Note 1

Accounting Policies

The accompanying concise financial report has been derived from the financial report of the Commonwealth Bank of Australia (the ‘Bank’) and its controlled entities, the Group, for the year ended 30 June 2005 provided in the full Annual Report – 2005 Financial Report. The statutory financial report complies with the requirements of the Banking Act, Corporations Act 2001, applicable Accounting Standards, including AASB 1039: Concise Financial Reports, and other mandatory reporting requirements so far as they are considered appropriate to a financial services corporation.

The concise financial report cannot be expected to provide as full an understanding of the financial performance and financial position of the Group as the full financial report.

The full financial report of the Commonwealth Bank of Australia and its controlled entities for the year ended 30 June 2005 and the Auditor’s Report thereon will be sent, free of charge, to members upon request.

The accounting policies applied are consistent with those of the previous year.

A full description of the accounting policies adopted by the Group is provided in the Full Annual Report 2005 Financial Statements.

 

International Financial Reporting Standards

Transition Management

On 1 July 2005 the Bank commenced application of the Australian equivalent of International Financial Reporting Standards (‘AIFRS’) to the maintenance of all financial records. This is in line with the conversion deadline set out by the Financial Reporting Council of Australia.

The Bank completed its review of the AIFRS and their impact during the planning stage of the project. Conversion issues were then identified and methodologies designed to resolve those issues.

Implementation of these changes was completed during the financial year ended 30 June 2005, including the maintenance of a shadow set of AIFRS-compliant financial records for that year.

Although all AIFRS are applied by the Bank from 1 July 2005 some standards are not applicable to the comparative financial year (the financial year beginning 1 July 2004). As such, on release of AIFRS-compliant financial statements for the financial year beginning 1 July 2005, the financial results for the comparative financial year will only be restated to a limited extent. Descriptions of the key AIFRS issues are set out below and segregated between those issues which have an effective impact from 1 July 2004 and those which have an effective impact from 1 July 2005.

Key Accounting Issues

Full disclosure around each of the key AIFRS issues is set out in Note 1(qq) to the Annual Financial Statements, including quantifications of the financial impact. The following is a summary of the key areas of difference between current accounting practice and the treatment under AIFRS:

Issues with effective impact from 1 July 2004

EMPLOYEE BENEFITS – DEFINED BENEFIT SUPERANNUATION PLANS

With the introduction of AIFRS, the surpluses and/or deficits that arise within individual defined benefit superannuation plans must be recognised in the Statement of Financial Position. The actuarial gains and losses related to defined benefit superannuation plans arising in each period are recognised directly in Retained Earnings from 1 July 2004.

EMPLOYEE BENEFITS – EMPLOYEE SHARE SCHEMES

The Bank currently accrues all share based compensation on a cost basis and amortises it to expense over the vesting period where there are performance hurdles to be met. Shares in the Bank are purchased by a Trust when the shares are granted and held until they vest to the employee.

Under AIFRS the fair value of the share based compensation is calculated at grant date and amortised to expense over the vesting period, subject to service and performance conditions being met. Transitional arrangements are in place under AIFRS such that only those shares granted after 7 November 2002 and vesting after 1 January 2005 are accounted for in this manner. Shares in the Bank held by the Trust are consolidated, reclassified as ‘Treasury Shares’ and accounted for as a deduction from Share Capital.

ACCOUNTING FOR LIFE INSURANCE AND FUNDS MANAGEMENT BUSINESS

Appraisal Value Accounting

On transition to AIFRS, the asset representing the excess of the net market value over net assets of the Bank’s life insurance controlled entities can no longer be recognised in full. As a result, the Bank will now cease to recognise any movement in the appraisal value in the Statement of Financial Performance. The write-off of the internally generated component has been principally reflected against the General Reserve; and the acquired component has been reclassified as Goodwill within the Statement of Financial Position and is subject to an annual impairment test.

Treasury Shares

Under Australian GAAP direct investments in Commonwealth Bank shares by the Bank’s life insurance statutory funds were recognised in the Statement of Financial Position at market value. On transition to AIFRS these assets have been reclassified as ‘Treasury Shares’ and accounted for as a deduction from Share Capital.

ACCOUNTING FOR GOODWILL

On transition to AIFRS, Goodwill is no longer amortised, but instead, is subject to an annual assessment for impairment to ensure that the carrying value of Goodwill is not greater than the recoverable amount. As a result, the Statement of Financial Performance will no longer include an expense item reflecting the annual Goodwill amortisation. No impairment adjustment to opening Retained Earnings arises as at 1 July 2004 in respect of this issue.

Other Issues (refer to Note 1(qq) to the Annual Financial Statements for further details) include:

• Consolidation of Special Purpose Vehicles
• Income and expense recognition
• Foreign Currency Translation Reserve
• Taxation

Issues with effective impact from 1 July 2005

DERIVATIVE FINANCIAL INSTRUMENTS INCLUDING HEDGE ACCOUNTING AND EMBEDDED DERIVATIVES

Under AIFRS all derivative financial instruments, including embedded derivatives and those used for balance sheet hedging purposes, are recognised on-balance sheet and measured at fair value.

Hedge accounting can be applied, subject to certain rules, for fair value hedges, cash flow hedges, and hedges of investments in foreign operations. Cash flow hedges are the predominant form of hedging applied by the Bank.

It is expected that these new rules on accounting for hedge instruments and embedded derivatives will introduce significant volatility within equity reserves, and the potential for some volatility within the Statement of Financial Performance.

PROVISIONS FOR LOAN IMPAIRMENT

In line with market practice, the Bank’s current general provisioning for impairment covers non-identifiable probable losses and latent risks inherent in the overall portfolio of advances and other credit transactions. Under AIFRS the Bank will at each reporting date first assess whether any objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. The Bank uses judgement to estimate the amount of any impairment loss.

As a result of this change, there may be a reduction in the amount of the Bank’s general/collective provisioning for impairment. Due to current uncertainty around AIFRS accounting interpretations and the development of Australian industry practice in this area, a loan impairment provision in accordance with AIFRS cannot be reliably estimated.

The practice of recording specific provisions for loan impairment will continue under AIFRS, however, such provisions – termed provisions for individually significant impaired loans – must be based on the discounted values of estimated future cash flows.

CLASSIFICATION OF HYBRID FINANCIAL INSTRUMENTS

The Bank currently has on issue three types of hybrid financial instruments: Preferred Exchangeable Resettable Listed Shares (‘PERLS’); Perpetual Exchangeable Resettable Listed Securities (‘PERLS II’) and Trust Preferred Securities (‘TPS’). These instruments are currently classified as equity instruments.

Under AIFRS these instruments were reclassified as debt within the Statement of Financial Position on 1 July 2005. From 1 July 2005 onwards, distributions to the holders of these hybrid financial instruments will be treated as interest expense in the Statement of Financial Performance.

ACCOUNTING FOR LIFE INSURANCE BUSINESS

Measurement Differences

Under AIFRS, measurement differences arise within the insurance products and investment-style products of the life insurance and funds management businesses. Specifically, the actuarial calculation of Policyholder liabilities is affected by a change in the discount rates applied, and certain acquisition costs related to investment-style products which were deferred under current Australian GAAP can no longer be deferred under AIFRS.

Outside Equity Interests

On transition to AIFRS, the outside equity interests in controlled unit trusts of the life companies no longer qualify as equity. As a result, the Bank has, on adoption of AIFRS, reclassified outside equity interests in life insurance statutory funds and other funds to liabilities.

Other Issues (refer to Note 1(qq) to the Annual Financial Statements for further details) include:

• Revenue and Expense Recognition
• Financial Instruments Classification for Banking Business.

SUBSEQUENT EVENTS

Sale of Hong Kong business
On 7 July 2005 the Bank entered into an agreement to sell its life insurance and financial planning business in Hong Kong for approximately $600 million to Sun Life Financial. The business consisted of CMG Asia Limited, CommServe Financial Limited and Financial Solutions Limited, with a combined carrying value of $527 million under current Australian GAAP. The carrying value will be different under AIFRS, principally due to differences in discount rates used in the actuarial valuation of policy holder liabilities and differences in treatment of historic foreign exchange losses under AIFRS.

The transaction, targeted for completion within three months, and together with the determination of the final profit is subject to conditions precedent.

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