale. The carrying value of the assets sold was $2,322 million.
(5) Includes write-off of redundant components of the Integrated Systems
Implementation application software assets of $54 million during 2002 (refer to
note 5(a)).
(6) Refer to note 17.
6 Income tax expense
Group Company
2003 2002 2001 2003 2002
$m $m $m $m $m
Reconciliation of income tax expense shown in
the statement of financial performance with
prima facie tax payable on the pre-tax
accounting profit
Profit from ordinary activities before income
tax expense
Australia 3,309 2,288 5,383 6,422 3,069
Overseas 2,319 2,053 (1,404 ) 227 145
Add/deduct: (Profit)/loss from ordinary (424 ) 21 (56 ) - -
activities before income tax expense
attributable to the life insurance statutory
funds and their controlled trusts (1)
Total profit from ordinary activities excluding 5,204 4,362 3,923 6,649 3,214
that attributable to the statutory funds of the
life insurance business, before income tax
expense
Prima facie income tax at 30% (2001: 34%) 1,561 1,309 1,334 1,995 964
Add/(deduct): Tax effect of permanent
differences
Non-allowable depreciation on buildings 6 7 5 - -
Rebate of tax on dividends, interest, etc. (28 ) 44 (31 ) (1,066 ) (249 )
Foreign tax rate differences (4 ) (6 ) (245 ) (1 ) (22 )
Amortisation of goodwill 29 29 59 - -
Attributable foreign income 26 25 10 23 23
Non-allowable impairment loss on goodwill - - 292 - -
Timing differences not carried forward as income - - 764 - -
tax assets (2)
Non-taxable amounts attributable to HomeSide US - (53 ) - - -
operation
Future income tax benefits no longer recognised 2 2 (4 ) 2 1
Restatement of tax timing differences due to - 2 (8 ) - -
change in the Australian company income tax rate
Under/(over) provision in prior years (6 ) 6 (17 ) (3 ) (1 )
Recognition of HomeSide US operation future - (89 ) - - -
income tax benefit not previously recognised
Other (31 ) (66 ) (56 ) (21 ) (4 )
Total income tax expense on profit from ordinary 1,555 1,210 2,103 929 712
activities excluding that attributable to the
statutory funds of the life insurance business
(3)(4)
Income tax expense/(benefit) attributable to the 126 (248 ) (212 ) - -
statutory funds of the life insurance business
(1)
Total income tax expense (3)(4) 1,681 962 1,891 929 712
--------------------
(1) The income tax expense attributable to the life insurance statutory funds
and their controlled trusts has been determined after segregating the life
insurance business into various classes of business and then applying, when
appropriate, different tax treatments to these classes of business (refer to
note 1(pp)).
(2) Refer to note 23 for further information on income tax assets not taken to
account.
(3) Total income tax expense on profit from ordinary activities includes $21
million income tax benefit attributable to the loss on sale of SR Investment,
Inc. in 2002 (refer to notes 5(a) and 23).
(4) Total income tax expense on profit from ordinary activities includes $704
million income tax expense attributable to the profit on sale of Michigan
National Corporation and its controlled entities in 2001.
103
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7 Dividends and distributions
Group Company
2003 2002 2001 2003 2002
$m $m $m $m $m
Interim dividend paid
80c ordinary dividend paid (2002: 72c, 2001: 1,104 1,115 1,026 1,104 1,115
67c), fully franked at a rate of 30%
Final dividend provided for
Nil ordinary dividend provided for (2002: 75c - 1,151 1,054 - 1,151
and 90% franked at a rate of 30%, 2001: 68c and
fully franked at a rate of 30%)
Total dividends paid or provided for 1,104 2,266 2,080 1,104 2,266
There is no provision for final dividend in respect of the year ended September
30, 2003 as a result of a change in accounting policy. The Group has adopted
the new Australian Accounting Standard AASB 1044 "Provisions, Contingent
Liabilities and Contingent Assets" for the first time from October 1, 2002.
Provision for dividends are now recognised at the time the dividends are
declared, determined or publicly recommended. Previously, the Group recognised
a provision for dividend in the reporting period to which the dividend related,
even though the dividend was declared or announced after the end of that
reporting period.
On November 21, 2003, the directors declared a final dividend in respect to the
year ended September 30, 2003 of 83 cents per fully-paid ordinary share, fully
franked, payable on December 10, 2003. The payment amount is expected to be
$1,248 million.
The dividend payout was based on after-tax cash earnings (adjusted for
significant items). Refer to page 6 for a reconciliation of non-GAAP measures
and page 60 for further information on 'Non-GAAP financial measures'.
With effect from July 1, 2002, Australian tax law requires companies to maintain
franking accounts on a tax-paid basis. The disclosures below, including the
prior year comparatives, therefore reflect the new tax-paid basis of measuring
franking credits.
The franking credits available to the Group at September 30, 2003, after
allowing for tax payable in respect of the current reporting period's profits
that will be subject to Australian income tax, the payment of the final
dividend, and the receipt of dividends recognised as receivable at balance date,
are estimated to be $nil (2002: $nil, 2001: $nil).
The franking credits that will be available to the Group at June 30, 2004 (being
the end of the Group's franking year), after allowing for the instalments of tax
payable in respect of the 2004 financial year, are estimated to be $nil (2002:
$nil, 2001: $65 million).
The extent to which future dividends will be franked will depend on a number of
factors including the level of the Group's profits that will be subject to
Australian income tax and any future changes to Australia's business tax system
(including the dividend imputation system) as a result of the Australian
Government's tax reform initiatives.
Distributions on other equity instruments
Trust units exchangeable for preference shares 61 70 71 - -
National Income Securities 122 117 142 122 117
Total distributions on other equity instruments 183 187 213 122 117
104
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8 Earnings per share
Group
2003 2002 2001
Basic Diluted(1) Basic Diluted(1) Basic Diluted(1)
Earnings ($m)
Net profit attributable to members 3,955 3,955 3,373 3,373 2,083 2,083
of the Company
Distributions on other equity (183 ) (183 ) (187 ) (187 ) (213 ) (213 )
instruments
Potential dilutive adjustments
Interest expense on exchangeable - 90 - 102 - 102
capital units
Adjusted earnings 3,772 3,862 3,186 3,288 1,870 1,972
Weighted average ordinary shares
(No. '000)
Weighted average ordinary shares 1,515,871 1,515,871 1,549,136 1,549,136 1,538,633 1,538,633
Potential dilutive ordinary shares
Options and performance rights - 3,742 - 8,335 - 1,152
Partly-paid ordinary shares - 485 - 670 - 895
Exchangeable capital units - 65,460 - 65,460 - 65,460
Total weighted average ordinary 1,515,871 1,585,558 1,549,136 1,623,601 1,538,633 1,606,140
shares
Earnings per share (cents) 248.8 243.6 205.7 202.5 121.5 122.8
--------------------
(1) The weighted average diluted number of ordinary shares includes the
impact of options, performance rights, partly-paid ordinary shares and potential
conversion of exchangeable capital units.
The Group has adopted the new Australian Accounting Standard AASB 1044 "
Provisions, Contingent Liabilities and Contingent Assets" for the first time
from October 1, 2002. The adoption of this standard did not have an impact on
basic or diluted earnings per share.
The Group has applied the revised Australian Accounting Standard AASB 1027 "
Earnings per Share" from October 1, 2001. The standard introduced changes to
the method of calculating earnings per share. The changes did not have a
material impact on earnings per share. The 2001 comparative has been restated
to reflect the change in method of calculating basic and diluted earnings per
share.
During 2001, the Group changed its accounting policy with respect to accounting
for the revaluation of non-current assets. This change did not have an impact
on basic or diluted earnings per share.
The Company issued 127,500 share options with an exercise price of $30.98 and
31,875 performance rights on October 30, 2003. There were 77,900 fully paid
ordinary shares of the Company issued since the end of the year as a result of
share options granted being exercised, for a total consideration of $1,890,331.
Refer to the Report of the Directors for additional information. Other than
these issues, there has been no conversion to, calls of, or subscriptions for
ordinary shares, or issues of potential ordinary shares since September 30, 2003
and before the completion of this financial report.
For further information on earnings per share calculations, refer to the
financial review section of the annual report.
9 Cash assets
Group Company
2003 2002 2003 2002
$m $m $m $m
Australia
Coins, notes and cash at bank 1,596 1,932 792 845
Money at short call 134 150 134 150
Other (including bills receivable and remittances in transit) 2,386 2,171 245 222
4,116 4,253 1,171 1,217
Overseas
Coins, notes and cash at bank 623 815 2 6
Money at short call 401 646 - 215
Other (including bills receivable and remittances in transit) (108 ) 580 (394 ) 77
916 2,041 (392 ) 298
Total cash assets 5,032 6,294 779 1,515
Included within cash assets are cash assets within the Group's life insurance
business statutory funds of $745 million (2002: $849 million) which are subject
to restrictions imposed under the Life Insurance Act 1995 (Cth) and other
restrictions and therefore are not available for use in operating, investing or
financing activities of other parts of the Group (refer to note 1(p)).
105
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10 Due from other financial institutions
Group Company
2003 2002 2003 2002
$m $m $m $m
Australia
Interest-earning 1,957 1,837 1,828 1,716
Non-interest-earning 64 26 51 19
2,021 1,863 1,879 1,735
Overseas
Interest-earning 8,296 13,409 5,890 10,274
Non-interest-earning 66 604 51 570
8,362 14,013 5,941 10,844
Total due from other financial institutions 10,383 15,876 7,820 12,579
11 Due from customers on acceptances
Australia
Government and public authorities 4 5 4 5
Agriculture, forestry and fishing 2,047 1,801 2,047 1,801
Financial, investment and insurance 4,006 4,111 4,006 4,111
Real estate - construction 844 824 844 824
Manufacturing 1,594 2,118 1,594 2,118
Instalment loans to individuals and other personal lending 185 316 185 316
(including credit cards)
Other commercial and industrial 10,816 10,071 10,816 10,071
19,496 19,246 19,496 19,246
Overseas
Agriculture, forestry and fishing - 4 - -
Financial, investment and insurance 17 114 - 72
Manufacturing 1 22 - 17
Other commercial and industrial 48 88 - 65
66 228 - 154
Total due from customers on acceptances 19,562 19,474 19,496 19,400
12 Trading securities
Listed - Australia
Australian Government Treasury notes - 199 - 199
Australian Government bonds and securities 1,317 1,371 1,317 1,318
Securities of Australian and semi-government authorities 2,435 2,130 2,435 2,130
Private corporations/other financial institutions' 4,197 2,122 4,197 2,122
certificates of deposit
Private corporations/other financial institutions' bills 11,327 8,792 11,327 8,792
Private corporations/other financial institutions' bonds 352 557 352 557
Private corporations/other financial institutions' commercial 20 - - -
paper
Private corporations/other financial institutions' floating 56 94 56 94
rate notes
Private corporations/other financial institutions' promissory 1,107 635 1,107 635
notes
Other securities 320 182 320 153
21,131 16,082 21,111 16,000
Listed - Overseas
Securities of Australian and semi-government authorities - 2 - 2
Securities of or guaranteed by UK/Irish governments - 4 - 4
Securities of or guaranteed by New Zealand Government - 48 - 48
Private corporations/other financial institutions' bonds 1,266 1,022 1,266 1,022
Other government bonds and securities 242 95 242 95
1,508 1,171 1,508 1,171
Total listed trading securities 22,639 17,253 22,619 17,171
106
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This information is provided by RNS
The company news service from the London Stock Exchange
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