EX-99.1

Chairman’s Statement

Introduction

The 2006 financial year has been an important one for the Commonwealth Bank. We have again delivered a very good financial result and made a record dividend payment to shareholders. The Which new Bank program has been completed, delivering significant financial benefits and productivity gains to the Bank. We have also seen a smooth transition from outgoing CEO David Murray to Ralph Norris, who has put in place a strategy which will build on the significant Which new Bank benefits.

Results

The Bank reported a statutory net profit after tax (NPAT) for the 12 months to 30 June 2006 of $3,928 million – an increase of 16 percent on the prior year. Cash NPAT grew 16 percent to $4,053 million with cash return on equity increasing from 18.8 percent to 21.3 percent.

Excluding the one-off gain of $145 million from the sale of the Bank’s Hong Kong based insurance business, cash earnings per share were up 15 percent to 304.6 cents per share. Over the past three years, the Bank has delivered earnings per share growth (excluding the profit on the Hong Kong sale) at an annual compound rate of 14 percent, exceeding the initial Which new Bank earnings target.

Some of the highlights were:

•

Strong growth in banking income, underpinned by profitable growth across all major product lines;

•

A substantial increase in Funds under Administration, to $152 billion, reflecting robust inflows and continued strength in investment markets;

•

Increases in insurance premiums, operating margins and a favourable claims experience;

•

Strong growth in earnings from ASB in the competitive New Zealand market;

•

Sound expense management and continued productivity improvement; and

•

Continued strength in credit quality across the portfolio.

The Banking business delivered a full year underlying NPAT of $3,227 million – an increase of 11 percent on the prior year. This performance was underpinned by continued volume growth in home loans, improvements in business lending volumes and good expense control. Credit quality remained sound with bad debts expense as a proportion to risk weighted assets stable.

The Australian Retail Banking business performed well with underlying NPAT up 13 percent. Highlights for the year included strong revenue growth, good margin and expense control and further productivity gains. Home loan revenues in particular, were up 16 percent on the prior year driven, in the second half, by an improvement in the performance of our branches. The personal lending and credit cards segments of the market, where the low rate “Yellow” credit card was launched in the second half, remained competitive. Deposit balances grew with NetBank Saver continuing to attract good inflows with approximately 63 percent being new funds to the Bank.

Premium, Business and Corporate and Institutional businesses delivered a solid result driven by moderate revenue growth and good expense control. Demand from the corporate sector led to an increase of 18 percent in lending and finance assets during the period. CommSec continued to trade well, confirming its position as the country’s leading online broker.

In the competitive New Zealand banking market, our subsidiary, ASB, again significantly outperformed its major competitors delivering underlying NPAT growth of 22 percent to NZ$400 million. ASB achievements included its fifteenth straight year of market share growth in home loans, strong commercial lending and continued productivity improvement. Credit quality remained sound.

The Funds Management business produced an outstanding result. Underlying net profit before tax increased 23 percent over the prior year to $563 million. Underlying NPAT, which was up 14 percent, was impacted by one-off costs and an increase in the effective tax rate from 21.9 percent to 28.4 percent due to the phasing out of transitional tax relief. Funds under Administration grew by 23 percent to $152 billion as a result of strong net fund flows and favourable investment markets. First Choice maintained its retail support base attracting over 25 percent of retail inflows in the platform market. First Choice has now exceeded $25 billion in funds under administration in less than four years.

The Insurance business delivered a 38 percent increase in underlying NPAT to $215 million.

Dividends & Capital

The Board again declared a record final dividend of 130 cents per share – a 16 percent increase on last year’s final dividend. The final dividend, which is fully franked, will be paid on 5 October 2006. This will take total dividends for the year to 224 cents per share – up 14 percent on last year. Over the last three years dividends have grown at an annual compound rate of 13 percent.

The Bank continues to issue new shares to satisfy the requirements of its Dividend Reinvestment Plan which is capped at 10,000 shares per shareholder.

During the year dividend and interest payments were also made to the holders of the Bank’s various capital securities: PERLS, PERLS II, Trust Preferred Securities, ASB Capital Preference Shares and ASB Capital No 2 Preference Shares.

The Bank continued to actively manage its capital. It successfully completed an issue of US$700 million Tier 1 hybrid capital and an issue of $1,166 million of PERLS III. These capital issues were off-set by the redemption of the total $700m of PERLS and a $500 million share buyback in the second half of the year.

The Bank’s credit ratings remained unchanged.

2 Commonwealth Bank of Australia Annual Report 2006

Chairman’s Statement

Outlook

The Australian economy performed well in the 2006 financial year. Business credit growth has been solid, supported by infrastructure and capacity expansion while consumer credit growth moderated.

The overall environment for the financial services industry is expected to remain highly competitive and as a result margin pressure will continue. Domestic credit quality, high employment levels and business confidence are strong and provide a positive outlook. Economic growth is likely to remain solid although higher oil prices, increasing domestic and international interest rates, geopolitical instability particularly in the Middle East and the health of the Chinese economy are all factors which could potentially impact the Australian economy.

Going into the new financial year we remain confident that we will be a tougher competitor and will continue to deliver both revenue growth and productivity improvements. Taking all of these factors into account, and in the absence of any exogenous shocks, we expect to see good profit growth for the 2007 fiscal year with the Bank delivering earnings per share growth which meets or exceeds the average of our peers.

Corporate Governance and Board Performance

This year has been another busy year for the Board and I would like to thank my fellow Directors for their contribution and commitment. I would especially like to acknowledge the contribution of Tony Daniels and Barbara Ward who will retire from the Board at the Bank’s Annual General Meeting on 3 November.

Tony and Barbara have been Directors during a period when the Bank has undergone considerable change. Their contributions to the functions of the Board have been significant and their expert insights into the specific issues dealt with by the People & Remuneration Committee (of which Tony has been a member) and the Audit Committee (on which Barbara served) have been a great assistance in dealing with complex issues covered by those Committees. We wish Tony and Barbara well in the future.

I also want to formally welcome our new CEO, Ralph Norris, who replaced retiring CEO David Murray on 22 September 2005. David and Ralph worked closely together to ensure that a seamless transition was achieved and on behalf of the Board I thank them for the significant contribution they both made to the Bank’s successful year.

We have recently announced the appointment of two Directors. David Turner, CEO of Brambles, and Jane Hemstritch, Managing Director for Asia Pacific, Accenture, join the Board effective 1 August 2006 and 9 October 2006 respectively. Both bring a wide range of skills to the Board and will, I am sure, make significant contributions to the Bank.

Conclusion

This has been a challenging year for the Bank. We have witnessed significant change with the appointment of Ralph Norris as CEO and with the successful completion of Which new Bank. The fact that we have also been able to maintain the momentum in the business and again deliver a very good financial result is a tribute to the commitment and hard work of all of our people. It is our employees who deliver our success and they deserve to be congratulated for their efforts.

Finally I would like to thank all our customers and shareholders for their continuing support of the Commonwealth Bank.

John Schubert
Chairman
23 August 2006

Commonwealth Bank of Australia Annual Report 2006 3

Chief Executive Officer’s Statement

Introduction

The 2006 financial year has been characterised by both significant change and real achievements. The year’s success again demonstrates the depth of the talent pool that we have at the Bank and the commitment of our people to realising our vision of creating Australia’s finest financial services organisation through excelling in customer service.

At an operational level the Bank maintained its momentum from last year and reported a very good result. In a competitive environment we have delivered cash earnings per share growth (excluding the impact of the sale of our Hong Kong insurance business) of 15 percent. Cash return on equity, again excluding the Hong Kong sale, was up 250 basis points to 21.3 percent. A particularly pleasing aspect of the result was that all of our business performed well.

In a competitive market we continued to focus on profitable growth, avoiding business which we perceived to have a high risk profile or which did not meet our return criteria. As a result our credit quality remains strong. We are confident going into the new financial year but recognise that business will remain competitive. However, we do not plan to trade off credit quality for growth.

As well as delivering a very good financial result, Which new Bank concluded successfully. This three year $1.5 billion program was brought in on time and within budget and delivered on all of its major financial and productivity goals. Total financial benefits for the year were $1,044 million against an initial target of $900 million. Annual compound earnings per share growth over the three years (excluding the profit on the sale of the Hong Kong insurance business) was 14 percent – significantly ahead of the 10 percent promised at the outset. Dividends also grew at 13 percent ensuring that shareholders benefited from Which new Bank. The productivity objectives we set for Banking, Funds Management and Insurance were also met.

In addition Which new Bank has provided a strong platform on which to build for the future. In particular the successful roll out of CommSee within the Retail Bank has provided our people with the tools to deliver improved service to our customers. We have also extended CommSee to our Business Bank which will help us grow that business in the future.

With Which new Bank drawing to a close we have focused on how we can build on its success to realise our vision of becoming Australia’s finest financial services organisation. We identified four strategic priorities to lift business performance and growth: Customer service; Business Banking; Technology and Operational Excellence; and Trust and Team Spirit. In addition to these priorities the Bank will continue to consider growth opportunities in selected markets.

Customer Service

Customer service remains the Bank’s top strategic priority and while more than 60 percent of our customers tell us they are satisfied with our service we still have some way to go before we achieve a level of service which we are happy with. However, we have made real progress in 2006:

•

We have begun to embed our Sales and Service culture, which has been at the core of our subsidiary ASB’s success, and have appointed a senior ASB executive to lead the program which we have called “SUCCESS”;

•

We are continuing to invest in our branches:

	—		We refurbished another 133 branches;

	—		We increased customer facing staff in the retail bank by 450 and have plans to replicate this in 2007;

	—		We are building new branches and are now opening 65 branches for business on Saturdays; and

	—		We have introduced new and improved products which we believe will make us more competitive. These include the new “Yellow” credit card, NetBank Saver and new pricing options for the streamline accounts. We also removed NetBank fees during the year.

While we have yet to see these improvements reflected in formal customer satisfaction surveys we are beginning to see evidence of improvements in service levels through feedback from our customers including a substantial reduction in the level of customer complaints.

Business Banking

While we have strong relationships with a significant proportion of Australian businesses we have failed in the last few years to capture an appropriate share of this growing market segment. During the year we began a number of initiatives to improve our performance in business banking.

These included:

•

We have restructured the business to better align it with the needs of our business customers;

•

We are increasing our business banking “footprint” increasing the number of business bankers, adding new business banking centres and putting business bankers back into selected branches;

•

We have rolled out our CommSee for Business across the network which provides us with the information platform to support the selective growth of the “footprint”;

•

We have built CommBiz, our new internet business banking offering, which we will begin rolling out to our customers shortly; and

•

We have developed a new and improved portfolio of business banking products and simplified our business banking processes and approval procedures.

Technology and Operational Excellence

The initiatives in this area are designed to deliver greater efficiency across the Bank and we have already made good progress in achieving our objectives which include $200 million in cost savings.

Progress to date includes:

•

In Technology we have a new team in place and we have reorganised our Enterprise IT function into a co-ordinated structure;

•

We have taken the first steps to restructure our relationship with our IT providers with the execution of new Enterprise Processing Systems and telecommunications agreements which will deliver savings and improved service levels to the Bank; and

•

We have introduced a more focussed approach to group wide procurement – building on the progress we have made over the last three years.

Our goal is to improve our efficiency and achieve cost savings including the reduction of IT costs by approximately $200 million.

4 Commonwealth Bank of Australia Annual Report 2006

Chief Executive Officer’s Statement

Trust and Team Spirit

The commitment, engagement and enthusiasm of our people go to the heart of our success as an organisation and our ability to deliver on our strategies. Over the year we have put in place a number of initiatives in this area including:

•

Recent management changes have strengthened the Bank’s leadership team while building greater collaboration across the organisation and better aligning the organisation with the needs of our customers;

•

We have increased our focus on our people with the introduction of a number of initiatives designed to enhance their wellbeing; and

•

We have continued to support our community making significant commitments to a range of initiatives including financial literacy, environmental partnerships and one-off assistance for communities in need of help.

We are already beginning to see positive results with improved engagement, positive feedback from our people and the community and a substantial decrease in employee injury rates.

Looking Ahead

I am very pleased with the progress we made in 2006. Financially we had a very good year and we have momentum going into the 2007 year. The successful completion of Which new Bank and the strategic initiatives which we are building on this platform will enhance our competitiveness in the coming year. Obviously the changes associated with the transition to a new CEO placed some pressures on the organisation last year but these are abating as we move into the new year. As a result I believe that we will be a tougher competitor this year, better able to meet the challenges of what continues to be a competitive market place.

The Bank’s ability to deliver the strong performance we have seen over the last three years would not have been possible without the goodwill and commitment of our people. In taking over as CEO, I am very grateful for the high level of support I have received across the organisation and have been enormously impressed with the quality and skills of our people. As far as the transition into this role is concerned I would particularly like to thank David Murray and the Board for their encouragement, counsel and support.

It is a great privilege to lead this organisation and I am confident that we can continue to deliver for our people, our customers and our shareholders.

Thank you.

Ralph Norris
Chief Executive Officer
23 August 2006

Commonwealth Bank of Australia Annual Report 2006 5

Highlights

Financial Performance and Business Review

Performance Highlights

Full year

Half year

Net Profit after

30/06/06

30/06/05

30/06/06

31/12/05

Income Tax

Statutory basis

3,928

3,400

1,929

1,999

Cash basis

4,053

3,492

1,992

2,061

Cash basis ex HK sale

3,908

3,492

1,992

1,916

The Bank’s net profit after tax (“statutory basis”) for the year ended 30 June 2006 was $3,928 million, an increase of 16% on the prior year. The final dividend of $1.30 is another record and the total dividend for the year is $2.24 per share.

The net profit after tax on a cash basis excluding the profit from the sale of the Hong Kong insurance business (“cash basis ex HK sale”) increased 12% to $3,908 million.

A more consistent comparison of profit growth is cash earnings per share (excluding the profit from the sale of the Hong Kong insurance business) which increased 15% on the prior year to 304.6 cents.

The cash EPS compound annual growth rate (excluding the profit from the sale of the Hong Kong insurance business) for the three years covering the Which new Bank strategy (2004-2006) was 15%.

The performance over the year was supported by:

•

Strong growth in banking income, following average interest earning asset growth of 12% to $275 billion and net interest margin contraction of seven basis points (after adjusting for the impact of AIFRS);

•

Growth in Funds under Administration of 23% to $152 billion supported by both strong inflows and continued strength in investment markets;

•

Solid growth in insurance premiums, operating margins and favourable claims experience;

•

Continued strength in credit quality across the portfolio; and

•

Underlying expense growth of 5% with continued productivity improvements.

The Bank’s results include the full impact of the adoption of Australian equivalent to International Financial Reporting Standards (“AIFRS”) from 1 July 2005. Comparative figures have also been adjusted to an AIFRS basis, other than for the impact of those standards related to financial instruments and insurance. Most significantly, the current year includes the expense of $123 million associated with distributions on hybrid financial instruments. Changes to the Bank’s accounting policies and explanations of the key changes are covered in Note 1 to the Financial Statements on pages 79-114.

The result for the six months to 30 June 2006 was solid with net profit after tax (“cash basis”), excluding the profit from the sale of the Hong Kong insurance business in the first half result, increasing by 4% to $1,992 million.

Financial Condition

The Group’s assets increased by $32 billion to $369 billion (2005: $337 billion) over the year.

Total lending assets increased by $30 billion from $236 billion to $266 billion at 30 June 2006 reflecting growth across a range of lending products.

The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 7.46% to 7.56% during the year reflecting the issue of hybrid securities during the second half of the year. The Total Capital Ratio decreased from 9.75% at 30 June 2005 to 9.66% at 30 June 2006 impacted by the growth in Risk Weighted Assets. Risk Weighted Assets increased from $190 billion to $216 billion at 30 June 2006 attributable to strong growth in lending assets particularly in the business/corporate sector. The Bank’s credit ratings remained unchanged.

The Bank adopted the Australian equivalent of International Financial Reporting Standards (“AIFRS”) on 1 July 2005. APRA required reporting under the previous Australian GAAP (“AGAAP”) accounting principles to continue for regulatory capital purposes until the introduction of revised prudential standards which take effect on 1 July 2006.

The revised prudential standards that apply from 1 July 2006 will impact Tier 1 Capital and Capital Base. However, APRA has granted transition relief in relation to changes to their prudential regulations from 1 July 2006, until 31 December 2007.

A number of significant capital management initiatives were undertaken to actively manage the Bank’s Tier One capital during the year, including the Dividend Reinvestment Plan (“DRP”), issue of Tier One hybrid capital, issue of PERLS III to replace expiring PERLS instruments, and completion of a $500 million on-market share buyback.

As required by APRA, the Bank’s investment in its life insurance and funds management companies is deducted from regulatory capital to arrive at the Bank’s Capital Ratios. The Bank’s insurance and funds management companies held an estimated $642 million excess over regulatory capital requirements at 30 June 2006 in aggregate.

The Bank has an integrated risk management framework to identify, assess and manage risks in the business. The Bank’s risk profile is measured by the difference between capital available to absorb loss and risk as assessed by economic capital required. This risk framework is described more fully elsewhere in this report.

Dividends

The final dividend declared is 130 cents per share which takes the full year dividend to a record of 224 cents, an increase of 27 cents or 14% on the prior year. The dividend payment is fully franked and will be paid on 5 October 2006 to owners of ordinary shares at the close of business on 18 August 2006 (“record date”). Shares were quoted ex–dividend on 14 August 2006.

Dividends per Share (cents)

6 Commonwealth Bank of Australia Annual Report 2006

Highlights


	Full Year Ended									Half Year Ended
	30/06/06			30/06/05			Jun 06 vs			30/06/06			31/12/05			Jun 06 vs
Group Performance Summary	$M			$M			Jun 05 %			$M			$M			Dec 05 %

Net interest income ⁽¹⁾		6,514			6,026			8			3,259			3,255			—
Other banking income ⁽¹⁾		3,036			2,845			7			1,591			1,445			10

Total Banking Income		9,550			8,871			8			4,850			4,700			3
Funds management income		1,543			1,247			24			828			715			16
Insurance income		742			747			(1	)		356			386			(8	)

Total Operating Income		11,835			10,865			9			6,034			5,801			4
Shareholder investment returns		101			237			(57	)		37			64			(42	)
Profit on sale of the Hong Kong insurance business		145			—			—			—			145			—

Total Income		12,081			11,102			9			6,071			6,010			1
Operating expenses		5,994			5,719			(5	)		3,027			2,967			(2	)
Which new Bank		—			150			—			—			—			—

Total Operating Expenses		5,994			5,869			(2	)		3,027			2,967			(2	)
Bad debts expense		398			322			(24	)		210			188			(12	)

Net profit before income tax		5,689			4,911			16			2,834			2,855			(1	)
Corporate tax expense ⁽²⁾		1,605			1,409			(14	)		829			776			(7	)
Minority interests ⁽³⁾		31			10		large				13			18			28

NPAT (“cash basis”)		4,053			3,492			16			1,992			2,061			(3	)
Defined benefit superannuation plan expense		(25	)		(53	)		53			(6	)		(19	)		68
Treasury shares		(100	)		(39	)	large				(57	)		(43	)		(33	)

NPAT (“statutory basis”)		3,928			3,400			16			1,929			1,999			(4	)


Represented by:
Banking		3,277			2,913			11			1,638			1,589			3
Funds management		400			351			14			217			183			19
Insurance		215			156			38			112			103			9

NPAT (“underlying basis”)		3,842			3,420			12			1,967			1,875			5
Shareholder investment returns		66			177			(63	)		25			41			(39	)
Which new Bank		—			(105	)		—			—			—			—

Cash NPAT ex Hong Kong Sale		3,908			3,492			12			1,992			1,916			4
Profit on sale of Hong Kong insurance business		145			—			—			—			145			—

NPAT (“cash basis”)		4,053			3,492			16			1,992			2,061			(3	)


(1)		Due to a change in accounting policy regarding classification of interest expense on certain non traded derivatives, a reclassification of $29 million between Net Interest Income and Other Banking Income has occurred in the half year ended 31 December 2005. There was no impact on total banking income or on profit.

(2)		For purposes of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis.

(3)		Minority interests includes preference dividends paid to holders of preference shares in ASB Capital.


	Full Year Ended						Half Year Ended
	30/06/06		30/06/05		Jun 06 vs		30/06/06		31/12/05		Jun 06 vs
Shareholder Summary					Jun 05 %						Dec 05%

Dividend per share – fully franked (cents)		224		197		14		130		94		38
Dividend cover – cash (times)		1.4		1.3		n/a		1.2		1.7		n/a
Earnings per share (cents)⁽¹⁾
Statutory – basic		308.2		259.6		19		151.1		157.1		(4	)
Cash basis – basic		315.9		264.8		19		154.9		160.9		(4	)
Cash basis – basic excluding the sale of Hong Kong		304.6		264.8		15		154.9		149.5		4
Dividend payout ratiDec 05 %o (%)
Statutory		73.3		77.0	(370)bpts			86.5		60.6	large
Cash basis		71.0		74.9	(390)bpts			83.7		58.8	large
Weighted avg no. of shares – statutory basic (M)		1,275		1,260		1		1,277		1,273		—
Weighted avg no. of shares – cash basic (M) ⁽¹⁾		1,283		1,269		1		1,285		1,281		—
Return on equity – cash (%)		21.3		18.8	250bpts			20.8		21.7	(90)bpts


(1)		Fully diluted EPS and weighted average number of shares (fully diluted) are disclosed in Note 7 to Financial Statements.

Credit Ratings

Long–term

Short–term

Affirmed

Fitch Ratings

F1+

Jun 06

Moody’s Investor Services

Aa3

P-1

Jun 06

Standards & Poor’s

AA-

A-1+

Jun 06

The Bank continues to maintain a strong capital position which is reflected in its credit ratings which remained unchanged for the year. Additional information regarding the Bank’s capital is disclosed in Note 35 to the Financial Statements.

Commonwealth Bank of Australia Annual Report 2006 7

Highlights


	As at
	30/06/06		31/12/05		30/06/05		Jun 06 vs			Jun 06 vs
Balance Sheet Summary	$M		$M		$M		Dec 05 %			Jun 05 %

Lending assets ⁽¹⁾		266,096		254,947		235,862		4			13

Total assets		369,103		351,193		337,404		5			9
Total liabilities		347,760		331,343		314,761		5			10

Shareholders’ equity		21,343		19,850		22,643		8			(6	)


Assets held and FUA
On balance sheet:
Banking assets		340,254		321,477		304,620		6			12
Insurance funds under administration		20,792		21,217		22,959		(2	)		(9	)
Other insurance and internal funds management assets		8,057		8,499		9,825		(5	)		(18	)

		369,103		351,193		337,404		5			9
Off balance sheet:
Funds under administration		130,721		115,757		100,105		13			31

		499,824		466,950		437,509		7			14


(1)		Lending assets comprise Loans, Advances, and Other Receivables (gross of provisions for impairment and excluding securitisation) and bank acceptances of customers.


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		31/12/05		Jun 06 vs
Key Performance Indicators					Jun 05 %							Dec 05 %

Banking
Underlying NPAT ($M) ⁽¹⁾		3,227		2,913		11			1,638		1,589		3
Net interest margin (%) ^{(2) (3)}		2.34		2.43	(9)bpts				2.29		2.39	(10)bpts
Average interest earning assets ($M) ⁽⁴⁾		274,798		244,708		12			282,553		267,169		6
Average interest bearing liabilities ($M) ⁽⁴⁾		255,100		255,597		14			263,203		247,129		7
Expense to income (%)		47.7		50.6		6			47.4		48.1		1

Funds Management
Underlying NPAT ($M) ⁽¹⁾		400		351		14			217		183		19
Operating income to average funds under administration (%)		1.12		1.08	4bpts				1.14		1.10	4bpts
Funds under administration – spot ($M)		151,513		123,064		23			151,513		136,974		11
Expense to average FUA (%)		0.71		0.72		1			0.72		0.70		(3	)

Insurance
Underlying NPAT ($M) ⁽¹⁾		215		156		38			112		103		9
Inforce premiums ($M)		1,223		1,265		(3	)		1,223		1,216		1
Expense to average inforce premium (%)		36.7		45.5		19			33.6		40.5		17

Capital Adequacy
Tier 1 (%)		7.56		7.46	10bpts				7.56		7.54	2bpts
Total (%)		9.66		9.75	(9)bpts				9.66		9.81	(15)bpts
Adjusted Common Equity (%)		4.50		4.91	(41)bpts				4.50		5.00	(50)bpts


(1)		Underlying NPAT excludes Which new Bank expenses and shareholder investment returns.

(2)		Net Interest Margin for the half year ended 31 December 2005 has been restated due to a change in accounting policy regarding classification of interest expense on certain non traded derivatives.

(3)		After adjusting for AIFRS the underlying variance is seven basis points (full year) and nine basis points (half year). Refer to Note 4 to the Financial Statement for the reconciliation of Net Interest Margin.

(4)		Average interest earning assets and average interest bearing liabilities have been adjusted to remove the impact of securitisation. Refer to Note 4 to the Financial Statements, Average Balance Sheet.

Important Dates for Shareholders



Ex-Dividend Date		14 August 2006
Record Date		18 August 2006
Final Dividend Payment		5 October 2006
Annual General Meeting		3 November 2006
2007 Interim Results Announced		14 February 2007

8 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis

Financial Performance and Business Review

Performance Highlights

The full year underlying net profit after tax of $3,227 million for the Banking business increased 11% on the prior year.

The performance during the year was underpinned by:

•

Continued strong volume growth in home loans, up 10% since June 2005 to $155 billion;

•

Domestic deposit volume growth of 7% since June 2005 to $151 billion including 11% growth in savings accounts;

•

Significant improvement in business lending volumes, up 20% since June 2005 to $76 billion;

•

Net interest margin (after adjusting for AIFRS) decreased seven basis points over the year in a competitive market;

•

Good expense control, with operating expenses increasing 4% compared with the prior year; and

•

Credit quality of the overall portfolio remaining sound.

The underlying NPAT for the second half of the year increased 3% to $1,638 million. The second half performance is impacted by seasonality, including three fewer days, but reflects similar themes to those for the full year.

More comprehensive disclosure of business highlights by key product category is contained on pages 14-19.

Net Interest Income

Net interest income increased by 8% compared with the prior year to $6,514 million. The growth was driven by a strong increase in average interest earning assets of 12% offset by a seven basis point reduction in net interest margin, excluding the impact of AIFRS. The introduction of AIFRS has not had a material impact on the growth rates for the year.

During the second half of the year, net interest income increased 2% compared to the prior half after adjusting for AIFRS and three fewer days. This was the result of 6% growth in average interest earning assets offset by net interest margin contraction of nine basis points (after adjusting for AIFRS).

Average Interest Earnings Assets

Average interest earning assets increased by $30 billion over the year to $275 billion, reflecting a $27 billion increase in average lending interest earning assets and a $3 billion increase in average non-lending interest earning assets.

Home lending growth continues to be the largest contributor to the increase in average interest earning assets. Average home loan balances increased by 12% since 30 June 2005 and 4% since December 2005. Following a slight decline in the first six months, domestic home loan market share has remained stable over the second half. In New Zealand, ASB Bank continues to grow ahead of the industry.

Personal Lending average balances have increased by 11% since June 2005 and 4% since December 2005. This result has been driven by strong growth in margin loans. Credit card and personal loan growth has been impacted by the repayment of low margin student loans and strong price based competition particularly in credit cards.

Average balances for Business, Corporate and Institutional lending increased 17% since June 2005 and 12% since December 2005.

Net Interest Margin

After adjusting for the impact of AIFRS, net interest margin of 2.34% decreased seven basis points compared with the prior year. The key drivers of the margin reduction were:

Pricing: includes asset and deposit price margin which has contributed a reduction of three basis points. Most of the price margin pressure is due to strong competition in the business and corporate segment. Both home loan and deposit margins were relatively stable over the year;

Funding mix: average lending asset growth of 13% continues to outpace average retail deposit growth of 8%, resulting in a greater reliance on wholesale funding which has moved from 43% in June 2005 to 45% in June 2006. The change in funding mix has resulted in a two basis point margin contraction; and

Asset mix: strength in business and corporate lending has out paced home loan growth. This has increased margin by one basis point. Average non lending interest earning assets have increased by $3 billion resulting in margin reduction of three basis points.

NIM Movement since June 2005

During the second half of the year net interest margin excluding the volatility associated with AIFRS, decreased by nine basis points.

This was mainly due to:

•

Business Lending price pressure of four basis points due to competitive pricing and the full impact of large, lower margin institutional loans written in the first half of the year;

•

Home Loan margin pressure of three basis points due to timing of the cash rate increase and strong price competition; and

•

Funding mix, asset mix, deposit pricing and non lending interest earning assets contributed two basis points to the decline.

Over the last quarter of the year net interest margin was stable at approximately 2.29%.

Additional information, including the average balance sheet, is set out Note 4 to the Financial Statements.

10 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		31/12/05		Jun 06 vs
Key Performance Indicators	$M		$M		Jun 05 %			$M		$M		Dec 05 %

Net interest income		6,514		6,026		8			3,259		3,255		—
Other banking income		3,036		2,845		7			1,591		1,445		10

Total banking income		9,550		8,871		8			4,850		4,700		3
Operating expenses		4,558		4,380		(4	)		2,298		2,260		(2	)
Which new Bank		—		112		—			—		—		—

Total operating expenses		4,558		4,492		(1	)		2,298		2,260		(2	)
Bad debts expense		398		322		(24	)		210		188		(12	)

Net profit before income tax		4,594		4,057		13			2,342		2,252		4
Income tax expense		1,339		1,220		(10	)		691		648		(7	)
Minority interests		28		3	large				13		15		13

NPAT (“cash basis”)		3,227		2,834		14			1,638		1,589		3

NPAT(“underlying basis”) ⁽¹⁾		3,227		2,913		11			1,638		1,589		3


(1)		Underlying basis excludes Which new Bank expenses.


Productivity and other measures

Net interest margin (%) ⁽¹⁾	2. 34	2.43	(9)bpts		2.29	2.39	(10)bpts
Expense to income (%)	47. 7	50.6		6	47.4	48.1		1
Expense to income – underlying (%)	47. 7	49.4		3	47.4	48.1		1
Effective corporate tax rate (%)	29. 1	30.1	(100)bpts		29.5	28.8	70bpts


(1)		After adjusting for AIFRS the underlying variance is seven basis points (full year) and nine basis points (half year). Refer to Note 4 to the Financial Statements for the reconciliation of Net Interest Margin.


Total Banking NPAT (“Underlying Basis”)

Australian Retail Products	1,794	1,589	13	900	894	1
Premium, Business & Corporate and Institutional Products	1,038	1,009	3	537	501	7
Asia Pacific	364	291	25	182	182	—
Other	31	24	29	19	12	58

Total Banking NPAT (“Underlying Basis”)	3,227	2,913	11	1,638	1,589	3

Other Banking Income

Full year

Half year

30/06/06

30/06/05

30/06/06

31/12/05

Commissions

1,635

1,545

820

815

Lending fees

800

733

411

389

Trading income

505

440

261

244

Other income

175

127

138

3,115

2,845

1,630

1,485

Non trading derivatives

(79

)

—

(39

)

(40

)

Other banking income

3,036

2,845

1,591

1,445

Excluding the non-trading derivatives impact of AIFRS, other banking income increased 9% over the year.

The introduction of AIFRS requires certain derivatives to be measured at fair value which may result in increased volatility in future periods.

Other Banking Income

Factors impacting other banking income were:

•

Commissions: increased by 6% on the prior year to $1,635 million. The increase was mainly driven by volume increases including a 30% increase in CommSec trading volume;

•

Lending fees: increased by 9% compared with the prior year to $800 million. After adjusting for AIFRS which required $25 million of net fee income to be deferred, lending fee growth was up 13% compared with the prior year. The result was driven by an increase in lending volumes in the business and corporate lending portfolios together with higher volumes in overdraft facilities;

•

Trading income increased 15% on the prior year to $505 million reflecting favourable market conditions; and

•

Other income increased $48 million on the prior year. The current year includes $32 million in relation to the Mastercard initial public offering. The prior year includes $52 million relating to tax consolidation legislation impacting the leasing business. Excluding these items, the increase was mainly due to structured transactions and leasing income.

Other income in the second half increased by $101 million to $138 million. After adjusting for the impact of AIFRS and timing of asset sales, other income was flat.

The other banking income result excluding the impact of AIFRS and timing of asset sales, increased by 5% compared to the prior half. This result was driven by similar themes to those for the full year.

Commonwealth Bank of Australia Annual Report 2006 11

Banking Analysis

Operating Expenses

Underlying operating expenses within the Banking business increased by 4% from the prior year to $4,558 million. Operating expenses were impacted by:

•

Average salary increases of 4% reflecting labour market movements and other inflation-related expense increases;

•

Commencement of a number of projects supporting the strategic priorities of the Bank (including customer service and business banking initiatives) totalling $40 million; partly offset by

•

Ongoing realisation of expense savings as a result of Which new Bank efficiency initiatives.

During the second half of the year operating expenses increased 2% to $2,298 million, mainly driven by the commencement of initiatives supporting the Bank’s strategic priorities.

Banking Expense to Income Ratio

The underlying Banking expense to income ratio improved from 49.4% as at June 2005 to 47.7% in June 2006 representing a productivity improvement of 3%. On an AGAAP basis, the Bank met its Which new Bank productivity target of 48%, with the expense to income ratio down to 47.1%. The improvement reflects strong income growth and good expense control, including the ongoing realisation of Which new Bank savings.

Productivity

Bad Debts Expense

The total charge for Bad Debts for the year was $398 million, which is 18 basis points of Risk Weighted Assets. This is the first year where provisions are calculated in accordance with AIFRS.

During the second half the Bad Debts expense increased by 12% to $210 million. This was driven by growth in risk weighted assets and an increase in provisioning for unsecured lending.

Gross impaired assets were $326 million as at 30 June 2006, compared with $395 million at June 2005.

The Bank remains well provisioned, with total provisions for impairment as a percentage of gross impaired assets of 373%.

Taxation Expense

The corporate tax charge for the year was $1,339 million, an effective tax rate of 29.1%.

The effective tax rate for the second half of the year was 29.5% compared to 28.8% in the first half.

Provisions for Impairment

Impairment provisions as at 30 June 2006 have been assessed under AIFRS. The prior year provisions have not been restated for AIFRS, but have been assessed using the previous Australian GAAP methodology and are not comparable to the current period.

Total provisions for impairment at 30 June 2006 were $1,217 million excluding the pre-tax equivalent General Reserve for Credit Losses ($500 million). The addition of the collective provision and General Reserve for Credit Losses (which is required by APRA) is 0.71% expressed as a percentage of risk weighted assets. The current level continues to reflect:

•

A major portion of the credit portfolio is in home loans which have a lower risk weighting compared with other portfolios;

•

The continuing strong asset quality in the business lending book; and

•

A level of impaired assets which is at the lower end of levels achieved over the past decade.

Risk Weighted Assets on Balance Sheet ($M)

Gross Impaired Assets ($M)

12 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis


	As at
	30/06/06			31/12/05			30/06/05			Jun 06 vs			Jun 06 vs
Total Banking Assets & Liabilities	$M			$M			$M			Dec 05 %			Jun 05 %

Interest earning assets
Home loans including securitisation		167,121			159,339			150,678			5			11
Less: securitisation		(12,607	)		(9,124	)		(10,818	)		38			17

Home loans		154,514			150,215			139,859			3			10
Personal		17,228			15,967			15,668			8			10
Business and corporate		76,044			71,502			63,549			6			20

Loans, advances and other receivables ⁽¹⁾		247,768			237,684			219,076			4			13
Non lending interest earning assets		40,283			39,431			36,273			2			11

Total interest earning assets		288,069			277,115			255,349			4			13
Other assets ⁽²⁾		52,185			44,362			49,271			18			6

Total assets		340,254			321,477			304,620			6			12


Interest bearing liabilities
Transaction deposits		37,079			34,287			34,694			8			7
Savings deposits		41,421			40,030			38,461			3			8
Investment deposits		67,364			67,462			66,087			—			2
Other demand deposits		20,325			19,573			21,806			4			(7	)

Total interest bearing deposits		166,189			161,352			161,048			3			3
Deposits not bearing interest		7,037			7,371			6,978			(5	)		1

Deposits and other public borrowings		173,226			168,723			168,026			3			3
Other interest bearing liabilities		99,976			95,538			72,935			5			37

Total interest bearing liabilities		266,165			256,890			233,983			4			14
Securitisation debt issues		13,505			9,849			12,144			37			11
Non interest bearing liabilities		44,515			40,316			41,422			10			7

Total liabilities		324,185			307,055			287,549			6			13


Provisions for Impairment
Collective Provisions		1,046			1,041			1,390			—			(25	)
Individually assessed provisions		171			179			157			(4	)		9

Total provisions		1,217			1,220			1,547			—			(21	)
General reserve for credit losses (pre-tax equivalent)		500			404			—			24			—

Total provisions including general reserve for credit losses		1,717			1,624			1,547			6			11


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		30/06/06		Jun 06 vs
Asset Quality ⁽³⁾	$M		$M		Jun 05 %			$M		$M		Dec 05 %

Risk weighted assets ($M) ⁽⁴⁾		216,438		189,559		14			216,438		202,667		7
Net impaired assets ($M)		155		219		(29	)		155		217		(29	)
General provisions as a % of risk weighted assets		—		0. 73		—			—		—		—
Collective provisions plus general reserve for credit losses (pre-tax equivalent)/risk weighted assets (%)		0.71		—		—			0. 71		0. 71		—
Specific provisions for impairment as a % of gross impairment assets net of interest reserved (%)		—		41. 8		—			—		—		—
Individually assessed provisions for impairment as a % of gross impaired assets net of interest reserved		52.5		—		—			52. 5		45. 2		16
Bad debt expense as a % of risk weighted assets annualised (%)		0.18		0. 17	1bpt				0. 19		0. 19		—


(1)		Gross of provisions for impairment which are included in Other Assets.

(2)		Other assets include Bank acceptances of customers, provision for impairment and securitisation assets.

(3)		Asset quality coverage ratios are not comparable to prior periods due to AIFRS.

(4)		No AIFRS adjustment is made to Risk Weighted Assets in the prior periods as the APRA prudential requirement is to apply previous Australian GAAP (‘AGAAP’).

Commonwealth Bank of Australia Annual Report 2006 13

Banking Analysis

Australian Retail

The Australian Retail Product segment performed strongly over the year, with underlying profit after tax increasing by 13% to $1,794 million. This result is highlighted by strong revenue growth, good expense control and further productivity gains.

Business Review

Over the year, a number of initiatives were introduced to improve the service experience for our customers including:

•

The rollout of CommSee, the Bank’s state-of-the-art customer management system, across our 1,000 strong branch network and seven call centres;

•

The implementation of CommServe, a training program designed to ensure our people are able to obtain maximum value from CommSee in improving Sales and Service outcomes. Over 14,000 staff undertook CommServe training during the 2006 financial year;

•

The refurbishment of a further 133 branches, taking to 384 the number of branches refurbished over the past three years into a design/layout more conducive to effective sales and service;

•

An additional 450 frontline customer service staff;

•

Improved access to Australia’s largest electronic banking and branch network through two new Streamline products with flat monthly fees, and the removal of transaction fees from NetBank;

•

The introduction of a low interest rate credit card (“Yellow”) to meet growing customer demand in this segment of the market; and

•

The pilot of a new customer service model which enables our frontline staff to spend more time on customer service and empowers our branch managers to make decisions about their business best suited to local conditions.

Home Loans

Home loan income has been impacted by the transition to AIFRS which required $35 million of net expenses to be deferred. After adjusting for this, revenue increased 13% compared to the prior year and was driven by solid volume growth of 11% and stable margins over the year.

Whilst second half revenue growth was flat, this was impacted by seasonal factors including three fewer calendar days in the half. From a product growth perspective, second half performance was strong, underpinned by record volume approvals in the June quarter. Second half balance growth was 7%.

Market share fell by 26 basis points over the year to 18.8%. All of this reduction occurred in the first half, where the Bank’s internal distribution channels underperformed reflecting in part the changes to systems and training required. Market share has stabilised over the second half through improved sales in proprietary channels, and selective product changes to raise competitiveness.

Full year average margins have been stable, but were lower in the second half mainly due to timing factors relating to passing on the May 2006 cash rate increase together with a higher volume of lower margin fixed rate lending towards the end of the year.

Consumer Finance (Personal Loans and Credit Cards)

Total income in the Consumer Finance portfolio grew by 11% over the year. The current year includes $32 million in relation to the Mastercard initial public offering.

Total Consumer Finance balances (combined Personal Loans and Credit Cards) decreased by 1% over the year to $11 billion. Second half growth was 1%. Full year growth was impacted by the repayment of low margin student loans in the first half. The market has been characterised by strong price based competition particularly in credit cards.

In March, the Bank launched a new low-rate credit card (“Yellow”) to meet customer demand in this segment of the market. Early results have been encouraging, with approximately 80,000 accounts opened since it launched.

Deposits

Deposit revenue increased 6% compared to the prior year, reflecting a combination of strong volume growth, relatively stable margins and higher other banking income.

Deposit balances grew by 8% over the year to $77 billion, with cyclical factors resulting in relatively stronger growth in the first half of the year. NetBank Saver balances grew by $4 billion, with approximately 63% being new funds to the Bank. Total deposit growth was slightly below market, as the Bank continues to pursue a balanced strategy aimed at optimising both growth and revenue outcomes. Net interest margin reduced slightly over the year.

In May, the Bank announced new pricing options on its main personal transaction account “Streamline”, allowing customers unlimited transactions for a fixed monthly fee. These changes provide customers with a greater level of certainty in their day-to-day banking whilst further consolidating the Bank’s competitive position in this segment of the market.

Operating Expenses

Expense growth was held to 3% over the full year. This result reflects further productivity gains within the business, with the expense to income ratio falling from 46.2% as at June 2005 to 43.6% as at June 2006. Employee numbers increased by 475 full-time equivalents to 17,253 full-time equivalents as at June 2006, reflecting increases in frontline customer service employees. Higher frontline employee expenses have been substantially offset by productivity and other expense savings elsewhere in the business.

Bad Debts

Total Bad Debts Expense for retail products for the full year was $354 million, an increase of 33%. Credit quality on the home loan portfolio remained high with percentage losses at historic lows. Credit card losses as a percentage of balances were stable at 1.96%. Personal loan losses peaked mainly as a result of business booked in 2004. Subsequent tightening of policy and the introduction of new scorecards has improved the quality of more recent business.


Market Share Percentage	30/06/06		31/12/05		30/06/05

Home Loans ⁽¹⁾		18.8		18.8		19.0
Credit Cards ^{(1) (2)}		20.5		21.4		22.8
Personal lending (APRA and other households) ⁽³⁾		16.1		16.0		16.7
Household Deposits		29.3		29.6		29.8
Retail deposits		22.2		22.9		23.0


(1)		Comparatives have been restated due to a reclassification between home loans and personal loans by another ADI.

(2)		As at 31 May 2006.

(3)		Personal lending market share includes personal loans and margin loans.

14 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis


Australian Retail	Full Year to June 2006
	Net		Other		Total						Underlying
	Interest		Banking		Banking		Expenses		Bad Debts		Profit after
	Income $M		Income $M		Income $M		$M		$M		Tax $M

Home loans		1,239		151		1,390
Consumer finance		727		368		1,095
Retail deposits		1,953		700		2,653

Australian Retail products		3,919		1,219		5,138		2,240		354		1,794

Full Year to June 2005

Total

Underlying

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

Home loans

1,194

Consumer finance

985

Retail deposits

2,514

Australian Retail products

4,693

2,168

266

1,589


	Half Year to June 2006
	Net		Other		Total						Underlying
	Interest		Banking		Banking		Expenses		Bad Debts		Profit after
	Income $M		Income $M		Income $M		$M		$M		Tax $M

Home loans		615		74		689
Consumer finance		363		195		558
Retail deposits		978		351		1,329

Australian Retail products		1,956		620		2,576		1,108		198		900


	As At
	30/06/06		31/12/05		30/06/05		Jun 06 vs			Jun 06 vs
Major Balance Sheet Items (gross of impairment)	$M		$M		$M		Dec 05 %			Jun 05 %

Home loans (incl securitisation)		144,834		135,990		129,913		7			11
Consumer finance ⁽¹⁾		10,640		10,507		10,720		1			(1	)

Total assets – Australian Retail products		155,474		146,497		140,633		6			11

Home loans (net of securitisation)		132,227		126,866		119,094		4			11


Transaction deposits		16,993		17,077		16,382		—			4
Savings deposits		38,071		36,306		34,061		5			12
Other demand deposits		19,818		19,977		19,197		(1	)		3
Deposits not bearing interest		2,362		2,478		2,172		(5	)		9

Total liabilities – Australia Retail products		77,244		75,838		71,812		2			8


(1)		Retail Consumer Finance includes personal loans and credit cards.


Australian Home Loan Approvals by State ^{(1) (2)}		Australian Home Loan Balances by State ⁽²⁾


(1)		As at 31 May 2006.

(2)		Half year averages.

Commonwealth Bank of Australia Annual Report 2006 15

Banking Analysis

Premium, Business & Corporate and Institutional

The Premium, Business & Corporate and Institutional product segment delivered underlying net profit after tax of $1,038 million, an increase of 3% compared to the prior year. The result has been impacted by the transition to AIFRS, which has decreased current year income by $55 million in relation to deferrals, and one-off inclusion of income recognised in relation to tax consolidation legislation changes in the prior year of $52 million. After adjusting for these items, underlying net profit after tax growth was 11%.

Business Review

The Premium, Business & Corporate and Institutional product segment performed well over the year, with the performance highlights including:

•

Institutional Banking customers gave the Bank a strong rating in the latest East & Partners customer satisfaction survey. Of the major banks, CBA retained number one status as principal and secondary transaction bank of the Top 500 corporates and the highest average rating in all key relationship management categories;

•

Development of dedicated mobile lenders, strong servicing for third party brokers, the introduction of a dedicated acquisition sales force for corporate clients and foreign exchange sales force;

•

Recent establishment of five distribution teams being Institutional Banking, Corporate Financial Services, Agribusiness, Local Business Banking and Private Client Services which all provide greater focus on each of these segments as the Bank expands its business banking footprint;

•

The introduction of the Business Online Saver high yield investment account, the Commonwealth Portfolio Loan product and the Business Line of Credit, all of which have reached $1 billion in balances;

•

CommSec has achieved record trading volumes and substantial margin lending balance growth during the year. On 30 June 2006, CommSec executed 47,406 trades to the value of $683 million in turnover. This set an Australian broking industry record for the highest number of trades and turnover by a broker in a single day;

•

Successful implementation of the CommSee customer management system across the business providing Bank employees with a common IT platform and access to common client information; and

•

Further extended specialised client service teams that are now capable of supporting all business clients centrally for most servicing activities.

Outcomes by key product category are summarised below.

Corporate Banking

Corporate Banking includes commercial and corporate transaction services and merchant acquiring.

This line of business achieved income growth of 1% for the year reflecting an increasingly competitive environment. Merchant acquiring in particular has been subject to intense competition in the second half of the year but has increased transaction volumes over the year, which allows the Bank to continue to leverage its scale position.

Financial Markets

Financial Markets includes financial markets and wholesale operations, equities broking (including CommSec) and structured products, capital markets services (including IPOs and placements) and margin lending.

Financial markets income has increased 14% compared to the prior year following improved trading conditions and increased customer flows. Continued strength in investment markets has also resulted in strong CommSec trading volumes while margin lending balances increased 34% over the year.

During the second half, revenue increased by 5% due to a strong March quarter which saw high levels of retail equities trades and increased leverage of high value clients from the Institutional Banking segment.

Lending and Finance

Lending and Finance includes asset finance, structured finance and general business lending.

Lending and Finance income has been impacted by the transition to AIFRS which required $55 million of net income to be deferred. In addition, the one-off inclusion of income recognised in relation to tax consolidation legislation changes impacted the leasing business by $52 million in the prior year. After adjusting for these items, Lending and Finance income increased by 8%.

Lending and Finance assets have increased $16 billion or 18% compared with the prior year. The increase has been driven by continued growth in the Australian and New Zealand syndicated loan market and an increase in volume in structured finance transactions. Bank acceptances have increased by 9% since June 2005 (6% growth since December 2005).

During the second half, revenue increased by 12% due to the continued strong volume of structured finance transactions and the timing of asset sales in the second half including Bankstown and Camden Airports.

Operating Expenses

Operating expenses of $1,570 million was contained to 2% growth compared to the prior year. This was driven by general salary increases and higher employee numbers, mainly to support volume growth in the Financial Markets business, partly offset by significant IT related savings.

Market Share

Business lending market share (including bank acceptances) declined during the year by 10 basis points to 13.1%. The movement from half to half reflects the volatility in the institutional and corporate lending businesses. Institutional lending is particularly sensitive to major funding requirements and is heavily impacted by relative levels of participations in syndicated loan deals.

Asset Finance market share has decreased by 90 basis points to 14.5% since June 2005. The decline reflects the maturity of this business segment, which has been characterised by aggressive price competition coupled with competitor expansion.

Equities Trading market share increased 70 basis points over the year. This result was supported by a 51% increase in value traded compared to market growth of 26%.

Market Share Percentage

30/06/06

31/12/05

30/06/05

Business Lending

13.1

13.5

13.2

Asset finance

14.5

15.1

15.4

Equities trading (CommSec)

4.3

4.3

3.6

16 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis

Premium, Business & Corporate and

Institutional

Full Year to June 2006

Net

Other

Total

Underlying

Interest

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

Corporate Banking

558

394

952

Financial Markets

287

642

929

Lending and Finance

751

441

1,192

Premium, Business & Corporate and Institutional products

1,596

1,477

3,073

1,570

1,038

Full Year to June 2005

Total

Underlying

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

Corporate Banking

945

Financial Markets

814

Lending and Finance

1,204

Premium, Business & Corporate and Institutional products

2,963

1,536

1,009


	Half Year to June 2006
	Net		Other		Total						Underlying
	Interest		Banking		Banking		Expenses		Bad Debts		Profit after
	Income $M		Income $M		Income $M		$M		$M		Tax $M

Corporate Banking		282		184		466
Financial Markets		144		331		475
Lending and Finance		382		249		631

Premium, Business & Corporate and Institutional products		808		764		1,572		791		31		537


	As At
	30/06/06		31/12/05		30/06/05		Jun 06 vs			Jun 06 vs
Major Balance Sheet Items (gross of impairment)	$M		$M		$M		Dec 05 %			Jun 05 %

Interest earning lending assets		66,343		60,949		51,584		9			29
Bank acceptances of customers		18,310		17,263		16,786		6			9
Non lending interest earning assets		35,471		35,320		33,993		—			4
Margin loans		5,758		4,664		4,311		23			34
Other assets ⁽¹⁾		19,947		15,711		19,773		27			1

Total assets – Premium, Business & Corporate and Institutional products ⁽²⁾		145,829		133,907		126,447		9			15

Transaction deposits		16,426		14,155		14,457		16			14
Other demand deposits		37,821		37,074		34,601		2			9
Deposits not bearing interest		3,520		3,675		3,651		(4	)		(4	)
Certificates of deposits and other		20,178		19,243		16,367		5			23
Dues to other financial institutions		11,333		9,852		7,964		15			42
Liabilities at fair value through the Income Statement		2,085		2,630		1,580		(21	)		32
Debt issues		77,848		69,854		65,463		11			19
Loan capital		9,744		9,129		8,356		7			17
Other non interest bearing Liabilities		36,703		31,628		32,927		16			11

Total liabilities – Business, Corporate and Institutional products Australia ⁽²⁾		215,658		197,240		185,366		9			16


Banking Sheet by Product Segment

Assets
Corporate Banking		3,546		2,982		3,299		19			7
Financial Markets		36,228		29,680		34,104		22			6
Lending and Finance		101,601		94,671		85,935		7			18
Other ⁽²⁾		4,454		6,574		3,109		(32	)		43

Total assets – Premium, Business & Corporate and Institutional products		145,829		133,907		126,447		9			15

Liabilities
Corporate Banking		20,799		18,592		18,659		12			11
Financial Markets		71,594		70,098		67,398		2			6
Lending and Finance		27,303		25,145		21,658		9			26
Other ⁽²⁾		95,962		83,405		77,651		15			24

Total liabilities – Business, Corporate and Institutional products Australia		215,658		197,240		185,366		9			16


(1)		Other assets include intangible assets and derivative assets. (2) Includes Group Funding, Balance Sheet Management and other capital not directly attributed to the product based segments above.

Commonwealth Bank of Australia Annual Report 2006 17

Banking Analysis

Asia Pacific

Asia Pacific Banking incorporates the Bank’s retail, business/commercial and rural banking operations in New Zealand, Fiji, Indonesia and China.

Underlying net profit after tax for Asia Pacific businesses increased 25% to $364 million ⁽¹⁾ compared to the prior year. ASB Bank in New Zealand represents the majority of the business.

ASB Bank

The New Zealand economy was characterised during 2006 by higher interest rates under the Reserve Bank of New Zealand’s tightening of monetary policy and strong competition in both deposits and lending. Despite these pressures ASB Bank again achieved solid growth in its asset and liability products. New Zealand lending balances grew strongly again in 2006, however, growth rates were slower than 2005 due to tighter economic conditions. Home lending balances grew by 18% to NZD 26.0 billion, commercial loans by 13% to NZD 4.5 billion and rural loans also by 13% to NZD 3.8 billion.

Retail deposit balances of NZD 20.4 billion were 12% higher than 2005. FastSaver and term investments contributed most of the growth in deposits.

Margins continued to come under pressure although competitive pressure eased in the second half of the year.

ASB Bank underlying net profit after tax for the year was NZD 400 million, ⁽¹⁾ an increase of 22% over the prior year. This was driven by:

•

Continued growth in home lending volumes above market growth rates. This is the 15th year of market share growth in this segment;

•

Strong growth in commercial/business and rural lending;

•

Success of the Fastsaver deposit product introduced in November 2004 with balances growing by more than 75% by the end of the year;

•

Net interest margin pressure over the year in a very competitive environment. Most of this pressure was evidenced in the first half with net interest margin flat in the second half;

•

Continued productivity improvements with expense to income ratio of 43.1% for the year; and

•

Sound credit quality.

Other performance highlights include:

•

For the fourth consecutive year, ASB Bank was recognised as New Zealand’s “Bank of the Year” by the UK based Banker Magazine; and

•

ASB Bank continued its leading position in Personal and Business Banking customer satisfaction among the major banks.

Underlying net profit after tax increased 6% in the second half to NZD 205 million. ⁽¹⁾ This reflected slower market volume growth, stabilisation of margins and three fewer days.

(1) Represents Group Management view for the product segment rather than statutory view.

Other Asia Pacific Business

The highlights in this region during the year were:

•

Purchase of the remaining 49% of the Colonial National Bank in Fiji from the Fiji Government in January 2006. Fiji loans and advances increased by 34% during 2006 to $484 million although liquidity and interest rate volatility issues in the Fiji economy resulted in a more subdued performance in the second half of the year;

•

Acquisition of a 19.9% interest in Hangzhou City Commercial Bank (HZB) for $102 million. HZB is one of the top five City Commercial Banks by assets in mainland China. When combined with our investment in Jinan City Commercial Bank, the Bank now holds interests in two of the top 10 City Commercial Banks in China;

•

Finalisation of the first stage of the Capability Transfer Program with Jinan City Commercial Bank;

•

Development of a mortgage broking business in Shanghai; and

•

Continuation of the branch expansion program in PT Bank Commonwealth in Indonesia with six new branches added during the year.

Market Share

Market share in New Zealand increased in all major asset categories and retail deposits. Home loan market share increased seven basis points to 23.1% ranking ASB Bank second in the market.

Retail deposit market share in New Zealand was 20.3% at 30 June 2006, an increase of 82 basis points from June 2005.

Fiji lending asset market share increased from 20.5% at 30 June 2005 to 22.5% as at 31 May 2006.

Market Share Percentage

30/06/06

31/12/05

30/06/05

NZ lending for housing

23.1

23.2

23.0

NZ retail deposits

20.3

19.9

19.5

18 Commonwealth Bank of Australia Annual Report 2006

Banking Analysis

Asia Pacific

Full Year to June 2006

Net

Other

Total

Underlying

Interest

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

ASB

680

291

971

Other

Asia Pacific

723

343

1,066

521

364

Full Year to June 2005

Total

Underlying

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

ASB

878

Other

Asia Pacific

917

490

291

Half Year to June 2006

Net

Other

Total

Underlying

Interest

Banking

Expenses

Bad Debts

Profit after

Income $M

Tax $M

ASB

338

138

476

Other

Total Banking Income – Asia Pacific

361

176

537

261

182


	As At
Major Balance Sheet Items	30/06/06		31/12/05		30/06/05		Jun 06 vs			Jun 06 vs
(gross of impairment) ⁽¹⁾	$M		$M		$M		Dec 05 %			Jun 05 %

Home lending		22,287		23,349		20,765		(5	)		7
Other lending assets		10,531		11,157		12,132		(6	)		(13	)
Non lending interest earning assets		4,812		5,523		3,664		(13	)		31
Other assets		1,321		1,044		979		27			35

Total Assets – Asia Pacific		38,951		41,073		37,540		(5	)		4


Debt Issues		744		182		6,939	large				(89	)
Deposits ⁽²⁾		18,040		19,256		23,006		(6	)		(22	)
Liabilities at fair value through the Income Statement		11,727		13,691		—		(14	)		—
Other Liabilities		772		848		426		(9	)		81

Total Liabilities – Asia Pacific		31,283		33,977		30,371		(8	)		3


Balance Sheet by Segment

Assets
ASB		36,724		38,981		35,593		(6	)		3
Other		2,227		2,092		1,947		6			14

Total Assets – Asia Pacific		38,951		41,073		37,540		(5	)		4

Liabilities
ASB		29,306		31,933		29,658		(8	)		(1	)
Other		1,977		2,044		713		(3	)	large

Total Liabilities – Asia Pacific		31,283		33,977		30,371		(8	)		3


(1)		30 June 2006 balance sheet impacted by deterioration of the NZD (11% over the full year).

(2)		Asia Pacific Deposits exclude deposits held in other overseas countries (30 June 2006: A$4 billion and 31 December 2005: A$4 billion and 30 June 2005: A$4 billion).

Commonwealth Bank of Australia Annual Report 2006 19

Funds Management Analysis

Financial Performance and Business Review

Performance Highlights

Full year underlying net profit after tax of $400 million increased 14% over the year for the Funds Management business reflecting strong revenue growth across the business.

Underlying profit before tax increased by 23%. The after tax result was impacted by $27 million due to a significantly higher effective tax rate primarily due to the phasing out of the transitional tax relief on investment style products within the life insurance entities, which ceased at the end of the last financial year ($27 million).

The underlying profit after tax result for the second half of the year increased 19% to $217 million also underpinned by strong revenue growth.

Funds under administration grew by 23% to $152 billion as at 30 June 2006. The growth in funds under administration was the result of strong net fund flows and favourable investment markets.

Business Review

Industry growth has been positive and industry retail flows have remained strong over the year.

Total funds flow performance for the year was strong with $11 billion of net inflows (up $10 billion on the prior year) due to the continuing success of FirstChoice, significant inflows into Avanteos, including $5 billion in net flows from the Goldman Sachs JB Were strategic alliance, excellent sales results in the International businesses and good inflows into domestic wholesale funds. An improvement in fund flows was achieved across most channels, including Independent Financial Advisors, Institutional Clients and the Bank Network.

The success of FirstChoice has underpinned recent growth in retail market share, with the Bank increasing share and maintaining its number one position in the overall retail market. In the latest Plan for Life market share statistics, FirstChoice received in excess of 25% of net flows in the platform market over the year. A recently published survey from ASSIRT showed that 50% of advisors in the market used FirstChoice as one of their platforms.

Investment performance during the year was good, in both absolute terms and against benchmark and this contributed to the improving fund flows.

Other key developments within the business during the year included:

•

Continued platform enhancements and new product offerings including the development of a self managed super offering “YourChoice”, to capitalise on this rapidly growing sector of the market;

•

Strategic alliance formed between Avanteos and Goldman Sachs JB Were, which has contributed $5 billion of additional net funds flow;

•

A funds management joint venture has been established to operate within China, with approval being received from the China Securities Regulatory Commission;

•

Further improvement in Bank planner performance, with a 16% increase in productivity for the year;

•

Acquisition of the Gandel Group’s interests in the Colonial First State Property Retail Trust Limited and Gandel Retail Management Trust Ltd, which provides funds management and property management services to a number of Colonial First State Retail Property trusts;

•

The continued rationalisation of legacy systems and products; and

•

Strengthening of the control and operating environment, particularly around unit pricing of investment style products within the life insurance entities.

Investment Performance

Investment performance has been good with 14 out of 18 major funds exceeding benchmark on a one year basis and 11 out of 18 major funds exceeding benchmark on a three year basis.

Importantly, the investment performance of the two flagship Australian Equity funds were well ahead of benchmark on a one year basis with rankings in first and second quartiles.

Operating Income

Operating income for the year increased by 23% to $1,552 million. Income growth was supported by a 23% increase in funds under administration to $152 billion at 30 June 2006 and a significant improvement in sales, particularly within the offshore businesses. The acquisition of Gandel’s Joint Venture interest in October 2005 has also contributed $45 million in revenue during the year. This contributed three basis points to gross margin.

During the second half of the year, operating income increased by 16% to $832 million. This result was driven by an 11% increase in the funds under administration and an additional $29 million contribution from the Gandel Joint Venture acquisition.

Excluding the impact of the Gandel acquisition, margin was stable. This reflects good margins on FirstChoice, strong inflows into higher margin International products and the maintenance of funds under administration levels on the higher margin legacy retail products.

Operating Expenses

Operating expenses (excluding volume expenses) of $765 million were up $123 million or 19% compared to the prior year.

This includes:

•

The acquisition of Gandel’s Joint Venture interest which increased expenses $28 million in the current year; and

•

Expenses in relation to the Unit Pricing control and process improvement program, totalling $55 million. This is expected to incur additional expenses of $20-30 million in the next 12 months.

Excluding the expenses associated with Gandel and the Unit Pricing initiative, expenses increased 6% compared to the prior year, reflecting average salary increases of 4% and performance based remuneration within the asset management business.

Volume expenses, driven predominantly by stronger sales and growth in funds under administration, increased 44%.

Expenses to average funds under administration for the year was 0.71%, an improvement on the prior year of one basis point.

Taxation

The corporate tax expense for the year was $164 million, representing an effective tax rate of 28.4% compared with 21.9% for the prior year. The increase in the effective tax rate, amounting to $27 million, is due to the phasing out of transitional tax relief on investment style funds management products within life insurance legal entities.

20 Commonwealth Bank of Australia Annual Report 2006

Funds Management Analysis


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		31/12/05		Jun 06 vs
Key Performance Indicators	$M		$M		Jun 05 %			$M		$M		Dec 05 %

Operating income – external		1,543		1,247		24			828		715		16
Operating income – internal		9		10		(10	)		4		5		(20	)

Total operating income		1,552		1,257		23			832		720		16
Shareholder investment returns		14		33		(58	)		7		7		—

Funds management income		1,566		1,290		21			839		727		15
Volume expense		224		156		(44	)		125		99		(26	)
Operating expenses		765		642		(19	)		405		360		(13	)
Which new Bank		—		36		—			—		—		—

Total operating expenses		989		834		(19	)		530		459		(15	)

Net profit before income tax (“cash basis”)		577		456		27			309		268		15

Net profit before income tax (“underlying basis”)⁽¹⁾		563		459		23			302		261		16

Corporate tax expense ⁽²⁾		164		100		(64	)		87		77		(13	)
Minority interests		3		7		(57	)		—		3		—

Net profit after income tax (“cash basis”)		410		349		17			222		188		18

Net profit after income tax (underlying basis) ⁽¹⁾		400		351		14			217		183		19


(1)		Underlying basis excludes shareholder investment returns and Which new Bank expenses.

(2)		For purpose of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis (2006: $193 million).

Funds under Administration



Funds under administration – average	139,082	116,262		20	147,684	130,179		13
Funds under administration – spot	151,513	123,064		23	151,513	136,974		11
Net flows	10,830	456	large		8,135	2,695	large
Total retail net flows	8,235	2,190	large		6,870	1,365	large

Productivity and Other Measures



Operating income to average funds under administration (%)	1.12	1.08	4bpts		1.14	1.10	4bpts
Operating expenses to average funds under administration (%)	0.71	0.72		1	0.72	0.70		(3	)
Effective corporate tax rate (%)	28.4	21.9	large		28.2	28.7	(50)bpts

Underlying Net Profit After Tax growth of 14% on the prior year

Commonwealth Bank of Australia Annual Report 2006 21

Funds Management Analysis

Funds under Administration

Funds under Administration (spot balances) have increased by 23% over the year to $152 billion. The growth in Funds under Administration has been driven by a combination of positive net fund flows, strong investment markets, albeit lower in the second half of the year, and positive absolute investment performance which exceeded benchmark across many of our funds. Net inflows for the year were $11 billion, representing a substantial improvement on the prior year. Investment returns contributed $17 billion for the year and $6 billion for the second half of the year.

Average Funds under Administration of $139 billion were 20% higher than the prior year.

The key drivers of net funds flows were:

•

Continuation of market leading flows into FirstChoice capturing in excess of 25% ⁽¹⁾ of the market net flows. FirstChoice has now exceeded $25 billion in funds under administration in less than four years;

•

Significant inflows associated with the Goldman Sachs JB Were strategic alliance of $5 billion;

•

Reduced net outflows on Australian equity funds due partly to improved investment performance;

•

A turnaround in net flows into wholesale products, which achieved positive net flows of $1.3 billion for the year;

•

Good flows into higher margin equity products and mandates in the International business;

•

Net outflows from the cash management product due to competition from attractively priced retail deposit products;

•

Property net outflows following the planned sell-down of assets within a closed end fund; and

•

Net outflows in other retail products which include closed legacy products, which is consistent with prior periods.


(1)		Nine months to March 2006 (source: Plan for Life).

Market Share

The Australian retail market share increased from 14.5% at 30 June 2005 to 15.7% at 31 March 2006. The business has achieved strong net flows in retail Funds under Administration in recent quarters and has also been favourably impacted by the inflow from the strategic alliance with Goldman Sachs JB Were which contributed 1% to market share growth.

The most recent Plan for Life survey (March 2006) showed the Bank ranking No. 1 for total retail net flows and No. 1 for retail flows excluding cash trusts. Improvement in investment performance has also aided market share gains.

Market Share Percentage ⁽²⁾

30/06/06

31/12/05

30/06/05

Australian retail – administrator view

15.7

14.6

14.5

New Zealand retail

15.0

15.0

15.2

Platforms (Masterfunds)

12.5

10.8

10.2


(2)		2006 figures are as at 31 March..


2006 FirstChoice — Fund Manager Destination		2006 FirstChoice — Sources of Funds

22 Commonwealth Bank of Australia Annual Report 2006

Funds Management Analysis


	Full Year Ended 30 June 2006
	Opening									FX⁽³⁾ &			Closing
	Balance							Investment		Other			Balance
	30/06/05		Inflows		Outflows			Income		Movements ⁽⁴⁾			30/06/06
Funds under Administration	$M		$M		$M			$M		$M			$M

FirstChoice & Avanteos		19,069		19,219		(5,886	)		3,190		(217	)		35,375
Cash management		4,182		2,417		(3,061	)		152		—			3,690
Other retail ⁽¹⁾		36,069		3,450		(7,904	)		4,353		(413	)		35,555

Australian retail		59,320		25,086		(16,851	)		7,695		(630	)		74,620
Wholesale		24,894		13,099		(11,810	)		3,682		(50	)		29,185
Property		13,456		1,074		(2,144	)		1,520		3			13,909
Other ⁽²⁾		2,886		192		(481	)		454		657			3,708

Domestically sourced		100,556		39,451		(31,286	)		13,351		(20	)		122,052
Internationally sourced		22,508		12,097		(9,432	)		3,835		453			29,461

Total – Funds under Administration		123,064		51,548		(40,718	)		17,186		433			151,513


	Full Year Ended 30 June 2005
	Opening									FX⁽³⁾ &			Closing
	Balance							Investment		Other			Balance
	30/06/04		Inflows		Outflows			Income		Movements ⁽⁴⁾			30/06/05
Funds under Administration	$M		$M		$M			$M		$M			$M

FirstChoice & Avanteos		12,075		10,377		(4,265	)		1,153		(271	)		19,069
Cash management		4,414		2,961		(3,425	)		232		—			4,182
Other retail		34,705		4,417		(7,875	)		3,951		871			36,069

Australian retail		51,194		17,755		(15,565	)		5,336		600			59,320
Wholesale		23,955		10,841		(13,350	)		3,177		271			24,894
Property		12,624		1,207		(1,172	)		1,668		(871	)		13,456
Other		3,033		248		(786	)		391		—			2,886

Domestically sourced		90,806		30,051		(30,873	)		10,572		—			100,556
Internationally sourced		19,077		9,209		(7,931	)		2,453		(300	)		22,508

Total – Funds under Administration		109,883		39,260		(38,804	)		13,025		(300	)		123,064


	Half Year Ended 30 June 2006
	Opening										FX ⁽³⁾ &			Closing
	Balance							Investment			Other			Balance
	31/12/05		Inflows		Outflows			Income			Movements ⁽⁴⁾			30/06/06
Funds under Administration	$M		$M		$M			$M			$M			$M

FirstChoice & Avanteos		24,770		12,655		(3,258	)		1,425			(217	)		35,375
Cash management		3,966		1,159		(1,548	)		113			—			3,690
Other retail		36,647		1,799		(3,937	)		1,459			(413	)		35,555

Australian retail		65,383		15,613		(8,743	)		2,997			(630	)		74,620
Wholesale		28,012		6,001		(5,901	)		1,753			(50	)		29,815
Property		13,750		304		(1,008	)		859			4			13,909
Other		3,349		95		(308	)		(85	)		657			3,708

Domestically sourced		110,494		22,013		(15,960	)		5,524			(19	)		122,052
Internationally sourced		26,480		6,633		(4,551	)		805			94			29,461

Total – Funds under Administration		136,974		28,646		(20,511	)		6,329			75			151,513


(1)		Includes stand alone retail and legacy retail products.

(2)		Includes life company assets sourced from retail investors but not attributable to a funds management product (e.g. premiums from risk products). These amounts do not appear in retail market share data.

(3)		Includes foreign exchange gains and losses from translation of internationally sourced business.

(4)		Other movements represent the re-alignment of funds to correctly classify source of funds.

Commonwealth Bank of Australia Annual Report 2006 23

Insurance Analysis

Financial Performance and Business Review

Performance Highlights

The Insurance business has delivered a strong result for the year to June 2006 with underlying profit after tax increasing by 38% to $215 million.

After adjusting ⁽¹⁾ the operating results following the sale of the Hong Kong insurance business, underlying net profit after tax increased by 35% to $206 million.

The result was underpinned by:

•

Solid inforce premium and operating margin growth in Australia and New Zealand;

•

Positive experience variations; and

•

Good expense control.

The underlying net profit after tax result, on the same basis, for the second half increased 19% and was driven by similar themes to those mentioned above.

The full year cash net profit after tax of $416 million includes the profit from the sale of the Hong Kong insurance business of $145 million. The cash net profit after tax for the year, excluding the profit on sale of the Hong Kong insurance business, decreased by 12% mainly due to lower shareholder investment returns. This was the result of the relative strength of investment market indices in the prior year.

The Bank continues to be the largest life insurer in the Australian, New Zealand and Fiji markets.

Business Review

Australia

The Australian business, CommInsure, delivered a strong result for the year. Highlights include:

•

Maintaining number one market share position for Australian risk premiums with 13.5% of the life insurance risk market;

•

Launch of a Guaranteed Index Tracked Annuity Product and a Travel Insurance product; and

•

Productivity improvements through continued simplification and rationalisation of systems and processes.

Underlying net profit after tax was up 32% to $125 million compared to the prior year.

Key drivers of the performance for the year were:

•

Life and General Insurance premium growth, with inforce premiums increasing by 8% for the year;

•

Sales volume growth, particularly within General Insurance (up 13%) and Group Risk products (up 8%); and

•

Positive claims experience in both Life and General Insurance products, despite the impact of claims associated with Cyclone Larry in the second half of the year.

Cash net profit after tax decreased 3% for the year, impacted mainly by lower shareholder investment returns.

New Zealand

The life insurance operations in New Zealand operate predominantly under the Sovereign brand.

Sovereign’s underlying profit after tax was $77 million for the year, an increase of 48% on the prior year. The main drivers of this result were:

•

Strong growth in new business sales of risk products resulting in market share growth and improved margins;

•

Positive persistency experience; and

•

Good investment returns.

The Sovereign strategy has been to focus on growth in new business market share and this was successfully achieved in 2006 with 33.2% of new business sales at 31 March 2006 compared to 30.4% for the same period last year. This enabled Sovereign to grow inforce premiums to NZD 367 million or 14%. Sovereign retained it’s number 1 market share in inforce premium growing from 30.7% to 31.1% at 30 April 2006.

Asia

During the year the Hong Kong based life insurance, pensions administration and financial planning businesses were sold to Sun Life Financial on 18 October 2005.

The Asian insurance businesses now consist of the joint venture life insurance businesses in China, Vietnam and Indonesia.

The underlying profit after tax in the Asia business was $13 million.

Operating Income

After adjusting ⁽¹⁾ the operating results following the sale of the Hong Kong insurance business, operating income of $700 million was up 13% compared to the prior year.

Life insurance income on the same basis increased 11% on the prior year. This reflects strong volume growth and favourable claims experience in both the Australian and New Zealand businesses.

General Insurance income of $73 million was up 35% on the prior year. The result was supported by inforce premium growth of 10% over the year together with favourable claims experience despite the impact of claims associated with Cyclone Larry.

Operating Expenses

After adjusting ⁽¹⁾ for the operating results following the sale of the Hong Kong insurance business, operating expenses of $423 million were slightly lower compared to the prior year.

On an AGAAP basis, underlying expenses to average inforce premiums of 36% has exceeded the Which new Bank target of 42%. Productivity improved over the second half following continued strength in revenue growth.

Volume expenses have increased as a result of increased inforce premiums.

Corporate Taxation

The effective corporate tax rate (excluding the impact of the sale of the Hong Kong insurance business) for the year was 27.3% compared with 22.4% in the prior year. The increase in the effective corporate tax rate is due to recognition of tax losses in the prior year.


(1)		Adjusted to remove the contribution to income, expenses, and operating result, of the Hong Kong insurance business for 2005 and 2006

24 Commonwealth Bank of Australia Annual Report 2006

Insurance Analysis


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		31/12/05		Jun 06 vs
Key Performance Indicators	$M		$M		Jun 05 %			$M		$M		Dec 05 %

Insurance
Life insurance operating income		669		693		(3	)		332		347		(7	)
General insurance operating income		73		54		35			34		39		(13	)

Total operating income		742		747		(1	)		356		386		(8	)
Shareholder investment returns		87		204		(57	)		30		57		(47	)
Profit on sale of the Hong Kong insurance business		145		—		—			—		145		—

Total insurance income		974		951		2			386		588		(34	)

Volume expense		181		218		17			86		95		9
Other operating expenses ⁽¹⁾		275		333		17			117		158		26
Which new Bank		—		2		—			—		—		—

Total operating expenses		456		553		18			203		253		20

Net profit before income tax		518		398		30			183		335		(45	)

Corporate tax expense ⁽²⁾		102		89		(15	)		51		51		—

Net profit after income tax (“cash basis”)		416		309		35			132		284		(54	)

Net profit after income tax (“underlying basis”) ⁽³⁾		215		156		38			112		103		9


Productivity and Other Measures
Expenses to average inforce premiums (%)		36. 7		45. 5		19	%		33. 6		40. 5		17	%
Expenses to average inforce premiums (underlying %) ⁽³⁾		36. 7		45. 3		19	%		33. 6		40. 5		17	%
Effective corporate tax rate including impact of profit on sale of Hong Kong insurance business (%)		27. 3		22. 4	large				27. 9		26. 8	large


(1)		Operating expenses include $9 million internal expenses relating to the asset management of shareholder funds (June 2005: $10 million).

(2)		For purpose of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis (2006: $138 million).

(3)		Underlying basis excludes shareholder investment returns, the profit on the sale of the Hong Kong insurance business and Which new Bank expenses.


	Full Year Ended								Half Year Ended
	30/06/06		30/06/05			Jun 06 vs			30/06/06			31/12/05		Jun 06 vs
Sources of Profit from Insurance Activities	$M		$M			Jun 05 %			$M			$M		Dec 05 %

The Margin on Services profit from ordinary activities after income tax is represented by:
Planned profit margins		146		122			20			77			69		12
Experience variations		48		27			78			29			19		53
Other		—		(8	)		—			(2	)		2	large
General insurance operating margins		21		13			62			8			13		(38	)

Operating margins		215		154			40			112			103		9
After tax shareholder investment returns		56		155			(64	)		20			36		(44	)
Profit on sale of the Hong Kong insurance business		145		—			—			—			145		—

Net profit after income tax (“cash basis”)		416		309			35			132			284		(54	)

Geographical Analysis of Business Performance


	Full Year Ended
	Australia				New Zealand				Asia					Total
Net Profit after Income Tax	30/06/06		30/06/05		30/06/06		30/06/05		30/06/06			30/06/05		30/06/06		30/06/05
(“cash basis”)	$M		$M		$M		$M		$M			$M		$M		$M

Operating margins		125		94		77		52		13			8		215		154
After tax shareholder investment returns		56		92		17		22		(17	)		41		56		155
Profit on sale of Hong Kong business		—		—		—		—		145			—		145		—

Net profit after income tax		181		186		94		74		141			49		416		309


	Half Year Ended
	Australia				New Zealand				Asia						Total
Net Profit after Income Tax	30/06/06		31/12/05		30/06/06		31/12/05		30/06/06			31/12/05			30/06/06		31/12/05
(“cash basis”)	$M		$M		$M		$M		$M			$M			$M		$M

Operating margins		70		55		39		38		3			10			112		103
After tax shareholder investment returns		21		35		7		10		(8	)		(9	)		20		36
Profit on sale of Hong Kong business		—		—		—		—		—			145			—		145

Net profit after income tax		91		90		46		48		(5	)		146			132		284

Commonwealth Bank of Australia Annual Report 2006 25

Insurance Analysis


	Full Year Ended 30 June 2006
	Opening										Closing
	Balance		Sales/New					Other			Balance
	30/06/05		Balances		Lapses			Movements ⁽²⁾			30/06/06
Annual Inforce Premiums ⁽¹⁾	$M		$M		$M			$M			$M

General insurance ⁽³⁾		215		70		(49	)		—			236
Personal life		785		137		(81	)		(109	)		732
Group life		265		71		(48	)		(33	)		255

Total		1,265		278		(178	)		(142	)		1,233


Australia		856		231		(166	)		—			921
New Zealand		296		47		(12	)		(29	)		302
Asia ⁽⁴⁾		113		—		—			(113	)		—

Total		1,265		278		(178	)		(178	)		1,223


	Full Year Ended 30 June 2005
	Opening									Closing
	Balance		Sales/New					Other		Balance
	30/06/04		Balances		Lapses			Movements ⁽²⁾		30/06/05
Annual Inforce Premiums ⁽¹⁾	$M		$M		$M			$M		$M

General insurance ⁽³⁾		192		62		(39	)		—		215
Personal life		703		164		(89	)		7		785
Group life		272		74		(87	)		6		265

Total		1,167		300		(215	)		13		1,265


Australia		815		228		(187	)		—		856
New Zealand		258		48		(15	)		5		296
Asia ⁽⁴⁾		94		24		(13	)		8		113

Total		1,167		300		(215	)		13		1,265


	Half Year Ended 30 June 2006
	Opening										Closing
	Balance		Sales/New					Other			Balance
	31/12/06		Balances		Lapses			Movements ⁽²⁾			30/06/06
Annual Inforce Premiums ⁽¹⁾	$M		$M		$M			$M			$M

General insurance		225		35		(24	)		—			236
Personal life		740		65		(39	)		(34	)		732
Group life		251		31		(24	)		(3	)		255

Total		1,216		131		(87	)		(37	)		1,223


Australia		895		110		(83	)		(1	)		921
New Zealand		321		21		(4	)		(36	)		302
Asia		—		—		—			—			—

Total		1,216		131		(87	)		(37	)		1,223


(1)		Inforce premium relates to risk business. Savings products are disclosed within Funds Management.

(2)		Includes foreign exchange movements.

(3)		General insurance inforce premiums includes approximately $46 million of badged premium (June 2005: $40 million).

(4)		Other movements represent the sale of the Hong Kong insurance business.

Inforce Premiums

Inforce premiums increased by 9% on the prior year excluding the impact of the sale of the Hong Kong insurance business and the deterioration of the New Zealand dollar against the Australian dollar in the second half of the year. This was achieved through consistent growth in both Australia and New Zealand. General Insurance premiums increased by 10% for the year.

Australia maintained its leading position of inforce premiums with 13.5% of market share in total life insurance at 31 March 2006.

Sovereign increased its leading market position in New Zealand with an increase to 31.1%, from 30.7% in June 2005.

Market Share Percentage – Annual Inforce Premiums

30/06/06

31/12/05

30/06/05

Australia (total risk) ⁽¹⁾

13.5

13.5

13.8

Australia (individual risk) ⁽¹⁾

12.4

12.6

13.0

New Zealand ⁽¹⁾

31.1

30.9

30.7


(1)		As at 31 March 2006.

26 Commonwealth Bank of Australia Annual Report 2006

Shareholder Investment Returns


	Full Year Ended							Half Year Ended
	30/06/06		30/06/05		Jun 06 vs			30/06/06		31/12/05		Jun 06 vs
Shareholder Investment Returns	$M		$M		Jun 05 %			$M		$M		Dec 05 %

Funds management business		14		33		(58	)		7		7		—
Insurance business ⁽¹⁾		87		204		(57	)		30		57		(47	)
Profit on sale of Hong Kong insurance business		145		—		—			—		145		—

Shareholder investment returns before income tax		246		237		4			37		209		(82	)
Income tax expense		35		60		42			12		23		48

Shareholder investment returns after tax		211		177		19			25		186		(87	)


(1)		Excluding profit on sale of the Hong Kong insurance business.

As at 30 June 2006

Australia

New Zealand

Asia

Total

Shareholder Investment Asset Mix ($M)

Local equities

—

International equities

—

Property

307

—

315

Sub-total

348

—

382

Fixed interest

342

191

556

Cash

823

132

964

Income

1,165

323

1,520

Total

1,513

357

1,902


	As at 30 June 2006
	Australia		New Zealand		Asia		Total
Shareholder Investment Asset Mix (%)	%		%		%		%

Local equities		3		—		—		2
International equities		—		7		—		1
Property		20		2		—		17

Sub-total		23		9		—		20

Fixed interest		23		54		72		29
Cash		54		37		28		51

Income		77		91		100		80

Total		100		100		100		100

Shareholder investment returns of $246 million pre tax include a $145 million profit on the sale of the Bank’s Hong Kong insurance business.

Domestic and international investment markets performed strongly for the year to June 2006, with the benchmark S&P/ASX200 price index increasing by 19% and the MSCI World index by 15%. All other asset classes (fixed interest, property and cash) posted positive returns.

Excluding the profit on sale of the Hong Kong insurance business, shareholder investment returns for the year of $101 million (pre tax) represent a significant decrease due to the relative strength of the indices in the prior year.

During the second half shareholder investment returns, excluding the profit from the sale of the Hong Kong insurance business, decreased 42% to $37 million. This was also mainly due to weakening in the indices over the second half.

Commonwealth Bank of Australia Annual Report 2006 27

Presentation of Financial Information

Definitions

In this Annual Report, the Bank presents its profit from ordinary activities after tax on a “statutory basis”, which is calculated in accordance with the Australian equivalent of International Financial Reporting Standards (“AIFRS”). This Annual Report is the first under AIFRS (for more details refer to the Financial Statements, Note 1). The Bank also presents its results on a “cash basis”. “Cash basis” is defined by management as net profit after tax and minority interests, before treasury share valuation adjustments and defined benefit superannuation plan expense. Management believes “cash basis” is a meaningful measure of the Bank’s performance and provides the basis for the determination of the Bank’s dividends. Also for the year ended 30 June 2004 the Bank added back the non-recurring ‘Which new Bank’ costs in considering the amount to be distributed as dividends to shareholders.

The Bank also presents its earnings per share on a statutory basis and on a cash basis. Earnings per share on a statutory basis are affected by the impact of changes in the treasury share valuation adjustments and defined benefit superannuation plan expense. “Earnings per share (cash basis)” is defined by management as net profit after tax and outside equity interests, before treasury share valuation adjustments and defined benefit superannuation plan expense, divided by the weighted average of the Bank’s ordinary shares outstanding over the relevant period. This measure shows the “cash basis” net profit after tax, as described above, per share.

“Operating Expenses – Which new Bank” refers to incremental expenses associated with the Which new Bank Program. These incremental costs principally relate to restructuring and IT development expenses. “Operating expenses – Which new Bank” plus “operating expenses — comparable business” is equal to the AIFRS measure “operating expenses”. Management believes it is meaningful to highlight these items in an analysis of our results.

“Underlying profit” refers to profit after tax, “cash basis”, before operating expenses - initiatives including Which new Bank and shareholder investment returns, and profit on sale of the Hong Kong insurance business. “Underlying profit” is referred to across all our businesses. The underlying profit is the result of our core operating performance. Management believes it is meaningful to highlight the underlying profit in order to show performance on a comparable basis, in particular excluding the volatility of equity markets and Which new Bank expenses.

“Underlying” productivity ratios:

•

Exclude expenses of “Which new Bank”;

•

Exclude shareholder investment returns from funds management and life insurance income;

•

Exclude policyholder tax from the funds management income and life insurance income lines; and

•

Exclude the effect of profit on sale of the Hong Kong insurance business.

“Underlying” productivity ratios have been presented to provide what management believes to be a more relevant presentation of our productivity ratios. Management believes that these adjustments enable comparison of our productivity ratios from period to period to be more meaningful as it reflects our core operating performance.

28 Commonwealth Bank of Australia Annual Report 2006

Integrated Risk Management

Risk Management

The integrated risk management framework identifies, assesses, manages and reports risks and risk adjusted returns on a consistent and reliable basis.

Independent review is carried out through the audit task assurance roles.

The Bank’s risk profile is measured by the difference between capital available to absorb loss and risk as assessed by economic capital required.

Economic capital is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating.

Economic capital is derived from underlying exposures to credit, market, operational and insurance risks in the banking, and wealth management (insurance and funds management) businesses of the Bank. In the banking business, economic capital is a measure of the potential risk of loss of cash earnings. In the wealth management businesses, economic capital is a measure of the potential risk of loss of the fair value of the business. This is then adjusted so as to allow comparison between the banking and wealth management businesses economic capital.

The following sections describe the integrated risk management framework components.

Credit Risk

Credit risk is the potential of loss arising from failure of a debtor or counterparty to meet their contractual obligations. The measurement of credit risk is based on an internal credit risk rating system, and utilises analytical tools to calculate expected and unexpected loss for the credit portfolio. This includes consideration of the probability of default (PD) and the loss given default (LGD) that would consequently be experienced.

Various risks are considered when calculating both PD and LGD. Such consideration includes the potential for default by a borrower due to management, industry, economic, environmental and/or other risks. Similarly, consideration is given to any potential adverse impact arising from these risks in relation to any security offered in support of loan facilities.

Credit risk arises in the banking business from lending activities, the provision of guarantees including letters of credit and commitments to lend, investment in bonds and notes, financial markets transactions and other associated activities. In the insurance business credit risk arises from investment in bonds and notes, loans, and from reliance on reinsurance. The funds management business does not generally involve credit risk from a shareholder perspective.

The Bank uses a diversified portfolio approach for the management of credit risk (refer to Note 16 to the Financial Statements) comprised of the following:

•

A system of industry limits and targets for exposures by industry;

•

A process for considering the risk associated with correlations between large exposures;

•

A large credit exposure policy for aggregate exposures to individual, commercial and industrial client groups tiered by credit risk rating and loan duration; and

•

A system of country limits for geographic exposures.

These policies assist in the diversification of the credit portfolio.

The credit portfolio is managed in two distinct segments:

Retail Segment:

Comprises exposures that are generally less than $1 million and is dominated by the housing loan portfolio. Secured commercial lending within this limit is presently being trialled using a scorecard model. Other consumer products managed within this segment are credit cards, personal loans and some leasing business.

Risk Rated Segment:

Comprises all other credit exposures. Management is based on the internal credit risk rating system, which makes an assessment of the potential for default for each exposure and the amount of loss if default should occur.

Provisions for impairment are raised where there is objective evidence of impairment and at an amount adequate to cover assessed credit related losses. Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments and assets acquired through security enforcement.

A centralised exposure management system records all significant credit exposures of the Bank. Customers, industry, geographic and other significant groupings of exposure are regularly monitored.

A centralised portfolio model is used to assess risk and return on an overall portfolio basis and for segments of the portfolio. The model also assists in determining economic capital, collective provision requirements, and credit portfolio stress testing.

Off Balance Sheet Arrangements

As detailed in Note 1 (ii), the Bank conducts a Loan Securitisation program through which it packages and sells loans as securities to investors. Liquidity facilities are provided at arm’s length to the program by the Bank in accordance with the Australian Prudential Regulation Authority (“APRA”) Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit.

The Bank is involved with a number of special purpose entities (“SPEs”) in the ordinary course of business, primarily to provide funding and financial services to our customers. Under AIFRS these entities are consolidated in the financial statements if they meet the criteria of control. The definition of control depends upon substance rather than form including consideration of exposure to the majority of benefits or risks of the SPE, and accordingly, determination of the existence of control involves management judgment. The Bank has no off balance sheet financing entities that it is considered to control.

Commonwealth Bank of Australia Annual Report 2006 29

Integrated Risk Management

Market Risk

Market risk is the potential for change in the value of on and off balance sheet positions caused by a change in the value, volatility or relationship between market rates and prices.

Market risk arises from the mismatch between assets and liabilities in both the banking and insurance businesses and from controlled trading undertaken in pursuit of profit. The Bank is exposed to diverse financial instruments including interest rates, foreign currencies, equities and commodities and transacts in both physical and derivative instruments.

A discussion and analysis of the Bank’s market risk is contained in Note 43 to the Financial Statements. Information on trading securities is further contained in Note 10 to the Financial Statements. Note 2 to the Financial Statements contains financial markets trading income contribution to the Bank.

In the trading book of the banking business, market risk is measured by a Value-at-Risk (VaR) model. This model uses the distribution of historical changes in market prices to assess the potential for future losses. The VaR model takes into account correlations between risks and the potential for movements in one portfolio to offset movements in another. Actual results are back-tested to check the validity of the VaR model. In addition, because the VaR model cannot encompass all possible outcomes, tests covering a variety of stress scenarios are regularly performed to simulate the effect of extreme market conditions.

The following table provides a summary of VaR by product.


	Average VaR During			Average VaR During			Average VaR During			Average VaR During
VaR Expressed based on 97.5%	June 2006			December 2005			June 2005			December 2004
confidence	Half Year $M			Half Year $M			Half Year $M			Half Year $M

Group
Interest rate risk		3.16			2.65			3.44			3.68
Exchange rate risk		0.65			0.53			0.26			0.58
Implied volatility risk		0.61			0.61			0.49			0.53
Equities risk		0.10			0.08			0.04			0.22
Commodities risk		1.20			0.36			0.18			0.34
Prepayment risk		0.33			0.28			0.38			0.54
ASB Bank		0.30			0.36			0.22			0.26
Diversification benefit		(2.26	)		(1.40	)		(0.98	)		(1.64	)

		4.09			3.47			4.03			4.51
Credit speed		5.97			5.74			4.85			4.67

Total		10.06			9.21			8.88			9.18


	Average VaR During			Average VaR During			Average VaR During			Average VaR During
VaR Expressed based on 99.0%	June 2006			December 2005			June 2005			December 2004
confidence	Half Year $M			Half Year $M			Half Year $M			Half Year $M

Group
Interest rate risk		4.01			3.36			4.78			4.72
Exchange rate risk		0.77			0.62			0.31			0.70
Implied volatility risk		0.80			0.95			0.73			0.70
Equities risk		0.13			0.09			0.05			0.30
Commodities risk		1.61			0.45			0.21			0.41
Prepayment risk		0.33			0.28			0.38			0.54
ASB Bank		0.40			0.48			0.32			0.34
Diversification benefit		(3.04	)		(1.93	)		(1.28	)		(2.01	)

		5.01			4.30			5.50			5.70
Credit speed		7.09			6.81			5.75			5.54

Total		12.10			11.11			11.25			11.24

In the non-traded book of the banking business, a range of techniques is adopted to measure market risk. These include simulation of the effects of market price changes on assets and liabilities for business activities where there are no direct measures of the effects of market prices on those activities.

Liquidity risk is the risk that assets cannot be liquidated in time to meet maturing obligations. Limits are set to ensure that holdings of liquid assets do not fall below prudent levels. The liquid assets held include assets that are eligible for repurchase by the Reserve Bank of Australia (over and above those required to meet the Real Time Gross Settlement obligations), certificates of deposits and bills of exchange accepted by other banks, overnight interbank loans and high quality securities. More detailed comments on the Bank’s liquidity and funding risks are provided in Note 43.

Market risk in the life insurance business arises from mismatches between assets and liabilities. Guaranteed returns are offered on some classes of policy. These liabilities may not be capable of being easily hedged through matching assets. Wherever possible, the Bank segregates policyholder’s funds from shareholder’s funds and sets investment mandates that are appropriate for each.

The investment mandates for assets in policyholder’s funds attempt to match asset characteristics with the nature of policy obligations. The ability to match asset characteristics with policy obligations may be constrained by a number of factors including regulatory constraints, the lack of suitable investments as well as by the nature of the policy liabilities themselves. A large proportion of policyholder’s assets are held for investment linked policies where the policyholder takes the risk of falls in the market value of the assets.

30 Commonwealth Bank of Australia Annual Report 2006

Integrated Risk Management

A smaller proportion of policyholder’s assets are held to support policies where life companies have guaranteed either the principal invested or the investment return (‘guaranteed policies’) where investment mandates for these classes of policies emphasise lower volatility assets such as cash and fixed interest. The Bank no longer sells guaranteed policies. Inforce business contains guaranteed policies sold in the past and on which the Bank continues to collect premiums.

Liquidity risk is not a significant issue in life insurance companies. The life insurance companies in the Bank hold substantial investments in highly liquid assets such as listed shares, government bonds and bank deposits. Furthermore, processing time for claims and redemptions enables each company to forecast and manage its liquidity needs.

Derivatives

Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. The Bank enters into derivatives transactions including swaps, forward rate agreements, futures, options and combinations of these instruments. The sale of derivatives to customers as risk management products and their use for trading purposes is integral to the Bank’s financial markets activities. Derivatives are also used to manage the Bank’s own exposure to market risk. The Bank participates in both exchange traded and Over the Counter (“OTC”) derivatives markets.

The Bank recognises all derivative financial instruments in the balance sheet at their fair value. Refer Note 1 (ff) to the financial statements for further information.

Exchange Traded Derivatives

Exchange traded derivatives are executed through a registered exchange, for example the Sydney Futures Exchange and the Australian Stock Exchange. The contracts have standardised terms and require lodgement of initial and variation margins in cash or other collateral at the Exchange, which guarantees ultimate settlement.

OTC Traded Derivatives

The Bank buys and sells financial instruments that are traded ‘over-the-counter’, rather than on recognised exchanges. The terms and conditions of these transactions are negotiated between the parties, although the majority conform to accepted market conventions. Industry standard documentation is used, most commonly in the form of a master agreement supported by individual transaction confirmations. The documentation protects the Bank’s interests should the counterparty default, and provides the ability to net outstanding balances in jurisdictions where the relevant law allows.

Operational and Strategic Business Risk

The Bank’s operational and strategic business risk management framework supports the achievement of its financial and business goals.

Operational Risk is defined as the risk of economic gain or loss resulting from:

•

Inadequate or failed internal processes and methodologies;

•

People;

•

Systems; or

•

External events.

Strategic Business Risk is defined as the risk of economic gain or loss resulting from changes in the business environment caused by the following factors:

•

Economic;

•

Competitive;

•

Social trends; or

•

Regulatory.

Each business manager is responsible for the identification and assessment of these risks, and for maintaining appropriate internal controls. The Bank’s operational risk framework and governance structures supports these efforts through a suite of risk mitigating policies, the reporting of internal loss incidents and key risk indicators, qualitative and quantitative assessment of risk exposures, and skilled operational risk professionals embedded throughout the Bank.

The Bank’s operational risk measurement methodology combines expert assessment of individual risk exposures with internal loss data to calculate operational risk economic capital and determine potential loss.

The Bank continues to benchmark and monitor its insurance risk transfer program for efficiency and effectiveness. This is primarily achieved through a methodology that optimises total shareholder returns and determines the most appropriate blend of insurance risk transfer and economic capital.

Business Continuity Management

Business Continuity Management (“BCM”) within the Bank involves the development, maintenance and testing of advance action plans to respond to defined risk events. This ensures that business processes continue with minimal adverse impact on customers, staff, products, services and brands.

BCM constitutes an essential component of the Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’s critical processes and revenue streams. It includes both cost-effective responses to mitigate the impact of risk events or disasters and crisis management plans to respond to crisis events.

A comprehensive BCM program including plan development, testing and education has been implemented across all business units.

Compliance Risk Management

Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss of reputation that the Bank may suffer as a result of its failure to comply with the requirements of relevant laws, industry and Bank standards and codes, principles of good governance and accepted community and ethical standards.

The Bank’s Compliance Risk Management Framework (CRMF) is a key element of the Bank’s integrated risk management framework. The CRMF is broadly consistent with the Australian Standard on Compliance Programs; as such it fulfils the Bank’s obligations under the Corporations Act 2001 and its Australian Financial Services Licence. The CRMF incorporates a number of components including Minimum Group Standards, Group Obligations Register and Guidance Notes that detail specific requirements and accountabilities. These are complemented by Business Unit compliance frameworks including obligations registers, standards and procedures.

Commonwealth Bank of Australia Annual Report 2006 31

Integrated Risk Management

The Framework provides for the assessment of compliance risks, implementation of controls, monitoring and testing of framework effectiveness, the escalation, remediation and reporting of compliance incidents and control weaknesses.

The Bank’s compliance strategy is based on two fundamental principles:

•

Line Management in each Business Unit are responsible for ensuring their business is and remains compliant with legislative, regulatory, industry code and organisational requirements by implementing and monitoring controls; and

•

Business Unit Compliance and Group Compliance work together to independently monitor, overview and report on compliance to management, compliance committees and the Board.

Security Risk

Security risk is defined as threats associated with theft and fraud, information and IT security, protective security and crisis management.

The Bank’s security risk management framework forms part of the operational risk framework and sets out the key roles, responsibilities and processes for security risk management across the Bank.

Insurance Risk

There are two risk types that are considered to be unique to life insurance businesses. These are the risks that the incidence of mortality (death) and morbidity (illness and injury) claims are higher than assumed when pricing life insurance policies, or is greater than best estimate assumptions used to determine the fair value of the business.

Insurance risk may arise through reassessment of the incidence of claims, the trend of future claims and the effect of unforeseen diseases or epidemics. In addition, in the case of morbidity, the time to recovery may be longer than assumed. Insurance risk is controlled by ensuring underwriting standards adequately identify potential risk, retaining the right to amend premiums on risk policies where appropriate and through the use of reinsurance. The experience of the Bank’s life insurance business and those of the industry as a whole are reviewed annually.

32 Commonwealth Bank of Australia Annual Report 2006

Description of Business Environment

Australia

Competitive Landscape

Financial services providers in Australia offer a wide range of products and services to retail and business customers, encompassing for the most part banking, funds management and insurance.

The domestic competitive landscape includes the four major banks (including Commonwealth Bank of Australia), regional banks, smaller players (including foreign banks) and both local and international non-bank financial intermediaries.

Each of the major banks offers a full range of financial products and services through branch networks, electronic channels and third party intermediaries across Australia. The regional banks, whilst smaller than the majors, now mostly operate across state borders, or nationally. They have experienced strong growth primarily in mortgage lending, facilitated by the proliferation of non-bank mortgage originators and brokers. Non-bank financial intermediaries such as building societies and credit unions compete strongly in the areas of accepting deposits and residential mortgage lending, mainly for owner-occupied housing. Other non-bank financial intermediaries include investment banks, fund managers, finance companies, and a diverse range of product and service specialists.

In recent years, a number of local and global new entrants are attacking segments of the market where margins are typically the widest, including product markets such as deposits, housing loans and credit cards, and on distribution markets such as mortgage broking and business banking broking.

Trends

The Australian financial services sector has performed strongly in the last decade, largely driven by strong growth in lending. More recently however, the expectation is for lower credit growth going forward. This, together with the encroachment of new entrants, may lead to intensifying competition, and to ongoing downward pressure on margins.

Substantial growth has also occurred in funds under management, especially within the superannuation (pension funds) industry. Future growth will be underpinned by the Australian Government’s continued encouragement of long-term saving through private superannuation and compulsory employer pension contributions, as well as the recent establishment of the Future Fund (designed to address the public sector’s superannuation liabilities). This growth potential continues to attract new entrants to this market, from international fund managers to boutique players. The major banks have expanded into funds management and/or insurance, either through acquisition or through agreements with third parties. The corporate bond market in Australia has also benefited from the growth in funds under management with many of the major Australian corporates now directly accessing capital markets domestically and around the world.

Changes in the financial needs of consumers, deregulation, and technology developments have also changed the mode of competition. In particular, the development of electronic delivery channels and the reduced reliance on a physical network facilitate the entry of new players from related industries, such as retailers, telecommunication companies and utilities. Technological change has provided opportunities for new entrants with differing combinations of expertise and has enabled the unbundling of the value chain.

New Zealand

As in Australia, the New Zealand banking system is characterised by strong competition. The Bank’s activities in New Zealand are conducted through ASB Group. Banks in New Zealand are free to compete in almost any area of financial activity. There is strong competition with non-bank financial institutions in the areas of funds management and the provision of insurance.

New Zealand banking activities are led by four financial services groups, all owned by Australian based banks operating through nationwide branch networks. There is also the Government-owned Kiwibank, operating nationwide, and TSB Bank, operating in the main centres. Both banks offer retail and business banking services through branches. In addition, there are several financial institutions operating largely in the wholesale banking sector.

Through its wholly owned subsidiaries, Sovereign Group and ASB Group Investments, ASB Group also competes in the New Zealand insurance and investment market.

Financial System Regulation in Australia

Australia has by international standards a high quality financial system which regulates financial products and services consistently regardless of the type of financial institutions providing them.

Since July 1998, financial services regulators in Australia have comprised four separate agencies: The Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission. Each agency has system wide responsibilities for the different objectives of government oversight of the financial system. A description of these agencies and their general responsibilities and functions is set out below.

Reserve Bank of Australia (“RBA”) – is responsible for monetary policy, financial system stability and regulation of the payments system.

Australian Prudential Regulation Authority (“APRA”) – has responsibility for the prudential supervision of banks, building societies and credit unions, life and general insurance companies, friendly societies and superannuation funds (pension funds). Unless an institution is authorised under the Banking Act 1959 or exempted by APRA, it is prohibited from engaging in the general business of deposit-taking.

Australian Securities and Investments Commission (“ASIC”) – has responsibility for monitoring, regulating and enforcing company and financial services laws and promoting market integrity and consumer protection across the financial services sector and the payments system.

Australian Competition and Consumer Commission (“ACCC”) – has responsibility for competition policy and consumer protection across all sectors of the economy.

The Corporations Act 2001 provides for a single licensing regime for sales, advice and dealings in financial products and services, consistent and comparable financial product disclosure and a single authorisation procedure for financial exchanges and clearing and settlement facilities. The current financial services regulatory framework is intended to facilitate innovation and promote business while at the same time ensuring consumer protection and market integrity.

Commonwealth Bank of Australia Annual Report 2006 33

Description of Business Environment

The Government passed into law in June 2004 a package of proposals (known as CLERP 9) dealing with audit regulation and corporate disclosure. CLERP 9 is designed to ensure Australia has an effective regulatory and disclosure framework that provides the structures and incentives for a fully informed market.

Supervisory Arrangements

The Bank is an authorised deposit-taking institution under the Banking Act and is subject to prudential regulation by APRA as a bank.

In carrying out its prudential responsibilities, APRA closely monitors the operations of banks to ensure that they operate within the prudential framework it has laid down, and that they follow sound management practices.

APRA currently supervises banks by a system of off-site examination. It closely monitors the operations of banks through the collection of regular statistical returns and regular prudential consultations with each bank’s management. APRA also conducts a program of specialised on-site visits to assess the adequacy of individual banks’ systems for identifying, measuring and controlling risks associated with the conduct of these activities.

In addition, APRA has established arrangements under which each bank’s external auditor reports to APRA regarding observance of prudential standards and other supervisory requirements.

The prudential framework applied by APRA is embodied in a series of prudential standards and other requirements including:

(i) Capital Adequacy

Under APRA capital adequacy guidelines, Australian banks are required to maintain a ratio of capital (comprising Tier One and Tier Two capital components) to risk-weighted assets of at least 8%, of which at least half must be Tier One capital. Regulatory capital requirements are measured for the Bank (“Level 1”) and for the Bank together with its banking subsidiaries (“Level 2”). APRA capital requirements are generally consistent with those agreed upon by the Basel Committee on Banking Supervision. APRA has advised that a third level of capital adequacy (“Level 3”) for conglomerate groups will be implemented to coincide with Basel II. For information on the capital position of the Bank and Basel II, see Note 35 Capital Adequacy.

(ii) Funding and Liquidity

APRA exercises liquidity control by requiring each bank to develop a liquidity management strategy that is appropriate for itself. Each policy is formally approved by APRA. A key element of the Group’s liquidity policy is the holding of a stock of high quality liquid assets to meet day to day fluctuations in liquidity. The liquid assets held are assets that are available for repurchase by the RBA (over and above those required to meet the Real Time Gross Settlement (“RTGS”) obligations, AUD Certificates of Deposits/Bills of other banks and AUD overnight interbank loans) and other highly liquid market securities. More detailed comments on the Group’s liquidity and funding risks are provided in Note 43.

(iii) Large Credit Exposures

APRA requires banks to ensure that, other than in exceptional circumstances, individual credit exposures to non-bank, non-government clients do not exceed 25% of the capital base. Exposure to authorised deposit taking institutions (“ADIs”) is not to exceed 50% of the capital base. Prior consultation must be held with APRA if a bank intends to exceed set thresholds. For information on the Bank’s large exposures refer to Note 16 to the Financial Statements.

(iv) Ownership and Control

In pursuit of transparency and risk minimisation, the Financial Sector (Shareholding) Act 1998 embodies the principle that regulated financial institutions should maintain widespread ownership. The Act applies a common 15% shareholding limit for authorised deposit taking institutions, insurance companies and their holding companies. The Treasurer has the power to approve acquisitions exceeding 15% where this is in the national interest, taking into account advice from the ACCC in relation to competition considerations and APRA on prudential matters. The Treasurer may also delegate approval powers to APRA where one financial institution seeks to acquire another.

The Government’s present policy is that mergers among the four major banks will not be permitted until the Government is satisfied that competition from new and established participants in the financial industry, particularly in respect of small business lending, has increased sufficiently.

Proposals for foreign acquisition of Australian banks are subject to approval by the Treasurer under the Foreign Acquisitions and Takeovers Act 1975.

(v) Banks’ Association With Non-Banks

There are formal guidelines (including maximum exposure limits) that control investments and dealings with subsidiaries and associates. A bank’s equity associations with other institutions should normally be in the field of finance. APRA has expressed an unwillingness to allow subsidiaries of a bank to exceed a size which would endanger the stability of the parent. No bank can enter into any agreements or arrangements for the sale or disposal of its business, or effect a reconstruction or carry on business in partnership with another bank, without the consent of the Commonwealth Treasurer.

(vi) Fit & Proper and Governance

From 1 October 2006, all ADIs will be subject to APRA’s new “Fit and Proper” and “Governance” prudential standards. All ADIs will be required to have and implement a Board approved Fit and Proper policy covering all of their responsible persons (directors and designated members of senior management etc). ADIs will also have to comply with APRA’s Governance prudential standard which sets out requirements for board size and composition, independence of directors and other APRA governance matters.

(vii) Supervision of Non-Bank Group Entities

The Australian life insurance company subsidiaries, general insurance company subsidiaries and the superannuation trustees of the group also come within the supervisory purview of APRA.

APRA’s prudential supervision of both life insurance and general insurance companies is exercised through the setting of minimum standards for solvency and financial strength to ensure obligations to policyholders can be met. Trustees operating APRA regulated superannuation entities are now required to hold a Registrable Superannuation Entity (“RSE”) licence from APRA.

General insurance companies are subject to prudential standards including capital adequacy, liability valuation, risk management and reinsurance arrangements. Compliance with APRA regulation for general insurance companies is monitored through regular returns, lodgement of an audited annual return, and auditor certification covering prudential matters.

34 Commonwealth Bank of Australia Annual Report 2006

Description of Business Environment

The financial condition of life insurance companies is monitored through regular financial reporting, lodgement of audited accounts, the preparation of a financial conditions report (prepared by the company’s approved actuary) and supervisory inspections.

From 1 October 2006 life and general insurance companies will be subject to similar Fit & Proper and Governance requirements as those to apply to ADIs.

Critical Accounting Policies and Estimates

The Notes to the Financial Statements contain a summary of the Group’s significant accounting policies. Certain of these policies are considered to be more important in the determination of the Group’s financial position, since they require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. These decisions are reviewed by a Committee of the Board.

These policies include judgements as to levels of provisions for impairment for loan balances, and actuarial assumptions in determining life insurance policy liabilities. An explanation of these policies and the related judgements and estimates involved is set out below.

Provisions for Impairment

Provisions for impairment are raised where there is objective evidence of impairment and at an amount adequate to cover assessed credit related losses.

Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, financial instruments and investments and assets acquired through security enforcement.

Individually Assessed Provisions

Individually Assessed provisions are raised where there is objective evidence of impairment and full recovery of principal is considered doubtful.

Individually Assessed provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. The provisions are established based primarily on estimates of the realisable (fair) value of collateral taken and are measured as the difference between the asset’s carrying amount and the present value of the expected future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. Short term balances are not discounted.

Individually Assessed provisions (in bulk) are also made against retail segments to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated segment for exposures aggregating to less than $250,000 and 90 days or more past due, and against credit risks identified in specific segments in the credit risk rated portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default.

Individually Assessed provisions are provided for from the collective provision.

Collective Provision

All other loans and advances that do not have an individually assessed provision are assessed collectively for impairment.

The collective provision is maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the balance sheet date.

The evaluation process is subject to a series of estimates and judgements.

In the credit risk rated segment, the risk rating system, including the frequency of default and loss given default rates, loss history, and the size, structure and diversity of individual credits are considered. Current developments in portfolios (industry, geographic and term) are reviewed.

In the retail segment, the history of defaults and losses, and the size, structure and diversity of portfolios are considered.

In addition, management considers overall indicators of portfolio performance, quality and economic conditions. Changes in these estimates could have a direct impact on the level of provision determined.

The amount required to bring the collective provision to the level assessed is taken to profit and loss as set out in Note 15.

Life Insurance Policyholder Liabilities

Life insurance policyholder liabilities on life insurance contracts are accounted for under AASB 1038: Life Insurance Business. A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions.

All policyholder liabilities are recognised in the Statement of Financial Position and are measured at net present values or, if not materially different, on an accumulation basis after allowing for acquisition expenses. They are calculated in accordance with the principles of Margin on Services (“MoS”) profit reporting as set out in Actuarial Standard AS 1.04: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board.

The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are:

•

Business assumptions including:

		- Amount, timing and duration of claims/policy payments

		- Policy lapse rates

		- Long term maintenance expense levels

•

Long term economic assumptions for discount and interest rates, inflation rates and market earnings rates; and

•

Selection of methodology, either projection or accumulation method. The selection of the method is generally governed by the product type.

The determination of assumptions relies on making judgements on variances from long term assumptions. Where experience differs from long term assumptions:

•

Recent results may be a statistical aberration; or

•

There may be a commencement of a new paradigm requiring a change in long term assumptions.

The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement.

Additional information on the accounting policy is set out in Note 1(hh) Life Insurance Business, and Note 38 Life Insurance Business details the key actuarial assumptions.

International Financial Reporting Standards

On 1 July 2005 the Bank commenced application of the Australian equivalent of International Financial Reporting Standards (“AIFRS”). This is in line with the conversion deadline set out by the Financial Reporting Council of Australia.

Descriptions of the key AIFRS issues are set out in Note 1 (nn) of the Financial Statements.

Commonwealth Bank of Australia Annual Report 2006 35

Corporate Governance

Board of Directors

Charter

The role and responsibilities of the Board of Directors are set out in the document entitled “Board Charter and Description of Board and Management Roles”. The responsibilities include:

•		The corporate governance of the Bank, including the establishment of Committees;

•		Oversight of the business and affairs of the Bank by:

	–		Establishing, with management, and approving the strategies and financial objectives;

	–		Approving major corporate and capital initiatives and approving capital expenditure in excess of limits delegated to management;

	–		Establishing appropriate systems of risk management; and

	–		Monitoring the performance of management;

•		Approving documents (including reports and statements to shareholders) required by the Bank’s Constitution and relevant regulation;

•		Appointment of the Chief Executive Officer; and

•		Approval of the Bank’s major HR policies and overseeing the development strategies for senior and high performing executives.

The Board carries out the legal duties of its role in accordance with the Bank’s values of trust, honesty and integrity and having regard to the interests of the Bank’s customers, staff, shareholders and the broader community in which the Bank operates.

The Board delegates to the Chief Executive Officer the authority to achieve the Bank objective of creating long term shareholder value for its shareholders through providing financial services to its customers and providing sustained best-in-industry performance in safety, community reputation and environmental impact.

Composition

There are currently 11 Directors of the Bank and details of their experience, qualifications, special responsibilities and attendance at meetings are set out in the Directors’ Report.

Membership of the Board and Committees is set out below:

Board Membership

Committee Membership

Board Performance

People

Director ⁽¹⁾

& Renewal

& Remuneration

Audit

Risk

J M Schubert

Non-Executive,
independent

Chairman

Member

R J Norris

Executive

Chief Executive Officer

Member

R J Clairs

Non-Executive,
independent

Chairman

Member

A B Daniels ⁽²⁾

Non-Executive,
independent

Member

C R Galbraith

Non-Executive,
independent

Member

S C H Kay

Non-Executive,
independent

Member

W G Kent

Non-Executive,
independent

Member

F D Ryan

Non-Executive,
independent

Chairman

Member

F J Swan

Non-Executive,
independent

Member

Chairman

B K Ward ⁽²⁾

Non-Executive,
independent

Member

D Turner ⁽³⁾

Non-Executive,
independent

Member

J Hemstritch ⁽⁴⁾

Non-Executive,
independent


(1)		Mr. D V Murray retired as Chief Executive Officer and Director on 22 September 2005

(2)		Mr. A B Daniels and Ms. B K Ward will retire at the Bank’s Annual General Meeting on 3 November 2006.

(3)		Mr. D Turner was appointed to the Board with effect from 1 August 2006. In accordance with the Bank’s Constitution and the ASX Listing Rules, he will stand for election at the Annual General Meeting to be held on 3 November 2006.

(4)		Mrs. J Hemstritch was appointed to the Board with effect from 9 October 2006. In accordance with the Bank’s constitution and the ASX Listing Rules, she will stand for election at the Annual General Meeting to be held on 3 November 2006.

The Constitution of the Bank specifies that:

•

The Chief Executive Officer and any other executive director shall not be eligible to stand for election as Chairman of the Bank;

•		The number of Directors shall not be less than 9 nor more than 13 (or such lower number as the Board may from time to time determine). The Board has determined that the number of directors shall be 12; and

•		At each Annual General Meeting one-third of Directors (other than the Chief Executive Officer) shall retire from office and may stand for re-election.

The Board has established a policy that, with a phasing in provision for existing Directors, the term of directors’ appointments would be limited to 12 years (except where succession planning for Chairman and appointment of Chairman requires an extended term. On appointment, the Chairman will be expected to be available for that position for five years).

36 Commonwealth Bank of Australia Annual Report 2006

Corporate Governance

Independence

The Board regularly assesses the independence of each Director. For this purpose an independent Director is a non-executive Director whom the Board considers to be independent of management and free of any business or other relationship that could materially interfere with the exercise of unfettered and independent judgment.

In addition to being required to conduct themselves in accordance with the ethical policies of the Bank, Directors are required to be meticulous in their disclosure of any material contract or relationship in accordance with the Corporations Act and this disclosure extends to the interests of family companies and spouses. Directors are required to strictly adhere to the constraints on their participation and voting in relation to matters in which they may have an interest in accordance with the Corporations Act and the Bank’s policies.

Each Director may from time to time have personal dealings with the Bank. Each Director is involved with other companies or professional firms which may from time to time have dealings with the Bank. Details of offices held by Directors with other organisations are set out in the Directors’ Report and on the Bank’s website. Full details of related party dealings are set out in notes to the Company’s accounts as required by law.

All the current non-executive Directors of the Bank have been assessed as independent Directors. In reaching that determination, the Board has taken into account (in addition to the matters set out above):

•

The specific disclosures made by each Director as referred to above;

•

Where applicable, the related party dealings referrable to each Director, noting that those dealings are not material under accounting standards;

•

That no Director is, or has been associated directly with, a substantial shareholder of the Bank;

•

That no non-executive Director has ever been employed by the Bank or any of its subsidiaries;

•

That no Director is, or has been associated with a supplier, professional adviser, consultant to or customer of the Bank which is material under accounting standards; and

•

That no non-executive Director personally carries on any role for the Bank other than as a Director of the Bank.

The Bank does not consider that term of service on the Board is a factor affecting a Director’s ability to act in the best interests of the Bank. Independence is judged against the ability, integrity and willingness of the Director to act. The Board has established a policy limiting Directors’ tenures to ensure that skill sets remain appropriate in a dynamic industry.

Education

Directors participate in an induction program upon appointment and in a refresher program on a regular basis. The Board has established a program of continuing education to ensure that it is kept up to date with developments in the industry both locally and globally. This includes sessions with local and overseas experts in the particular fields relevant to the Bank’s operations.

Review

The Board has in place a process for annually reviewing its performance, policies and practices. These reviews seek to identify where improvements can be made and also assess the quality and effectiveness of information made available to Directors. Every two years, this process is facilitated by an external consultant, with an internal review conducted in the intervening years. The review process includes an assessment of the performance of the Board Committees and each Director.

After consideration of the results of the performance assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next Annual General Meeting.

The non-executive Directors meet at least annually, without management, in a forum intended to allow for an open discussion on Board and management performance. This is in addition to the consideration of the Chief Executive Officer’s performance and remuneration which is conducted by the Board in the absence of the Chief Executive Officer.

The Chairman meets at least annually with members of the senior executive team to discuss with them the Board’s performance and level of involvement from their perspective.

Selection of Directors

The Board Performance and Renewal Committee has developed a set of criteria for director appointments which have been adopted by the Board. The criteria are aimed at creating a Board capable of challenging, stretching and motivating management to achieve sustained outstanding company performance in all respects. These criteria, which are reviewed annually, aim to ensure that any new appointee is able to contribute to the Board constituting a competitive advantage for the Bank and:

•

Be capable of operating as part of an exceptional team;

•

Contribute outstanding performance and exhibit impeccable values;

•

Be capable of inputting strongly to risk management, strategy and policy;

•

Provide skills and experience required currently and for the future strategy of the Bank;

•

Be excellently prepared and receive all necessary education,

•

Provide important and significant insights, input and questions to management from their experience and skill; and

•

Vigorously debate and challenge management.

The Committee regularly reviews the skill base and experience of existing Directors to enable identification of attributes required in new Directors.

An executive search firm is engaged to identify potential candidates based on the identified criteria.

Candidates for appointment as Directors are considered by the Board Performance and Renewal Committee, recommended for decision by the Board and, if appointed, stand for election, in accordance with the Constitution, at the next general meeting of shareholders.

Commonwealth Bank of Australia Annual Report 2006 37

Corporate Governance

The Bank has adopted a policy whereby, on appointment, a letter is provided from the Chairman to the new Director setting out the terms of appointment and relevant Board policies including time commitment, code of ethics and continuing education. All current Directors have been provided with a letter confirming the terms of their appointment. A copy of the form of letter of appointment appears on the Bank’s website.

Policies

Board policies relevant to the composition and functions of Directors include:

•

The Board will consist of a majority of independent non-executive Directors and the membership of the Board Performance and Renewal, People & Remuneration and Audit Committees should consist solely of independent non-executive Directors. The Risk Committee should consist of a majority of independent non-executive Directors;

•

The Chairman will be an independent non-executive Director. The Audit Committee will be chaired by an independent non-executive Director other than the Board Chairman;

•

The Board will generally meet regularly with an agenda designed to provide adequate information about the affairs of the Bank, allow the Board to guide and monitor management and assist in involvement in discussions and decisions on strategy. Matters having strategic implications are given priority on the agenda for regular Board meetings. In addition, ongoing strategy is the major focus of at least two of the Board meetings annually;

•

The Board has an agreed policy on the basis on which Directors are entitled to obtain access to company documents and information and to meet with management; and

•

The Bank has in place a procedure whereby, after appropriate consultation, Directors are entitled to seek independent professional advice, at the expense of the Bank, to assist them to carry out their duties as Directors. The policy of the Bank provides that any such advice is generally made available to all Directors.

Ethical Standards

Conflicts of Interest

In accordance with the Constitution and the Corporations Act 2001, Directors are required to disclose to the Board any material contract in which they may have an interest. In compliance with section 195 of the Corporations Act 2001 any Director with a material personal interest in a matter being considered by the Board will not be present when the matter is being considered and will not vote on the matter. In addition, any director who has a conflict of interest in connection with any matter being considered by the Board or a Committee does not receive a copy of any paper dealing with the matter.

Share Trading

The restrictions imposed by law on dealings by Directors in the securities of the Bank have been supplemented by the Board of Directors adopting guidelines which further limit any such dealings by Directors, their spouses, any dependent child, family company or family trust.

The guidelines provide, that in addition to the requirement that Directors not deal in the securities of the Bank or any related company when they have or may be perceived as having relevant unpublished price-sensitive information, Directors are only permitted to deal within certain periods. These periods include between three and 30 days after the announcement of half yearly and final results and from the date of the annual general meeting until 14 days after the Annual General Meeting. Further, the guidelines require that Directors not deal on the basis of considerations of a short term nature or to the extent of trading in those securities. Similar restrictions apply to executives of the Bank.

In addition, Bank policy prohibits:

•

For Directors and executives who report to the Chief Executive Officer, any hedging of publicly disclosed shareholding positions; and

•

For executives, any trading (including hedging) in positions prior to vesting of shares or options.

Remuneration Arrangements

Details of the governance arrangements and policies relevant to remuneration are set out in the Directors’ Report — Remuneration Report.

Audit Arrangements

Audit Committee

The Charter of the Audit Committee incorporates a number of policies and practices to ensure that the Committee is independent and effective. Among these are:

•

The Audit Committee consists entirely of independent non-executive Directors, all of whom have familiarity with financial management and at least one has expertise in financial accounting and reporting. The Chairman of the Bank is not permitted to be the Chairman of the Audit Committee;

•

At least twice a year the Audit Committee meets the external auditors and the chief internal audit executive and also separately with the external Auditors independently of management;

•

The Audit Committee is responsible for nominating the external auditor to the Board for appointment by shareholders. The Audit Committee approves the terms of the contract with the external auditor, agrees the annual audit plan and approves payments to the Auditor;

•

The Audit Committee discusses and receives assurances from the external auditors on the quality of the Bank’s systems, its accounting processes and its financial results. It also receives a report from the Auditors on any significant matters raised by the Auditors with management;

•

All material accounting matters requiring exercise of judgement by management are specifically reviewed by the Audit Committee and reported on by the Committee to the Board; and

•

Certified assurances are received by the Audit Committee and the Board that the Auditors meet the independence requirements as recommended by the Corporations Act and the Securities and Exchange Commission (“SEC”) of the USA.

38 Commonwealth Bank of Australia Annual Report 2006

Corporate Governance

In carrying out these functions, the Committee:

•

Reviews the financial statements and reports of the Group;

•

Reviews accounting policies to ensure compliance with current laws, relevant regulations and accounting standards;

•

Conducts any investigations relating to financial matters, records, accounts and reports which it considers appropriate; and

•

Reviews all material matters requiring exercise of judgment by management and reports those matters to the Board.

The Committee regularly considers, in the absence of management and the external auditor, the quality of the information received by the Committee and, in considering the financial statements, discusses with management and the external auditor:

•

The financial statements and their conformity with accounting standards, other mandatory reporting and statutory requirements; and

•

The quality of the accounting policies applied and any other significant judgments made.

The external audit partner attends meetings of the Audit Committee by invitation and attends the Board meetings when the annual and half yearly accounts are approved and signed.

The Committee, at least annually, meets separately with each of the chief internal audit executive and the external auditor, without management, as part of the process of ensuring independence of the audit functions.

The Board has determined that Fergus Ryan is an “audit committee financial expert” within the meaning of that term as described in the SEC rules. Although the Board has determined that this individual has the requisite attributes defined under the rules of the SEC, his responsibilities are the same as those of the other Audit Committee members. He is not an auditor, does not perform “field work” and is not a full time employee. The SEC has determined that an audit committee member who is designated as an audit committee financial expert will not be deemed to be an “expert” for any purpose as a result of being identified as an audit committee financial expert. The Board has also determined that Fergus Ryan is independent within the meaning of the definition of audit committee member independence used by the New York Stock Exchange.

The Audit Committee is responsible for oversight of management in the preparation of the Bank’s financial statements and financial disclosures. The Audit Committee relies on the information provided by management and the external auditor. The Audit Committee does not have the duty to plan or conduct audits to determine whether the Bank’s financial statements and disclosures are complete and accurate.

Non-Audit Services

The Board has in place an Independent Auditor Services Policy which only permits the Independent Auditor to carry out audit services which are required by statute and related services which are an extension of, or an adjunct to, those audit services. All other non-audit services are prohibited unless the Audit Committee determines otherwise in any particular case. The objective of this policy is to avoid prejudicing the independence of the Auditors.

The policy also ensures that the Auditors do not:

•

Assume the role of management or act as an employee;

•

Become an advocate for the Bank;

•

Audit their own work;

•

Create a mutual or conflicting interest between the Auditor and the Bank;

•

Require an indemnification from the Bank to the Auditor;

•

Seek contingency fees; nor

•

Have a direct financial or business interest or a material indirect financial or business interest in the Bank or any of its affiliates, or an employment relationship with the Bank or any of its affiliates.

Under the policy, the Auditor shall not provide the following services:

•

Bookkeeping or services relating to accounting records or financial statements of the Bank;

•

Financial information systems design and implementation;

•

Appraisal or valuation services and fairness opinions;

•

Actuarial services;

•

Internal audit outsourcing services;

•

Management functions, including acting as an employee;

•

Human resources;

•

Broker-dealer, investment adviser or investment banking services;

•

Legal services; or

•

Expert services unrelated to the audit.

In general terms, the permitted services are:

•

Audit services to the Bank or an affiliate;

•

Related services connected with the lodgement of statements or documents with the ASX, ASIC, APRA, SEC or other regulatory or supervisory bodies;

•

Services reasonably related to the performance of the audit services;

•

Agreed upon procedures or comfort letters provided by the Auditor to third parties in connection with the Bank’s financing or related activities; and

•

Other services pre-approved by the Audit Committee.

Auditor

Ernst & Young was appointed as the Auditor of the Bank at the 1996 Annual General Meeting and continues in that office.

The audit partner from Ernst & Young attends the Annual General Meetings of the Bank and is available to respond to shareholder audit related questions.

The Bank currently requires that the partner managing the audit for the external auditor be changed within a period of five years.

The Chief Executive Officer is authorised to appoint and remove the chief internal audit executive only after consultation with the Audit Committee.

The SEC has requested that the Bank produce documents and information relating to all services provided by the Bank’s external auditors, Ernst & Young, since July 1, 2000, that may impact on the independence of the external auditors under U.S. rules. The Bank understands that the SEC has made similar requests to certain other Australian companies registered with the SEC and their accounting firms.

Commonwealth Bank of Australia Annual Report 2006 39

Corporate Governance

The Bank has produced the documents and information requested, which include information regarding a number of engagements in each fiscal year involving the “secondment” of Ernst & Young personnel to entities in the Commonwealth Bank Group, including the internal audit department, and non-management assistance in relation to portions of the financial statements.

In addition, Ernst & Young has reported to the Bank’s Audit Committee and to the SEC that, during the past three fiscal years, certain Ernst & Young professionals maintained deposit accounts or had other financial relationships with the Commonwealth Bank Group that are prohibited by the SEC’s auditor independence rules. Ernst & Young has advised that the deposit accounts and other financial relationships were generally small in size and that they have been terminated or rectified. In 2004, Ernst & Young also reported to the Bank’s Audit Committee regarding (i) certain small non-consolidated trusts managed by a subsidiary of the Bank in Fiji, where three Ernst & Young partners in Fiji owned a company that was appointed as trustee of the trusts prior to the Bank’s acquisition of the manager, and (ii) certain non-operating indirect subsidiaries of the Bank in the United Kingdom, where the Ernst & Young firm in Edinburgh was appointed as liquidator of those subsidiaries. Those activities may also be impermissible under the SEC rules.

If the SEC determines that the above matters or any other services provided by Ernst & Young to the Commonwealth Bank Group did not comply with applicable rules, the SEC may impose or negotiate a broad range of possible sanctions. Examples of sanctions imposed on audit firms or other companies for breaches of the SEC’s rules have included fines, the entry of cease-and-desist orders or injunctions, or a requirement to engage a different accounting firm to perform procedures and report on aspects of the relevant accounts or financial statements that may have been impacted by auditor independence concerns. Although the Bank cannot predict the nature of any future action by the SEC, based on information currently available to the Bank, the Bank does not believe the outcome of the SEC’s ongoing inquiry will have a material adverse financial effect on the Commonwealth Bank Group.

Risk Management

Risk Committee

The Risk Committee oversees credit, market, and operational risks assumed by the Bank in the course of carrying on its business.

The Committee considers the Group’s credit policies and ensures that management maintains a set of credit underwriting standards designed to achieve portfolio outcomes consistent with the Group’s risk/return expectations. In addition, the Committee reviews the Group’s credit portfolios and recommendations by management for provisioning for bad debts.

The Committee approves risk management policies and procedures for market, funding and liquidity risks incurred or likely to be incurred in the Group’s business. The Committee reviews progress in implementing management procedures and identifying new areas of exposure relating to market, funding and liquidity risk.

In addition, the Committee ratifies the Group’s operational risk policies for approval by the Board and reviews and informs the Board of the measurement and management of operational risk. Operational risk is a basic line management responsibility within the Group consistent with the policies established by the Committee. A range of insurance policies maintained by the Group mitigates some operational risks.

The Committee meets, at least annually, with the Chief Risk Officer, in the absence of other management to allow the Committee to form a view on the independence of the function.

Framework

The Bank has in place an integrated risk management framework to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis.

A full description of the functions of the framework and the nature of the risks is set out in the section of the Annual Report entitled Integrated Risk Management and in Notes 16 and 43 to the Financial Statements.

Board Performance and Renewal Committee

The Board Performance and Renewal Committee of the Board critically reviews, at least annually, the corporate governance procedures of the Bank and the composition and effectiveness of the Commonwealth Bank of Australia Board and the boards of the major wholly owned subsidiaries. The policy of the Board is that the Committee shall consist solely of independent non executive directors. The Chief Executive Officer attends the meeting by invitation.

In addition to its role in proposing candidates for director appointment for consideration by the Board, the Committee reviews fees payable to non-executive directors and reviews, and advises the Board in relation to Chief Executive Officer succession planning.

Continuous Disclosure

The Corporations Act 2001 and the ASX Listing Rules require that a company discloses to the market matters which could be expected to have a material effect on the price or value of the company’s securities. The Bank’s “Guidelines for Communication between the Bank and Shareholders” sets out the processes to ensure that shareholders and the market are provided with full and timely information about the Bank’s activities in compliance with continuous disclosure requirements. Management procedures are in place throughout the Commonwealth Bank Group to ensure that all material matters which may potentially require disclosure are promptly reported to the Chief Executive Officer, through established reporting lines, or as a part of the deliberations of the Bank’s Executive Committee. Matters reported are assessed and, where required by the Listing Rules, advised to the market. A Disclosure Committee has been formed to provide advice on the requirements for disclosure of information to the market. The Company Secretary is responsible for communications with the ASX and for ensuring that such information is not released to any person until the ASX has confirmed its release to the market.

40 Commonwealth Bank of Australia Annual Report 2006

Corporate Governance

Ethical Policies

Values Statement

The Bank demands the highest standards of honesty and loyalty from all its people and strong governance within the Bank.

Our values statement — “trust, honesty and integrity” — reflects this standard.

Statement of Professional Practice

The Bank has adopted a code of ethics, known as a Statement of Professional Practice, which sets standards of behaviour required of all employees and directors including:

•		To act properly and efficiently in pursuing the objectives of the Bank;

•		To avoid situations which may give rise to a conflict of interest;

•		To know and adhere to the Bank’s Equal Employment Opportunity policy and programs;

•		To maintain confidentiality in the affairs of the Bank and its customers; and

•		To be absolutely honest in all professional activities.

These standards are regularly communicated to staff. In addition, the Bank has established insider trading guidelines for staff to ensure that unpublished price sensitive information about the Bank or any other company is not used in an illegal manner.

Our People

The Bank is committed to providing fair, safe, challenging and rewarding work, recognising the importance of attracting and retaining high quality staff and consequently, being in a position to excel in customer service.

There are various policies and systems in place to enable achievement of these goals, including:

•		Fair Treatment Review;

•		Equal Employment Opportunity;

•		Occupational Health and Safety;

•		Recruitment and selection;

•		Performance management;

•		Talent management and succession planning;

•		Remuneration and recognition;

•		Employee share plans; and

•		Supporting Professional Development.

Behaviour Issues

The Bank is strongly committed to maintaining an ethical workplace, complying with legal and ethical responsibilities. Policy requires staff to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows staff to remain anonymous, if they wish, for reporting of these matters.

The policy has been extended to include reporting of auditing and accounting issues, which will be reported to the Chief Compliance Officer by the Chief Security Officer, who administers the reporting and investigation system. The Chief Security Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken.

Governance Philosophy

The Board has consistently placed great importance on the governance of the Bank, which it believes is vital to the well-being of the corporation. The Bank has adopted a comprehensive framework of Corporate Governance Guidelines which are designed to properly balance performance and conformance and thereby allow the Bank to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business. The Guidelines and the practices of the Bank comply with all the current best practice recommendations set by the ASX Corporate Governance Council.

US Sarbanes-Oxley Act

On 30 July 2002, a broad US financial reporting and corporate governance reform law, called the Sarbanes-Oxley Act of 2002 (“SOX Act”), was enacted. A number of provisions of this Act apply to the Group because it has certain securities registered with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”).

Under the Exchange Act, the Bank files periodic reports with the SEC, including an Annual Report on Form 20-F. Pursuant to the requirements of the SOX Act, the SEC has adopted rules requiring that the Group’s Chief Executive Officer and Chief Financial Officer personally provide certain certifications with respect to the disclosure contained in the Annual Report on Form 20-F.

Certifications and disclosures

In respect of this Annual Report and as at the date of this annual report, the Group’s Chief Executive Officer and Chief Financial Officer make the following Sarbanes-Oxley related certifications:

•		That they have reviewed the report;

•		That based on their knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by the report;

•		That based on their knowledge, the Financial Statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Group as of, and for, the periods presented in the report;

•		That they are responsible for establishing and maintaining disclosure controls and procedures (as defined in the US Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Group and have:

	–		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to the Group, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the report is being prepared;

	–		Evaluated the effectiveness of those disclosure controls and procedures, with the assistance of other members of the Group’s management, and presented in this report their conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Commonwealth Bank of Australia Annual Report 2006 41

Corporate Governance

•		Disclosed in this report any change in the Group’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting; and

•		That they have disclosed, based on their most recent evaluation of internal control over financial reporting, to the Group’s auditors and the Audit Committee of the Group’s Board of Directors:

	–		All significant deficiencies (if any) in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Group’s ability to record, process, summarise and report financial data; and

	–		Any fraud, whether or not material, that involves management or other employees who have a significant role in the Group’s internal control over financial reporting.

Evaluation of disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Group’s disclosure controls and procedures as at 30 June 2006. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that the Group’s disclosure controls and procedures are effective.

Changes in internal control over financial reporting

The following change in internal controls over financial reporting occurred during the year ended 30 June 2006 that has materially affected our internal controls over financial reporting:

•

From 1 July 2005 a number of new processes and controls were implemented and existing processes and controls enhanced to address the transition to International Financial Reporting Standards, refer to Note 1 (nn) to the Financial Statements.

No other changes in our internal controls over financial reporting occurred during the year ended 30 June 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Compliance with future requirements of the SOX Act (Section 404)

New rules of the SOX Act in respect of internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) come into effect for the Group for the year ended 30 June 2007 (being the first financial year for the Group ending after 15 July 2006). These rules require that the Group’s Chief Executive Officer and Chief Financial Officer personally provide certain certifications with respect to internal controls over financial reporting in the Group’s 30 June 2007 annual report on Form 20-F. The certifications required by the Group’s Chief Executive Officer and Chief Financial Officer are as follows:

•

That they designed internal control over financial reporting, or caused such internal control over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Code of Ethics

The Group is required to disclose in its annual report on Form 20-F that it has adopted a written code of ethics that applies to all employees of the Group, including its Chief Executive Officer, Chief Financial Officer and principal accounting officers or controllers or persons performing similar functions. The Group has adopted such a code.

Company Secretaries

The details of the Bank’s Company Secretaries, including their experience and qualifications are set out below.

John Hatton has been Company Secretary of the Commonwealth Bank of Australia since 1994.

From 1985-1994, he was a solicitor with the Bank’s Legal Department.

He has a Bachelor of Laws degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of Chartered Secretaries Australia and a Member of the Australian Institute of Company Directors.

Carla Collingwood was appointed a Company Secretary to the Bank in July 2005

From 1994 until 2005, she was a solicitor with the Bank’s Legal Services Department, before being appointed to the position of General Manager, Secretariat. She holds a Bachelor of Laws degree (Hons.) and a Graduate Diploma in Company Secretary Practice from Chartered Secretaries Australia.

42 Commonwealth Bank of Australia Annual Report 2006

Director’s Report

The Directors of the Commonwealth Bank of Australia submit their report, together with the financial report of the Commonwealth Bank of Australia (the ‘Bank’) and of the Group, being the Bank and its controlled entities, for the year ended 30 June 2006.

The names of the Directors holding office during the financial year and until the date of this report are set out below together with details of Directors’ experience, qualifications, special responsibilities and organisations in which each of the Directors has declared an interest.

John M Schubert, Chairman

Dr Schubert has been a member of the Board since 1991 and Chairman since November 2004. He is Chairman of the Board Performance & Renewal Committee and a member of the Risk and People & Remuneration Committees. He holds a Bachelor’s Degree and PhD in Chemical Engineering and has executive experience in the petroleum, mining and building materials industries. Dr Schubert is the former Managing Director and Chief Executive Officer of Pioneer International Limited and the former Chairman and Managing Director of Esso Australia Ltd.

Chairman: G2 Therapies Limited.

Director: BHP Billiton Limited, BHP Billiton Plc, and Qantas Airways Limited.

Other Interests: Academy of Technological Science and Engineering (Fellow), Institute of Engineers (Fellow), and AGSM Advisory Board (Member).

Dr Schubert is a resident of New South Wales. Age 63.

Ralph J Norris, DCNZM, Managing Director and Chief Executive Officer

Mr Norris was appointed as Managing Director and Chief Executive Officer with effect from 22 September 2005. Mr Norris has been Chief Executive Officer and Managing Director of Air New Zealand since February 2002 and had been a Director of that company since August 1998. He retired from that Board in August 2005 to take up his position with the Bank. He is a member of the Risk Committee.

Prior to his appointment at Air New Zealand, Mr Norris had a 30 year career in banking. He was Chief Executive Officer of ASB Bank Limited from March 1991 until September 2001 and Head of International Financial Services from August 1999 until 2001.

In August 2005, Mr Norris retired from the Board of Fletcher Building Limited where he had been a Director since 2001.

Other Interests: New Zealand Institute of Management (Fellow) and New Zealand Computer Society (Fellow).

Mr Norris is a resident of New South Wales. Age 57.

Reg J Clairs, AO

Mr Clairs has been a member of the Board since March 1999 and is Chairman of the People & Remuneration Committee and a member of the Risk Committee. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years experience in retailing, branding and customer service.

Director: David Jones Limited and The Cellnet Group.

Other Interests: Australian Institute of Company Directors (Member).

Mr Clairs is a resident of Queensland. Age 68.

A B (Tony) Daniels, OAM

Mr Daniels has been a member of the Board since March 2000 and is a member of the People & Remuneration and Risk Committees. He has extensive experience in manufacturing and distribution, being Managing Director of Tubemakers of Australia for eight years to December 1995, during a long career with that company. In addition to serving as a director of various public companies, he has also worked with government in superannuation, competition policy and export facilitation. Mr. Daniels will retire from the Board at the Annual General Meeting on 3 November 2006.

Director: O’Connell St Associates.

Other Interests: Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow).

Mr Daniels is a resident of New South Wales. Age 71.

Colin R Galbraith, AM

Mr Galbraith has been a member of the Board since June 2000 and is a member of the Board Performance & Renewal Committee, and the Audit and Risk Committees. He is a special advisor for Gresham Partners Limited.

Chairman: BHP Billiton Community Trust.

Director: GasNet Australia (Group) and OneSteel Limited.

Other Interests: CARE Australia (Director) and Royal Melbourne Hospital Neuroscience Foundation (Trustee). Allens Arthur Robinson (Special Advisor).

Mr Galbraith is a resident of Victoria. Age 58.

S Carolyn H Kay

Ms Kay has been a member of the Board since March 2003 and is also a member of the People & Remuneration and Risk Committees. She holds Bachelor Degrees in Law and Arts and a Graduate Diploma in Management. She has extensive experience in international finance. She was a senior executive at Morgan Stanley in London and Melbourne for 10 years and prior to that she worked in international banking and finance both as a lawyer and banker in London, New York and Melbourne.

Director: Symbion Health Limited, Brambles Industries Ltd, Brambles Industries Plc.

Other Interests: Australian Institute of Company Directors (Fellow). Allens Arthur Robinson (External Member of the Board), Starlight Foundation (Director).

Ms Kay is resident in New South Wales. Age 44.

Warwick G Kent, AO

Mr Kent has been a member of the Board since June 2000 and is a member of the Audit and Risk Committees. He was previously a Director of Colonial Limited, appointed 1998. He was Managing Director and Chief Executive Officer of BankWest until his retirement in 1997. Prior to joining BankWest, Mr Kent had a long and distinguished career with Westpac Banking Corporation.

Chairman: Coventry Group Limited and West Australian Newspapers Holdings Limited.

Director: Hoyts Corporation Pty Ltd.

Other Interests: Walter and Eliza Hall Trust (Trustee), Australian Institute of Company Directors (Fellow), Australian Society of CPAs (Fellow), Finsia (Senior Fellow) and the Chartered Institute of Company Secretaries (Fellow).

Mr Kent is a resident of Western Australia. Age 70.

Commonwealth Bank of Australia Annual Report 2006 43

Director’s Report

Fergus D Ryan

Mr Ryan has been a member of the Board since March 2000 and is Chairman of the Audit Committee and a member of the Risk Committee. He has extensive experience in accounting, audit, finance and risk management. He was a senior partner of Arthur Andersen until his retirement in August 1999 after thirty three years with that firm including five years as Managing Partner Australasia. Until November 2002, he was Strategic Investment Co-ordinator and Major Projects Facilitator for the Commonwealth Government.

Member: Prime Minister’s Community Business Partnership and Chairman of the Partnership Sub Committee on Corporate Social Responsibility.

Director: Australian Foundation Investment Company Limited, Clayton Utz, National Australia Day Council and Deputy Chairman for National Library of Australia.

Other Interests: Committee for Melbourne (Patron), Pacific Institute (Counsellor) and Special Committee for Mature Age Workers (Chairman).

Mr Ryan is a resident of Victoria. Age 63.

Frank J Swan

Mr Swan has been a member of the Board since July 1997 and is Chairman of the Risk Committee and a member of the Board Performance and Renewal Committee. He holds a Bachelor of Science degree and has twenty three years senior management experience in the food and beverage industries.

Chairman: Foster’s Group Limited and Centacare Catholic Family Services.

Other Interests: Institute of Directors (Fellow), Australian Institute of Company Directors (Fellow) and Australian Institute of Management (Fellow).

Mr Swan is a resident of Victoria. Age 65.

Barbara K Ward

Ms Ward has been a member of the Board since 1994 and is a member of the Audit and Risk Committees. She holds a Bachelor of Economics and Master of Political Economy and has experience in policy development and public administration as a senior ministerial adviser and experience in the transport and aviation industries, most recently as Chief Executive of Ansett Worldwide Aviation Services. Ms Ward will retire from the board at the Annual General Meeting on 3 November 2006.

Chairperson: Country Energy.

Director: Lion Nathan Limited, Allco Finance Group Limited, Multiplex Limited and Multiplex Funds Management Limited.

Other Interests: Sydney Opera House Trust (Trustee), Australia Day Council of New South Wales (Member) and Australian Institute of Company Directors (Member).

Ms Ward is a resident of New South Wales. Age 52.

David V Murray, Retired 22 September 2005

Mr Murray had been a member of the Board and Chief Executive Officer since June 1992 and was a member of the Risk Committee. He holds a Bachelor of Business, Master of Business Administration, an honorary PhD from Macquarie University and has thirty-eight years experience in banking.

Chairman: Future Fund Australia and Business/Industry/Higher Education Collaboration Council.

Director: Tara Anglican School for Girls Foundation Limited.

Other Interests: International Monetary Conference (Member), Asian Bankers’ Association (Member), Australian Bankers’ Association (Member), Asia Pacific Bankers’ Club (Member), Business Council of Australia (Member), and the Financial Sector Advisory Council (Member).

Mr Murray is a resident of New South Wales. Age 57.

David J Turner, appointed 1 August 2006

Mr Turner is CEO of Brambles, having occupied that role since October 2003. He joined Brambles as Chief Financial Officer in August 2001 having previously been Finance Director of GKN plc. Mr Turner has also served as a member of the Board of Whitbread plc from December 2000 until March 2006. He is a Fellow of The Institute of Chartered Accountants in England and Wales and has wide experience in finance, international business and governance.

Director: Brambles Enterprises Limited, Brambles Finance Limited, Brambles Holdings (UK) Limited, Brambles Industries Limited, Brambles Industries plc, Brambles Limited, CHEP International Inc.

Mr Turner is a resident of New South Wales. Age 61.

Jane Hemstritch, appointment effective 9 October 2006

Mrs Hemstritch is Managing Director — Asia Pacific, Accenture Limited, having been appointed to that role in November 2004. She is a member of Accenture’s global executive leadership team and oversees the management of Accenture’s business portfolio in Asia Pacific. Mrs Hemstritch joined the company in 1982, became a partner in 1988 and has held several leadership roles within that organisation prior to being appointed to her current position. She holds a Bachelor of Science Degree in Biochemistry and Physiology and has professional expertise in technology, communications, change management and accounting. She also has experience across the financial services, telecommunications, government, energy and manufacturing sectors and in business expansion in Asia.

Other Interests: Institute of Chartered Accountants in Australia (Fellow), Institute of Chartered Accountants in England and Wales (Fellow), Business Council of Australia (Member) and Chief Executive Women Inc. (Member)

Mrs Hemstritch is a resident of Victoria. Age 53.

44 Commonwealth Bank of Australia Annual Report 2006

Director’s Report

Other Directorships

The Directors held directorships on other listed companies within the last three years as follows:


			Date of Ceasing
Director	Company	Date Appointed	(if applicable)

J M Schubert	BHP Biliton Limited BHP Biliton Plc Qantas Limited Worley Group Limited	01/06/2000 29/06/2001 23/10/2000 28/11/2002	28/02/2005

R J Norris	Air New Zealand Limited Fletcher Building Limited	18/02/2002 17/04/2001	30/08/2005 09/08/2005

R J Clairs	David Jones Limited Cellnet Group Limited	22/02/1999 01/07/2004

A B Daniels	The Australian Gas Light Company Orica Limited	04/08/1999 01/03/1995	18/10/2005 17/12/2003

C R Galbraith	OneSteel Limited GasNet Australia Group	25/10/2000 17/12/2001

S C H Kay	Symbion Health Limited Brambles Industries Limited Brambles Industries Plc	28/09/2001 01/06/2006 01/06/2006

W G Kent	West Australian Newspaper Holdings Limited Coventry Group Limited Perpetual Trustees Australia Limited (Group)	02/02/1998 01/07/2001 01/05/1998	31/07/2005

F D Ryan	Australian Foundation Investment Company Limited	08/08/2001

F J Swan	Foster’s Group Limited National Foods Limited Southcorp Limited	25/10/1999 11/03/1997 26/05/2005	30/06/2005 29/07/2005

B K Ward	Lion Nathan Limited Multiplex Group Allco Finance Group Limited	20/02/2003 26/10/2003 29/04/2005

Directors’ Meetings

The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Commonwealth Bank of Australia during the financial year were:


	No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended

J M Schubert		9		9
R J Norris		7		7
R J Clairs		9		9
A B Daniels		9		9
C R Galbraith		9		9
S C H Kay		9		9
W G Kent		9		9
F D Ryan		9		9
F J Swan		9		9
B K Ward		9		9
D V Murray		2		2


(1)		The number of meetings held during the time the Director was a member of the Board.

Commonwealth Bank of Australia Annual Report 2006 45

Director’s Report

Committee Meetings


									People & Remuneration
	Risk Committee				Audit Committee				Committee
	No. of Meetings		No. of Meetings		No. of Meetings		No. of Meetings		No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended		Held ⁽¹⁾		Attended		Held ⁽¹⁾		Attended

J M Schubert		6		6		6		5		8		8
R J Norris		5		5
R J Clairs		6		6						8		8
A B Daniels		6		5						8		8
C R Galbraith		6		6		6		6
S C H Kay		6		6						8		8
W G Kent		6		6		6		6
F D Ryan		6		6		6		6
F J Swan		6		5
B K Ward		6		6		6		5
D V Murray		1		1


	Board Performance & Renewal
	Committee
	No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended

J M Schubert		4		4
C R Galbraith		4		4
F J Swan		4		4


(1)		The number of meetings held during the time the Director was a member of the relevant committee

Principal Activities

The Commonwealth Bank Group is one of Australia’s leading providers of integrated financial services including retail, business and institutional banking, superannuation, life insurance, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial year were:

(i) Banking

The Group provides a full range of retail banking services including housing loans, credit cards, personal loans, savings and cheque accounts, and demand and term deposits. The Group has leading domestic market shares in home loans, credit cards, retail deposits and discount stockbroking, and is one of Australia’s largest issuers of personal loans. The Group also offers a full range of commercial products including business loans, equipment and trade finance, and rural and agribusiness products. For our corporate and institutional clients, we offer a broad range of structured finance, equities and advisory solutions, financial markets and equity markets solutions, transactions banking, and merchant acquiring.

The Group has full service banking operations in New Zealand, Fiji and Indonesia.

The Group also has wholesale banking operations in London, New York, Hong Kong, Singapore, Indonesia, China, Tokyo and Malta.

(ii) Funds Management

The Group is Australia’s largest funds manager and largest retail funds manager in terms of its total value of Funds under Administration, and is Australia’s largest manager in retail superannuation, allocated pensions and annuities by funds under management. The Group’s funds management business is managed as part of the Wealth Management division. This business manages a wide range of wholesale and retail investment, superannuation and retirement funds. Investments are across all major asset classes including Australian and International shares, property, fixed interest and cash.

The Group also has funds management businesses in New Zealand, the UK and Asia.

(iii) Insurance

The Group provides term life insurance, investment contracts, annuities, master trusts, investment products and household general insurance.

The Group is Australia’s largest insurer based on life insurance assets held.

Life insurance operations are also conducted in New Zealand, where the Group has the leading market share, and throughout Asia and the Pacific.

There have been no significant changes in the nature of the principal activities of the Group during the financial year.

Consolidated Profit

Consolidated operating profit after tax and minority interests for the financial year ended 30 June 2006 was $3,928 million (2005: $3,400 million).

The net operating profit for the year ended 30 June 2006 after tax, and before superannuation plan expense, treasury share valuation adjustment, shareholder investment returns, and sale of the Hong Kong insurance business was $3,842 million. This is an increase of $422 million or 12% over the year ended 30 June 2005.

The principal contributing factors to the profit increase were strong growth in banking income following growth in average interest earning assets. Funds management and insurance income growth was also strongly supported by growth in Funds under Administration and solid growth in inforce premiums. Underlying Expense growth was 5%, driven by average salary increases, the commencement of spend on a number of strategic initiatives and, ongoing compliance expenditure partly offset by the realisation of expense savings from Which new Bank initiatives.

46 Commonwealth Bank of Australia Annual Report 2006

Director’s Report

During the period September 2003 to June 2006, the Bank implemented the Which new Bank program, a program of investment focused on improving customer service and people engagement and simplifying processes. The Bank made significant progress during this time, and financial targets for the program were met and, in some cases, exceeded.

In March 2006, the Bank announced an evolutionary strategic direction that builds directly on the progress achieved through Which new Bank and the Bank’s inherent strengths. The strategy focuses on four key priorities to lift business performance and growth: Customer Service; Business Banking; Technology and Operational Excellence; and Trust and Team Spirit.

Dividends

The Directors have declared a fully franked (at 30%) final dividend of 130 cents per share amounting to $1,668 million. The dividend will be payable on 5 October 2006 to shareholders on the register at 5pm on 18 August 2006. Dividends paid in the year to 30 June 2006 were as follows:

•

As declared in the 30 June 2005 Annual Report, a fully franked final dividend of 112 cents per share amounting to $1,435 million was paid on 23 September 2005. The payment comprised cash disbursements of $1,172 million with $262 million being reinvested by participants through the Dividend Reinvestment Plan; and

•

In respect of the year to 30 June 2006, a fully franked interim dividend of 94 cents per share amounting to $1,211 million was paid on 5 April 2006. The payment comprised cash disbursements of $992 million with $219 million being reinvested by participants through the Dividend Reinvestment Plan.

Review of Operations

An analysis of operations for the financial year is set out in the Highlights and Analysis sections for Banking, Funds Management and Insurance on pages 6 to 13, 20 to 21 and 24 to 25. A review of the financial condition of the Bank is set out in the Highlights on page 6.

Changes in State of Affairs

During the year, the Bank continued to make significant progress in implementing a number of strategic initiatives.

The initiatives are designed to ensure a better service outcome for the Bank’s customers.

Progress within the major initiatives included the following:

•

The implementation of CommServe, a training program designed to ensure our people are able to obtain maximum value from CommSee (the Bank’s state-of-the-art customer management system) in improving Sales and Service outcomes. Over 14,000 staff undertook CommServe training during 2006;

•

The refurbishment of a further 133 branches, taking to 384 the number of branches refurbished over the past 3 years into a design/layout more conducive to effective sales and service;

•

Improved access to Australia’s largest electronic banking and branch network through two new Streamline products with flat monthly fees, and the removal of transaction fees from NetBank;

•

The introduction of the Business Online Saver high yield investment account, the Commonwealth Portfolio Loan product and the Business Line of Credit, all of which have reached $1 billion in balances;

•

Continued platform enhancements and new product offerings including the development of a self managed super offering “YourChoice”, to capitalise on this rapidly growing sector of the market;

•

Strategic alliance formed between Avanteos and Goldman Sachs JB Were, which has contributed $5.0 billion of additional net funds flow;

•

Acquisition of the Gandel Group’s interests in the Colonial First State Property Retail Trust and Gandel Retail Management Trust, which provides funds management and property management services to a number of Colonial First State Retail Property trusts;

On 22 September 2005 the Managing Director and Chief Executive Officer Mr. David Murray retired from the Group, and the Board appointed Mr. Ralph Norris to take over the role. Mr. Norris was previously Managing Director and Chief Executive Officer of Air New Zealand Limited, and prior to that was Managing Director and Chief Executive Officer of ASB Bank Limited.

The Hong Kong insurance business was sold during the year for a profit of $145 million.

There were no other significant changes in the state of affairs of the Group during the financial year.

Events Subsequent to Balance Date

On 11 July 2006 the appointment of Mr. David Turner as a Director was announced. Mr. Turner’s appointment is effective from 1 August 2006.

On 20 July 2006 the Bank concluded agreements to dispose of all holdings in its Loy Yang investment to several parties, for total net proceeds of approximately $175 million. This has resulted in a profit on sale of approximately $70 million.

On 25 July 2006 the appointment of Mr. David Craig as Chief Financial Officer was announced. Mr. Craig’s appointment is due to commence in September 2006.

On 8 August 2006 the retirement of Mr Tony Daniels and Ms Barbara Ward from the Board of the Bank and the appointment of Mrs Jane Hemstritch as a Director of the Bank was announced. Mr Daniels and Ms Ward will retire at the Bank’s Annual General Meeting on 3 November 2006 and Mrs Hemstritch’s appointment will take effect from 9 October 2006.

The Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years.

Business Strategies and Future Developments

Accommodation Strategy

On 12 July 2006 the Bank announced its strategy to relocate approximately 5,000 staff from the Sydney central business district to Sydney Olympic Park or Parramatta by 2009-2010. This would result in rationalisation of the existing Sydney CBD property space.

At this stage, it is not anticipated this will have a material financial impact on the Bank’s financial results.

In the majority of cases the relocations are in line with the Bank’s lease expiry profile. Where lease expiries occur beyond the relocation dates opportunities will be taken to sub-let the space in order to avoid shortfalls in rentals.

Commonwealth Bank of Australia Annual Report 2006 47

Director’s Report

Business Strategies

Business strategies, prospects and future developments, which may affect the operations of the Group in subsequent financial years, are referred to in the Chairman’s Statement on page 2. In the opinion of the Directors, disclosure of any further information on likely developments in operations would be unreasonably prejudicial to the interests of the Group.

Environmental Regulation

The Bank and its controlled entities are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Bank has developed credit policies to ensure this is managed appropriately.

Directors’ Shareholdings

Particulars of shares held by Directors in the Commonwealth Bank or in a related body corporate are set out in the Remuneration Report within this report.

Options

An Executive Option Plan (“EOP”) was approved by shareholders at the Annual General Meeting on 8 October 1996 and its continuation was further approved by shareholders at the Annual General Meeting on 29 October 1998. At the 2000 Annual General Meeting, the EOP was discontinued and shareholders approved the establishment of the Equity Reward Plan (“ERP”). The last grant of options to be made under the ERP was the 2001 grant, with options being granted on 31 October 2001, 31 January 2002 and 15 April 2002. A total of 3,007,000 options were granted by the Bank to 81 executives in the 2001 grant. During the financial year, the performance hurdle for the 2001 ERP grant was met. All option grants have now met their specified performance hurdles. During the financial year and for the period to the date of this report 2,741,600 shares were allotted by the Bank consequent to the exercise of options granted under the EOP and ERP. Full details of the Plan are disclosed in Note 33 to the financial statements. No options have been allocated since the beginning of the 2001/2002 financial year.

The names of persons who currently hold options in the Plan are entered in the register of option holders kept by the Bank pursuant to Section 170 of the Corporations Act 2001. The register may be inspected free of charge.

For details of the options previously granted to the Chief Executive Officer, being a Director, refer to the Remuneration Report within this report.

Directors’ Interests in Contracts

A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies.

Directors’ and Officers’ Indemnity

Articles 19.1, 19.2 and 19.3 of the Commonwealth Bank of Australia’s Constitution provides:

“19. Indemnity

19.1 Persons to whom articles 19.2 and 19.4 apply

Articles 19.2 and 19.4 apply:

(a) to each person who is or has been a director, secretary or senior manager of the company; and

(b) to such other officers, employees, former officers or former employees of the company or of its related bodies corporate as the directors in each case determine,

(each an “Officer” for the purposes of this article).

19.2 Indemnity

The company must indemnify each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (“Liabilities”) incurred by the Officer as an officer of the company or of a related body corporate.

19.3 Extent of indemnity

The indemnity in article 19.2:

(a) is enforceable without the Officer having to first incur any expense or make any payment;

(b) is a continuing obligation and is enforceable by the Officer even though the Officer may have ceased to be an officer of the company or its related bodies corporate; and

An indemnity for employees, who are not directors, secretaries or senior managers, is not expressly restricted in any way by the Corporations Act 2001.

The Directors, as named on pages 43 and 44 of this report, and the Secretaries of the Commonwealth Bank of Australia, being J D Hatton, H J Broekhuijse (resigned 12 July 2005) and C F Collingwood (appointed 12 July 2005) are indemnified under article 19.1, 19.2 and 19.3 as are all the senior managers of the Commonwealth Bank of Australia.

A deed poll has been executed by Commonwealth Bank of Australia consistent with the above articles in favour of each secretary and senior manager of the Bank, each director, secretary and senior manager of a related body corporate of the Bank (except where in the case of a partly owned subsidiary the person is a nominee of an entity which is not a related body corporate of the Bank unless the Bank’s Chief Executive Officer has certified that the indemnity shall apply to that person), and any employee of the Bank or any related body corporate of the Bank who acts as a director or secretary of a body corporate which is not a related body corporate of the Bank.

Directors’ and Officers’ Insurance

The Commonwealth Bank has, during the financial year, paid an insurance premium in respect of an insurance policy for the benefit of those named and referred to above and the directors, secretaries, executive officers and employees of any related bodies corporate as defined in the insurance policy. The insurance grants indemnity against liabilities permitted to be indemnified by the company under Section 199B of the Corporations Act 2001. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium.

48 Commonwealth Bank of Australia Annual Report 2006

Director’s Report — Remuneration Report


Remuneration Report

Introduction			51

Changes since 2005			51

People & Remuneration Committee			51

Compensation Policy			51

Compensation Structure			52

Current Target Potential Compensation Mix for Executives			53

Short Term Incentive (STI) Arrangements			53

Long Term Incentive (LTI) Arrangements			53

Summary of performance hurdles for Employee Reward Plan (ERP) grants			54

Bank Performance			55

Short Term Performance — 2005/2006			55

Cash NPAT performance 2002 — 2006			55

Cash EPS performance 2002 — 2006			55

Long Term Performance			56

LTI Grant Performance			56

Share Price			56

Dividends per Share			56

Directors’ Compensation			57

Managing Director and CEO			57

Non-Executive Directors			57

Details of Components of Non-Executive Directors’ fees			58

Directors’ Retirement Allowance Scheme			58

Compensation of Directors			59

Compensation of Executives			60

Termination Arrangements			61

STI Allocations to Executives for the Year Ended 30 June 2006			62

LTI Allocations to Executives (under 2005 ERP Grant) in the Year Ended 30 June 2006			62

Equity Holdings of Key Management Personnel and Other Executives			63

Shares held by Directors			63

Shares held by Executives			64

Option Holdings of Key Management Personnel and Other Executives			65

Shares Vested and Options Exercised During the Year			66

Loans to Key Management Personnel and Other Executives			67

Terms and Conditions of Loans			68

Other Transactions of Key Management Personnel, Other Executives and Other Related Parties			68

Audit			68

Commonwealth Bank of Australia Annual Report 2006 49

Director’s Report — Remuneration Report

To assist readers a number of key terms and abbreviations used in the Remuneration Report are set out below


Term		Definition

Australian Equivalent to International Financial Reporting Standards (AIFRS)		The Australian equivalent to International Financial Reporting Standards (AIFRS) adopted by the Bank from 1 July 2005.

Australian Generally Accepted Accounting Principles (AGAAP)		The financial reporting standards adopted by the Bank up to the year ended 30 June 2005. The 2005 comparatives have been restated for AIFRS.

Base Compensation		Calculated on a total cost basis and includes any Fringe Benefits Tax charges related to employee benefits including motor vehicles.

Board		The Board of Directors of the Bank.

Committee		The People and Remuneration Committee of the Board of Bank.

Compensation		All forms of consideration paid, payable or provided by the Bank, or on behalf of the Bank, in exchange for services rendered to the Bank.

Earnings Per Share (EPS)		The portion of a company’s net profit after tax allocated to each outstanding share of common stock.

Equity Reward Plan (ERP)		The Bank’s long term incentive scheme.

Fixed Compensation		Consists of Base Compensation, as well as employer contributions to superannuation. For further details please refer to page 53.

Group		Commonwealth Bank of Australia and its subsidiaries.

International Financial Reporting Standards (IFRS)		Reporting standards which have been adopted by the International Accounting Standards Board (IASB), an independent, international organisation supported by the professional accountancy bodies. The objective is to achieve uniformity and transparency in the accounting principles used by businesses and other organisations for financial reporting globally.

Key Management Personnel		Persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. In addition to Key Management Personnel, there are separate disclosure requirements for Directors and Executives of the Bank.

Long Term Incentive (LTI)		LTI grants to Executives are delivered in the form of ordinary shares in the Bank that vest if, and to the extent that, a performance hurdle is met. For further details please refer to page 53.

Options		A right to acquire a Bank share on payment of an exercise price if relevant performance hurdles are met.

Other Executives		Other Executives are those who are not Key Management Personnel but are amongst the Executives for whom disclosure is required in accordance with section 300A(1)(c) of the Corporations Act 2001.

Peer Group		The group of competitors that the Bank’s long term incentive plan is compared to in order to determine if the performance hurdle is met.

Performance Hurdle		The criteria relating to the Bank’s long term incentive plan that must be met in order for shares to partially or fully vest within the plan.

Reward Shares		Shares in the Bank granted under the Equity Reward Plan and subject to a performance hurdle.

Short Term Incentive (STI)		Compensation paid with direct reference to the individual’s performance over the preceding financial year. For further details please refer to page 53.

Salary Packaging		An arrangement where an employee agrees to forego part of his or her base compensation in return for non-cash benefits of a similar value.

STI Deferral		Withholding a portion of short term incentives in cash for one year for the CEO and Executives who, in a reporting sense, are no more than two levels removed from the CEO. For further details please refer to page 53.

Total Shareholder Return (TSR)		TSR is calculated by combining the reinvestment of dividends and the movement in the Bank’s share price. TSR is utilised as a performance hurdle for the Bank’s long term incentive plan.

50 Commonwealth Bank of Australia Annual Report 2006

Director’s Report — Remuneration Report

Introduction

This report details the Bank’s compensation policy for Directors and Key Management Personnel and the links between the performance of the Bank and individual compensation outcomes. Compensation arrangements, including details of equity holdings, loans and other transactions for Directors and Key Management Personnel of the Bank, are also disclosed. In compiling this report the Bank has met the disclosure requirements of accounting standard AASB124 as well as those prescribed by the Corporations Act 2001.

Changes since 2005

Changes arising from revision of Accounting Standards

The 2005 Remuneration Report was compiled in accordance with the disclosure requirements of accounting standard AASB1046 as well as those prescribed by the Corporations Act 2001. Following publication of the 2005 Report, AASB1046 was replaced by AASB124.

The key differences in reporting under the revised AASB124 are:

•

Disclosure of compensation for ‘Key Management Personnel’ as opposed to ‘Specified Executives’ previously. AASB1046 defined a ‘Specified Executive’ as someone who is directly accountable and responsible for the strategic and operational management of an organisation. In 2005, the Bank was required to disclose details of compensation for the five employees, excluding Directors, with the greatest authority in this area. The Bank took the view that all members of its Executive Committee have significant influence over the strategic direction of the Bank, and accordingly defined all nine of its Group Executives as Specified Executives for disclosure purposes. This approach is consistent with the definition of Key Management Personnel required under AASB124, used in compiling the 2006 report;

•

Changes in the sub-categories of compensation that are reported. AASB124 requires the breakdown to be in five categories — short term benefits, post-employment benefits, other long term benefits, termination benefits and share-based payments. This differs from AASB1046 which required four categories — primary benefits, post employment benefits, equity benefits and other benefits; and

•

AASB124 requires the Bank to use a fair value calculation to determine the value of reward shares to be disclosed for each Executive. The fair value approximates the number of shares that are expected to vest in the participants over the expected vesting period. This has resulted in changes in the calculation of long term incentives (LTI) values being disclosed since 2004/05, including some negative values for Executives who forfeited their entitlements to reward shares upon exiting the Bank.

Long Term Incentive (LTI) design change — Equity Reward Plan (ERP)

In 2006 the Bank reviewed and will implement the following changes to ERP design features for future grants:

•

Restriction of re-testing from four occasions to one occasion, 12 months after initial testing, at which time a maximum of 50% only of the original grant may vest; and

•

The use of a straight line vesting scale with 50% vesting at the 51st percentile, through to 100% vesting at the 75th percentile. Previous vesting commenced when Bank performance met the 50th percentile, with 100% vesting at the 75th percentile, but the scale was tiered with accelerated straight line vesting where performance exceeded the 67th percentile.

People & Remuneration Committee

The Bank’s compensation arrangements are overseen by the People & Remuneration Committee of the Board, which currently consists of Mr R J Clairs (Chairman), Mr A B Daniels, Ms S C H Kay and Dr J M Schubert. The Committee’s activities are governed by its terms of reference which is available on the Bank’s website at http://shareholders.commbank.com.au.

The Committee considers changes in compensation policy likely to have a material impact on the Bank and is informed of leadership performance, legislative compliance on employment issues, industrial agreements and incentive plans operating across the Bank.

The Committee also considers senior appointments and compensation arrangements for senior management. The full Board approves the compensation arrangements, performance reviews and talent reviews for the Chief Executive Officer (CEO) and Group Executives (senior direct reports to the CEO), as outlined in the Corporate Governance Statement.

The policy of the Board is that the Committee shall consist entirely of independent Non-Executive Directors. The CEO attends Committee meetings by invitation but does not attend in relation to matters that can affect him.

Compensation Policy

The Bank’s compensation systems complement and reinforce its performance culture, leadership and talent management systems. The compensation systems aim to:

•

Attract and retain high calibre employees;

•

Align individual and Bank goals; and

•

Ensure total compensation is competitive by market standards. Fixed compensation is generally set at the market median and total compensation up to the 75th percentile for performance. In this regard the Bank is careful not to generate upward pressure on the market.

For Executives, this also aims to reward with an appropriate mix of compensation according to their level in the organisation, with a significant weighting towards both short term and long term variable (‘at risk’) pay linked to performance. This weighting increases at higher levels in the organisation. This focus aims to:

•

Reward Executives for Bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks and against behavioural standards;

•

Align the interests of Executives with those of shareholders; and

•

Link Executive reward with the strategic goals and sustainable performance of the Bank.

In determining appropriate levels of Executive compensation, the People & Remuneration Committee engages an external consultant to provide independent advice. This ensures that the compensation of Executives is set competitively compared to the market. It also helps the Committee understand movements and trends in Executive compensation that should be factored into considerations regarding the compensation of Executives.

Compensation and terms and conditions of employment are specified in an individual contract of employment with each Executive, which is signed by the Executive and the Bank.

Commonwealth Bank of Australia Annual Report 2006 51

Director’s Report — Remuneration Report

Compensation Structure

Compensation of the Bank’s Executives consists of three key elements:

•

Fixed compensation;

•

Short Term Incentive (STI); and

•

Long Term Incentive (LTI).

The ‘mix’ of these components for each Executive varies according to their role, as outlined below.

The following diagram illustrates the annual cycle of the Bank’s compensation arrangements for senior executives.


(1)		STI refers to Short Term Incentive

(2)		STI deferral applies generally to the CEO and to executives who, in a reporting sense, are no more than three levels removed from the CEO. Payment is subject to forfeiture on resignation or misconduct, including misrepresentation of performance outcomes.

(3)		LTI refers to Long Term Incentive. LTI grant allocations are made by September each year. After three years the grant is measured against the performance hurdle to assess what portion of the grant, if any, will vest at that time. Some re-testing can occur after that time. Refer to page 53 for further detail.

(4)		Maximum vesting period of four years applies to all future LTI grants. Refer page 53 for further details.

The following table generally summarises the eligibility of each compensation element by Employee Group

Fixed

Short Term

Long Term

Compensation

Incentive (STI)

Incentive (LTI)

STI Deferral ⁽¹⁾

Salary Packaging ⁽²⁾

CEO

Group Executive

Executive General Manager

General Manager

Executive Manager

Australian Workplace Agreement

Other Staff


(ü)		Eligible

(û)		Ineligible

(1)		STI Deferral also applies to certain General Managers and Executive Managers with relatively high levels of STI payments.

(2)		Salary packaging refers to the option for employees to sacrifice base compensation for other benefits.

52 Commonwealth Bank of Australia Annual Report 2006

Director’s Report — Remuneration Report

Fixed Compensation

Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer compensation contributions to superannuation.

Fixed compensation is competitively set so that the & Bank can attract, motivate and retain high calibre local and international Executives.

Fixed compensation is reviewed annually by the People performance. The & Remuneration Committee through a process that components considers relevant comparative compensation in the performance market and internal and, where appropriate, external advice on policies and practices. As noted above, the Committee has access to external advice independent of management.

Variable (‘At Risk’) Compensation

The relationship of fixed and variable (potential short term and long term incentives) is for each level of executive management by the People Remuneration Committee.

The Bank’s compensation structure is designed to employees for quality short and long term mix between short term and long term variable maintains a focus on the sustainable short term of the Bank, whilst ensuring a clear line of sight in positioning the Bank for its longer term success.

The current target mix of compensation components for Executives is illustrated in the following table.

Current target potential compensation mix for executives


	Fixed Component		STI		LTI
	(base compensation and		Component		Component
	Superannuation) %		%		%

CEO		25		25		50

Group Executives		30		30		40

Executive General Managers		40		30		30

General Managers		50		35		15

Where market practice requires, the structure for some specialist (high revenue-generating) roles differs from that which applies generally to Executive management. For such specialists, a greater proportion of the variable component of compensation may be in short term rather than long term incentives but the overall mix of compensation is still heavily weighted towards ‘at risk’ pay.

Short Term Incentive (STI) Arrangements

Employees at all levels of the Bank participate in STI arrangements.

Actual STI payments for Executives depend on the extent to which operating targets and behaviour standards set at the beginning of the financial year are met.

Depending on the Executive’s level within the organisation, any actual STI payments received are based on a combination of Bankwide, business unit and individual performance.

On an annual basis, after consideration of performance against Key Result Areas, the Board approves an overall performance rating for the Bank and each business unit. The Executive’s manager assesses individual performance based on the Bank’s Performance Feedback and Review (Performance Management) system.

Executives generally do not receive a performance payment if their individual performance is not ‘meeting expectations’. Such situations would be under active performance management.

The aggregate of annual STI payments available for Executives across the Bank is subject to the approval of the People & Remuneration Committee. In the case of the CEO and Group

For payments made in recognition of performance for the year ended 30 June 2006, where STI deferral applies, the

STI payments are delivered in two components -

•		50% paid as immediate cash payment; and

•		50% in cash deferred for one year. Generally, the Executive will need to be an employee of the Bank at the end of the deferral period to receive this portion.

Long Term Incentive (LTI) Arrangements

Under the Bank’s Equity Reward Plan (ERP), LTI grants to Executives are delivered in the form of ordinary shares in the Bank that vest in the Executive if and to the extent that a performance hurdle is met.

LTI grants are made to Executives who are able to directly influence the generation of shareholder wealth and thus the Bank’s performance against the relevant hurdle. Participation is thus restricted to Executives who, in a reporting sense, are no more than three levels removed from the CEO.

The quantum of grants made to each Executive depends on their level within the organisation and has regard to the desired mix between fixed compensation, short term and long term incentive as well as the performance and potential of the individual Executive.

The Bank’s LTI plans do not allow the participants to hedge their exposure to unvested shares or reduce the risk associated with the performance hurdles in any way. The Bank has never put in place any enablers to facilitate hedging arrangements.

Commonwealth Bank of Australia Annual Report 2006 53

Director’s Report — Remuneration Report

No value will accrue to the Executive unless the Bank’s Total Shareholder Return (TSR) at least meets the 51st percentile of a peer comparator group of companies over a three to four year period. This was the 50th percentile prior to the 2006 grant. The percentage of shares vesting in the Executive rises with increased performance. To receive the full value of the LTI grant, the Bank’s performance must be in the top quartile of the peer group.

The ERP arrangements represent a restriction of re-testing from the previous four occasions to one occasion, 12 months after initial testing, at which time a maximum of 50% only of the original grant may vest.

The table below provides a summary of the ERP grants from previous years that were in operation during the year ended 30 June 2006.

Summary of performance hurdle for Employee Reward Plan (ERP) grants


	2002 Grant ⁽¹⁾	2003 Grant	2004 Grant	2005 Grant

Performance measurement From To	2 Aug 2002 3 Oct 2005	1 Aug 2003 2 Oct 2006	23 Sept 2004 24 Sept 2007	15 Jul 2005 16 Jul 2008

Additional measurement opportunities	Every Six months from 3 Aug 2005 until 2 Oct 2007	Every Six months from 2 Aug 2006 until 1 Oct 2008	Every Six months from 24 Sept 2007 until 23 Sept 2009	Every Six months from 16 July 2008 until 15 July 2010

Expiry Date if Exercisable	2 Oct 2007	1 Oct 2008	23 Sept 2009	14 July 2010

Status as at 30 June 2006	30th percentile	50th percentile	51st percentile	40th percentile

Vesting Scale	<50th percentile = Nil shares 50th - 67th percentile = 50% - 75% of shares 68th -75th percentile = 76% - 100% of shares

Performance Hurdle ⁽²⁾	TSR vs Peer Group. Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the Executive, within the half yearly windows, over the next two years. The vesting percentage will be the higher of the rating determined at the third anniversary of the grant and the rating determined at the half yearly measurement point at which the Executive nominates that the shares will vest. Where the rating is below the 50th percentile on the third anniversary of the grant, the shares can still vest if the rating reaches the 50th percentile at one of the half yearly measurement points prior to the fifth anniversary, but the maximum vesting will be 50%.

(1)		The 2002 Grant did not meet the performance hurdle at the first or second measurement points.

(2)		Amendments have been made for the 2006 grant to adopt a straight line vesting scale with 50% vesting at the 51st percentile, through to 100% vesting at the 75th percentile. Previous vesting commenced when Bank performance met the 50th percentile, with 100% vesting at the 75th percentile but the scale was tiered with accelerated straight line vesting where performance exceeded the 67th percentile. A restriction of re-testing from four occasions to one occasion, 12 months after initial testing, at which time a maximum of 50% only of the original grant may vest has also been implemented for 2006 and future grants.

The use of a relative TSR based hurdle ensures an alignment between comparative shareholder return and reward for Executives.

In assessing whether the performance hurdles for each grant have been met, the Bank receives independent data from Standard & Poor’s which provides both the Bank’s TSR growth from the commencement of each grant and that of the peer group (excluding the Bank). The Bank’s performance against the hurdle is then determined by ranking each company in the peer group and the Bank in order of TSR growth from the commencement of each grant. A weighting for each company in the peer group is determined by dividing the market capitalisation of the relevant company by the total market capitalisation of the peer group. The Bank’s percentile ranking is determined by aggregating the calculated weighting of each company ranked below the Bank.

The peer group chosen for comparison reflects the Bank’s business mix and currently consists of:


Adelaide Bank		Macquarie Bank

AMP		National Australia Bank

Australian & New Zealand Banking		QBE insurance

Group

AXA		St George

Bank of Queensland		Suncorp-Metway

Bendigo Bank		Westpac Banking Group

IAG

The Bank is excluded from this group.

Further details of the ERP are in Note 33 to the Financial Statements.

54 Commonwealth Bank of Australia Annual Report 2006

Director’s Report — Remuneration Report

Bank Performance

Short Term Performance — 2005/2006

The Bank’s Short Term Incentive framework is underpinned by a performance management system through which all staff are assessed on outcomes and behaviours. Staff have common Key Result Areas in Customer Service, People Engagement and Business Outcomes. All executives of the Bank in roles of General Manager and above are assessed in relation to a ‘Special Task’ / Project which is designed to ensure continuing focus beyond business as usual and to enhance Bankwide collaboration.

Within the Key Result Areas, particular emphasis is given to the Bank’s four strategic priorities of Customer Service, Business Banking, Technology and Operational Excellence and Trust and Team Spirit when assessing performance.

Below is a description of the Bank’s performance in each of the Key Result Areas.

Summary of Bank Performance


Key Result Area		Commentary

Customer Service		The Bank’s vision is ‘to be Australia’s finest financial services organisation through excelling in customer service’. The Bank has made progress as a result of the Which new Bank program, through enhanced customer turnaround times, the implementation of CommSee and CommServe, further branch refurbishments and, more recently, the introduction of new products, removal of transaction fees from NetBank and the opening of some branches on Saturdays for convenient banking.
		In March 2006 the Bank announced an evolutionary strategic direction for the next phase of the Bank’s development. The strategy draws on the Bank’s strengths and attributes and identifies areas of opportunity and brings together these two elements to ensure customers benefit in a way that is important to them.
		It is expected that the impact during 2006/2007 of service initiatives already completed and being implemented will add further to the Bank’s competitiveness, customer satisfaction levels and ultimately the Bank’s market share in profitable areas.

People Engagement		There have been solid people engagement improvements driven from the Which new Bank program. This result is supported by enhanced employee satisfaction readings, key culture change measures, a continuing safety improvement focus and the implementation of enhanced leadership, performance management and talent management frameworks.
		This progress is reflective of the Bank’s commitment to its people. The evolutionary strategy builds on the success of the Which new Bank program and includes a strategic priority relating to Trust and Team spirit. Through strengthening leadership, developing and valuing our people and working collaboratively business performance will be lifted and growth will continue.

Business Outcomes		The Bank exceeded its net profit after tax (NPAT) targets for the year ended 30 June 2006. Cash NPAT increased by 16% compared to the prior year. This result includes the profit from the sale of the Hong Kong insurance business of $145 million. Excluding this item, cash NPAT increased 12%. Underlying NPAT also increased by 12%.
		All Which new Bank market commitments were either met or exceeded.
		The result was delivered through strong performances across the business driven by strong growth in Banking Income. Fund flows and investment returns have also been strong, insurance growth has been good and productivity continues to improve.

The following graphs illustrate the Bank’s NPAT and earnings per share (EPS) performance on a cash basis over the last five years. The graphs note the years where AIFRS accounting arrangements have been in place. Please see Note 1 to the Bank’s Financial Statements for further information regarding the impact of AIFRS requirements on these measures.


Cash NPAT performance 2002 to 2006		Cash EPS performance 2002 to 2006

Commonwealth Bank of Australia Annual Report 2006 55

Director’s Report — Remuneration Report

Directors’ Compensation

Ralph Norris (Managing Director and CEO)

Summary of Compensation Arrangements

The Bank appointed Mr Ralph Norris as Managing Director and CEO effective 22 September 2005. Mr Norris’ compensation consists of fixed and variable (at risk) components. For the year ended 30 June 2006, fixed compensation, which comprises base compensation (calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles) as well as employer contributions to superannuation, was 46% of total compensation.

The variable (at risk) compensation consists of short and long-term incentives.

Short Term Incentives (STIs) are delivered in two components: 50% made as an immediate cash payment and 50% in deferred cash. Performance is measured against Key Result Areas, with payment subject to the approval of the Board. The Board has assessed Mr Norris’ performance for the year. The Bank has approved a total STI payment of $1.3 million.

This assessment took into account the following factors:

•		Progress in relation to the Bank’s four strategic priorities of Customer Service, Business Banking, Technology and Operational Excellence and Trust and Team Spirit;

•		Business and financial results;

•		Recruitment and development of top management;

•		Employee engagement initiatives;

•		The Bank’s sales and service culture; and

•		Relationships with external stakeholders including the general community, investors, regulators, Government and the media.

Long Term Incentives (LTIs) are delivered in the form of Reward Shares under the Bank’s Equity Reward Plan, and no value will accrue unless the Bank’s Total Shareholder Return (TSR) at least meets the 50th percentile of the comparator group of companies for the 2005 grant and the 51st percentile for the 2006 grant and beyond. At the 2005 Annual General Meeting (AGM), the Board sought and was granted the approval of shareholders for a maximum of $12,000,000 to be allocated to Mr Norris in three tranches prior to the 2007 AGM.

The total variable compensation for the year ended 30 June 2006 was 54% of total compensation.

The Board determines Mr Norris’ compensation, pursuant to the Constitution, as part of the terms and conditions of his appointment. Those terms and conditions are established in a contract of employment with Mr Norris which was effective from 22 September 2005 with compensation subject to review annually by the Board. Mr Norris’ compensation arrangements are detailed on page 59 (Compensation of Directors) and follow the same principles as other Executives except in relation to the Bank seeking shareholder approval of LTI grants.

Mr Norris’ contract provides for no end date, although he may resign at any time by giving six months notice. The Bank may terminate Mr Norris’ employment, in cases other than misconduct, on twelve months notice in his first year of service and six months notice thereafter. In the latter case the Bank will pay all fixed compensation and any outstanding statutory entitlements. Any unvested STI or LTI amounts will be payable at the discretion of the Board.

There is also a provision allowing Mr Norris to terminate the agreement if a material change to his status occurs and to receive benefits as if the Bank had terminated his employment.

On exit from the Bank Mr Norris is entitled to receive his statutory entitlements of accrued annual and long service leave as well as accrued superannuation benefits. This arrangement is the same for all Executives.

Non-Executive Directors

Compensation Arrangements

Compensation for Non-Executive Directors consists of base and committee fees within a maximum of $3,000,000 per annum as approved by shareholders at the Annual General Meeting held on 5 November 2004. As indicated at the time of approval the total compensation for Non-Executive Directors is less than that approval. This will allow for additional Board members to be appointed to continue having an appropriate mix of skills and experience as well as to accommodate compensation increases in the future, when justified. No component of Non-Executive Director compensation is contingent upon performance.

On appointment to the Board, Non-Executive Directors enter into a service agreement with the Bank in the form of a letter of appointment. The letter of appointment, a copy of which appears on the Bank’s website, summarises the Board policies and terms, including compensation, relevant to the office of Director. All Non-Executive Directors have entered into a form of service agreement.

The policy of the Board is that the aggregate amount of fees should be set at a level which provides the Bank with the necessary degree of flexibility to enable it to attract and retain the services of directors of the highest calibre.

The Board Performance and Renewal Committee annually reviews the fees payable to individual Non-Executive Directors and takes into account relevant factors and, where appropriate, receives external advice on comparable compensation. The Committee decided to defer the review of fees to December 2006.

Non-Executive Directors have 20% of their annual fees applied to the mandatory on-market acquisition of shares in the Bank. In addition, in 2005/06, Non Executive Directors could voluntarily elect to sacrifice up to a further 50% of their fees for the acquisition of shares (the Board subsequently approved the removal of this limit).

The Bank’s Non-Executive Directors’ fee structure provides for a base fee for all Bank Directors of $160,000, and a base Chairman’s fee of $560,000. In addition, amounts re payable where Directors are members of, or chair a Committee. Details of the breakdown of each Non-Executive Directors’ fees is provided on page 58. The Bank also contributes to compulsory superannuation on behalf of Non-Executive Directors.

Commonwealth Bank of Australia Annual Report 2006 57

Directors’ Report — Remuneration Report

Details of Components of Non-Executive Directors’ fees


	Committee Compensation
	Board		People and
	Compensation ⁽¹⁾		Remuneration		Audit		Risk		Total
Director	$		$		$		$		$

J M Schubert		560,000		20,000		—		20,000		600,000
R J Clairs		160,000		35,000		—		20,000		215,000
A B Daniels		160,000		20,000		—		20,000		200,000
C R Galbraith		160,000		—		25,000		20,000		205,000
S C H Kay		160,000		20,000		—		20,000		200,000
W G Kent		160,000		—		25,000		20,000		205,000
F D Ryan		160,000		—		45,000		20,000		225,000
F J Swan		160,000		—		—		35,000		195,000
B K Ward		160,000		—		25,000		20,000		205,000


Total		1,840,000		95,000		120,000		195,000		2,250,000


(1)		Non-Executive Directors sacrifice 20% of these fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP).

Retirement Benefits

Under the Directors’ Retirement Allowance Scheme, which was approved by shareholders at the 1997 Annual General Meeting, Directors previously accumulated a retirement benefit on a pro rata basis to a maximum of four years’ total emoluments after twelve years’ service. No benefit accrued until the Director had served three years on the Board. In 2002 the Board decided to discontinue the Directors’ Retirement Allowance Scheme without affecting the entitlements of the then existing Non-Executive

Directors. After that time, new Directors have not been entitled to participate in the scheme.

The Board resolved with effect from the 2004 Annual General Meeting to terminate accrual of further benefits under the Scheme and freeze the entitlements of current members until their respective retirements. This approach has resulted in compensation arrangements being expressed in a more transparent manner.

The entitlements of the Non-Executive Directors under the Directors’ Retirement Allowance Scheme are:

Directors’ Retirement Allowance Scheme


	Increase in Accrued Benefit in Year		Entitlement as at 30 June 2005
Director	$		$

J M Schubert		—		636,398
R J Clairs		—		202,989
A B Daniels		—		160,618
C R Galbraith		—		159,092
S C H Kay ⁽¹⁾		—		—
W G Kent		—		159,092
F D Ryan		—		168,263
F J Swan		—		266,173
B K Ward		—		370,180

Total				2,122,805


(1)		Ms Kay was appointed a Director after the closure of the scheme.

58 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report — Remuneration Report

Compensation of Key Management Personnel and Other Executives

Individual compensation details for Directors for the year ended 30 June 2006 are set out below

Compensation of Directors


	Short Term Benefits						Post Employment Benefits				Equity Benefits							Other Benefits
					STI						STI		LTI
	Cash		Cash STI payment		Deferred in Cash		Super- annuation		Retirement Allowance		Deferred in Shares		Reward Shares			NEDSP		Termi- nation		Other		Total
	Fixed ⁽¹⁾		At Risk		At Risk		Fixed ⁽²⁾		Fixed ⁽³⁾		At Risk		At Risk			Fixed ⁽¹⁾		Benefits		Benefits		Compensation
	$		$		$		$		$		$		$			$		$		$		$

J M Schubert	Chairman (commenced as Chairman on 26 November 2004)
2006		478,665		—		—		43,082		—		—		—			119,666		—		—		641,413
2005		342,987		—		—		30,869		12,157		—		—			85,747		—		—		471,760
R J Norris ⁽⁴⁾	Managing Director and CEO (commenced in role on 22 September 2005. See notes to the “Compensation of Executives” table for details of individual items)
2006		921,642		—		650,000		1,248,358		—		—		483,045			—		—		846,963		4,150,008
2005		—		—		—		—		—		—		—			—		—		—		—
R J Clairs
2006		171,529		—		—		15,438		—		—		—			42,882		—		—		229,849
2005		139,075		—		—		12,517		18,201		—		—			34,769		—		—		204,562
A B Daniels ⁽⁵⁾
2006		159,562		—		—		—		—		—		—			39,891		—		—		199,453
2005		131,831		—		—		11,865		15,159		—		—			32,958		—		—		191,813
C R Galbraith
2006		163,551		—		—		14,720		—		—		—			40,888		—		—		219,159
2005		130,220		—		—		11,720		8,542		—		—			32,555		—		—		183,037
S C Kay
2006		159,562		—		—		14,361		—		—		—			39,891		—		—		213,814
2005		165,976		—		—		14,938		—		—		—			41,494		—		—		222,408
W G Kent
2006		163,551		—		—		14,720		—		—		—			40,888		—		—		219,159
2005		130,220		—		—		11,720		8,542		—		—			32,555		—		—		183,037
F D Ryan
2006		179,507		—		—		16,156		—		—		—			44,877		—		—		240,540
2005		145,398		—		—		13,086		12,723		—		—			36,350		—		—		207,557
F J Swan
2006		155,573		—		—		14,002		—		—		—			38,893		—		—		208,468
2005		124,478		—		—		11,203		8,087		—		—			31,120		—		—		174,888
B K Ward
2006		163,551		—		—		14,720		—		—		—			40,888		—		—		219,159
2005		135,831		—		—		12,225		17,225		—		—			33,958		—		—		199,239
D V Murray ^{(4) (6)}	(retired 22 September 2005. See notes to the “Compensation of Executives” table for details of individual items)
2006		351,500		—		—		1,395,557		—		112,500		(2,891,623	)		—		8,772,464		—		7,740,398
2005		1,757,500		760,000		760,000		142,500		—		431,250		1,124,865			—		—		—		4,976,115

Total Compensation for Directors
2006		3,068,193		—		650,000		2,791,114		—		112,500		(2,408,578	)		448,764		8,772,464		846,963		14,281,420
2005		3,328,730		760,000		760,000		274,839		100,636		431,250		1,124,865			392,808		—		—		7,173,128


(1)		For Non-Executive Directors, this includes that portion of base fees and committee fees paid as cash. Non-Executive Directors also sacrifice 20% of their fees on a mandatory basis under the Non-Executive Directors Share Plan (NEDSP). Further detail on the NEDSP is contained in Note 33 to the Financial Statements.

(2)		Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives.

(3)		For Non-Executive Directors this represents the increase in their accrued benefit in the year under the Director’s Retirement Allowance Scheme which was approved by shareholders at the 1997 Annual General Meeting. See page 58 regarding discontinuance of the Scheme.

(4)		Refer to page 57 for explanatory information for each compensation component.

(5)		Mr Daniels turned 70 during the year ended 30 June 2005. The Bank’s compulsory superannuation obligations cease after a person reaches age 70.

(6)		Mr Murray’s termination benefit represents a pro rata entitlement to Performance Units granted in place of the Reward Shares originally granted under the 2002, 2003 and 2004 ERP arrangements that were automatically forfeited when he retired from the Bank. The Performance Units may vest in him at a future date, depending on the performance of the relevant grant. He may receive all, some or none of these Performance Units, depending on the performance of the grant over the relevant periods. This arrangement is consistent with termination arrangements for Executives who have unvested ERP Reward Shares when they retire from the Bank.

Commonwealth Bank of Australia Annual Report 2006 59

Directors’ Report — Remuneration Report

Individual compensation details for Executives for the year ended 30 June 2006 are set out below:

Compensation of Executives


										Post
										Employment
			Short Term Benefits							Benefits		Equity Benefits						Other Benefits
							STI					STI			LTI
	Cash		Non Monetary		Cash STI payment		Deferred in Cash			Super- annuation		Deferred in Shares			Reward Shares			Termi- nation		Other		Total
	Fixed ⁽¹⁾		Fixed ⁽²⁾		At Risk ⁽³⁾		At Risk ⁽⁴⁾			Fixed ⁽⁵⁾		At Risk ⁽⁶⁾			At Risk ⁽⁷⁾			Benefits ⁽⁸⁾		Benefits ⁽⁹⁾		Compensation
	$		$		$		$			$		$			$			$		$		$

M A Cameron	Group Executive, Retail Banking Services
2006		833,465		10,260		382,485		382,485			59,995		42,500			346,920			—		—		2,058,110
2005 ⁽¹⁰⁾		718,300		10,260		327,250		327,250			51,700		160,625			190,436			—		—		1,785,821
L G Cupper	Group Executive, People Services
2006 ⁽¹¹⁾		634,500		10,260		—		—			643,900		48,750			396,886			—		—		1,734,296
2005 ⁽¹⁰⁾		605,000		10,260		292,500		292,500			45,000		185,625			274,675			—		—		1,705,560
S I Grimshaw	Group Executive, Premium Business Services
2006		1,026,000		10,260		506,000		506,000			74,000		70,000			560,429			—		—		2,752,689
2005 ⁽¹⁰⁾		932,500		10,260		425,000		425,000			67,500		275,625			369,986			—		—		2,505,871
H D Harley	Group Executive, Group Strategic Development
2006		839,500		9,837		324,000		324,000			60,500		57,500			449,894			—		—		2,065,231
2005 ⁽¹⁰⁾		783,500		10,260		357,500		357,500			56,500		207,500			273,868			—		—		2,046,628
M R Harte	Group Executive, Enterprise IT (commenced in the role on 10 April 2006)
2006		117,500		—		64,575		64,575			708,500		—			—			—		115,825		1,070,975
2005 ⁽¹⁰⁾		—		—		—		—			—		—			—			—		—		—
M A Katz	Group Executive, Premium Business Services (resigned on 24 March 2006)
2006 ⁽¹²⁾		775,227		7,490		—		—			50,330		72,500			(1,293,780	)		3,564,028		—		3,175,795
2005 ⁽¹⁰⁾		950,000		10,260		382,500		382,500			68,400		277,500			453,878			—		—		2,525,038
R V McKinnon	Group Executive, Technology Services (resigned on 31 December 2005)
2006 ⁽¹²⁾		293,750		5,130		—		(240,000	)		21,250		(35,625	)		(542,201	)		31,280		—		(466,416	)
2005 ⁽¹⁰⁾		560,000		10,260		240,000		240,000			40,000		138,750			191,324			—		—		1,420,334
G L Mackrell	Group Executive, International Financial Services
2006		710,000		10,260		363,400		363,400			80,907		50,625			419,034			—		—		1,997,626
2005 ⁽¹⁰⁾		628,000		10,260		315,000		315,000			84,985		198,125			270,349			—		—		1,821,719
J K O’Sullivan	General Counsel
2006		755,600		10,260		291,200		331,200			94,400		50,000			313,517			—		—		1,846,177
2005 ⁽¹⁰⁾		728,000		10,260		295,000		295,000			52,000		150,000			186,873			—		—		1,717,133
G A Petersen	Group Executive, Wealth Management
2006		542,233		10,260		282,449		282,449			102,543		27,612			219,233			—		—		1,466,779
2005 ⁽¹⁰⁾		437,000		10,260		217,500		217,500			72,200		103,227			110,538			—		—		1,168,225

Total Compensation ⁽¹³⁾
2006		6,527,775		84,017		2,214,109		2,014,109			1,896,325		383,862			869,932			3,595,308		115,825		17,701,262
2005 ^{(10) (13)}		6,342,300		92,340		2,852,250		2,852,250			538,285		1,696,977			2,321,927			—		—		16,696,329


Other Executives ⁽¹⁴⁾
J Beggs	Executive General Manager, Enterprise IT
2006		412,000		—		721,000		721,000			12,139		162,504			147,989			—		—		2,176,632
2005		400,000		—		1,125,000		1,125,000			11,585		625,012			94,741			—		—		3,381,338
W Negus	Chief Executive Officer, Colonial First State Global Asset Management (commenced in role 1 June 2005)
2006		932,836		10,260		886,000		886,000			67,164		—			194,994			—		—		2,977,254
2005		77,333		855		—		—			5,568		—			—			—		—		83,756
M Touw ⁽¹⁵⁾	Executive General Manager, Global Markets and Group Treasury
2006		535,600		10,260		2,420,000		3,630,000			38,563		317,243			168,236			—		—		7,119,902
2005		515,000		10,260		831,110		1,246,665			37,080		678,946			106,986			—		—		3,426,047

Total Compensation for Executives
2006		8,408,211		104,537		6,241,109		7,251,109			2,014,191		863,609			1,381,151			3,595,308		115,825		29,975,050
2005		7,334,633		103,455		4,808,360		5,223,915			592,518		3,000,935			2,523,654			—		—		23,587,470

Amounts in the above table reflect compensation for the time the Executive has been in a Key Management Personnel role, i.e. pro-rating is applied relative to the date the Executive commenced or ceased a Key Management Personnel role. Compensation earned as an Executive prior to appointment to a Key Management Personnel role is not included in the amounts shown for that Executive.


(1)		Reflects amounts paid in the year ended 30 June and is calculated on a total cost basis. Included may be salary sacrifice amounts (e.g. motor vehicles plus FBT) with the exception of salary sacrifice superannuation which is included under ‘Superannuation’.

(2)		Represents the cost of car parking (including FBT).

(3)		Cash STI payment represents the amount of cash immediately payable to an Executive in recognition of performance for the year ended 30 June, with the exception of STI sacrificed to superannuation which is included under ‘Superannuation’.

(4)		STI Deferred in Cash represents the mandatory deferral of 50% of STI payments for Executives in recognition of performance to the year ended 30 June 2006. These amounts are deferred until 1 July 2007. Generally, the Executive will need to be an employee of the Bank at the end of the deferral period to receive this portion. Deferrals of STI payments prior to 2005 were made in shares.

(5)		Represents company contribution to superannuation and includes any allocations made by way of salary sacrifice by Executives.

60 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report — Remuneration Report

(6)		STI Deferred in Shares represents the cost of shares acquired under the mandatory component of the Equity Participation Plan (EPP). Shares vest in two equal tranches after one and two years respectively. For example, for STI payments for the year ended 30 June 2004, half the shares vested on 1 July 2005 and half vested on 1 July 2006. The amount included in compensation each year has been amortised on a straight-line basis over the vesting period for each tranche of shares. See Note 33 to the Financial Statements for further details on the operation of the EPP. The last share grant made under the mandatory component of the EPP was in 2005. Mr McKinnon forfeited shares deferred under the mandatory component of the EPP (MEP) when he exited the Bank, resulting in a reversal of disclosed amounts for STI Deferred in Shares, as required under AASB124.

(7)		The ‘fair value’ of LTI reward shares has been calculated using a Monte-Carlo simulation method, incorporating the assumptions below : The assessment has been made as at purchase date for each ERP grant based on the expected future TSR performance of the Bank and each member of its peer group. The annualised equivalent of the ‘fair value’ in respect of the number of shares for each grant has been amortised on a straight line basis over the term of the grant. Messrs Katz, McKinnon and Murray forfeited reward shares when they exited the Bank, resulting in a reversal of disclosed amounts for LTI Reward Shares, as required under AASB124.

Reward Share Valuation Assumptions


Purchase Date	Fair Value		Exercise Price		Risk Free Rate			Assumption Term	Dividend Yield	Volatility

30 November 2002	$	16.75	$	0.00		5.35	%	57 mths	Nil		20.0	%
29 October 2003	$	16.36	$	0.00		5.70	%	58 mths	Nil		20.0	%
22 September 2004	$	16.72	$	0.00		5.48	%	59 mths	Nil		15.0	%
5 November 2004	$	19.72	$	0.00		5.61	%	57 mths	Nil		15.0	%
23 November 2005	$	24.51	$	0.00		5.65	%	56 mths	Nil		15.0	%

(8)		Represents any severance payments made on termination of employment (excluding any payment in lieu of notice). For Messrs Katz and McKinnon, termination benefit includes a pro rata entitlement to Performance Units granted in place of the Reward Shares originally granted under the ERP arrangements that were automatically forfeited when they resigned from the Bank. The Performance Units may vest at a future date, depending on the performance of the relevant grant. They may receive all, some or none of these Performance Units, depending on the performance of the grant over the relevant periods. This arrangement is consistent with termination arrangements for Executives who have unvested ERP Reward Shares when they exit the Bank.

(9)		All Other Benefits payable that are not covered above, including any payment made in lieu of notice on termination of employment and other contractual payments.

(10)		Differences in disclosure requirements of AASB1046 which applied for the 2005 Remuneration Report and requirements under AASB124 and AASB2 which apply for 2006 disclosure have resulted in differences in compensation disclosures. In particular, options are no longer disclosed in the 2005 comparative figures as all options were issued by the Bank prior to 7 November 2002, and AASB2 does not require these to be disclosed, and the calculation for determining LTI amounts to be disclosed has also changed.

(11)		As announced on 4 August 2006, Mr Cupper will retire from the Bank at the end of October 2006. As a result, 100% of his STI payment was immediately payable and has been included under ‘Superannuation’.

(12)		Negative values are shown where at risk compensation that was disclosed in previous Remuneration Reports has been forfeited. Messrs Katz and McKinnon both forfeited LTI Reward Shares upon exiting the Bank that were included in their disclosed compensation details for the year ended 30 June 2005.

(13)		Group totals in respect of the financial year ended 30 June 2005 do not necessarily equal the sum of amounts disclosed for individuals specified in 2006 as there are differences to the individuals specified in 2005.

(14)		These Executives, who are not Key Management Personnel, and Messrs Grimshaw and Katz are the five Executives who received the highest compensation for the year ended 30 June 2006 as defined in the Section 300A of the Corporations Act 2001.

(15)		60% of Mr Touw’s STI payment is deferred as cash, with a 20% tranche vesting on 1 July each year until the final 20% vests at the end of three years. Each tranche is indexed to mirror the Bank’s TSR performance over the relevant vesting period. Generally Mr Touw will need to be employed with the Bank at the vesting date to receive the relevant tranche.

Termination Arrangements

The Bank’s Executive contracts generally provide for severance payments of up to six months in cases where termination of employment is initiated by the Bank, other than for misconduct or unsatisfactory performance. Exceptions to these arrangements apply to Messrs Grimshaw, Cupper and O’Sullivan whose contracts allow for a twelve months severance payment where termination is initiated by the Bank. There is also a four week notice period for either party to terminate the agreement.

The contracts for Key Management Personnel and Other Executives do not have a fixed term.

Upon exit from the Bank, Executives are entitled to receive their statutory entitlements of accrued annual and long service leave, as well as accrued superannuation benefits.

Executives who leave the Bank during a given performance year (i.e. 1 July to 30 June) will generally not receive a STI payment for that year except in the circumstances of retrenchment, retirement or death. In those circumstances, a pro-rated payment may be made based on the length of service during the performance year.

Deferred cash or shares from previous STI awards are usually forfeited where the Executive resigns or is dismissed. In circumstances of retrenchment, retirement or death any cash will generally be paid and unvested shares will generally vest immediately. LTI grants are generally forfeited where the Executive resigns or is dismissed. In circumstances of retrenchment, retirement or death, the Executive or their estate may, at Board discretion, retain a pro-rated grant of long term incentives. Vesting of any long term incentives retained by the Executive will still be subject to the performance hurdle relevant to that grant.

Commonwealth Bank of Australia Annual Report 2006 61

Directors’ Report — Remuneration Report

STI Allocations for Executives for the Year Ended 30 June 2006


	Percentage		Percentage		Percentage		Minimum Total		Maximum Total
	Paid		Forfeited		Deferred ⁽¹⁾		Value		Value
	%		%		%		$		$

M A Cameron		50		—		50		382,485		764,970
L G Cupper ⁽²⁾		100		—		—		598,400		598,400
S I Grimshaw		50		—		50		506,000		1,012,000
H D Harley		50		—		50		324,000		648,000
M R Harte ⁽³⁾		50		—		50		64,575		129,150
M A Katz ⁽⁴⁾		—		—		—		—		—
R V McKinnon ⁽⁵⁾		—		—		—		—		—
G L Mackrell		50		—		50		363,400		726,800
R J Norris ⁽⁶⁾		50		—		50		650,000		1,300,000
J K O’Sullivan		50		—		50		331,200		662,400
G A Petersen		50		—		50		282,449		564,898
J Beggs		50		—		50		721,000		1,442,000
W Negus		50		—		50		886,000		1,772,000
M Touw ⁽⁷⁾		40		—		60		2,420,000		6,050,000


(1)		Will generally vest on 1 July 2007 and be paid in July 2007, subject to not being forfeited due to resignation or misconduct including misrepresentation of performance outcomes. Will generally vest and be immediately payable in circumstances of retrenchment, retirement or death. Mr Touw has slightly different arrangements. Refer Footnote 7 below for details.

(2)		Mr Cupper will retire from the Bank at the end of October 2006. As a result, 100% of his STI payment was immediately payable as cash.

(3)		Mr Harte commenced on 10 April 2006.

(4)		Mr Katz ceased employment on 24 March 2006

(5)		Mr McKinnon ceased employment on 31 December 2005.

(6)		Mr Norris commenced in the role on 22 September 2005.

(7)		60% of Mr Touw’s STI payment is deferred as cash, with a 20% tranche vesting on 1 July each year until the final 20% vests at the end of three years. Each tranche is indexed to mirror the Bank’s TSR performance over the relevant vesting period. Generally Mr Touw will need to be employed with the Bank at the vesting date to receive the relevant tranche.

LTI Allocations to Executives for the Year Ended 30 June 2006


	Percentage		Percentage		Percentage		Current		Minimum Total		Maximum Total
	Paid ⁽¹⁾		Forfeited		Deferred ⁽¹⁾		Allocation		Value		Value ⁽²⁾
	%		%		%		(No. of Shares)		$		$

M A Cameron		—		—		100		29,190		—		1,132,572
L G Cupper		—		—		100		22,440		—		870,672
S I Grimshaw		—		—		100		35,140		—		1,363,432
H D Harley		—		—		100		32,440		—		1,258,672
M R Harte ⁽³⁾		—		—		100		—		—		—
M A Katz ⁽⁴⁾		—		74		26		9,900		—		384,120
R V McKinnon ⁽⁵⁾		—		100		—		—		—		—
G L Mackrell		—		—		100		27,570		—		1,069,716
R J Norris ⁽⁶⁾		—		—		100		100,328		—		3,892,726
J K O’Sullivan		—		—		100		23,250		—		902,100
G A Petersen		—		—		100		20,280		—		786,864
J Beggs		—		—		100		10,000		—		388,000
W Negus		—		—		100		40,500		—		1,571,400
M Touw		—		—		100		11,250		—		436,500


(1)		Will vest in 2008/2009, 2009/2010 or 2010/2011 subject to the service conditions and performance hurdle being met (see page 54). In circumstances of retrenchment, retirement or death, the Executive or their Estate may, at Board discretion, retain a pro-rated grant of long term incentives.

(2)		This equals the “Number of Reward Shares Allocated” multiplied by the Bank’s closing share price at the Commencement Date of the grant (15 July 2005), which was $38.80.

(3)		Mr Harte commenced on 10 April 2006.

(4)		Mr Katz ceased employment on 24 March 2006 and retained a pro rata LTI allocation.

(5)		Mr McKinnon ceased employment on 31 December 2005.

(6)		Mr Norris commenced in the role on 22 September 2005.

62 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report — Remuneration Report

Equity Holdings of Key Management Personnel and Other Executives

Shareholdings

All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan.

Shares awarded under the Equity Reward Plan and the mandatory component of the Equity Participation Plan are registered in the name of the Trustee. For further details of the Non-Executive Directors’ Share Plan, Equity Reward Plan, previous Executive Option Plan and Equity Participation Plan refer to Note 33 to the Financial Statements.

Details of shareholdings of Key Management Personnel and Other Executives(or close family or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned hold significant voting power) are as follows:

Shares held by Directors


				Acquired/Granted
		Balance		as		On Exercise of		Net Change			Balance
Name	Class	1 July 2005		Compensation⁽¹⁾		Options		Other ⁽²⁾			30 June 2006

Directors
R J Clairs	Ordinary		13,357		776		—		—			14,133
A B Daniels ⁽³⁾	Ordinary		17,669		721		—		301			18,691
C R Galbraith	Ordinary		8,824		740		—		466			10,030
S C H Kay	Ordinary		3,669		721		—		—			4,390
W G Kent	Ordinary		15,286		740		—		87			16,113
D V Murray ⁽⁴⁾	Ordinary		323,638		—		250,000		(78,093	)		495,545
	Deferred STI		21,866		—		—		(21,866	)		—
	Reward Shares		325,000		—		—		(325,000	)		—
R J Norris ⁽⁵⁾	Ordinary		10,000		—		—		—			10,000
	Reward Shares		—		100,328		—		—			100,328
F D Ryan	Ordinary		7,430		812		—		—			8,242
J M Schubert	Ordinary		18,508		2,165		—		515			21,188
F J Swan	Ordinary		5,954		704		—		316			6,974
B K Ward ⁽⁶⁾	Ordinary		5,766		739		—		124			6,629

	Ordinary		430,101		8,118		250,000		(76,284	)		611,935
Total For Directors	Deferred STI		21,866		—		—		(21,866	)		—
	Reward Shares		325,000		100,328		—		(325,000	)		100,328


(1)		For Non-Executive Directors, represents shares acquired under NEDSP on 2 September 2005 and 15 March 2006 by mandatory sacrifice of fees. All shares acquired through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 33 to the Financial Statements for further details on the NEDSP. For Mr Norris, this represents Reward Shares granted under the Equity Reward Plan (ERP) and subject to a performance hurdle. The first possible date for meeting the performance hurdle is 15 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 to the Financial Statements for further details on the ERP.

(2)		‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of deferred STI shares on retirement (which became Ordinary shares).

(3)		A related party of Mr Daniels beneficially holds an investment of $62,838 in Colonial First State Global Health and Biotech Fund, $403,860 in Colonial First State Future Leaders Fund and $361,464 in Colonial First State Imputation Fund.

(4)		Mr Murray retired on 22 September 2005. Mr Murray acquired 10,000 PERLS III securities during the year and continued to hold them at 30 June 2006.

(5)		Mr Norris commenced on 22 September 2005.

(6)		Ms Ward continued to hold 250 PERLS II securities at 30 June 2006.

Commonwealth Bank of Australia Annual Report 2006 63

Directors’ Report — Remuneration Report

Shares held by Executives


				Acquired/Granted
		Balance		as		On Exercise		Net Change			Balance
Name	Class	30 June 2005		Compensation ⁽¹⁾		of Options		Other ⁽²⁾			30 June 2006

Executives
M A Cameron	Ordinary		—		—		—		—			—
	Deferred STI		8,094		—		—		(5,246	)		2,848
	Reward Shares		60,430		29,190		—		—			89,620
L G Cupper ⁽³⁾	Ordinary		44,540		—		—		6,815			51,355
	Deferred STI		9,385		—		—		(6,118	)		3,267
	Reward Shares		84,000		22,440		—		—			106,440
S I Grimshaw	Ordinary		16,365		—		100,000		(91,057	)		25,308
	Deferred STI		14,133		—		—		(9,442	)		4,691
	Reward Shares		113,800		35,140		—		—			148,940
H D Harley	Ordinary		25,852		—		87,500		(87,071	)		26,281
	Deferred STI		10,241		—		—		(6,388	)		3,853
	Reward Shares		85,700		32,440		—		—			118,140
M R Harte ⁽⁴⁾	Ordinary		—		—		—		—			—
	Deferred STI		—		—		—		—			—
	Reward Shares		—		—		—		—			—
M A Katz ⁽⁵⁾	Ordinary		303,748		—		250,000		(378,748	)		175,000
	Deferred STI		14,061		—		—		(14,061	)		—
	Reward Shares		139,130		38,380		—		(177,510	)		—
R V McKinnon ⁽⁶⁾	Ordinary		43,991		—		37,500		(81,491	)		—
	Deferred STI		7,083		—		—		(7,083	)		—
	Reward Shares		58,750		17,030		—		(75,780	)		—
G L Mackrell	Ordinary		27,319		—		—		7,611			34,930
	Deferred STI		10,134		—		—		(6,742	)		3,392
	Reward Shares		83,230		27,570		—		—			110,800
J K O’Sullivan	Ordinary		5,565		—		—		3,351			8,916
	Deferred STI		6,702		—		—		(3,351	)		3,351
	Reward Shares		59,440		23,250		—		—			82,690
G A Petersen	Ordinary		8,572		—		—		1,335			9,907
	Deferred STI		5,177		—		—		(3,327	)		1,850
	Reward Shares		35,500		20,280		—		—			55,780
Other Executives
J Beggs	Ordinary		105,891		—		—		20,845			126,736
	Deferred STI		31,734		—		—		(20,845	)		10,889
	Reward Shares		29,000		10,000		—		—			39,000
W Negus	Ordinary		3,680		—		—		—			3,680
	Deferred STI		—		—		—		—			—
	Reward Shares		—		40,500		—		—			40,500
M Touw	Ordinary		—		—		—		—			—
	Deferred STI		49,703		—		—		(16,574	)		33,129
	Reward Shares		33,200		11,250		—		—			44,450

Total for Executives	Ordinary		585,523		—		475,000		(598,410	)		462,113
	Deferred STI		166,447		—		—		(99,177	)		67,270
	Reward Shares		782,180		307,470		—		(253,290	)		836,360


(1)		Represents:

•		Deferred STI — acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 33 to the Financial Statements for further details on the EPP.

•		Reward Shares — granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 16 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 to the Financial Statements for further details on the ERP.

(2)		‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which became Ordinary shares).

(3)		Mr Cupper acquired 6,000 PERLS III securities during the year, and continued to hold them at 30 June 2006.

(4)		Mr Harte commenced on 10 April 2006.

(5)		Mr Katz ceased employment on 24 March 2006. Mr Katz acquired 2,250 PERLS III securities during the year, and continued to hold these and 250 PERLS II securities as at 30 June 2006.

(6)		Mr McKinnon ceased employment on 31 December 2005.

64 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report — Remuneration Report

Option Holdings


								Vested and Exercisable at
								30 June 2006⁽¹⁾
	Balance		Options			Balance				Exercise Price
Name	1 July 2005		Exercised			30 June 2006		Number		$

Directors
D V Murray (retired on 22 September 2005)		250,000		(250,000	)		—		—		—
R J Norris (commenced on 22 September 2005)		—		—			—		—		—

Executives
M A Cameron		—		—			—		—		—
L G Cupper		75,000		—			75,000		75,000		30.12
S I Grimshaw		100,000		(100,000	)		—		—		—
H D Harley		87,500		(87,500	)		—		—		—
M R Harte		—		—			—		—		—
M A Katz (ceased employment on 24 March 2006)		250,000		(250,000	)		—		—		—
R V McKinnon (ceased employment on 31 December 2005)		37,500		(37,500	)		—		—		—
G L Mackrell		—		—			—		—		—
J K O’Sullivan		—		—			—		—		—
G A Petersen		—		—			—		—		—

Total for Key Management Personnel		800,000		(725,000	)		75,000		75,000		n/a


Other Executives
J Beggs		150,000		—			150,000		75,000		23.84
									37,500		26.97
									37,500		30.12
W Negus		—		—			—		—		—
M Touw ⁽²⁾		—		—			—		—		—

Total		950,000		(725,000	)		225,000		225,000		n/a


(1)		‘Vested and Exercisable’ options represents those granted on 3 September 2001 with an exercise price of $30.12. Mr Beggs also held vested but unexercised options granted on 24 September 1999 with an exercise price of $23.84 and 13 September 2001 with an exercise price of $26.97 at 30 June 2006.

(2)		As at 30 June 2005, Mr Touw privately held a short selling (negative) position in Commonwealth Bank Call Options of 40,000. During the year he reversed out of this position and had a nil balance as at 30 June 2006. As at 30 June 2005 Mr Touw had a nil position in Commonwealth Bank Low Exercise Price Options (LEPOs). During the year he short sold 10,000 LEPOs and that position remained as at 30 June 2006.

Commonwealth Bank of Australia Annual Report 2006 65

Directors’ Report — Remuneration Report

Shares Vested and Options Exercised During the Year


					Shares Granted on Exercise of Options
									Value in Excess		Total Value
									of Exercise		of Options
	Deferred STI		Reward Shares				Exercise Price		Price ⁽¹⁾		Exercised ⁽²⁾
Name	Vested		Vested		Number		$		$		$

Directors
D V Murray ⁽³⁾		21,866		—		250,000		30.12		10.88		2,720,000
R J Norris ⁽⁴⁾		—		—				—

Executives
M A Cameron		5,246		—		—		—		—		—
L G Cupper		6,118		—		—		—		—		—
S I Grimshaw		9,442		—		100,000		30.12		7.15		715,000
H D Harley		6,388		—		37,500		26.97		16.85		631,875
						50,000		30.12		13.70		685,000
M R Harte ⁽⁵⁾		—		—		—		—		—		—
M A Katz ⁽⁶⁾		14,061		—		125,000		26.97		18.48		2,310,000
						125,000		30.12		15.33		1,916,250
R V McKinnon ⁽⁷⁾		4,696		—		37,500		30.12		13.53		507,375
G L Mackrell		6,742		—		—		—		—		—
J K O’Sullivan		3,351		—		—		—		—		—
G A Petersen		3,327		—		—		—		—		—

Total for Key Management Personnel		81,237		—		725,000		n/a		n/a		9,485,500


Other Executives
J Beggs		20,845		—		—		—		—		—
W Negus		—		—		—		—		—		—
M Touw		16,574		—		—		—		—		—

Total		118,656		—		725,000		n/a		n/a		9,485,500


(1)		“Value in Excess of Exercise Price” represents the difference between the exercise price and closing market value of CBA shares on date of exercise.

(2)		“Total Value of Options Exercised” represents the number of options exercised multiplied by the “Value in Excess of Exercise Price”. No options were granted or lapsed during the year. Accordingly, this value represents the total value of options that were granted, lapsed and exercised during the year.

(3)		Mr Murray retired on 22 September 2005 and deferred STI vested at this time.

(4)		Mr Norris commenced on 22 September 2005.

(5)		Mr Harte commenced in the role on 10 April 2006

(6)		Mr Katz ceased employment on 24 March 2006.

(7)		Mr McKinnon ceased employment on 31 December 2005.

66 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report — Remuneration Report

Loans to Key Management Personnel and Other Executives

Total Loans to Key Management Personnel and Other Executives


		Balance				Interest Not				Balance		Number in
	Year Ended	1 July		Interest Charged		Charged		Write-off		30 June		Group at
	30 June	$000s		$000s		$000s		$000s		$000s		30 June

Directors
	2006		—		379		—		—		5,729		1
	2005		2		—		—		—		3		1
Executives
	2006		9,894		550		—		—		9,284		7
	2005		8,706		523		—		—		8,803		6

Total for Key Management Personnel
	2006		9,894		929		—		—		15,013		8
	2005		8,708		523		—		—		8,806		7


Other Executives
	2006		554		31		—		—		442		1
	2005		554		32		—		—		554		1

Details of Individuals with Loans above $100,000 in the reporting period are as follows:

Individual Loans above $100,000 to Key Management Personnel and Other Executives


											Highest
	Balance		Interest		Interest Not				Balance		Balance
	1 July 2005		Charged		Charged		Write-off		30 June 2006		in Period
	$000s		$000s		$000s		$000s		$000s		$000s

Directors
D V Murray		—		379		—		—		5,729		5,729

Executives
M A Cameron		—		5		—		—		358		546
		—		3		—		—		300		302
S I Grimshaw		1,485		73		—		—		857		1,485
		—		16		—		—		391		394
H D Harley		332		19		—		—		304		334
		243		11		—		—		—		243
		347		7		—		—		—		427
M A Katz		175		11		—		—		175		175
		175		11		—		—		175		175
		500		31		—		—		500		500
		100		—		—		—		100		100
G L Mackrell		1,080		43		—		—		1,017		1,080
J K O’Sullivan		1,500		97		—		—		1,500		1,500
		392		26		—		—		582		587
		696		42		—		—		614		696
		258		17		—		—		274		277
		647		42		—		—		647		647
		200		12		—		—		200		200
		201		7		—		—		—		203
G A Petersen		400		11		—		—		155		400
		800		52		—		—		800		800

Total for Key Management Personnel		9,531		915		—		—		14,678		16,800


Other Executives
W Negus		442		30		—		—		442		442
		112		1		—		—		—		112

Total		10,085		946		—		—		15,120		17,354

Commonwealth Bank of Australia Annual Report 2006 67

Directors’ Report — Remuneration Report

Terms and Conditions of Loans

All loans to Key Management Personnel and Other Executives (or related entities controlled or significantly influenced by them) have been provided on an arms-length commercial basis including the term of the loan, security required and the interest rate (which may be fixed or variable).

Other Transactions of Key Management Personnel and Other Executives and Related Parties

Financial Instrument Transactions

Financial instrument transactions (other than loans and shares disclosed above) of Key Management Personnel and Other Executives with the Bank and other banks that are controlled entities occur in the ordinary course of business of the banks on an arm’s length basis.

Disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with Key Management Personnel and Other Executives and entities controlled or significantly influenced by them.

All such financial instrument transactions that have occurred between the banks and their Key Management Personnel and Other Executives have been trivial or domestic and were in the nature of normal personal banking and deposit transactions.

Transactions other than Financial Instrument Transactions of Banks

All other transactions with Key Management Personnel Other Executives and their related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by entities not controlled by the Bank.

The interests of Mr Daniels in investment funds managed by Colonial First State are detailed on page 63.

Mr Galbraith was a partner in the law firm Allens Arthur Robinson to 31 January 2006. Mr Galbraith was a salaried adviser to this law firm from 1 February to 30 June 2006. Allens Arthur Robinson acted for the Bank in the provision of legal services during the financial year. The fees for these services amounted to $2,137,174.

Audit

Certain disclosures required by AASB124 have been made in this Remuneration Report. Pages 51 to 68 of this report have been audited as required.

68 Commonwealth Bank of Australia Annual Report 2006

Directors’ Report

Non-Audit Services

Amounts paid or payable to Ernst & Young for non-audit services provided during the year, as set out in the Annual Report in Note 39 to the Financial Statements are as follows:


	$’000

Regulatory audits, reviews, attestations and assurances for Group entities — Australia		1,495

Regulatory audits, reviews, attestations and assurances for Group entities — Off-shore		631

APRA reporting (including the tripartite review)		996

Financial and other audits, reviews, attestations and assurances for Group entities — Australia		52

Financial and other audits, reviews, attestations and assurances for Group entities — Off-shore		132

Assurance services relating to Sarbanes-Oxley legislation compliance		2,782

Agreed upon procedures and comfort letters in respect of financing, debt raising and related activities		457

Total		6,545	⁽¹⁾


(1)		An additional amount of $4,056,000 was paid to Ernst & Young by way of fees paid for Non-Audit Services provided to entities not consolidated into the Financial Statements, being management investment schemes and superannuation funds. $3,923,000 of this amount related to statutory audits, with the residual relating to reviews, attestations and assurances.

Amounts paid or payable for audit services to Ernst & Young totalled $9,481,000 and to other auditors totalled $176,000.

The Bank has in place an Independent Auditor Services Policy, details of which are set out in the Corporate Governance section of this Annual Report, to assist in ensuring the independence of the Bank’s external auditor.

The Audit Committee has considered the provision, during the year, of non-audit services by Ernst & Young and has concluded that the provision of those services did not compromise the auditor independence requirements of the Corporations Act.

The Audit Committee advised the Board accordingly and, after considering the Committee’s advice, the Board of Directors agreed that it was satisfied that the provision of the non-audit services by Ernst & Young during the year, was compatible with the general standard of independence imposed by the Corporations Act.

The reasons for the Directors being satisfied that the provision of the non-audit services during the year did not compromise the auditor independence requirements of the Corporations Act are:

•		The operation of the Independent Auditor Services Policy during the year to restrict the nature of non-audit services engagements, to prohibit certain services and to require Audit Committee pre-approval for all such engagements; and

•		The relative quantum of fees paid for non-audit services compared to the quantum of audit fees.

The above Directors’ statements are in accordance with the advice received from the Audit Committee.

Auditor’s Declaration of Independence

We have obtained an independence declaration from our auditor, Ernst and Young as presented on the following page.

Roundings

The amounts contained in this report and the financial statements have been rounded to the nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100 (as amended by ASIC Class Order 04/667).

Incorporation of Additional Material

This report incorporates the Chairman’s Statement, Highlights, Analysis sections for Banking, Funds Management and Insurance, Corporate Governance and Shareholding Information sections of this Annual Report.

Signed in accordance with a resolution of the Directors.



J M Schubert		R J Norris
Chairman		Managing Director and Chief Executive Officer
23 August 2006

Commonwealth Bank of Australia Annual Report 2006 69

Five Year Financial Summary


	AIFRS⁽¹⁾						AGAAP⁽¹⁾
	2006			2005			2004			2003			2002
	$M			$M			$M			$M			$M

Income Statement
Net interest income		6,514			6,026			5,410			5,026			4,710
Other operating income		5,567			5,076			5,081			4,373			4,358

Total operating income		12,081			11,102			10,491			9,399			9,068
Bad debts expense		398			322			276			305			449
Operating expenses:
Comparable business		5,994			5,719			5,500			5,312			5,201
Initiatives including Which new Bank		—			150			749			239			—

Total operating expenses		5,994			5,869			6,249			5,551			5,201
Net profit before income tax		5,689			4,911			3,966			3,543			3,418
Corporate tax expense		(1,605	)		(1,409	)		(1,262	)		(958	)		(916	)
Outside equity interests		(31	)		(10	)		(9	)		(6	)		(1	)

Net profit after tax (“cash basis”)		4,053			3,492			2,695			2,579			2,501
Defined benefit superannuation plan expense		(25	)		(53	)		—			—			—
Treasury share valuation adjustment		(100	)		(39	)		—			—			—
Appraisal value uplift/(reduction)		—			—			201			(245	)		477
Goodwill amortisation		—			—			(324	)		(322	)		(323	)

Operating profit after income tax attributable to members of the Bank		3,928			3,400			2,572			2,012			2,655


Contributions to profit (after tax)
Banking		3,227			2,913			2,675			2,376			2,067
Funds management		400			351			274			233			368
Insurance		215			156			129			65			33

Net profit after income tax (“underlying basis”)		3,842			3,420			3,078			2,674			2,468
Shareholder investment returns		66			177			152			73			33
Which new Bank		—			(105	)		(535	)		(168	)		—
Profit on sale of the Hong Kong insurance business		145			—			—			—			—

Net profit after income tax (“cash basis”)		4,053			3,492			2,695			2,579			2,501
Defined benefit superannuation plan expense		(25	)		(53	)		—			—			—
Treasury share valuation adjustment		(100	)		(39	)		—			—			—
Goodwill amortisation		—			—			(324	)		(322	)		(323	)
Appraisal value uplift/(reduction)		—			—			201			(245	)		477

Net profit after income tax		3,928			3,400			2,572			2,012			2,655


Balance Sheet
Loans, advances and other receivables		259,176			228,346			189,391			160,347			147,074
Total assets		369,103			337,404			305,995			265,110			249,648

Deposits and other public borrowings		173,227			168,026			163,177			140,974			132,800
Total liabilities		347,760			314,761			281,110			242,958			228,592

Shareholders’ equity		21,343			22,643			22,405			20,024			19,030
Net tangible assets		12,087			10,938			17,700			14,995			13,639

Risk weighted assets		216,438			189,559			169,321			146,808			141,049

Average interest earning assets		274,798			244,708			214,187			188,270			170,634
Average interest bearing liabilities		255,100			225,597			197,532			174,737			157,105

Assets (on balance sheet)
Australia		304,831			280,255			252,652			221,248			208,673
New Zealand		43,318			41,383			35,059			27,567			24,579
Other		20,954			15,766			18,284			16,295			16,396

Total Assets		369,103			337,404			305,995			265,110			249,648


(1)		The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2006 and 2005 results are presented on an AIFRS basis, while the 2004, 2003 and 2002 results are presented on the previous AGAAP basis.

Commonwealth Bank of Australia Annual Report 2006 71

Five Year Financial Summary


	AIFRS⁽¹⁾						AGAAP⁽¹⁾
	2006			2005			2004			2003			2002

Shareholder Summary
Dividends per share (cents) — fully franked		224			197			183			154			150
Dividends cover (times) — statutory		1. 4			1. 3			1. 1			0. 9			1. 4
Dividends cover (times) — cash		1. 4			1. 3			1. 1			1. 3			1. 3
Dividends cover (times) — underlying		1. 3			1. 3			1. 3			1. 4			1. 3
Earnings per share (cents)
Basic
Statutory		308. 2			259. 6			196. 9			157. 4			209. 6
Cash basis		315. 9			264. 8			206. 6			202. 6			197. 3
Underlying basis		299. 4			259. 2			237. 1			210. 2			194. 6
Fully diluted
Statutory		303. 1			255. 3			196. 8			157. 3			209 .3
Cash basis		310. 5			260. 5			206. 5			202. 5			197. 0
Underlying basis		294. 7			255. 0			237. 0			210. 0			194. 3
Dividend payout ratio (%)
Statutory		73. 3			77. 0			93. 5			97. 7			71. 7
Cash basis		71. 0			74. 9			89. 1			75. 9			76. 2
Underlying basis		74. 9			76. 5			77. 6			73. 3			77. 2
Net tangible assets per share ($)		9. 4			8. 5			12. 2			11. 4			10. 3
Weighted average number of shares (statutory basic)		1,275			1,260			1,256			1,253			1,250
Weighted average number of shares (fully diluted)		1,329			1,316			1,257			1,254			1,252
Weighted average number of shares (cash basic)		1,283			1,269			1,256			1,253			1,250
Weighted average number of shares (cash fully diluted)		1,338			1,325			1,257			1,254			1,252
Number of shareholders		698,552			704,906			714,901			746,073			722,612
Share prices for the year ($)
Trading high		47. 41			38. 52			33. 54			32. 75			34. 94
Trading low		36. 62			28. 79			27. 0			23. 05			24. 75
End (closing price)		44. 41			37. 95			32. 58			29. 55			32. 93


Performance Ratios (%)
Return on average Shareholders’ equity
Statutory		20. 4			18. 2			12. 5			10. 5			14. 7
Cash basis		21. 3			18. 8			12. 7			13. 1			12. 9
Underlying basis		20. 2			18. 4			14. 6			13. 6			12. 8
Return on average total assets
Statutory		1. 1			1. 1			0. 9			0. 8			1. 1
Cash basis		1. 1			1. 1			0. 9			1. 0			1. 0
Underlying basis		1. 1			1. 1			1. 1			1. 0			1. 0
Capital adequacy — Tier 1		7. 56			7. 46			7. 43			6. 96			6. 78
Capital adequacy — Tier 2		3. 10			3. 21			3. 93			4. 21			4. 28
Deductions		(1. 00	)		(0. 92	)		(1. 11	)		(1. 44	)		(1. 26	)
Capital adequacy — Total		9. 66			9. 75			10. 25			9. 73			9. 80
Net interest margin		2. 34			2. 43			2. 53			2. 67			2. 76


Other Information (numbers)
Full time staff equivalent		36,664			35,313			36,296			35,845			37,245
Branches/services centres (Australia)		1,005			1,006			1,012			1,014			1,020
Agencies (Australia)		3,836			3,864			3,866			3,893			3,936
ATMs (proprietary)		3,191			3,154			3,109			3,116			3,049
EFTPOS terminals		148,220			137,240			126,049			129,259			126,613
EzyBanking locations		862			841			815			760			730


Productivity
Total net operating income per full-time (equivalent) employee ($)		329,506			314,388			289,040			262,212			243,469
Staff expense/Total operating income (%)		23. 4			24. 1			24. 3			26. 4			26. 4
Total operating expenses/Total operating income (%)		49. 6			52. 9			59. 6			59. 1			57. 4


(1)		The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result the 2006 and 2005 results are presented on an AIFRS basis, while the 2004, 2003 and 2002 results are presented on the previous AGAAP basis.

72 Commonwealth Bank of Australia Annual Report 2006

Financial Statements


Income Statements		74
Balance Sheets		75
Statements of Recognised Income and Expense		76
Statements of Cash Flows		77
Note 1	Accounting Policies	79
Note 2	Profit	115
Note 3	Income	117
Note 4	Average Balances and Related Interest	118
Note 5	Income Tax Expense	123
Note 6	Dividends	126
Note 7	Earnings Per Share	127
Note 8	Cash and Liquid Assets	128
Note 9	Receivables from Other Financial Institutions	128
Note 10	Assets at Fair Value through Income Statement	129
Note 11	Derivative Assets and Liabilities	131
Note 12	Available-for-Sale Investments	138
Note 13	Investment Securities	140
Note 14	Loans, Advances and Other Receivables	142
Note 15	Provisions for Impairment	144
Note 16	Credit Risk Management	148
Note 17	Asset Quality	155
Note 18	Shares in and Loans to Controlled Entities	159
Note 19	Investment Property	159
Note 20	Property, Plant and Equipment	160
Note 21	Intangible Assets	162
Note 22	Other Assets	163
Note 23	Deposits and Other Public Borrowings	164
Note 24	Payables to Other Financial Institutions	165
Note 25	Liabilities at Fair Value through Income Statement	165
Note 26	Income Tax Liabilities	165
Note 27	Other Provisions	166
Note 28	Debt Issues	167
Note 29	Managed Fund Units on Issue	169
Note 30	Bills Payable and Other Liabilities	170
Note 31	Loan Capital	170
Note 32	Detailed Statements of Changes in Equity	173
Note 33	Share Capital	176
Note 34	Minority Interests	182
Note 35	Capital Adequacy	183
Note 36	Maturity Analysis of Monetary Assets and Liabilities	188
Note 37	Financial Reporting by Segments	190
Note 38	Life Insurance Business	193
Note 39	Remuneration of Auditors	199
Note 40	Commitments for Capital Expenditures Not Provided for in the Accounts	199
Note 41	Lease Commitments — Property, Plant and Equipment	200
Note 42	Contingent Liabilities, Assets and Commitments	201
Note 43	Market Risk	204
Note 44	Retirement Benefit Obligations	215
Note 45	Controlled Entities	218
Note 46	Investments in Associated Entities and Joint Ventures	220
Note 47	Director and Executive Disclosures	221
Note 48	Related Party Disclosures	221
Note 49	Notes to the Statements of Cash Flows	228
Note 50	Disclosures about Fair Value of Financial Instruments	230

Commonwealth Bank of Australia Annual Report 2006 73

Financial Statements

Income Statements
For the year ended 30 June 2006


	Group								Bank
			2006			2005			2006			2005
	Note		$M			$M			$M			$M

Interest income		2		19,758			16,781			16,027			13,681
Interest expense		2		13,244			10,755			11,305			8,858

Net interest income				6,514			6,026			4,722			4,823
Other operating income				3,036			2,845			5,540			3,991

Net banking operating income				9,550			8,871			10,262			8,814

Funds management income				1,589			1,247			—			—
Investment revenue				2,098			1,956			—			—
Claims and policyholder liability expense				(2,064	)		(1,871	)		—			—

Net funds management operating income		2		1,623			1,332			—			—

Premiums from insurance contracts				1,052			1,132			—			—
Investment revenue				1,031			1,186			—			—
Claims and policyholder liability expense from insurance contracts				(970	)		(1,243	)		—			—

Insurance margin on services operating income		2		1,113			1,075			—			—


Total net operating income		2		12,286			11,278			10,262			8,814

Bad debts expense		2,15		398			322			380			292
Operating expenses:
Comparable business		2		5,994			5,719			4,604			4,388
Which new Bank				—			150			—			150

Total operating expenses		2		5,994			5,869			4,604			4,538
Defined benefit superannuation plan expense		2,44		(35	)		(75	)		(35	)		(75	)

Profit before income tax		2		5,859			5,012			5,243			3,909
Corporate tax expense		5		1,569			1,374			976			897
Policyholder tax expense		5		331			228			—			—

Profit after income tax ⁽¹⁾				3,959			3,410			4,267			3,012
Minority interests				(31	)		(10	)		—			—

Net profit attributable to members of the Bank				3,928			3,400			4,267			3,012


(1)		Net banking operating income, and profit after income tax of the Bank, is greater than the Group, due to the receipt of tax exempt intragroup dividends.


	Cents per share

Earnings per share:
Basic		7	308. 2	259. 6
Fully diluted		7	303. 1	255. 3
Dividends per share attributable to shareholders of the Bank:
Ordinary shares		6	224	197
PERLS ⁽¹⁾			—	1,115
Trust preferred securities (TPS) — issued 6 August 2003 ⁽¹⁾			—	7,795
PERLS II — issued 6 January 2004 ⁽¹⁾			—	908


(1)		Instruments reclassified to loan capital on adoption of AIFRS from 1 July 2005.


	$M			$M

Net profit after income tax comprises:
Net profit after income tax (“underlying basis”)		3,842			3,420
Shareholder investment returns (after tax)		66			177
Which new Bank (after tax)		—			(105	)
Profit on sale of the Hong Kong insurance business		145			—

Net profit after income tax (“cash basis”)		4,053			3,492

Defined benefit superannuation plan expense		(25	)		(53	)
Treasury share valuation adjustment		(100	)		(39	)

Net profit after income tax (“statutory basis”)		3,928			3,400

74 Commonwealth Bank of Australia Annual Report 2006

Financial Statements

Balance Sheets
As at 30 June 2006


	Group						Bank
			2006		2005		2006		2005
	Note		$M		$M		$M		$M

Assets
Cash and liquid assets		8		5,131		6,055		4,819		5,736
Receivables due from other financial institutions		9		7,107		6,087		7,464		5,972
Assets at fair value through Income Statement:		10
Trading				15,758		14,631		13,926		12,432
Insurance				24,437		27,484		—		—
Other				2,944		—		396		—
Derivative assets		11		9,675		—		9,938		—
Available-for-sale investments		12		11,203		—		9,914		—
Investment securities		13		—		10,838		—		6,922
Loans, advances and other receivables		14		259,176		228,346		212,699		183,925
Bank acceptances of customers				18,310		16,786		18,439		16,917
Shares in and loans to controlled entities		18		—		—		36,150		29,161
Investment property		19		258		252		—		—
Property, plant and equipment		20		1,314		1,132		1,027		821
Investment in associates		46		190		52		114		12
Intangible assets		21		7,809		7,656		2,738		2,675
Deferred tax assets		5		650		651		392		599
Other assets		22		5,141		17,434		4,624		17,154

Total Assets				369,103		337,404		322,640		282,326


Liabilities
Deposits and other public borrowings		23		173,227		168,026		155,956		143,858
Payables due to other financial institutions		24		11,184		8,023		11,131		7,969
Liabilities at fair value through Income Statement		25		13,811		—		2,085		—
Derivative liabilities		11		10,820		—		10,955		—
Bank acceptances				18,310		16,786		18,439		16,917
Due to controlled entities				—		—		32,435		26,428
Current tax liabilities		26		378		833		334		764
Deferred tax liabilities		26		1,336		921		640		872
Other provisions		27		821		871		690		703
Insurance policy liabilities		38		22,225		24,694		—		—
Debt issues		28		78,591		70,765		52,198		40,687
Managed funds units on issue		29		1,109		—		—		—
Bills payable and other liabilities		30		6,053		17,551		4,299		16,737

				337,865		308,470		289,162		254,935
Loan capital		31		9,895		6,291		10,688		7,010

Total Liabilities				347,760		314,761		299,850		261,945

Net Assets				21,343		22,643		22,790		20,381


Shareholders’ Equity

Share capital:
Ordinary share capital		33		13,505		13,486		13,766		13,739
Preference share capital		33		—		687		—		687
Other equity instruments		33		939		1,573		1,895		737
Reserves		32		1,904		1,265		2,657		2,226
Retained profits		32		4,487		3,843		4,472		2,992

Shareholders’ Equity attributable to members of the Bank				20,835		20,854		22,790		20,381


Minority interests:
Controlled entities		34		508		631		—		—
Insurance statutory funds and other funds				—		1,158		—		—

Total Minority Interests				508		1,789		—		—

Total Shareholders’ Equity				21,343		22,643		22,790		20,381

Commonwealth Bank of Australia Annual Report 2006 75

Financial Statements

Statements of Recognised Income and Expense
For the year ended 30 June 2006


	Group								Bank
			2006			2005			2006			2005
	Note		$M			$M			$M			$M

Actuarial gains/(losses) from defined benefit superannuation plan		32,44		387			110			387			110
Gains/(losses) on cash flow hedging instruments:
Recognised in equity		32		89			—			58			—
Transferred to Income Statement		32		(58	)		—			(51	)		—
Gains/(losses) on available-for-sale investments:							—						—
Recognised in equity		32		51			—			52			—
Transferred to Income Statement on sale		32		(33	)		—			(31	)		—
Transferred to Income Statement on impairment		32		(3	)		—			(3	)		—
Revaluation of properties		32		19			29			14			29
Transfer from FCTR to Income Statement on sale of entities		32		41			—			—			—
Exchange differences on translation of foreign operations		32		(232	)		(141	)		(8	)		—
Income tax on items taken directly to or transferred directly from equity:
FCTR		32		13			—			—			—
AFS investments revaluation reserve		32		(6	)		—			7			—
Revaluation of properties		32		(4	)		—			(3	)		—
Cash flow hedge reserve		32		(11	)		—			(2	)		—

Net income recognised directly in equity				253			(2	)		420			139
Profit for the period				3,959			3,410			4,267			3,012

Total net income recognised for the period				4,212			3,408			4,687			3,151

Attributable to:
Members of the parent				4,181			3,398			4,687			3,151
Minority interests				31			10			—			—

Total net income recognised for the period				4,212			3,408			4,687			3,151

76 Commonwealth Bank of Australia Annual Report 2006

Financial Statements

Statements of Cash Flows ^{(1) (2)}
For the year ended 30 June 2006


	Group									Bank
				2006			2005			2006			2005
	Note			$M			$M			$M			$M

Cash Flows From Operating Activities
Interest received					19,712			16,781			16,268			13,571
Interest paid					(12,555	)		(10,720	)		(11,348	)		(8,960	)
Other operating income received					4,319			4,559			2,715			3,621
Expenses paid					(5,809	)		(5,678	)		(4,318	)		(4,459	)
Income taxes paid					(1,980	)		(985	)		(1,117	)		(619	)
Net decrease/(increase) in trading securities					—			318			—			505
Net increase in assets at fair value through Income Statement (excluding life insurance)					(307	)		—			(1,926	)		—
Life insurance:
Investment income					2,399			1,572			—			—
Premiums received ⁽³⁾					2,338			3,183			—			—
Policy payments ⁽³⁾					(4,938	)		(4,664	)		—			—
Net increase in liabilities at fair value through Income Statement (excluding life insurance)					1,445			—			504			—

Cash flows from operating activities before changes in operating assets and liabilities					4,624			4,366			778			3,659


Changes in operating assets and liabilities arising from cash flow movements
Movement in investment securities:
Purchases					—			(22,608	)		—			(20,254	)
Proceeds from sale					—			396			—			275
Proceeds at or close to maturity					—			22,799			—			19,344
Movement in available-for-sale investments:
Purchases					(28,189	)		—			(25,310	)		—
Proceeds from sale					646			—			558			—
Proceeds at or close to maturity					24,831			—			21,828			—
Lodgement of deposits with regulatory authorities					(29	)		(7	)		(1	)		3
Net (increase) in loans, advances and other receivables					(31,996	)		(31,721	)		(28,936	)		(24,777	)
Net (increase)/decrease in receivables due from other financial institutions not at call					(881	)		1,097			(793	)		464
Net decrease in securities purchased under agreement to resell					537			991			740			988
Life insurance business:
Purchase of insurance assets at fair value through Income Statement					(8,078	)		(14,165	)		—			—
Proceeds from sale/maturity of insurance assets at fair value through Income Statement					9,398			15,281			—			—
Net increase in deposits and other borrowings					12,799			6,332			13,284			7,291
Net proceeds from issuance of debt securities					14,605			17,934			13,331			16,238
Net increase in payables due to other financial institutions not at call					2,571			449			2,566			426
Net increase/(decrease) in securities sold under agreements to repurchase					328			(1,480	)		328			(1,418	)

Changes in operating assets and liabilities arising from cash flow movements					(3,458	)		(4,702	)		(2,405	)		(1,420	)

Net cash provided by/(used in) Operating Activities		49	(a)		1,166			(336	)		(1,627	)		2,239

Cash flows from Investing Activities
Payment for acquisition of entities and management rights		49	(e)		(418	)		(40	)		(26	)		(24	)
Proceeds from disposal of controlled entities		49	(c)		553			—			—			178
Proceeds from disposal of entities and businesses (net of cash disposed)					35			173			—			306
Dividends received					4			3			2,080			988
Net amounts paid to controlled entities					—			—			1,531			(3,325	)
Proceeds from sale of property, plant and equipment					32			30			17			30
Purchases of property, plant and equipment					(385	)		(286	)		(329	)		(164	)
Payment for acquisitions of investments in associates					(152	)		(42	)		(102	)		—
Purchases of intangible assets					(90	)		(92	)		(95	)		—
Net decrease in other assets					31			1,055			371			758

Net cash (used in)/provided by Investing Activities					(390	)		801			3,447			(1,253	)


(1)		It should be noted that the Bank does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions.

(2)		Adjusted for AIFRS gross-up. Refer Note 1 (nn) (ii).

(3)		Represents gross premiums and policy payments before splitting between policyholders and shareholders.

Commonwealth Bank of Australia Annual Report 2006 77

Financial Statements

Statements of Cash Flows ^{(1) (2)}
For the year ended 30 June 2006


	Group									Bank
				2006			2005			2006			2005
	Note			$M			$M			$M			$M

Cash Flows from Financing Activities
Buyback of shares					(500	)		—			(500	)		—
Proceeds from issue of shares (net of costs)					49			66			49			66
Proceeds from issue of preference shares to minority interests					—			323			—			—
Proceeds from issue of other equity instruments (net of costs)					939			—			1,895			—
Dividends paid (excluding DRP buyback of shares)					(2,163	)		(2,083	)		(2,163	)		(2,024	)
Net movement in other liabilities					139			(330	)		(3,313	)		(292	)
Net (purchase) of treasury shares					(10	)		(60	)		(2	)		—
Issue of loan capital					2,446			1,233			3,152			1,554
Redemption of loan capital					(915	)		(1,392	)		(918	)		(1,621	)
Other					1			55			(93	)		6

Net cash (used in) Financing Activities					(14	)		(2,188	)		(1,893	)		(2,311	)


Net increase/(decrease) in cash and cash equivalents					762			(1,723	)		(73	)		(1,325	)
Cash and cash equivalents at beginning of period					1,276			2,999			314			1,639

Cash and cash equivalents at end of period		49	(b)		2,038			1,276			241			314


(1)		It should be noted that the Bank does not use this accounting Statement of Cash Flows in the internal management of its liquidity positions.

(2)		Adjusted for AIFRS gross-up. Refer Note 1 (nn) (ii).

78 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies

General Information

This annual reporting period is the first under the Australian equivalent to International Financial Reporting Standards (“AIFRS”). For this reason, a full explanation of all AIFRS accounting policies and differences from previous Australian GAAP (“AGAAP”) is set out below. The financial impact of these changes is summarised in Note 1 (nn).

The financial statements of the Commonwealth Bank of Australia (the ‘Bank’) and the Bank and its subsidiaries (the ‘Group’) for the year ended 30 June 2006, were approved and authorised for issue by the Board of Directors on 23 August 2006.

The Bank is incorporated and domiciled in Australia. It is a company limited by shares that are publicly traded on the Australian Stock Exchange. The address of its registered office is Level 7, 48 Martin Place, Sydney NSW 1155, Australia.

The Group is one of Australia’s leading providers of integrated financial services including retail, business and institutional banking, superannuation, life insurance, general insurance, funds management, broking services and finance company activities. The principal activities of the Commonwealth Bank Group during the financial period were:

(i) Banking

The Group provides retail banking services including housing loans, credit cards, personal loans, savings and cheque accounts, and demand and term deposits. The Group also offers commercial products including business loans, equipment and trade finance, and rural and agribusiness products. The Group also has full service banking operations in New Zealand, Fiji, and Indonesia. The Group has wholesale banking operations in London, New York, Hong Kong, Singapore, Indonesia, China, Tokyo and Malta.

(ii) Funds Management

The Group’s funds management business comprises wholesale and retail investment, superannuation and retirement funds. Investments are across all major asset classes including Australian and international shares, property, fixed interest and cash. The Group also has funds management businesses in New Zealand, the United Kingdom and Asia.

(iii) Insurance

The Group provides term insurance, disability insurance, annuities, master trusts, investment products and household general insurance. Life insurance operations are also conducted in New Zealand, where the Group has the leading market share, and throughout Asia and the Pacific.

There have been no significant changes in the nature of the principal activities of the Group during the financial year.

(a) Bases of accounting

This general purpose financial report for the reporting period ended 30 June 2006 has been prepared in accordance with the requirements of the Corporations Act 2001.

For the financial year ended 30 June 2005 and all prior years the Annual Financial Report was prepared under the Australian accounting standards applicable to reporting periods beginning prior to 1 January 2005 (AGAAP). This 30 June 2006 Annual Financial Report, however, complies with current Australian accounting standards which consist of Australian equivalents to International Financial Reporting Standards (AIFRS). The basis of the AIFRS standards are the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. As a result of complying with AIFRS, the Group accounts also comply with IFRS, and interpretations adopted by the International Accounting Standards Board.

Accounting policies for the Bank have changed significantly due to the adoption of AIFRS. These changes have been summarised by comparing prior years’ accounting policies to the new AIFRS accounting policies. Differences in measurement, recognition and disclosure have been noted in the change in accounting policy section within each topic.

The preparation of the financial report in conformity with AIFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Use of available information and application of judgement are inherent in the formation of estimates. Actual results could differ from these estimates and possible impacts are disclosed in Note 1 (mm).

(b) Basis of preparation

The financial statements are prepared on the basis of historical cost except that the following assets and liabilities are stated at their fair value: derivative financial instruments, assets and liabilities at fair value through Income Statement, available-for-sale investments, insurance policy liabilities, domestic bills discounted which are included in loans, advances and other receivables held by the Group, investment property and owner occupied property, defined benefit plan assets and liabilities, and employee share-based compensation liabilities. Recognised assets and liabilities that are hedged and are attributable to the hedged risk are stated at fair value.

The accounting policies which have changed as a result of the adoption of AIFRS have been applied retrospectively and consistently by the Group to all periods presented in these financial statements and in preparing an opening AIFRS balance sheet at 1 July 2004, except for the following standards which were adopted and applied from 1 July 2005 onwards:-

i) AASB 132 Financial Instruments – Disclosure and Presentation;

ii) AASB 139 Financial Instruments – Recognition and Measurement;

iii) AASB 4 Insurance Contracts;

iv) AASB 1023 General Insurance Contracts; and

v) AASB 1038 Life Insurance Contracts.

Commonwealth Bank of Australia Annual Report 2006 79

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

On this basis, comparison with prior period results should be read in conjunction with the following accounting policy notes.

AIFRS has been applied retrospectively subject to the following elections under AASB 1 First-Time Adoption of AIFRS:

i) not to restate any past business combinations that occurred prior to 1 July 2004 in preparing the Group’s opening AIFRS Balance Sheet at 30 June 2005.

ii) to transfer the Foreign Currency Translation Reserve as at 1 July 2004 to Retained Profits.

The Group has applied its previous AGAAP in the comparative information to financial instruments and insurance contracts within the scope of the above standards.

The financial report is presented in Australian dollars. The Group has elected to early adopt the following accounting standards and amendments:

•

AASB 119 Employee Benefits (July 2005).

•

AASB 2004-3 Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 101 Presentation of Financial Statements and AASB 124 Related Party Disclosures.

•

AASB 2005-1 Amendments to Australian Accounting Standards (May 2005) amending AASB 139 Financial Instruments: Recognition and Measurement.

•

AASB 2005-3 Amendments to Australian Accounting Standards (June 2005) amending AASB 119 Employee Benefits (either July or December 2004).

•

AASB 2005-4 Amendments to Australian Accounting Standards (June 2005) amending AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts.

•

AASB 2005-5 Amendments to Australian Accounting Standards (June 2005) amending AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), and AASB 139 Financial Instruments: Recognition and Measurement.

•

AASB 2005-6 Amendments to Australian Accounting Standards (June 2005) amending AASB 3 Business Combinations.

•

AASB 2005-9 Amendments to Australian Accounting Standards (September 2005) requires that liabilities arising from the issue of financial guarantee contracts are recognised in the Balance Sheet.

•

AASB 2006-1 Amendments to Australian Accounting Standards (January 2006) amending AASB 121 The Effects of Change in Foreign Exchange Rates (July 2004).

•

UIG 8 Scope of AASB 2.

The following standards and amendments were available for early adoption but have not been applied by the Group in these financial statements:

•

AASB 7 Financial Instruments: Disclosure (August 2005) replacing the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007.

•

AASB 2005-10 Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosures and Presentation, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts, arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007.

The Group plans to adopt AASB 7 and AASB 2005-10 from the financial year commencing 1 July 2007.

The initial application of AASB 7 and AASB 2005-10 is not expected to have an impact on the financial results of the Bank and the Group as the standard and the amendment are concerned only with disclosures.

(c) Consolidation

Additional entities have been consolidated within the Group due to the adoption of AASB 127 Consolidated and Separate Financial Statements and UIG 112 Consolidation – Special Purpose Entities. These changes do not have a material impact on net assets or net profit however they have resulted in material gross ups of individual asset and liability line items of the Group.

For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The consolidated financial statements include the financial statements of the Bank and all entities where it is determined that there is a capacity to control as defined in AASB 127 and UIG 112.

All balances and transactions between Group entities, including unrealised gains and losses, have been eliminated on consolidation.

The consolidated financial statements also include the Group’s share of the financial results of entities where the Group holds an investment in, and has significant influence over, the financial and operating policies as defined in AASB 128 Investments in Associates. This is normally evidenced when the group owns 20% or more of the voting rights.

80 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Associated companies are defined as those entities over which the Group has significant influence but there is no capacity to control. Investments in associates are carried at cost plus the Group’s share of post-acquisition profit or loss and other reserves. The Group’s share of profit or loss of associates is included in the profit from ordinary activities.

(ii) Change in accounting policy

With the adoption of AASB 127 and UIG 112, a number of additional entities have been included in the Group. This is due to a change in what constitutes control and the inclusion of potential voting rights when considering control. Some of these entities were formed by the Group for the purpose of asset securitisation transactions and structured debt issuance, and to accomplish certain narrow and well-defined objectives. Such entities may acquire assets directly or indirectly from the Bank or its affiliates. Additionally, some of these entities are bankruptcy-remote (i.e. their assets are not available to satisfy the claims of creditors of the Group or any other of its subsidiaries). However, these entities have been consolidated in the Group’s financial statements as the exposure to risks and benefits from the entity resides with the Group.

The adoption of AASB 127 and UIG 112 has been applied retrospectively from 1 July 2004.

(d) Revenue recognition

The adoption of AASB 118 Revenue and AASB 139 has had an impact on the recognition and measurement of revenue. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The principal sources of revenue are interest income and fees and commissions.

Interest income

Interest income is recognised on an accrual basis using the effective interest method. Further information is included in Note 1(g) Receivables from other financial institutions, Note 1(j) Available-for-sale investments, Note 1(l) Loans, advances and other receivables, and Note 1(m) Leasing.

Lending fees

Fee income and direct costs relating to loan origination, financing or restructuring and to loan commitments are deferred and amortised to interest income over the life of the loan using the effective interest method. Fees received for commitments which are not expected to result in a loan are recognised in the profit and loss over the commitment period. Loan syndication fees where the Group does not retain a portion of the syndicated loan are recognised in income once the syndication has been completed. Where fees are received on an ongoing basis and represent the recoupment of the costs of maintaining and administering existing loans, these fees are taken to profit and loss on an accrual basis.

Fees and commission

When commission charges and fees relate to specific transactions or events, they are recognised in income in the period in which they are earned. However, when they are charged for services provided over a period, they are recognised in income on an accrual basis.

Other income

Trading income is brought to account when earned based on changes in fair value of financial instruments and recorded from trade date. Further information is included in Notes 1(e) Foreign Currency Translations, 1(i) Assets at Fair Value Through Income Statement, and Note 1(ff) Derivative financial instruments. Life insurance business income recognition is explained in Note 1(hh) below.

(iii) Change in accounting policy

Under AASB 118 and AASB 139, interest income now includes fees integral to the establishment of financial instruments for which interest income is recognised using the effective interest method. Fee income and direct costs relating to loan origination are deferred and amortised to interest earned on loans, advances and other receivables over the life of the loan using the effective interest method.

There is no material change in the recognition and measurement of fees and commission and other income.

The changes have been applied from 1 July 2005.

(e) Foreign currency translations

The adoption of AASB 121, The Effects of Changes in Foreign Exchange Rates, has not had a substantial impact on the reporting currency of the Group’s entities or the translation of foreign currency assets and liabilities. However, on transition under AASB 1 First-time Adoption of Australian Equivalents to IFRS, an option exists to transfer any amounts recorded within the Foreign Currency Translation Reserve (FCTR) as at 1 July 2004 to Retained Profits. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The functional and presentation currency of the domestic operations of the Bank has been determined to be Australian Dollars (AUD) as this currency best reflects the economic substance of the underlying events and circumstances relevant to the Bank. Each entity and overseas branch within the Group has also determined their functional currency based on their own primary economic indicators.

All foreign currency monetary items are revalued at spot rates of exchange prevailing at balance sheet date and changes in the spot rate are recorded in the profit and loss. Foreign currency forward, futures, swaps and option positions are revalued at the appropriate market rates applying at balance sheet date.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into AUD at foreign exchange rates ruling at the dates the fair value was determined. With the exception of the revaluations classified in equity, unrealised foreign currency gains and losses arising from these revaluations and gains and losses arising from foreign exchange dealings are included in the profit and loss.

The foreign currency assets and liabilities of overseas branches and controlled entities with an overseas functional currency are converted to AUD at balance sheet date in accordance with the foreign exchange rates ruling at that date. Profit and loss items for overseas branches and controlled entities are converted to AUD progressively throughout the year at the spot exchange rate at the date of the transaction. All resulting exchange differences are recognised in the FCTR as a separate component of equity.

Commonwealth Bank of Australia Annual Report 2006 81

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Translation differences arising from conversion of opening balances of shareholders’ funds of overseas branches and controlled entities at year end exchange rates are reflected in the FCTR. The Group maintains a substantially matched position in assets and liabilities in foreign currencies and the level of net foreign currency exposure does not have a material impact on its financial condition.

(ii) Change in accounting policy

Under the option available within AASB 1 the Bank transferred the balance of the FCTR as at 30 June 2004 to Retained Profits.

The translation on non-monetary Available-for-sale investments, the cash flow hedge reserve and net investments in foreign entities are all recorded in the FCTR.

These changes have been applied retrospectively from 1 July 2004.

(f) Cash and liquid assets

The adoption of AIFRS, AASB 127 Consolidated and Separate Financial Statements and UIG 112 Consolidation – Special Purpose Entities has not impacted the definition of cash and liquid assets, however additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation. These changes have resulted in recognition of additional cash and liquid assets. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Cash and liquid assets includes cash at branches, cash at bankers, nostro balances, money at short call with an original maturity of three months or less and securities held under reverse repurchase agreements. They are brought to account at the face value or the gross value of the outstanding balance. Interest is taken to profit and loss using the effective interest method when earned.

(ii) Change in accounting policy

Under AASB 127 and UIG 112 special purpose vehicles used for the securitisation of loans and receivables by the Group will be consolidated under AIFRS. This has resulted in an increase in cash and liquid assets.

Under AASB 107 Cash Flow Statements, the definition of cash and liquid assets includes nostro balances. This balance was previously recorded in receivables from other financial institutions.

The change has been applied retrospectively from 1 July 2004.

(g) Receivables from other financial institutions

The adoption of AIFRS has not had a substantial impact on receivables from other financial institutions. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Receivables from other financial institutions include loans, deposits with regulatory authorities and settlement account balances due from other banks. They are brought to account at the gross value of the outstanding balance. Interest is taken to profit and loss using the effective interest method.

(ii) Change in accounting policy

Under AASB 107 Cash Flow Statements, nostro balances, previously recorded separately in receivables from other financial institutions, have been reclassified to cash and liquid assets.

Deposits with regulatory authorities, previously recorded separately on the face of the balance sheet, have been reclassified to receivables from other financial institutions.

The change has been applied retrospectively from 1 July 2004

(h) Financial instruments

The adoption of AASB 132 Financial Instruments: Disclosure and Presentation, AASB 139 Financial Instruments: Recognition and Measurement and AASB 130 Disclosures in the Financial Statements of Banks and Similar Financial Institutions from 1 July 2005 has had a significant impact on the recognition, measurement and disclosure of financial instruments. Under these standards, the accounting policy has changed to recognise all derivatives in the balance sheet and to record all derivatives and some financial assets and liabilities at fair market value. Those financial assets and financial liabilities which are not at fair value will be carried at cost or amortised cost.

For each class of financial instrument listed below, except for restructured facilities referred to in Note 1(l) Loans, advances and other receivables, financial instruments are transacted on a commercial basis to derive an interest yield/cost with terms and conditions having due regard to the nature of the transaction and the risks involved.

Under AASB 132 and AASB 139, financial instruments are required to be classified into one of the following measurement categories which determines the accounting treatment of the item:

•

Assets at fair value through Income Statement (Note 1 (i))

•

Available-for-sale investments (Note 1 (j))

•

Loans, advances and other receivables (Note 1 (l))

•

Liabilities at fair value through Income Statement (Note 1 (x))

•

Liabilities at amortised cost

•

Equity (Note 1 (ee))

The change in accounting policy on transition to AIFRS for each class of financial instrument is detailed below.

The application of AASB 139 to the recognition and measurement of financial assets and financial liabilities, including derivatives, has given rise to a transition adjustment and will increase volatility in reported profits. For a summary of the change in accounting policy for hedge accounting see Note 1(ff), Derivative financial instruments.

The Group has no held to maturity investments.

In line with the exemption provided by AASB 1, comparative information has not been restated under AASB 132 and AASB 139.

Offsetting financial instruments

The Group offsets financial assets and liabilities where there is a legally enforceable right to set off, and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

82 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Derecognition of financial instruments

The derecognition of a financial instrument takes place when the Group no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party and the risks and rewards have substantially been transferred.

(i) Assets at fair value through Income Statement

“Assets at fair value through Income Statement”, is a new class of financial asset under AASB 139. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Assets at fair value through Income Statement include assets held for trading and assets that upon initial recognition are designated by the Group as at fair value through Income Statement. The assets designated as at fair value through Income Statement are those assets where the designation either reduces significant accounting mismatches between assets and related liabilities, the group of financial assets are managed and their performance is evaluated on a fair value basis, or where the asset is a contract which contains an embedded derivative. The assets are recognised initially at fair value and transaction costs including brokerage commissions and fees are taken directly to profit and loss. Subsequent changes in fair value are reported in other operating income. Dividends and interest are reflected in other operating income. Interest earned is recorded within Net Interest Earnings.

Assets at fair value through Income Statement are classified into three subcategories: Trading, Insurance and Other investments.

Trading

Trading assets are short and long term public, bank and other debt securities and equities that are acquired and held for trading purposes. Subsequent to initial recognition fair value is measured using quoted bid prices where available. In a trading portfolio with offsetting risk positions, quoted mid prices, where available, are used to measure the fair value. Non-market quoted assets are valued using valuation techniques based on market conditions and risks existing at balance sheet date.

Insurance

Insurance investment assets are investment securities that back life insurance contracts and life investment contracts. Refer to Note 1(hh), Life insurance business for further details.

Other investments

Other investments include financial assets which the Group has designated as at fair value through the Income Statement. Subsequent to initial recognition fair value is measured using quoted bid prices. Quoted mid prices are used to measure assets with offsetting risk positions in a portfolio at fair value. Non-market quoted instruments are valued using valuation techniques that are market conditions and risks existing at balance sheet date. Changes in fair value, and the reporting of interest and dividends earned are accounted for as outlined above. Other investments are recorded on a trade date basis.

(ii) Change in accounting policy

Under AASB 132 and AASB 139, there is a substantial change in the disclosure, recognition, measurement and presentation of those financial assets now classified as Assets at fair value through Income Statement. The standards have been applied from 1 July 2005. The changes are summarised below:

Assets at fair value through Income Statement is a new category of financial asset.

Trading securities have been reclassified into assets at fair value through Income Statement.

Insurance investment assets have been reclassified into Assets at fair value through Income Statement.

Other Investments is a new category of financial asset within Assets at fair value through Income Statement. They were previously carried at cost, or amortised cost, predominantly as investment securities.

Quoted bid prices, where available, are used to measure fair value. Quoted mid prices, where available, are used to measure fair value where there is an offsetting risk position in a portfolio. There is no material change in the measurement of assets at fair value.

Unrealised changes in fair value and realised gains and losses on disposal are reflected in other operating income. Interest on other investments is reported in net interest earnings using the effective interest method. Dividends are reflected in other operating income when earned.

Other investments are recorded on a trade date basis.

(j) Available-for-sale investments

The adoption of AASB 132 and AASB 139 has had a substantial impact on the measurement and disclosure of those financial instruments now classified as available-for-sale investments. Additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation, which has resulted in recognition of additional available-for-sale investments. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Available-for-sale investments are short and long term public, bank and other securities and include bonds, notes, bills of exchange, commercial paper, certificates of deposit, equities and rolling loan originations and syndications.

Available-for-sale investments are initially recognised at fair value including transaction costs and thereafter at fair value. Unquoted equities and investments whose fair value cannot be reliably measured are valued at cost. Gains and losses arising from changes in fair value are reported in the available-for-sale revaluation reserve net of applicable income taxes until such investments are sold, collected, otherwise disposed of, or become impaired. Interest, premiums and dividends are reflected in other operating income when earned.

Available-for-sale investments are tested for lasting impairment in line with Note 1(n) Provisions for impairment.

Upon disposal or impairment, the accumulated change in fair value within the available-for-sale revaluation reserve is transferred to profit and loss and reported under other operating income.

Commonwealth Bank of Australia Annual Report 2006 83

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

(ii) Change in accounting policy

Under AASB 139, financial assets previously classified as investment securities have predominantly been reclassified to Available-for-sale investments and Loans, advances and other receivables.

Investment securities which were previously recognised at cost or amortised cost have been restated to fair value. Changes in fair value have been included as a separate component of equity (available-for-sale revaluation reserve) until sale or impairment when the cumulative gain or loss is transferred to profit and loss. The change in measurement has been applied from 1 July 2005.

(k) Repurchase agreements

There is no material change in accounting policy.

Securities sold under agreements to repurchase are retained within the Available-for-sale investments or Assets at fair value through Income Statement categories and accounted for accordingly in line with Note 1 (j) and (i) respectively.

Liability accounts are used to record the obligation to repurchase and disclosed as Deposits. Securities held under reverse repurchase agreements are recorded within Cash and liquid assets.

(l) Loans, advances and other receivables

The adoption of AASB 127, AASB 132, AASB 139 and UIG 112 has had a substantial impact on the recognition, measurement and disclosure of those financial instruments classified as loans, advances and other receivables. Additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation, which has resulted in recognition of additional loans, advances and other receivables. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Loans, advances and other receivables are financial assets with fixed and determinable payments that are not quoted in an active market.

They include overdrafts, home loans, credit card and other personal lending, term loans, bill financing, redeemable preference shares, securities and finance leases. Loans, advances and other receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where loans, advances and other receivables are originated with the intent to be sold immediately or in the short term, they are recorded in Assets at fair value through Income Statement.

Note 1(d) and Note 1(n) provide additional information with respect to revenue recognition and impairment respectively.

Non Performing Facilities

Individual provisions for impairment are recognised to reduce the carrying amount of loans and advances to their estimated recoverable amounts. Individually significant provisions are calculated based on discounted cash flows.

The unwinding of the discount from initial recognition of impairment through to recovery of the written down amount is recognised as interest income. In subsequent periods, interest in arrears/due on non performing facilities is taken to profit and loss when a cash payment is received/realised and the amount is not designated as a principal payment.

Restructured Facilities

There is no change in accounting policy.

When the original contractual terms of facilities (primarily loans) are modified, the accounts become classified as restructured. Such accounts continue to accrue interest as long as the facility is performing in accordance with the restructured terms. If performance is not maintained, or collection of interest and/or principal is no longer probable, the account will be returned to the non performing classification. Facilities are generally kept as non performing until they are returned to a performing basis.

Assets Acquired Through Securities Enforcement (AATSE)

There is no change in accounting policy.

Assets acquired in satisfaction of facilities in default (primarily loans) are recorded at net market value at the date of acquisition. Any difference between the carrying amount of the facility and the net market value of the assets acquired is represented as an individually assessed provision or written off. AATSE are further classified as Other Real Estate Owned (“OREO”) or Other Assets Acquired Through Security Enforcement (“OAATSE”) and classified in the appropriate asset classifications in the balance sheet.

Impairment of loans, advances and other receivables

There has been a change in the recognition and measurement of impairment of loans, advances and other receivables as explained in Note 1(n) Provisions for impairment.

(ii) Change in accounting policy

Under AASB 139, loans are measured at amortised cost using the effective interest rate method.

As explained in Note 1(n), the Group has individually assessed provisions and collective provisions for impairment. In addition, the measurement and recognition of those provisions has changed, which is also explained in Note 1(n).

The change in measurement has been applied from 1 July 2005. Under AASB 127 and UIG 112 certain special purpose vehicles used for the securitisation of loans and receivables by the Group are consolidated under AIFRS, which has resulted in an increase in loans, advances and other receivables.

The change in recognition associated with AASB 127 and UIG 112 has been applied retrospectively from 1 July 2004.

(m) Leasing

The adoption of AASB 117 Leases has not had a significant impact on the recognition, measurement or disclosure of leases.

The changes are minimal except and so far as leveraged leases that were ‘grandfathered leveraged leases’ are now measured and disclosed as finance leases. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Leases where the Group transfers substantially all the risks and rewards incident to ownership of an asset to the lessee or a third party are classified as finance leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognised.

84 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

AASB 117 requires income on finance lease transactions to be recognised on a basis reflecting a constant periodic return based on the lessor’s net investment outstanding in respect of the finance lease.

The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognised over the term of the lease using the effective interest method. Finance lease receivables are included in loans, advances and other receivables.

Leases where the Group retains substantially all the risk and rewards incident to ownership of an asset are classified as operating leases.

Operating lease rental revenue and expense is recognised in profit and loss on a straight-line basis over the lease term. The Group classifies assets leased out under operating leases as property, plant and equipment. These assets are depreciated over their expected useful lives on a basis consistent with similar fixed assets.

(ii) Change in accounting policy

Previously, only leveraged leases with a lease term beginning from 1 July 1999 were accounted for as finance leases with income brought to account progressively over the lease term. With the adoption of AASB 117 Leases, all leveraged leases, including those written prior to 1 July 1999 are now measured and disclosed as finance leases.

(n) Provisions for impairment

The adoption of AASB 139 Financial Instruments: Recognition and Measurement and AASB 136 Impairment of Assets has had a substantial impact on the measurement and recognition of impairment of financial and non-financial assets. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Financial assets

Financial assets, excluding derivative assets and assets at fair value through Income Statement, are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. A financial asset or portfolio of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet date (“a loss event”) and that loss event or events has had an impact on the estimated future cash flows of the financial asset or the portfolio that can be reliably estimated. If any such indication exists, the asset’s carrying amount is written down to the asset’s estimated recoverable amount.

Loans, advances and other receivables

The Group assesses at each balance date whether there is any objective evidence of impairment.

If there is objective evidence that an impairment loss on loans, advances and other receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the expected future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. Short-term balances are not discounted.

Loans and advances are presented net of provisions for loan impairment. The Group has Individually assessed provisions and Collectively assessed provisions. Individually assessed provisions are made against individually significant financial assets and those that are not individually significant, including groups of financial assets with similar credit risk characteristics.

All other loans and advances that do not have an individually assessed provision are assessed collectively for impairment. Collective provisions are maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the balance sheet date.

The expected future cash flows for portfolios of assets with similar risk characteristics are estimated on the basis of historical loss experience. Loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the loss experience is based and to remove the effects of conditions in the period that do not currently exist. Increases or decreases in the provision amount are recognised in the profit and loss.

Available-for-sale investments

When a decline in the fair value of an available-for-sale investment has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity (refer Note 1(j)) is removed from equity and recognised in the profit and loss.

If in a subsequent period the amount of an impairment loss for an available-for-sale debt security decreases and the decrease can be linked objectively to an event occurring after the impairment event, the impairment is reversed through profit and loss. However, impairment losses on available-for-sale equity securities are not reversed while the asset is still recognised.

Goodwill and other non-financial assets

Goodwill balances and intangible assets with an indefinite useful life are assessed for impairment at each reporting date or more regularly where an indication of impairment exists. Please refer to Note 1(t) Intangibles for more details on goodwill and intangibles impairment testing. If any such indication exists, the asset’s carrying amount is written down to the asset’s estimated recoverable amount and the loss is recognised in the profit and loss in the period in which it occurs.

The carrying amounts of the Group’s other non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash generating unit can be the greater of the fair value less cost to sell, or value in use. The Group’s policy is to use the fair value less costs to sell in assessing recoverable amount. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss.

A previously recognised impairment loss (except for goodwill) is reversed if there has been a change in the estimates used to determine the recoverable amount. However, the reversal is not to an amount higher than the carrying amount that would have been determined, net of amortisation or depreciation, if no impairment loss had been recognised in prior years.

Commonwealth Bank of Australia Annual Report 2006 85

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Off-balance sheet items

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, provisions for impairment on off-balance sheet items such as a commitment are reported in other provisions. Measurement of provisions is discussed further in Note 1(aa) Provisions.

The amounts required to bring the provisions for impairment to their assessed levels are charged to profit and loss.

(ii) Change in accounting policy

Under previous AGAAP and in line with market practice, the Group’s general provision for bad debts was maintained to cover non identified probable losses and latent risks inherent in the overall portfolio of advances and other credit transactions.

Under AIFRS, the Group recognises impairment provisions in respect of only those advances and credit transactions for which there is objective evidence of impairment as at each balance sheet date.

As a result of this change, there has been a reduction in the amount of the Bank’s collective provisioning for impaired loans.

Specific provisions are now known as individually assessed provisions and are established where objective evidence of impairment has been identified via an individual assessment of a financial asset or group of financial assets.

Individually significant provisions are assessed as the difference between an asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

Loans and advances that do not have an individually assessed provision are assessed collectively for impairment.

The transitional provisions for loan impairment resulted in adjustments to existing provisions being taken to Retained Profits.

The difference between the post-tax equivalents of the previous general provision and the new collective provision has been appropriated from Retained Profits to a separate component of equity - General Reserve for Credit Loss.

(o) Bank acceptances of customers

There is no change in accounting policy.

The exposure arising from the acceptance of bills of exchange that are sold into the market is brought to account as a liability. An asset of equal value is raised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate fee income that is taken to profit and loss when earned.

(p) Shares in and loans to controlled entities

There has been no substantial change in accounting policy.

Shares in controlled entities are carried in the Bank’s financial statements at the lower of cost of acquisition or recoverable amount, and loans to controlled entities are measured at amortised cost using the effective interest method.

These assets are brought to account at fair value when impaired and a provision is raised as per Note 1(n) Provisions for impairment.

(q) Investment property

The adoption of AASB 116 Property, Plant and Equipment, and AASB 140, Investment Property, have not had a material impact on the recognition and measurement of these assets. There have, however, been some disclosure changes in relation to investment property. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Investment properties are classified as properties held to earn rental income and/or for capital appreciation.

The Group carries investment properties at fair value based on a valuation performed by professional valuers. Valuations are carried out annually. Fair value movements are taken to the profit and loss in the year in which they arise.

Investment properties are separately disclosed on the face of the balance sheet and in the notes to the financial statements.

(ii) Change in accounting policy

Investment properties were previously included within Property, Plant and Equipment and are now separately disclosed on the face of the balance sheet and in the notes to the financial statements.

The changes in disclosure have been applied from 1 July 2005.

(r) Assets classified as held for sale

The adoption of AASB 5, Non-Current Assets Held for Sale and Discontinued Operations, and AASB 116, Property, Plant and Equipment, have not had a material impact on the recognition and measurement of these assets. There have been some disclosure changes in relation to assets classified as held for sale. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Assets are classified as held for sale when their carrying amounts will be recovered principally through sale within 12 months. They are measured at the lower of carrying amount and fair value less costs to sell and if material are disclosed separately on the face of the balance sheet.

Assets classified as held for sale are neither amortised nor depreciated.

(ii) Change in accounting policy

Assets classified as held for sale were previously included within Property, Plant and Equipment and if material are now separately disclosed on the face of the balance sheet and in the notes to the financial statements.

The changes in disclosure have been applied from 1 July 2005.

86 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

(s) Property, Plant and Equipment

The adoption of AASB 5, Non-Current Assets Held for Sale and Discontinued Operations, AASB 116, Property, Plant and Equipment, and AASB 140, Investment Property have not had a material impact on the recognition and measurement of these assets. There have been some disclosure changes in relation to investment property and assets classified as held for sale. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The Group measures its property assets (land and buildings) on a fair value measurement basis which is based upon independent market valuations.

Adjustments arising from revaluation are generally reflected in the Asset Revaluation Reserve, except to the extent they reverse a revaluation decrease of the same asset previously recognised in profit and loss. Gains or losses on disposals are determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. Realised amounts in the Asset Revaluation Reserve are transferred to the Capital Reserve.

Equipment is measured at cost less accumulated depreciation and provision for impairment, if any. Depreciation is calculated principally on a category basis at rates applicable to each category’s useful life using the straight-line method and treated as an operating expense charged to profit and loss. The amounts charged for the year are shown in Note 2 Profit.

Computer software is capitalised at cost and classified as Property, Plant and Equipment where it is deemed integral to the operation of associated hardware.

The useful lives of major depreciable asset categories are as follows:


Buildings

Shell		Maximum 30 years
Integral plant and equipment:
Carpets		10 years
All other (air-conditioning, lifts)		20 years
Non integral plant and equipment:
Fixtures and fittings		10 years

Leasehold improvements

Leasehold improvements		Lesser of unexpired lease term or lives as above
Equipment

Security surveillance systems		7 years
Furniture		8 years
Office machinery		5 years
EFTPOS machines		3 years

Depreciation rates and methods underlying the calculation of depreciation of items of property, plant and equipment are kept under review to take account of any change in circumstances.

No depreciation is charged on freehold land, although, in common with all long-lived assets, it is subject to impairment testing, if deemed appropriate.

Property, plant and equipment are periodically reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately through profit and loss to its recoverable amount.

Where the Group expects the carrying amount of assets held within property, plant and equipment to be recovered principally through a sale transaction in the short-term rather than through continuing use, these assets are classified as held for sale.

(ii) Change in accounting policy

Under AASB 116 Property, Plant and Equipment, property revaluations were previously recognised on a class of asset basis where increments and decrements are offset against each other when they relate to the same class of assets. Under AIFRS, net cumulative increments or decrements are determined at the level of each individual asset. This has led to revaluation amounts that were previously offset being allocated back to assets.

Investment properties and assets classified as held for sale previously included within property, plant and equipment have been split out and if material, are separately disclosed on the face of the balance sheet and in the notes to the financial statements. For further details refer to Note 1(q) and Note 1(r) on Investment property and assets classified as held for sale respectively.

Previously, realised amounts in the Asset Revaluation Reserve were transferred to the Capital Reserve, but are now transferred to Retained Profits.

The changes in disclosure have been applied from 1 July 2004.

(t) Intangibles

The adoption of AASB 138 Intangible Assets has had a substantial impact on the recognition, measurement and disclosure of intangibles. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Goodwill

Goodwill, representing the excess of purchase consideration plus incidental expenses over the fair value of the identifiable net assets at the time of acquisition of an entity, is capitalised and brought to account in the balance sheet.

Goodwill is reviewed annually for impairment at each reporting date, or more frequently if events or changes in circumstances indicate that it might be impaired. For the purposes of impairment testing, goodwill is allocated to cash-generating units or groups of units. A cash-generating unit is the smallest identifiable group of assets that generate independent cash flows. Goodwill is allocated by the Group to cash generating units or groups of units based on how goodwill is monitored by management.

An impairment loss is recognised for a cash-generating unit if the recoverable amount of the unit/group of units is less than the carrying amount of the unit/group of units. The recoverable amount of the cash-generating units is calculated as the fair value less costs to sell, measured using readily available market data and assumptions. Impairment losses on goodwill are not subsequently reversed.

Commonwealth Bank of Australia Annual Report 2006 87

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Gains and losses on the disposal of an entity are net of the carrying amount of the goodwill relating to the entity.

Under AASB 138, the acquired component of any excess of the net market value over net assets of the Group’s life insurance controlled entities is classified as goodwill.

Computer software costs

Where computer software costs are not integrally related to associated hardware, the Group recognises them as an intangible asset where they are clearly identifiable, can be reliably measured and it is probable they will lead to future economic benefits that the Group controls.

The Group carries capitalised software assets at cost less amortisation and any impairment losses.

These assets are amortised over their estimated useful lives on a straight-line basis which is usually 2¹/2 years. Software maintenance costs continue to be expensed as incurred.

Any impairment loss is recognised in the profit and loss when incurred.

Other Intangibles

Other intangibles comprise acquired management fee rights and customer lists where they are clearly identifiable, can be reliably measured and where it is probable they will lead to future economic benefits that the Group controls.

The Group carries capitalised management fee rights and customer lists at cost less amortisation and any impairment losses. These assets are either deemed to have indefinite lives and assessed annually for impairment, or are amortised over their estimated useful lives on a straight-line basis over ten years.

Any impairment loss is recognised in the profit and loss when incurred.

(ii) Change in accounting policy

Under AASB 138, goodwill is no longer required to be amortised, but is subject to an annual impairment test, or more frequent tests if events or changes in circumstances indicate that it might be impaired. On transition, goodwill is included on the basis of its deemed cost as at 1 July 2004 which represents the carrying amount recorded under previous AGAAP.

The AIFRS standards have not been applied retrospectively to business combinations that occurred prior to 1 July 2004 in preparing the Group’s opening AIFRS balance sheet at 1 July 2005. The only adjustment made to goodwill has been the recognition of other separately identifiable intangible assets for capitalised management fee rights and customer lists.

Computer software costs were previously included in Other assets, but have either been reclassified to intangible assets or property, plant and equipment.

Under AASB 138 the asset representing the excess of the net market value over net assets of the Group’s life insurance controlled entities can no longer be recognised in full. The acquired component has been reclassified to goodwill and the write off of the internally generated component has been reflected on transition at 1 July 2004 against the General Reserve. For further details, refer to Note 1(hh) Life Insurance Business.

(u) Other Assets

The adoption of AASB 132, AASB 138 and AASB 1038 Life Insurance Contracts, has resulted in the reclassification of derivative assets, computer software costs and the asset representing the excess of the net market value of net assets of the Group’s life insurance controlled entities. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Other assets include all other financial assets and include interest, fees and other unrealised income receivable, and securities sold not delivered. These assets are recorded at the cash value to be realised when settled.

The net surpluses or deficits that arise within defined benefit superannuation plans are recognised and disclosed separately in other assets and bills payable and other liabilities. As the bank carries a net surplus, no funding of the Australian defined benefit superannuation plan is required, therefore the related expense has been treated as a non cash item.

(ii) Change in accounting policy

Capitalised computer software costs have been reclassified to Intangible assets. Trading derivatives have been reclassified to Derivative assets.

Under AASB 138 the asset representing the excess of the net market value over net assets of the Group’s life insurance controlled entities can no longer be recognised in full.

The acquired component has been reclassified to goodwill and the write off of the internally generated component has been reflected on transition at 1 July 2004 against the General Reserve. For further details, refer to Note 1(hh) Life Insurance Business.

Under AASB 119, the surplus within the defined benefit superannuation plan has been recognised and disclosed within other assets. The change in measurement has been applied retrospectively from 1 July 2004.

(v) Deposits from Customers

The adoption of AASB 132 and AASB 139 has not had a substantial impact on deposits and other public borrowings. The changes relate to measurement and recognition. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Deposits and other public borrowings includes certificates of deposits, term deposits, savings deposits, cheque and other demand deposits, debentures and other funds raised publicly by borrowing corporations. They are brought to account at fair value including directly attributable transaction costs at inception. Deposits and other public borrowings are subsequently stated at amortised cost. Interest and yield related fees are taken to profit and loss based on the effective interest method when incurred.

Where the Group has hedged the deposits with derivative instruments, hedge accounting rules are applied (refer to Note 1(ff) Derivative financial instruments).

88 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

(ii) Change in accounting policy

Interest and yield related fees are taken to profit and loss based on the effective interest method when incurred, whereas previously interest was taken to profit and loss on an accrual basis when incurred. There has been no substantial change in the carrying value of deposits and other public borrowings as a result of this change.

The change has been applied from 1 July 2005.

(w) Payables to other financial institutions

The adoption of AASB 132 and AASB 139 has not had a substantial impact on payables to other financial institutions. The changes relate to measurement and recognition. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Payables to other financial institutions include deposits, vostro balances and settlement account balances due to other banks. They are brought to account at fair value including directly attributable transaction costs at inception.

Payables to other financial institutions are subsequently recognised at amortised cost. Interest and yield related fees are taken to profit and loss using the effective interest method when incurred.

Where the Group has stated the payables to other financial institutions at fair value through the Income Statement, the changes in fair value are reported in profit and loss (refer Note 1 (x) Liabilities at Fair Value through Income Statement).

(ii) Change in accounting policy

Interest and yield related fees are taken to profit and loss based on the effective interest method, whereas previously interest was taken to profit and loss on an accrual basis. There has been no substantial change in the carrying value of Payables to other financial institutions as a result of this change.

The liabilities are measured at fair value plus directly attributable transaction costs at inception. They are subsequently measured at amortised cost. They were previously carried at the gross value of the outstanding balance. The change has been applied from 1 July 2005.

(x) Liabilities at fair value through Income Statement

“Liabilities at fair value through Income Statement” is a new class of financial liabilities under AASB 139. There is a substantial change in the recognition, measurement and disclosure of these liabilities. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The Group designates certain liabilities as at fair value through Income Statement on origination where those liabilities are managed on a fair value basis. Changes in the fair value of liabilities through the Income Statement are reported in profit and loss. For quoted liabilities, quoted offer prices are used to measure fair value. Quoted mid prices are used to measure liabilities at fair value through Income Statement with offsetting risk positions in a portfolio at fair value. For non-market quoted liabilities, fair values have been determined using valuation techniques.

(ii) Change in accounting policy

Under AASB 139, certain financial liabilities that were predominantly disclosed as deposits from customers and debt issues at amortised cost under previous AGAAP, are now reclassified to liabilities at fair value through Income Statement. The change in measurement has been applied from 1 July 2005.

(y) Income taxes

The adoption of AASB 112 Income Taxes and UIG 1052 Tax Consolidation Accounting has had an impact on the measurement and disclosure of income taxes of the tax-consolidated Group, and thus, of various members of the Group. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Income tax on the profit and loss for the period comprises current and deferred tax.

Income tax is recognised in profit and loss, except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled.

A deferred tax asset is recognised only to the extent it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

The Commonwealth Bank of Australia elected to be taxed as a single entity under the tax consolidation system with effect from 1 July 2002.

The Bank has formally notified the Australian Taxation Office of its adoption of the tax consolidation regime. In addition to the Bank electing to be taxed as a single entity under the tax consolidation regime, the measurement and disclosure of deferred tax assets and liabilities has been performed in accordance with the principles in AASB 112, and on a modified stand alone basis under UIG 1052.

Any current tax liabilities/assets (after the elimination of intra-group transactions) and deferred tax assets arising from unused tax losses assumed by the Bank from the subsidiaries in the tax consolidated group are recognised in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Bank as an equity contribution to or distribution from the subsidiary.

Commonwealth Bank of Australia Annual Report 2006 89

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

The Bank recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses assumed from subsidiaries are recognised by the Bank only.

The members of the tax-consolidated group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts.

(ii) Change in accounting policy

A “balance sheet” approach to tax-effect accounting is followed under AIFRS, replacing the previous “liability method”. This approach recognises deferred tax balances when there is a difference between the carrying value of an asset or liability and its tax base. Also, unused tax losses are now recognised as deferred tax assets to the extent that it is probable that future taxable profits will be available, whereas previously the tax losses had to be virtually certain of being utilised. As at 1 July 2004 these changes in approach did not result in any material adjustment to Shareholders’ Equity other than as a result of other AIFRS transition adjustments.

In addition, deferred tax assets and liabilities are now separately disclosed on the face of the Balance Sheet. Additional disclosures have been provided in the notes to the financial statements.

(z) Employee benefits

The adoption of AASB 119 Employee Benefits and AASB 2 Share-based Payments, have had a substantial impact on the recognition, measurement, and disclosure of net surpluses and/or deficits of defined benefit superannuation plans. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Annual leave

The provision for annual leave represents the current outstanding liability to employees at balance sheet date.

Long service leave

The provision for long service leave is discounted to the present value, is subject to actuarial review and is maintained at a level that accords with actuarial advice.

Other employee benefits

The provision for other employee entitlements represents liabilities for staff housing loan benefits, a subsidy to a registered health fund with respect to retired employees and current employees, and employee incentives under employee share plans and bonus schemes.

The level of these provisions has been determined in accordance with the requirements of AASB 119.

Under AASB 2 Share-based Payments, the Group engages in equity settled share-based compensation in respect of services received from certain of its employees. The fair value of the share-based compensation is calculated at grant date and amortised to profit and loss against the Equity Compensation Reserve over the vesting period, subject to service and performance conditions being met.

When allocating share-based payments, the Bank purchases shares on market and recognises them at cost as a deduction from Share Capital (Treasury Shares). On settlement the shares are issued and recognised against the Equity Compensation Reserve.

Defined benefit superannuation plan

The Group currently sponsors two defined benefit superannuation plans for its employees. The assets and liabilities of these plans are legally held in separate trustee-administered funds. They are calculated separately for each plan by assessing the fair value of plan assets and deducting the amount of future benefit that employees have earned in return for their service in current and prior periods discounted to present value. The discount rate is the yield at balance sheet date on government securities which have terms to maturity approximating to the terms of the related liability. The defined benefit superannuation plan surpluses and/or deficits are calculated by fund actuaries. Contributions to all superannuation plans are made in accordance with the rules of the plans. As the Australian plan is in surplus, no funding is currently necessary.

Actuarial gains and losses related to defined benefit superannuation plans are directly recorded in Retained Profits. The net surpluses or deficits that arise within defined benefit superannuation plans are recognised and disclosed separately in Other assets and Bills payable and other liabilities.

Defined contribution superannuation plan

The Group sponsors a number of defined contribution superannuation plans. Certain plans permit employees to make contributions and earn matching or other contributions from the Group. The Group recognises contributions due in respect of the accounting period in the profit and loss. Any contributions unpaid at the balance sheet date are included as a liability.

Superannuation plan expense

Under AIFRS, an additional non-cash expense is recognised reflecting the accrual accounting charge to profit and loss associated with defined benefit superannuation plans.

(ii) Change in accounting policy

The Group sponsors two defined benefit superannuation plans on behalf of its employees. Previously, the net surpluses and/or deficits of these plans were not included in the financial statements.

Under AASB 119, the surpluses or deficits that arise within defined benefit superannuation plans are recognised and disclosed separately in Other assets and Bills payable and other liabilities. From 1 July 2004, the actuarial gains and losses relating to defined benefit superannuation plans are recorded in Retained profits. On transition to AIFRS, the comparative period beginning 1 July 2004 recorded an opening Retained profits adjustment where an additional non-cash expense is recognised reflecting the accrual accounting charge to profit and loss associated with defined benefit superannuation plans.

Under previous AGAAP, the Bank accrued all share-based compensation on a cost basis and amortised it to expense over the vesting period where there were performance hurdles to be met. Shares in the Bank were purchased by a Trust when the shares were granted and held until they vested to the employee. Under AASB 2, AASB 119 and AASB 132 the fair value of the share-based compensation is calculated at grant date and amortised to the profit and loss over the vesting period, subject to service and performance conditions being met.

90 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Shares in the Bank held by the Trust are consolidated, reclassified as ‘Treasury Shares’ and accounted for as a deduction from Share Capital.

(aa) Provisions

The adoption of AASB 137 Provisions, Contingent Liabilities and Contingent Assets has not had any material impact on provisions.

(i) Current accounting policy

A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and where it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

Provision for dividend

A provision for dividend payable is recognised when dividends are declared by the Directors.

Provisions for restructuring

Provisions for restructuring are brought to account where there is a detailed formal plan for restructure and a demonstrated commitment to that plan.

Provision for ‘Which new Bank’ costs

On 19 September 2003, the Group launched its “Which new Bank” customer service vision. This was a three year program and involved the Bank in additional expenditure in the key areas of staff training and skilling, systems and process simplification, and technology. Such expenses provided for principally comprised redundancies and process improvements.

Provision for self-insurance

The provision for self-insurance covers certain non-lending losses and non-transferred insurance risks. Actuarial reviews are carried out at regular intervals with provisioning effected in accordance with actuarial advice.

(bb) Debt issues

The adoption of AASB 127, AASB 139 and UIG 112 has had a substantial impact on the recognition and measurement of debt issues.

Additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation, which has resulted in recognition of additional debt issues.

Where the Group has designated debt instruments at fair value through Income Statement, the changes in fair value are reported in profit and loss (refer to Note 1(x)) Liabilities at fair value through Income Statement.

Certain debt issues are designated within fair value hedging relationships and as a result the debt has been measured at fair value for the risk that has been hedged.

For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Debt issues are short and long term debt issues of the Group including commercial paper, notes, term loans and medium term notes. Commercial paper, floating, fixed and structured debt issues are recorded at cost or amortised cost using the effective interest method. Premiums, discounts and associated issue expenses are recognised using the effective interest method through profit and loss from the date of issue to ensure that securities attain their redemption values by maturity date.

Interest is charged against profit and loss using the effective interest method when incurred. Any profits or losses arising from redemption prior to maturity are taken to profit and loss in the period in which they are realised.

Hedging

The Group hedges interest rate and foreign currency risk on certain debt issues. When hedge accounting is applied to fixed rate debt issues, the carrying values are adjusted for changes in fair value related to the hedged risks rather than carried at amortised cost. Refer to Note 1(ff) Derivative financial instruments.

(ii) Change in accounting policy

Premiums, discounts and associated issue expenses are recognised using the effective interest method through profit and loss from the date of issue to ensure securities attain their redemption values by maturity date.

Under previous AGAAP, these items were recognised on an accrual basis through the profit and loss.

The requirement to separate embedded derivatives from debt issues is new under AASB 139. The change has been applied from 1 July 2005.

Debt issued by entities used to securitise assets of the Group, and certain asset-backed conduit entities, are consolidated under AIFRS. This results in material gross-ups of debt issues and the related interest expense (assets and related income are similarly grossed up). This change has been applied retrospectively from 1 July 2004.

(cc) Bills payable and other liabilities

The adoption of AASB 119, AASB 127, AASB 139 and UIG 112 has not had a substantial impact on Bills payable and other liabilities. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Bills payable and other liabilities includes interest, fees, defined benefit superannuation plan deficit, other unrealised expenses payable and securities purchased not delivered.

The superannuation plan deficit is recorded in line with Note 1(z) Employee benefits while the remaining liabilities are recorded at amortised cost using the effective interest method.

Commonwealth Bank of Australia Annual Report 2006 91

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Where the group has stated bills payable and other liabilities at fair value through Income Statement, the changes in fair value are reported in profit and loss (refer to Note 1(x) Liabilities at fair value through Income Statement).

(ii) Change in accounting policy

Additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation. These changes have resulted in a reduction of bills payable and other liabilities due to inter-company eliminations.

Market revaluation of trading derivatives previously recorded in bills payable and other liabilities have been reclassified to derivative financial instruments from 1 July 2005.

Under AASB 119, the deficit within one defined benefit superannuation plan has been recognised and disclosed in Bills payable and other liabilities. The change in measurement has been applied retrospectively from 1 July 2004.

(dd) Loan capital

The adoption of AASB 132 and AASB 139 has had a substantial impact on the disclosure and measurement of loan capital. Certain hybrid financial instruments of the Group previously classified as equity instruments have now been classified as loan capital. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Loan capital is debt issued by the Group with terms and conditions, such as being undated or subordinated, which qualify the debt issue for inclusion as capital under APRA Prudential Standards. Loan capital debt issues are initially recorded at fair value plus transaction costs that are directly attributable to the loan capital debt issue. After initial recognition the loan capital debt issue is measured at amortised cost using the effective interest method.

Interest inclusive of premiums, discounts and associated issue expenses are recognised using the effective interest method over the expected life of the instrument through the profit and loss each year from the date of issue so that they attain their redemption values by maturity date. Any profits or losses arising from redemption prior to expected maturity are taken to the profit and loss in the period in which they are realised.

(ii) Change in accounting policy

From 1 July 2005, under AASB 132, certain hybrid financial instruments of the Group which were previously classified as equity with the associated distributions reported as dividends paid, are now classified as loan capital and the associated distributions reported as interest expense.

Interest, inclusive of premiums, discounts and associated issue expenses are amortised through profit and loss each year using the effective interest method.

Previously, they were taken to profit and loss on a straight line basis when incurred.

(ee) Shareholders’ equity

The adoption of AASB 132 has had a substantial impact on the recognition and disclosure of shareholders’ equity. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Ordinary share capital is the amount of paid up capital from the issue of ordinary shares.

Under AASB 132, Treasury Shares are deducted from Ordinary share capital. Gains or losses on the reissue of Treasury Shares are recognised in Shareholders’ Equity within Retained Profits.

Other contributed capital represents the movement between the acquisition and reissue price of Treasury Shares.

The General Reserve is derived from revenue profits and is available for dividend payments except for undistributable profits in respect of the Group’s life insurance businesses.

The Capital Reserve was derived from capital profits and is available for dividend payments.

A General Reserve for Credit Loss has been appropriated from Retained Profits to comply with APRA’s proposed prudential requirements.

(ii) Change in accounting policy

From 1 July 2004, under AASB 132 Treasury Shares are deducted from ordinary share capital. The gain or loss on reissue of Treasury Shares is recognised in Retained Profits. The minority interests in controlled unit trusts of the life insurance companies no longer qualify as equity. As a result, the Group has, on adoption of AIFRS, reclassified outside equity interests in life insurance statutory funds and other funds as liabilities.

From 1 July 2005 certain hybrid financial instruments previously recorded in Shareholders’ Equity have been reclassified as Loan capital.

(ff) Derivative financial instruments

The adoption of AASB 132 and 139 has had a substantial impact on the recognition, measurement and disclosure of derivative financial instruments. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The Group has a significant volume of derivative financial instruments that include foreign exchange contracts, forward rate agreements, futures, options and interest rate, currency, equity and credit swaps.

Derivative financial instruments are used as part of the Group’s trading activities and to hedge certain assets and liabilities. All derivatives that do not meet the hedging criteria under AASB 139 are classified as derivatives held for trading, or as other derivatives.

92 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

The Group initially recognises derivative financial instruments in the balance sheet at the fair value of consideration given or received. They are subsequently remeasured to fair value based on quoted market prices, or broker or dealer price quotations. Non market quoted instruments are valued using valuation techniques based on market conditions and risks existing at balance sheet date. A positive revaluation amount of a contract is reported as an asset and a negative revaluation amount of a contract as a liability.

Changes in fair value of derivatives are reflected in the profit and loss immediately as they occur unless designated within a cash flow hedging relationship.

Derivative financial instruments utilised for hedging relationships

The Group uses derivative instruments as part of its asset and liability management activities to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. Hedge accounting can be applied subject to certain rules for fair value hedges, cash flow hedges and hedges of foreign operations. Cash flow and fair value hedges are the predominant hedges applied by the Group. Swaps are the major financial instruments used in the Bank’s hedging arrangements.

Swaps

Interest rate swap receipts and payments are accrued to profit and loss using the effective interest method as interest of the hedged item or class of items being hedged over the term for which the swap is effective as a hedge of that designated item.

Similarly with cross currency swaps, interest rate receipts and payments are brought to account on the same basis outlined in the previous paragraph. In addition, the initial principal flows are revalued to market at the current market exchange rate with revaluation gains and losses taken to profit and loss against revaluation losses and gains of the underlying hedged item or class of items.

Fair value hedges

For fair value hedges, the change in fair value of the hedging derivative, and the hedged risk of the hedged item, is recognised immediately in the Income Statement within other operating income. If the fair value hedge relationship is terminated for reasons other than the derecognition of the hedged item, fair value hedge accounting ceases and, in the case of an interest bearing item, the fair value adjustment of the hedged item is amortised to profit and loss over the remaining term of the original hedge. If the hedged item is derecognised the unamortised fair value adjustment is recognised immediately in profit and loss.

Cash flow hedges

A fair valuation gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognised initially in Shareholders’ Equity within the cash flow hedge reserve. Amounts in the cash flow hedge reserve are transferred to profit and loss when the cash flows on the hedged item are recognised in profit and loss. Gains and losses resulting from cash flow hedge ineffectiveness are recorded immediately in profit and loss.

A fair valuation gain or loss represents the amount by which changes in the fair value of the expected cash flow of the hedging derivative differ from the fair value of the changes (or expected changes) in the cash flow of the hedged item.

Where the hedged item is derecognised, the cumulative gain or loss is recognised immediately in profit and loss. If for reasons other than the derecognition of the hedged item, cash flow hedge accounting ceases, the cumulative gains or losses are amortised over the remaining term of the original hedge.

Embedded derivatives

A derivative may be embedded within a host contract. If the host contract is not already carried at fair value with changes in fair value reported in profit and loss, and where the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative instrument at fair value.

(ii) Change in accounting policy

The adoption of AASB 132 and AASB 139 has had a substantial impact on the recognition, measurement and disclosure of derivative financial instruments. The changes are summarised below:

Derivative assets and derivative liabilities are recognised at fair value and disclosed separately on the face of the balance sheet.

The Group complies with new hedge accounting rules which include the use of predominantly fair value or cash flow hedges, the designation of hedging relationships and the documentation of these relationships.

Embedded derivatives are now required to be identified, separated and fair valued provided they are not closely related to their host contract.

(gg) Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued

The adoption of AASB 132 and AASB 139 has had a substantial change in the disclosure, recognition, measurement and presentation of certain financial liabilities which were previously treated as contingent liabilities. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events, or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised, but are disclosed unless they are remote.

Financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities, and to other parties in connection with the performance of customers under obligations related to contracts, advance payments made by other parties, tenders, retentions and the payment of import duties.

Financial guarantee contracts are initially recognised in the financial statements at fair value on the date that the guarantee was given.

Commonwealth Bank of Australia Annual Report 2006 93

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of the initial measurement amount, less amortisation calculated to recognise in the profit and loss the fee income earned over the period, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantees at the balance sheet date.

Any increase in the liability relating to guarantees is taken to profit and loss. Any liability remaining is recognised in profit and loss when the guarantee is discharged, cancelled or expires.

(ii) Change in accounting policy

Under AGAAP, credit related instruments (other than credit derivatives) were treated as contingent liabilities and these were not shown on the balance sheet unless, and until, the Group was called upon to make a payment under the instrument.

Fees received for providing these instruments were taken to profit over the life of the instrument and reflected in fees and commissions receivable.

Under AIFRS, the Group recognises financial guarantee contracts as financial liabilities, initially at fair value through profit and loss and subsequently at the higher of the initial measurement amount, less amortisation calculated to recognise in the profit and loss the fee income earned over the period, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantees at the balance sheet date.

(hh) Life Insurance Business

The adoption of AASB 4 Insurance Contracts and AASB 1038 Life Insurance Contracts has impacted on the measurement, recognition and disclosure of the life insurance business.

Under AASB 4, life insurance contracts are accounted for in accordance with AASB 1038 (which is largely consistent with previous AGAAP except there is a change in determination of discount rates) while investment contracts are accounted for as financial instruments with a separate management services element in accordance with AASB 139 and AASB 118. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The Group’s life insurance business is comprised of insurance contracts and investment contracts as defined by AASB 4.

Insurance contracts are accounted for in accordance with the requirements of AASB 1038. Investment contracts are accounted for in accordance with AASB 118, 139 and 1038. Details are set out below.

All assets, liabilities, revenues, expenses and equity are included in the financial report irrespective of whether they are designated as relating to policyholders or to shareholders.

All assets backing insurance liabilities are classified as assets at fair value through Income Statement. They are brought to account at fair value based on quoted bid prices or using appropriate valuation techniques.

Life insurance contract liabilities are measured at the net present value of future receipts from and payments to policyholders using a risk free discount rate (or expected fund earning rate where benefits are contractually linked to the asset performance), and are calculated in accordance with the principles of Margin on Services (MoS) profit reporting as set out in Actuarial Standard AS 1.04: Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standards Board.

Life investment contract liabilities are measured at fair value in accordance with AASB 139 as liabilities with changes in fair value taken to the Income Statement.

Returns on all investments controlled by life insurance entities within the Group are recognised as revenues. Investments in the Group’s own equity instruments held within the life insurance statutory funds and other funds are treated as Treasury Shares in accordance with Note 1(ee) Shareholders’ Equity.

Initial entry fee income on investment contracts issued by life insurance entities is recognised up front where the Group provides financial advice. Other entry fees are deferred and recognised over the life of the underlying investment contract.

Participating benefits vested in relation to the financial year, other than transfers from unvested policyholder benefits liabilities, are recognised as expenses.

Reinsurance contracts entered into are recognised on a gross basis.

Premiums and Claims

Premiums and claims are separated on a product basis into their revenue, expense and change in liability components unless the separation is not practicable or the components cannot be reliably measured.

(i) Life insurance contracts

Premiums received for providing services and bearing risks are recognised as revenue. Premiums with a regular due date are recognised as revenue on a due and receivables basis. Premiums with no due date are recognised on a cash received basis. Insurance contract claims are recognised as an expense when a liability has been established.

(ii) Investment contracts

Premiums received include the fee portion of the premium recognised as revenue over the period the underlying service is provided and the deposit portion recognised as an increase in investment contract liabilities. Premiums with no due date are recognised on a cash received basis. Fees earned for managing the funds invested are recognised as revenue. Claims under investment contracts represent withdrawals of investment deposits and are recognised as a reduction in investment contract liabilities.

94 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Life Insurance Liabilities and Profit

Life insurance contract policy liabilities are calculated in a way that allows for the systematic release of planned profit margins as services are provided to policyowners and the revenues relating to those services are received. Selected profit carriers including premiums and anticipated policy payments are used to determine profit recognition.

Investment assets are held in excess of those required to meet life insurance contract and investment contract liabilities. Investment earnings are directly influenced by market conditions and as such this component of profit will vary from year to year.

Participating Policies

Life insurance contract policy liabilities attributable to participating policies include the value of future planned shareholder profit margins and an allowance for future supportable bonuses.

The value of supportable bonuses and planned shareholder profit margins account for all profit on participating policies based on best estimate assumptions.

Under the Margin on Services profit recognition methodology, the value of supportable bonuses and the shareholder profit margin relating to a reporting year will emerge as planned profits in that year.

Life Insurance Contract Acquisition Costs

Acquisition costs for life insurance contracts include the fixed and variable costs of acquiring new business. These costs are effectively deferred through the determination of life insurance contract liabilities at the balance date to the extent that they are deemed recoverable from the expected future profits of an amount equivalent to the deferred cost.

Deferred acquisition costs are amortised over the expected life of the life insurance contract.

Life Investment Contract Acquisition Costs

Acquisition costs for investment contracts include the variable costs of acquiring new business. However, the deferral of investment contract acquisition costs is limited by the application of AASB 118 to the extent that only incremental transaction costs (for example commissions and volume bonuses) are deferred. The investment contract liability calculated in accordance with AASB 139 is no less than the contract surrender value.

Managed Fund Units on Issue – held by minority unitholders

The life insurance statutory funds and other funds include controlling interests in trusts and companies, and the total amounts of each underlying asset, liability, revenue and expense of the controlled entities are recognised in the consolidated financial statements.

When a controlled unit trust is consolidated, the share of the unit holder liability attributable to the Bank is eliminated but amounts due to external unit holders remain as liabilities in the consolidated balance sheet. The share of the net assets of controlled companies attributable to minority unit holders is disclosed separately on the balance sheet. In the Income Statement, the net profit or loss of the controlled entities relating to minority interests is removed before arriving at the net profit or loss attributable to members of the Bank.

(ii) Change in accounting policy

The changes in the accounting policy for the life insurance business, apply retrospectively from 1 July 2004 and the remainder on 1 July 2005.

The following are changes which have been applied retrospectively from 1 July 2004:

(a) Under AASB 1038, the asset representing the excess of the net market value over net assets of the Bank’s life insurance controlled entities is no longer recognised in full. As a result, the Group has ceased to recognise any movement in this asset. The internally generated component has been written off against the General Reserve; and the acquired component has been reclassified as goodwill within the balance sheet and subjected to an annual impairment test. For further details on goodwill, refer to Note 1(t) Intangibles.

(b) Under previous AGAAP, direct investments in the Group’s own equity securities by the Group’s life insurance statutory funds were recognised in the balance sheet at market value. Under AASB 127 these assets have been reclassified as Treasury Shares, and accounted for as a deduction from ordinary share capital. For further details, refer to Note 1(ee) Shareholders’ Equity.

The following are changes which have been applied from 1 July 2005:

(a) AASB 1038 requires income from investment contracts sold by life insurance businesses to be shown separately from income from insurance contracts sold by insurance companies. Insurance contracts are accounted for in accordance with the requirements of AASB 1038, and investment contracts are accounted for in accordance with AASB 118, 139 and 1038.

(b) Under AIFRS, the actuarial calculation of insurance contract liabilities is affected by a change in the determination of the discount rate applied for some contracts.

(c) Certain acquisition costs related to investment contracts which were deferred under previous AGAAP can no longer be deferred under AIFRS.

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

Commonwealth Bank of Australia Annual Report 2006 95

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

(e) Initial entry fee income on investment contracts issued by life insurance entities is recognised up front where the Group provides financial advice. Other entry fees are deferred over the life of the underlying investment contract.

(f) AASB 1038 requires separate disclosure of investment contract and insurance contract liabilities.

(ii) Asset Securitisation

The adoption of AASB 127, 132, 139 and UIG 112 has had a substantial impact on the recognition of asset securitisation. However, there is no material change in disclosure and measurement of asset securitisations. For further details, refer to the change in accounting policy below.

(i) Current accounting policy

The Group conducts an asset securitisation program through which it packages and sells assets as securities to investors. 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. Therefore the Group is considered to hold the majority of the residual risks and benefits within the entities through which asset securitisation is conducted and therefore consolidates these entities.

Additional entities have been consolidated into the Group, refer to Note 1(c) Consolidation. These changes have resulted in recognition of material additional individual asset, liability and profit and loss line items of the Group.

The liabilities associated with the asset securitisation entities and related issue costs are accounted for on an amortised cost basis using the effective interest method. Interest rate swaps and liquidity facilities are provided at arm’s length to the program by the Group in accordance with APRA Prudential Guidelines.

Derivatives return the risks and rewards of ownership of the securitised assets to the Bank and consequently the Bank cannot derecognise these assets. An imputed liability is recognised inclusive of the derivative and any related fees.

For further details on the treatment of the securitisation entities, refer to Note 1(c) Consolidation.

(ii) Change in accounting policy

AIFRS requires the consolidation of certain asset securitisation entities that were not consolidated under previous AGAAP. AIFRS also requires the recognition by the Bank of assets and liabilities that were not recognised under the previous AGAAP. This has resulted in the gross up of the entities’ assets and liabilities recorded within the Balance Sheet. The changes have been applied from 1 July 2004.

(jj) Fiduciary activities

(i) Current accounting policy

There is no change in accounting policy.

The Bank and designated controlled entities act as Responsible Entity, Trustee and/or Manager for a number of Wholesale, Superannuation and Investment Funds, Trusts and Approved Deposit Funds.

The assets and liabilities of these Trusts and Funds are not included in the consolidated financial statements as the Group does not have direct or indirect control of the Trusts and Funds as defined by AASB 1024. Commissions and fees earned in respect of the activities are included in the Income Statement of the Group.

(kk) Comparative figures

Where necessary, comparative figures have been adjusted to conform with changes in presentation in these financial statements.

Comparative figures have been prepared in accordance with AIFRS as outlined in Note 1(a) and (b) except for the adoption of AASB 132 Financial Instruments: Disclosure and Presentation, AASB 139 Financial Instruments: Recognition and Measurement, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. These standards have not been applied against comparative information in line with the exemption provided by AASB 1 First-time adoption of Australian Equivalents to International Financial Reporting Standards.

The Group has continued to apply its previous AGAAP in preparing the comparative information within the scope of the above standards.

(ll) Roundings

The amounts contained in this report and the financial statements are presented in Australian Dollars and have been rounded to the nearest million dollars unless otherwise stated, under the option available to the Company under ASIC Class Order 98/100 (as amended by ASIC Class Order 04/667).

(mm) Critical Accounting Policies and Estimates

These Notes to the Financial Statements contain a summary of the Group’s significant accounting policies. Certain of these policies are considered to be more important in the determination of the Group’s financial position, since they require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. These decisions are reviewed by a Committee of the Board.

These policies include judgements as to levels of provisions for impairment for loan balances, actuarial assumptions in determining life insurance policy liabilities and market valuations of life insurance controlled entities and determining whether certain entities should be consolidated. An explanation of these policies and the related judgements and estimates involved is set out below.

Provisions for Impairment

Provisions for impairment are raised where there is objective evidence of impairment and at an amount adequate to cover assessed credit related losses.

96 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

Individually Assessed Provisions

Individually assessed provisions are raised where there is objective evidence of impairment and full recovery of principal is considered doubtful.

Individually assessed provisions are made against individual facilities in the credit risk rated managed segment where exposure aggregates to $250,000 or more, and a loss of $10,000 or more is expected. The provisions are established based primarily on estimates of the realisable (fair) value of collateral taken and are measured as the difference between the asset’s carrying amount and the present value of the expected future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. Short term balances are not discounted.

Individually Assessed provisions (in bulk) are also made against statistically managed segments to cover facilities which are not well secured and past due 180 days or more, against the credit risk rated segment for exposures aggregating to less than $250,000 and 90 days or more past due, and against credit risks identified in specific segments in the credit risk rated portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default.

Individually assessed provisions are provided for from the collective provision.

Collective Provision

All other loans and advances that do not have an individually assessed provision are assessed collectively for impairment.

The collective provision is maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the balance sheet date.

The evaluation process is subject to a series of estimates and judgements.

In the statistically managed segment the history of defaults and losses, and the size, structure and diversity of portfolios are considered.

In addition management considers overall indicators of portfolio performance, quality and economic conditions.

Changes in these estimates could have a direct impact on the level of provision determined.

The amount required to bring the collective provision to the level assessed is taken to profit and loss as set out in Note 15.

Life Insurance Policyholder Liabilities

Life insurance policyholder liabilities are accounted for under AASB 1038: Life Insurance Business. A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions. ⁽¹⁾

(1) The measurement basis is outlined in Note 1 (hh)

The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are:

•

Business assumptions including:

•

Amount, timing and duration of claims/policy payments;

•

Policy lapse rates; and

•

Acquisition and long term maintenance expense levels;

•

Long term economic assumptions for discount and interest rates, inflation rates and market earnings rates; and

•

Selection of methodology, either projection or accumulation method. The selection of the method is generally governed by the product type.

The determination of assumptions relies on making judgements on variances from long-term assumptions. Where experience differs from long term assumptions:

•

Recent results may be a statistical aberration; or

•

There may be a commencement of a new paradigm requiring a change in long term assumptions.

The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement.

Additional information on the accounting policy is set out in Note 1(hh) Life Insurance Business, and Note 38 Life Insurance Business details the key actuarial assumptions.

Consolidation of Special Purpose Entities

The Group assesses whether a special purpose entity should be consolidated based on the risks and rewards of each entity and whether the majority pass to the Group. Such assessments are predominately required in the context of the Group’s securitisation program and structured transactions.

International Financial Reporting Standards

Descriptions of the key AIFRS issues are set out in Note 1 (nn) of the Financial Statements.

(nn) Explanation of transition to Australian equivalents to IFRS

As stated in Note 1(a), these financial statements are prepared in accordance with Australian equivalents to IFRS (AIFRS).

As required by AASB 1, the accounting policies set out in Note 1 have been applied in preparing the financial statements for the year ended 30 June 2006, the comparative information presented in these financial statements for the year ended 30 June 2005 and in the preparation of an opening Australian equivalents to IFRS Balance Sheet at 1 July 2004 (the Group’s date of transition).

As noted in Note 1(b) and 1(kk) comparative figures and the opening Australian equivalents to IFRS Balance Sheet at 1 July 2004 have been prepared in accordance with AIFRS as outlined in Note 1(a) and 1(b) except for the adoption of AASB 132 Financial Instruments: Disclosure and Presentation, AASB 139 Financial Instruments: Recognition and Measurement, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts.

Commonwealth Bank of Australia Annual Report 2006 97

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

These standards have not been applied against comparative information in line with the exemption provided by AASB 1 First-time adoption of Australian Equivalents to International Financial Reporting Standards.

In preparing its opening AIFRS balance sheet, the Group has adjusted amounts reported previously in financial statements prepared in accordance with the previous AGAAP basis of accounting.

An explanation of how the transition from previous GAAP to AIFRS has affected the Group and the Bank’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.

Explanation of AIFRS Transition Adjustments

In the following reconciliations, AIFRS impacts have been shown as Reclassifications, Gross-ups and Re-measurements. The major impacts are as follows:

(i) Reclassifications

Relates to the reclassification of various assets and liabilities in line with AIFRS disclosure requirements.

Significant items reclassified for periods prior to 1 July 2005 included:

•

Investment properties reclassified from Property, Plant and Equipment to a separate line on the face of the Balance Sheet (refer note 1 (q));

•

Capitalised computer software reclassified from Other assets to Intangible assets – computer software costs (refer note 1 (t));

•

The acquired portion of excess market value over net assets is reclassified from Other assets to Intangible assets – goodwill (refer note 1 (t)); and

•

Separation and reclassification of deferred tax assets and tax liabilities (refer note 1 (y)).

Additional items reclassified with effect from 1 July 2005 include:

•

Derivative assets and liabilities reclassified from Other assets and Other liabilities to separate lines on the face of the Balance Sheet (refer note 1 (ff));

•

Insurance and trading assets reclassified to Assets at fair value through Income Statement (refer note 1 (i));

•

Investment securities predominately reclassified to Available-for-sale investments (refer note 1 (j));

•

Some Deposits from customers and Debt issues reclassified to Liabilities at fair value through Income Statement (refer note 1 (x));

•

Reclassification of minority interests in Insurance Statutory funds and other funds to liabilities (refer note 1 (hh)); and

•

Reclassification of preference share capital and other equity instruments from shareholders’ equity to loan capital (refer note 1 (dd)).

There is no net impact on net assets, shareholders’ equity nor net profit.

(ii) Gross-up

Impact of the consolidation of certain special purpose vehicles related to the securitisation of Bank assets, and certain other customer asset securitisations. On transition to AIFRS, consolidation of these vehicles has the effect of grossing up individual asset, liability and profit and loss line items. This has no net impact on net assets, shareholders’ equity nor net profit.

(iii) Re-measurements

Relates to AIFRS transition adjustments which involve a change in the measurement basis relative to previous AGAAP. Affected line items are explained by reference to the relevant accounting policy note. Material impacts are further explained in the tables on page 103 to 106 and 111 to 114, and referenced to the re-measure column of the following AIFRS transition tables.

98 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)

(nn) Effect of Transition to Australian Equivalents of IFRS

Balance Sheet Reconciliation


	Group
	1 July 2004
	Transition Adjustments
	Policy			AGAAP		Reclass			Gross-up			Re-Measure			Total			AIFRS
	Note ⁽¹⁾			Group $M		$M			$M			$M⁽²⁾			$M			Group $M

Assets
Cash and liquid assets		(f	)		6,453		168			153			—			321			6,774
Receivables from other financial institutions		(g	)		8,369		(130	)		—			—			(130	)		8,239
Assets at fair value through Income Statement:
Trading		(i	)		14,896		—			3			—			3			14,899
Insurance	(i),(hh		)		28,942		(16	)		—			(301	) A		(317	)		28,625
Investment securities					11,447		—			531			—			531			11,978
Loans, advances and other receivables		(l),(m),(n	)		189,391		—			7,605			24			7,629			197,020
Bank acceptances of customers		(o	)		15,019		—			—			—			—			15,019
Deposits with regulatory authorities		(g	)		38		(38	)		—			—			(38	)		—
Investment property		(q	)		—		252			—			—			252			252
Property, plant and equipment		(s	)		1,204		(228	)		—			31			(197	)		1,007
Investment in associates		(c	)		239		—			—			—			—			239
Intangible assets		(t	)		4,705		2,836			—			—			2,836			7,541
Deferred tax assets		(y	)		—		564			—			23	H		587			587
Other assets		(u	)		25,292		(3,408	)		(17	)		(2,512	) I		(5,937	)		19,355

Total Assets					305,995		—			8,275			(2,735	)		5,540			311,535


Liabilities

Deposits and other public borrowings		(v	)		163,177		—			24			—			24			163,201
Payables due to other financial institutions		(w	)		6,641		—			—			—			—			6,641
Bank acceptances		(o	)		15,019		—			—			—			—			15,019
Income tax liability		(y	)		811		(811	)		—			—			(811	)		—
Current tax liabilities		(y	)		—		426			—			—			426			426
Deferred tax liabilities		(y	)		—		385			—			188	L		573			573
Other provisions	(z),(aa		)		1,011		—			—			(85	) M		(85	)		926
Insurance policy liabilities	(hh		)		24,638		—			—			—			—			24,638
Debt issues	(bb		)		44,042		—			8,732			—			8,732			52,774
Bills payable and other liabilities	(cc		)		19,140		—			(481	)		77	P		(404	)		18,736
Loan capital	(dd		)		6,631		—			—			—			—			6,631

Total Liabilities					281,110		—			8,275			180			8,455			289,565

Net Assets					24,885		—			—			(2,915	)		(2,915	)		21,970


Shareholders’ Equity

Share capital:
Ordinary share capital	(ee		)		13,359		—			—			(371	) R		(371	)		12,988
Preference share capital					687		—			—			—			—			687
Other equity instruments					1,573		—			—			—			—			1,573
Reserves	(ee		)		3,946		492			—			(3,045	) S		(2,553	)		1,393
Retained profits					2,840		(492	)		—			501	T		9			2,849

Shareholders’ equity attributable to members of the Bank					22,405		—			—			(2,915	)		(2,915	)		19,490

Minority interests:
Controlled entities					304		—			—			—			—			304
Insurance statutory funds and other funds	(hh		)		2,176		—			—			—			—			2,176

Total Shareholders’ Equity					24,885		—			—			(2,915	)		(2,915	)		21,970


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.

Commonwealth Bank of Australia Annual Report 2006 99

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation


						Group
						30 June 2005
						Transition Adjustments
	Policy			AGAAP		Reclass			Gross-up			Re-Measure				Total			AIFRS
	Note ⁽¹⁾			Group $M		$M			$M			$M ⁽²⁾				$M			Group $M

Assets
Cash and liquid assets		(f	)		5,715		163			177			—				340			6,055
Receivables from other financial institutions		(g	)		6,205		(118	)		—			—				(118	)		6,087
Assets at fair value through Income Statement:
Trading		(i	)		14,628		—			3			—				3			14,631
Insurance	(i),(hh		)		27,837		(16	)		—			(337	)	A		(353	)		27,484
Investment securities					10,272		—			566			—				566			10,838
Loans, advances and other receivables		(l),(m),(n	)		217,516		—			10,818			12				10,830			228,346
Bank acceptances of customers		(o	)		16,786		—			—			—				—			16,786
Deposits with regulatory authorities		(g	)		45		(45	)		—			—				(45	)		—
Investment property		(q	)		—		252			—			—				252			252
Property, plant and equipment		(s	)		1,344		(237	)		—			25				(212	)		1,132
Investment in associates		(c	)		52		—			—			—				—			52
Intangible assets		(t	)		4,394		2,941			—			321		G		3,262			7,656
Deferred tax assets		(y	)		—		627			—			24		H		651			651
Other assets		(u	)		24,241		(3,567	)		(37	)		(3,203	)	I		(6,807	)		17,434

Total Assets					329,035		—			11,527			(3,158	)			8,369			337,404


Liabilities

Deposits and other public borrowings		(v	)		168,029		—			(3	)		—				(3	)		168,026
Payables due to other financial institutions		(w	)		8,023		—			—			—				—			8,023
Bank acceptances		(o	)		16,786		—			—			—				—			16,786
Income tax liability		(y	)		1,550		(1,550	)		—			—				(1,550	)		—
Current tax liabilities		(y	)		—		833			—			—				833			833
Deferred tax liabilities		(y	)		—		717			—			204		L		921			921
Other provisions	(z),(aa		)		895		—			—			(24	)	M		(24	)		871
Insurance policy liabilities	(hh		)		24,694		—			—			—				—			24,694
Debt issues	(bb		)		58,621		—			12,144			—				12,144			70,765
Bills payable and other liabilities	(cc		)		18,086		—			(614	)		79		P		(535	)		17,551
Loan capital	(dd		)		6,291		—			—			—				—			6,291

Total Liabilities					302,975		—			11,527			259				11,786			314,761

Net Assets					26,060		—			—			(3,417	)			(3,417	)		22,643


Shareholders’ Equity

Share capital:
Ordinary share capital	(ee		)		13,871		—			—			(385	)	R		(385	)		13,486
Preference share capital					687		—			—			—				—			687
Other equity instruments					1,573		—			—			—				—			1,573
Reserves	(ee		)		4,624		492			—			(3,851	)	S		(3,359	)		1,265
Retained profits					3,516		(492	)		—			819		T		327			3,843

Shareholders’ equity attributable to members of the Bank					24,271		—			—			(3,417	)			(3,417	)		20,854

Minority interests:
Controlled entities					631		—			—			—				—			631
Insurance statutory funds and other funds	(hh		)		1,158		—			—			—				—			1,158

Total Shareholders’ Equity					26,060		—			—			(3,417	)			(3,417	)		22,643


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.

100 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation


						Group
						1 July 2005
						Transition Adjustments
	Policy			AGAAP		Reclass			Gross-up			Re-Measure				Total			AIFRS
	Note⁽¹⁾			Group $M		$M			$M			$M ⁽²⁾				$M			Group $M

Assets
Cash and liquid assets		(f	)		5,715		163			177			—				340			6,055
Receivables from other financial institutions		(g	)		6,205		(627	)		—			—				(627	)		5,578
Assets at fair value through Income Statement:
Trading		(i	)		14,628		(436	)		3			—				(433	)		14,195
Insurance	(i),(hh		)		27,837		(16	)		—			(352	)	A		(368	)		27,469
Other		(i	)		—		3,402			—			—				3,402			3,402
Derivative assets	(ff		)		—		12,096			—			(2,292	)	B		9,804			9,804
Investment securities					10,272		(10,838	)		566			—				(10,272	)		—
Available-for-sale investments		(j	)		—		9,706			—			85		C		9,791			9,791
Loans, advances and other receivables		(l),(m),(n	)		217,516		(1,146	)		10,818			574		D-F		10,246			227,762
Bank acceptances of customers		(o	)		16,786		—			—			—				—			16,786
Deposits with regulatory authorities		(g	)		45		(45	)		—			—				(45	)		—
Investment property		(q	)		—		252			—			—				252			252
Property, plant and equipment		(s	)		1,344		(238	)		—			25				(213	)		1,131
Investment in associates		(c	)		52		—			—			—				—			52
Intangible assets		(t	)		4,394		2,941			—			321		G		3,262			7,656
Deferred tax assets		(y	)		—		627			—			241		H		868			868
Other assets		(u	)		24,241		(16,165	)		(37	)		(3,670	)	I		(19,872	)		4,369

Total Assets					329,035		(324	)		11,527			(5,068	)			6,135			335,170


Liabilities

Deposits and other public borrowings		(v	)		168,029		(8,272	)		(3	)		66		J		(8,209	)		159,820
Payables due to other financial institutions		(w	)		8,023		(16	)		—			—				(16	)		8,007
Liabilities at fair value through Income Statement		(x	)		—		12,437			—			—				12,437			12,437
Derivative liabilities	(ff		)		—		11,913			—			(609	)	K		11,304			11,304
Bank acceptances		(o	)		16,786		—			—			—				—			16,786
Income tax liability		(y	)		1,550		(1,550	)		—			—				(1,550	)		—
Current tax liabilities		(y	)		—		833			—			—				833			833
Deferred tax liabilities		(y	)		—		717			—			444		L		1,161			1,161
Other provisions	(z),(aa		)		895		16			—			(24	)	M		(8	)		887
Insurance policy liabilities	(hh		)		24,694		—			—			342		N		342			25,036
Debt issues	(bb		)		58,621		(4,240	)		12,144			(1,046	)	O		6,858			65,479
Managed fund units on issue	(hh		)		—		1,158			—			—				1,158			1,158
Bills payable and other liabilities	(cc		)		18,086		(12,162	)		(614	)		(282	)	P		(13,058	)		5,028
Loan capital	(dd		)		6,291		2,260			—			(194	)	Q		2,066			8,357

Total Liabilities					302,975		3,094			11,527			(1,303	)			13,318			316,293

Net Assets					26,060		(3,418	)		—			(3,765	)			(7,183	)		18,877


Shareholders’ Equity

Share capital:
Ordinary share capital	(ee		)		13,871		—			—			(385	)	R		(385	)		13,486
Preference share capital					687		(687	)		—			—				(687	)		—
Other equity instruments					1,573		(1,573	)		—			—				(1,573	)		—
Reserves	(ee		)		4,624		802	⁽³⁾		—			(3,729	)	S		(2,927	)		1,697
Retained profits					3,516		(802	) ⁽³⁾		—			349		T		(453	)		3,063

Shareholders’ equity attributable to members of the Bank					24,271		(2,260	)		—			(3,765	)			(6,025	)		18,246

Minority interests:
Controlled entities					631		—			—			—				—			631
Insurance statutory funds and other funds	(hh		)		1,158		(1,158	)		—			—				(1,158	)		—

Total Shareholders’ Equity					26,060		(3,418	)		—			(3,765	)			(7,183	)		18,877


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.

(3)		These estimates of AIFRS transition adjustments have been revised due to a change in functional currency. The details are discussed further in Note 32.

Commonwealth Bank of Australia Annual Report 2006 101

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Income Statement Reconciliation


							Group
							Year Ended 30 June 2005
							Transition Adjustments
														AIFRS
	Policy			AGAAP			Gross-up			Re-Measure				Transition			AIFRS
	Note⁽¹⁾			Group $M			$M			$M ⁽²⁾				$M			Group $M

Interest income		(m	)		16,194			598			(11	)			587			16,781
Interest expense					10,228			527			—				527			10,755

Net interest income					5,966			71			(11	)			60			6,026
Other operating income					2,915			(70	)		—				(70	)		2,845

Net banking operating income					8,881			1			(11	)			(10	)		8,871

Funds management income					1,261			—			(14	)			(14	)		1,247
Investment revenue	(hh		)		2,008			—			(52	)	U		(52	)		1,956
Claims and policyholder liability expense from insurance contracts					(1,871	)		—			—				—			(1,871	)

Net funds management and investment contract operating income					1,398			—			(66	)			(66	)		1,332
Premiums from insurance contracts					1,132			—			—				—			1,132
Investment revenue					1,186			—			—				—			1,186
Claims and policyholder liability expense from insurance contracts					(1,243	)		—			—				—			(1,243	)

Insurance margin on services operating income					1,075			—			—				—			1,075


Total net operating income					11,354			1			(77	)			(76	)		11,278

Bad debts expense					322			—			—				—			322
Operating expenses:
Comparable business					5,697			1			21				22			5,719
Which new Bank					150			—			—				—			150

Total operating expenses					5,847			1			21				22			5,869
Defined benefit superannuation plan expense		(z	)		—			—			(75	)	V		(75	)		(75	)
Appraisal value uplift	(hh		)		778			—			(778	)	W		(778	)		—
Goodwill amortisation		(t	)		(325	)		—			325		X		325			—

Profit before income tax					5,638			—			(626	)			(626	)		5,012
Income tax expense		(y	)		1,637			—			(35	)			(35	)		1,602

Profit after income tax					4,001			—			(591	)			(591	)		3,410
Minority interests					(10	)		—			—				—			(10	)

Net profit attributable to members of the Bank					3,991			—			(591	)			(591	)		3,400


Net profit after income tax comprises:
Net profit after income tax (“underlying basis”)					3,466			—			(46	)			(46	)		3,420
Shareholder investment returns					177			—			—				—			177
Which new Bank					(105	)		—			—				—			(105	)

Net profit after income tax (“cash basis”)					3,538			—			(46	)			(46	)		3,492

Defined benefit superannuation plan expense		(z	)		—			—			(53	)			(53	)		(53	)
Treasury share valuation adjustment	(hh		)		—			—			(39	)			(39	)		(39	)

Net profit after income tax (“statutory basis”) ⁽¹⁾					3,538			—			(138	)			(138	)		3,400


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 103 to 106.

102 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Group
AIFRS Balance Sheet Impacts



Re-measure
Adjustment
Reference	Transition Date	Adjustment $M			Explanation of material AIFRS re-measurements

A	Insurance assets at fair value through Income Statement (refer note 1 (i) and (hh))

	1 July 2004		(301	)	The recognition of direct investments in Commonwealth Bank shares by the Bank’s life insurance statutory funds as ‘Treasury Shares’ results in the reversal of the fair value of these shares from consolidated insurance assets while the cost of these shares is reversed from ordinary share capital (refer adjustment R). The associated insurance policyholder liability is not reversed, resulting in an accounting mismatch (see adjustment U).
	30 June 2005		(337	)	As above.
	1 July 2005		(352	)	As above, also includes impact of valuing assets held by life insurance using bid prices rather than mid prices (-$15m).

B	Derivative assets (refer note 1 (ff))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(2,292	)	Principally relates to the elimination of internal swaps; and an adjustment to re-measure derivatives that were previously accrual accounted.

C	Available-for-sale investments (refer note 1 (j))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		85		Revaluation of available-for-sale (‘AFS’) investments from cost to fair value. AFS assets are principally comprised of those assets classified as investment securities under previous Australian GAAP, which were measured on a cost basis.

D	Loans, advances and other receivables — gross (refer note 1 (l))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		295		Principally relates to two adjustments: (1) re-measurement to fair value of loan assets designated within fair value hedging relationships. Such loan assets are initially measured on an amortised cost basis, and then adjusted to fair value to offset the mark-to-market movement on the associated fair value hedge derivative (+$399m); and (2) capitalisation of the net fee income integral to the yield of an originated loan results in the recognition of an unamortised deferred income balance (-$122m).

E	Loans, advances and other receivables — collective provision for impairment (refer note 1 (n))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		294		Reflects the difference between the previous Australian GAAP general provision for impairment and the AIFRS collective provision for impairment, net of reclassifications. Under AIFRS, collective provisions are recognised where there is objective evidence of impairment, and includes an estimate of losses which have been incurred but not reported as at balance sheet date.

F	Loans, advances and other receivables — individually assessed provisions for impairment (refer note 1 (n))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(15	)	Reflects the difference between the previous Australian GAAP specific provision for impairment and the AIFRS individually assessed provisions. This difference relates to the impact of discounting of expected cash flows on recovery.

G	Intangible assets (refer note 1 (t))

	1 July 2004	—
	30 June 2005		321		Goodwill no longer amortised under AIFRS. Reflects the reversal of amortisation of goodwill for the year ended 30 June 2005.
	1 July 2005		321		As above.

Commonwealth Bank of Australia Annual Report 2006 103

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Group
AIFRS Balance Sheet Impacts



Re-measure
Adjustment
Reference	Transition Date	Adjustment $M			Explanation of material AIFRS re-measurements

H	Deferred tax assets (refer note 1 (y))

	1 July 2004		23		Principally relates to the deferred tax asset recognised on the defined benefit superannuation plan deficit liability, under the AIFRS “balance sheet” approach to tax-effect accounting.
	30 June 2005		24		As above.
	1 July 2005		241		As above, and also includes deferred tax assets related to various AIFRS adjustments such as hedge accounting, loan impairment provisioning and revenue and expense recognition.

I	Other assets (refer note 1 (u))

	1 July 2004		(2,512	)	Principally relates to two adjustments: (1) the reversal of internally generated appraisal value excess (-$3,123m); and (2) the recognition of the defined benefit superannuation plan surplus asset (+$633m). Refer to adjustments R and S.
	30 June 2005		(3,203	)	As above, though adjustments become (1) (-$3,901m); and (2) (+$717m).
	1 July 2005		(3,670	)	As above, also includes hedging impact of (-$473 m), which relates to the elimination of interest receivable on hedged derivatives.

J	Deposits from customers (refer note 1 (v))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		66		Represents the revaluation of deposits designated within fair value hedge relationships.

K	Derivative liabilities (refer note 1 (ff))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(609	)	Principally relates to the elimination of internal swaps; initial recognition of embedded derivatives at fair value; and an adjustment to re-measure derivatives that were previously accrual accounted.

L	Deferred tax liabilities (refer note 1 (y))

	1 July 2004		188		Principally relates to the deferred tax liability recognised on the defined benefit superannuation plan surplus asset, under the AIFRS “balance sheet” approach to tax-effect accounting. Refer adjustment I above.
	30 June 2005		204		As above.
	1 July 2005		444		As above, and also includes deferred tax liabilities related to various AIFRS adjustments such as hedge accounting, re-measurement of available-for-sale assets, and revenue and expense recognition.

M	Other provisions (refer note 1 (z) and (aa))

	1 July 2004		(85	)	Principally relates to the reversal of accrued liabilities in respect of employee share-based compensation. This is a one-off adjustment in the comparative period due to the discontinuance of the mandatory component of the Equity Participation Plan.
	30 June 2005		(24	)	As above.
	1 July 2005		(24	)	As above.

N	Insurance policyholder liabilities (refer note 1 (hh))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		342		Relates to measurement differences in the actuarial calculation of policyholder liabilities under AIFRS. Impact primarily driven by a change in the discount rates applied to some contracts, and the write off of deferred acquisition costs related to investment-style products of the Wealth Management business.

104 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Group
AIFRS Balance Sheet Impacts


Re-measure
Adjustment
Reference	Transition Date	Adjustment $M			Explanation of material AIFRS re-measurements

O	Debt issues (refer note 1 (bb))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(1,046	)	Represents the revaluation of debt issues designated within fair value hedge relationships.

P	Bills payable and other liabilities (refer note 1 (cc))

	1 July 2004		77		Relates to the recognition of the defined benefit superannuation plan deficit liability.
	30 June 2005		79		As above.
	1 July 2005		(282	)	As above, also includes impact of the elimination of interest payable on hedge derivatives.

Q	Loan capital (refer note 1 (dd))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(194	)	Relates to the impact of fair value hedging and foreign currency re-translation of hybrid instrument reclassified from equity.

R	Ordinary share capital (refer note 1 (ee))

	1 July 2004		(371	)	Relates to two adjustments: (1) recognition of direct investments in Commonwealth Bank shares by the Bank’s life insurance statutory funds as ‘Treasury Shares’ results in the reversal of the cost of these shares from ordinary share capital (-$245m), being fair value of $301m less market value appreciation $46m (less $10m tax effect)); and (2) the consolidation of the Employee Share Scheme Trust, which holds shares in the Bank on behalf of employees, results in the reversal of the cost of these shares from ordinary share capital (-$126m).
	30 June 2005		(385	)	As above, though adjustments become (1) (-$253m); and (2) (-$132m).
	1 July 2005		(385	)	As above.

S	Reserves (refer note 1 (ee))

	1 July 2004		(3,045	)	Principally relates to the reversal from general reserve of the internally generated appraisal value excess (-$3,123m).
	30 June 2005		(3,851	)	As above (-$3,901m).
	1 July 2005		(3,729	)	As above, also includes the impact of the recognition of available-for-sale revaluation reserve; cash flow hedge reserve; and the retranslation of certain hybrid financial instruments on reclassification from equity to loan capital.

T	Retained profits

	1 July 2004		501		Principally relates to three adjustments: (1) Recognition of the net after tax surplus on the Bank’s defined benefit superannuation plans (+$389m) comprising an opening surplus of (+$443m) less an opening deficit of (-$54m); (2) adjustment related to employee share-based compensation accounting under AIFRS (+$141m); and (3) the reversal of the cumulative market value appreciation on life insurance treasury shares (-$46m).
	30 June 2005		819		As above, though adjustments become (1) (+$447m); (2) (+$112m); and (3) (-$66m), together with (4) the reversal of goodwill amortisation for the full year (+$321m)
	1 July 2005		349		As above, also includes the impact of (1) the initial recognition of derivative financial instruments on initial application of hedge accounting and recognition of embedded derivatives (-$282m); (2) change in calculation of life insurance policy holder liabilities and DAC (-$260m); (3) revenue and expense recognition adjustments (-$167m); and (4) recalculation of loan impairment provisions (+$195m).

Commonwealth Bank of Australia Annual Report 2006 105

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation


				Bank
				1 July 2004
				Transition Adjustments
	Policy	AGAAP		Reclass			Gross-up		Re-Measure				Total			AIFRS
	Note ⁽¹⁾	Bank $M		$M			$M		$M ⁽²⁾				$M			Bank $M

Assets
Cash and liquid assets			6,485		168					—				168			6,653
Receivables from other financial institutions			7,068		(164	)		—		—				(164	)		6,904
Assets at fair value through Income Statement:
Trading			12,877		—			—		—				—			12,877
Investment securities			6,626		—			—		—				—			6,626
Loans, advances, and other receivables			154,139		—			5,473		13				5,486			159,625
Bank acceptances of customers			15,160		—			—		—				—			15,160
Deposits with regulatory authorities			4		(4	)		—		—				(4	)		—
Shares in and loans to controlled entities			23,677		—			—		—				—			23,677
Investment property			—		—			—		—				—			—
Property, plant and equipment			722		—			—		30				30			752
Investment in associates			220		—			—		—				—			220
Intangible assets			2,522		78			—		—				78			2,600
Deferred tax assets			—		423			—		23		G		446			446
Other assets			18,849		(501	)		96		611		H		206			19,055

Total Assets			248,349		—			5,569		677				6,246			254,595


Liabilities

Deposits and other public borrowings			142,469		—			—		—				—			142,469
Payables due to other financial institutions			6,611		—			—		—				—			6,611
Bank acceptances			15,160		—			—		—				—			15,160
Income tax liability			690		(690	)		—		—				(690	)		—
Due to controlled entities			14,176		—			5,468		—				5,468			19,644
Current tax liabilities			—		358			—		—				358			358
Deferred tax liabilities			—		332			—		197		K		529			529
Other provisions			832		—			—		(83	)	L		(83	)		749
Debt issues			24,449		—			—		—				—			24,449
Bills payable and other liabilities			17,888		—			101		80		N		181			18,069
Loan capital			7,338		—			—		—				—			7,338

Total Liabilities			229,613		—			5,569		194				5,763			235,376

Net Assets			18,736		—			—		483				483			19,219


Shareholders’ Equity

Share capital:
Ordinary share capital			13,359		—			—		(126	)	P		(126	)		13,233
Preference share capital			687		—			—		—				—			687
Other equity instruments			737		—			—		—				—			737
Reserves			2,148		(5	)		—		80		Q		75			2,223
Retained profits			1,805		5			—		529		R		534			2,339

Shareholders’ equity attributable to members of the Bank			18,736		—			—		483				483			19,219

Minority interests:
Controlled entities			—		—			—		—				—			—
Insurance statutory funds and other funds			—		—			—		—				—			—

Total Shareholders’ Equity			18,736		—			—		483				483			19,219


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.

Commonwealth Bank of Australia Annual Report 2006 107

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation


				Bank
				30 June 2005
				Transition Adjustments
	Policy	AGAAP		Reclass			Gross-up			Re-Measure			Total			AIFRS
	Note ⁽¹⁾	Bank $M		$M			$M			$M ⁽²⁾			$M			Bank $M

Assets
Cash and liquid assets			5,574		162			—			—			162			5,736
Receivables from other financial institutions			6,133		(161	)		—			—			(161	)		5,972
Assets at fair value through Income Statement:
Trading			12,432		—			—			—			—			12,432
Investment securities			6,922		—			—			—			—			6,922
Loans, advances, and other receivables			174,140		—			9,783			2			9,785			183,925
Bank acceptances of customers			16,917		—			—			—			—			16,917
Deposits with regulatory authorities			1		(1	)		—			—			(1	)		—
Shares in and loans to controlled entities			29,161		—			—			—			—			29,161
Investment property			—		—			—			—			—			—
Property, plant and equipment			796		—			—			25			25			821
Investment in associates			12		—			—			—			—			12
Intangible assets			2,336		153			—			186	F		339			2,675
Deferred tax assets			—		577			—			22	G		599			599
Other assets			17,200		(727	)		(7	)		688	H		(46	)		17,154

Total Assets			271,624		3			9,776			923			10,702			282,326


Liabilities

Deposits and other public borrowings			143,858		—			—			—			—			143,858
Payables due to other financial institutions			7,969		—			—			—			—			7,969
Bank acceptances			16,917		—			—			—			—			16,917
Income tax liability			1,421		(1,421	)		—			—			(1,421	)		—
Due to controlled entities			16,652		—			9,776			—			9,776			26,428
Current tax liabilities			—		764			—			—			764			764
Deferred tax liabilities			—		657			—			215	K		872			872
Other provisions			723		—			—			(20	) L		(20	)		703
Debt issues			40,687		—			—			—			—			40,687
Bills payable and other liabilities			16,658		—			—			79	N		79			16,737
Loan capital			7,010		—			—			—			—			7,010

Total Liabilities			251,895		—			9,776			274			10,050			261,945

Net Assets			19,729		3			—			649			652			20,381


Shareholders’ Equity

Share capital:
Ordinary share capital			13,871		—			—			(132	) P		(132	)		13,739
Preference share capital			687		—			—			—			—			687
Other equity instruments			737		—			—			—			—			737
Reserves			2,179		(2	)		—			49	Q		47			2,226
Retained profits			2,255		5			—			732	R		737			2,992

Shareholders’ equity attributable to members of the Bank			19,729		3			—			649			652			20,381

Minority interests:
Controlled entities			—		—			—			—			—			—
Insurance statutory funds and other funds			—		—			—			—			—			—

Total Shareholders’ Equity			19,729		3			—			649			652			20,381


(1)		References relate to key Accounting Policies as set out on pages 79 to 98. (2) References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.

108 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Balance Sheet Reconciliation


				Bank
				1 July 2005
				Transition Adjustments
	Policy	AGAAP		Reclass			Gross-up			Re-Measure			Total			AIFRS
	Note ⁽¹⁾	Bank $M		$M			$M			$M ⁽²⁾			$M			Bank $M

Assets
Cash and liquid assets			5,574		162			—			—			162			5,736
Receivables from other financial institutions			6,133		(161	)		—			—			(161	)		5,972
Assets at fair value through Income Statement:
Trading			12,432		(101	)		—			—			(101	)		12,331
Other			—		324			—			—			324			324
Derivative assets			—		12,249			—			(2,691	) A		9,558			9,558
Investment securities			6,922		(6,922	)		—			—			(6,922	)		—
Available-for-sale investments			—		6,860			—			93	B		6,953			6,953
Loans, advances, and other receivables			174,140		50			9,783			169	C-E		10,002			184,142
Bank acceptances of customers			16,917		—			—			—			—			16,917
Deposits with regulatory authorities			1		(1	)		—			—			(1	)		—
Shares in and loans to controlled entities			29,161		—			—			68			68			29,229
Investment property			—		—			—			—			—			—
Property, plant and equipment			796		—			—			25			25			821
Investment in associates			12		—			—			—			—			12
Intangible assets			2,336		153			—			186	F		339			2,675
Deferred tax assets			—		577			—			154	G		731			731
Other assets			17,200		(13,025	)		(7	)		956	H		(12,076	)		5,124

Total Assets			271,624		165			9,776			(1,040	)		8,901			280,525


Liabilities

Deposits and other public borrowings			143,858		(1,580	)		—			67	I		(1,513	)		142,345
Payables due to other financial institutions			7,969		—			—			—			—			7,969
Liabilities at fair value through Income
Statement			—		1,580			—			—			1,580			1,580
Derivative liabilities			—		11,854			—			(937	) J		10,917			10,917
Bank acceptances			16,917		—			—			—			—			16,917
Income tax liability			1,421		(1,421	)		—			—			(1,421	)		—
Due to controlled entities			16,652		—			9,776			—			9,776			26,428
Current tax liabilities			—		764			—			—			764			764
Deferred tax liabilities			—		657			—			366	K		1,023			1,023
Other provisions			723		—			—			16	L		16			739
Debt issues			40,687		—			—			(996	) M		(996	)		39,691
Managed funds units on issue			—		—			—			—			—			—
Bills payable and other liabilities			16,658		(11,842	)		—			269	N		(11,573	)		5,085
Loan capital			7,010		1,435			—			(186	) O		1,249			8,259

Total Liabilities			251,895		1,447			9,776			1,401			9,822			261,717

Net Assets			19,729		(1,282	)		—			361			(921	)		18,808


Shareholders’ Equity

Share capital:
Ordinary share capital			13,871		—			—			(132	) P		(132	)		13,739
Preference share capital			687		(687	)		—			—			(687	)		—
Other equity instruments			737		(737	)		—			—			(737	)		—
Reserves			2,179		252			—			88	Q		340			2,519
Retained profits			2,255		(110	)		—			405	R		295			2,550

Shareholders’ equity attributable to members of the Bank			19,729		(1,282	)		—			361			(921	)		18,808

Minority interests:
Controlled entities			—		—			—			—			—			—
Insurance statutory funds and other funds			—		—			—			—			—			—

Total Shareholders’ Equity			19,729		(1,282	)		—			361			(921	)		18,808


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.

Commonwealth Bank of Australia Annual Report 2006 109

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents of IFRS
Income Statement Reconciliation


		Bank
		Year Ended 30 June 2005
		Transition Adjustments
	Policy	AGAAP			Gross-up			Re-Measure			AIFRS			AIFRS
	Note ⁽¹⁾	Group $M			$M			$M			Transition $M			Bank $M

Interest income			13,404			289			(12	)		277			13,681
Interest expense			(8,601	)		(257	)		—			(257	)		(8,858	)

Net interest income			4,803			32			(12	)		20			4,823
Other operating income			4,023			(32	)		—			(32	)		3,991

Net banking operating income			8,826			—			(12	)		(12	)		8,814

Funds management income			—			—			—			—			—
Investment revenue			—			—			—			—			—
Claims and policyholder liability expense			—			—			—			—			—

Net funds management and investment contract operating income			—			—			—			—			—

Premiums from insurance contracts			—			—			—			—			—
Investment revenue			—			—			—			—			—
Claims and policyholder liability expense from insurance contracts			—			—			—			—			—

Insurance margin on services operating income			—			—			—			—			—


Total net operating income			8,826			—			(12	)		(12	)		8,814

Bad debts expense			(292	)		—			—			—			(292	)
Operating expenses:			—			—			—			—			—
Comparable business			(4,357	)		—			(31	)		(31	)		(4,388	)
Which new Bank			(150	)		—			—			—			(150	)

Total operating expenses			(4,507	)		—			(31	)		(31	)		(4,538	)
Defined benefit superannuation plan expense			—			—			(75	) S		(75	)		(75	)
Appraisal value uplift			—			—			—			—			—
Goodwill amortisation			(186	)		—			186	T		186			—

Profit before income tax			3,841			—			68			68			3,909
Corporate tax expense			(920	)		—			23			23			(897	)

Profit after income tax			2,921			—			91			91			3,012
Minority interests			—			—			—			—			—

Net profit attributable to members of the Bank			2,921			—			91			91			3,012


(1)		References relate to key Accounting Policies as set out on pages 79 to 98.

(2)		References relate to explanations of the key AIFRS re-measure adjustments set out on pages 111 to 114.

110 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Bank
AIFRS Balance Sheet Impacts


Re-measure
Adjustment
Reference	Transition Date	Adjustment $M		Explanation of material AIFRS re-measurements

A	Derivative assets (refer note 1 (ff))

	1 July 2004	—
	30 June 2005	—
	1 July 2005	(2,691	)	Principally relates to the recognition of internal swaps; and an adjustment to re-measure derivatives that were previously accrual accounted.

B	Available-for-sale investments (refer note 1 (j))

	1 July 2004	—
	30 June 2005	—
	1 July 2005	93		Principally relates to the revaluation of available-for-sale (‘AFS’) investments from cost to fair value. AFS assets are principally comprised of those assets classified as investment securities under previous Australian GAAP, which were measured on a cost basis.

C	Loans, advances and other receivables — gross (refer note 1 (l))

	1 July 2004	—
	30 June 2005	—
	1 July 2005	(112	)	Principally relates to two adjustments: (1) capitalisation of the net fee income integral to the yield of an originated loan results in the recognition of an unamortised deferred income balance (-$155m); and (2) re-measurement to fair value of loan assets designated within fair value hedging relationships. Such loan assets are initially measured on an amortised cost basis, and then adjusted to fair value to offset the mark-to-market movement on the associated fair value hedge derivative (+$37m).

D	Loans, advances and other receivables — collective provision for impairment (refer note 1 (n))

	1 July 2004	—
	30 June 2005	—
	1 July 2005	302		Reflects the difference between the previous Australian GAAP general provision for impairment and the AIFRS collective provision for impairment, net of reclassifications. Under AIFRS, collective provisions are recognised where there is objective evidence of impairment, and includes an estimate of losses which have been incurred but not reported as at balance date.

E	Loans, advances and other receivables — individually assessed provisions for impairment (refer note 1 (n))

	1 July 2004	—
	30 June 2005	—
	1 July 2005	(21	)	Reflects the difference between the previous Australian GAAP specific provision for impairment and the AIFRS individually assessed provisions. This difference relates to the impact of discounting of expected cash flows on recovery.

F	Intangible assets (refer note 1 (t))

	1 July 2004	—
	30 June 2005	186		Goodwill no longer amortised under AIFRS. Reflects the reversal of amortisation of goodwill for the full year ended 30 June 2005.
	1 July 2005	186		As above.

Commonwealth Bank of Australia Annual Report 2006 111

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Bank
AIFRS Balance Sheet Impacts


Re-measure
Adjustment
Reference	Transition Date	Adjustment $M			Explanation of material AIFRS re-measurements

G	Deferred tax assets (refer note 1 (y))

	1 July 2004		23		Principally relates to the deferred tax asset recognised on the defined benefit superannuation plan deficit liability, under the AIFRS “balance sheet” approach to tax-effect accounting.
	30 June 2005		22		As above.
	1 July 2005		154		As above, and also includes deferred tax assets related to various AIFRS adjustments such as hedge accounting, loan impairment provisioning and revenue and expense recognition.

H	Other assets (refer note 1 (u))

	1 July 2004		611		Principally relates to the recognition of the defined benefit superannuation plan surplus asset (+$633m). Refer to adjustment S.
	30 June 2005		688		As above, though adjustment becomes +$717m.
	1 July 2005		956		As above, also includes hedging impact of +$261m, which relates to the elimination of interest receivable on hedged derivatives.

I	Deposits from customers (refer note 1 (v))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		67		Represents the revaluation of deposits designated within fair value hedge relationships.

J	Derivative liabilities (refer note 1 (ff))

	1 July 2004	—
	30 June 2005	—
	1 July 2005		(937	)	Principally relates to the elimination of internal swaps; initial recognition of embedded derivatives at fair value; and an adjustment to re-measure derivatives that were previously accrual accounted.

K	Deferred tax liabilities (refer note 1 (y))
	1 July 2004		197		Principally relates to the deferred tax liability recognised on the defined benefit superannuation plan surplus asset, under the AIFRS “balance sheet” approach to tax-effect accounting. Refer adjustment H above.
	30 June 2005		215		As above.
	1 July 2005		366		As above, and also includes deferred tax liabilities related to various AIFRS adjustments such as hedge accounting, re-measurement of available-for-sale investments, and revenue and expense recognition.

L	Other provisions (refer note 1 (z) and (aa))

	1 July 2004		(83	)	Principally relates to the reversal of accrued liabilities in respect of employee share-based compensation. This is a one-off adjustment in the comparative period due to the discontinuance of the mandatory component of the Equity Participation Plan.
	30 June 2005		(20	)	As above.
	1 July 2005		16		As above.

112 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 1 Accounting Policies (continued)
(nn) Effect of Transition to Australian Equivalents to IFRS
Explanation of AIFRS Re-measure Transition Adjustments

Bank
AIFRS Bank Balance Sheet Impacts


Re-measure
Adjustment
Reference	Transition Date	Adjustment $M			Explanation of material AIFRS re-measurements

M	Debt issues (refer note 1 (bb))

	1 July 2004		—
	30 June 2005		—
	1 July 2005		(996	)	Represents the revaluation of debt issues designated within fair value hedge relationships.

N	Bills payable and other liabilities (refer note 1 (cc))

	1 July 2004		80		Principally relates to the recognition of the defined benefit superannuation plan deficit liability.
	30 June 2005		79		As above.
	1 July 2005		269		As above, also includes impact of the elimination of interest payable on hedge derivatives.

O	Loan capital (refer note 1 (dd))

	1 July 2004		—
	30 June 2005		—
	1 July 2005		(186	)	Relates to the impact of fair value hedging and foreign currency re-translation of hybrid instruments reclassified from equity.

P	Ordinary share capital (refer note 1 (ee))

	1 July 2004		(126	)	Relates to the consolidation of the Employee Share Scheme Trust, which holds shares in the Bank on behalf of employees, results in the reversal of the cost of these shares from ordinary share capital (-$126m).
	30 June 2005		(132	)	As above, though adjustment becomes (-$132m).
	1 July 2005		(132	)	As above.

Q	Reserves (refer note 1 (ee))

	1 July 2004		80		Principally relates to two adjustments: (1) recognition of a new employee compensation reserve for the accrual of employee expenses incurred by the Bank to be compensated through share based payments (+$47m); and (2) the recognition of the directors discount on property in the asset revaluation reserve (+$30m).
	30 June 2005		49		As above, though adjustment becomes (1) (+$23m); and (2) (+$25m).
	1 July 2005		88		As above, also includes the impact of the recognition of available-for-sale revaluation reserve; cash flow hedge reserve; and the retranslation of certain hybrid financial instruments on reclassification from equity to loan capital.

R	Retained profits

	1 July 2004		529		Principally relates to two adjustments: (1) Recognition of the net after tax surplus on the Bank’s defined benefit superannuation plans (+$389m) comprising an opening surplus of (+$443m) less an opening deficit of (-$54m); and (2) adjustment related to employee share-based compensation accounting under AIFRS (+$141m).
	30 June 2005		732		As above, though adjustments become (1) (+$447m); and (2) (+$112m), together with (3) the reversal of goodwill amortisation for the full year (+$186m)
	1 July 2005		405		As above, also includes the impact of (1) the initial recognition of derivative financial instruments on initial application of hedge accounting (-$105m); (2) revenue and expense recognition adjustments (-$108m); and (3) recalculation of loan impairment provisions (+$114m).

Commonwealth Bank of Australia Annual Report 2006 113

Notes to the Financial Statements

Note 2 Profit

Profit before income tax has been determined as follows:


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Interest Income
Loans		17,304			14,846			13,739			11,708
Other financial institutions		333			229			319			136
Cash and liquid assets		250			198			271			221
Assets at fair value through Income Statement		1,186			785			796			647
Available-for-sale investments		685			—			241			—
Investment securities		—			723			—			242
Controlled entities		—			—			661			727

Total Interest Income		19,758			16,781			16,027			13,681


Interest Expense
Deposits		7,388			7,063			6,663			5,543
Other financial institutions		475			257			433			255
Liabilities at fair value through Income Statement		971			—			371			—
Debt issues		3,795			3,084			2,398			2,201
Controlled entities		—			—			854			496
Loan capital		615			351			586			363

Total Interest Expense		13,244			10,755			11,305			8,858

Net Interest Income		6,514			6,026			4,722			4,823


Other Operating Income
Lending fees		800			733			714			722
Commission and other fees		1,635			1,545			1,330			1,286
Trading income		505			440			498			381
Net gain/(loss) on disposal of non-trading instruments		45			(13	)		31			(39	)
Net hedging ineffectiveness		(79	)		—			333			—
Dividends — Controlled entities		—			—			2,078			988
Dividends — Other		4			3			2			—
Net profit on sale of property, plant and equipment		4			4			(1	)		4
Funds management and investment contract income		1,623			1,332			—			—
Insurance contracts income		1,113			1,075			—			—
Other		122			133			555			649

Total Other Operating Income		5,772			5,252			5,540			3,991

Total Net Operating Income		12,286			11,278			10,262			8,814


Bad Debts Expense
Collectively assessed impairment loss/(recovery)		398			322			380			292

Bad Debts Expense (Note 15)		398			322			380			292

Commonwealth Bank of Australia Annual Report 2006 115

Notes to the Financial Statements

Note 2 Profit (continued)


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Staff Expenses
Salaries and wages		2,419			2,274			1,872			1,758
Share based compensation		39			74			39			74
Superannuation contributions		8			7			(14	)		(18	)
Provisions for employee entitlements		66			67			59			59
Payroll tax		123			115			111			101
Fringe benefits tax		34			32			30			28
Other staff expenses		134			104			31			29

Comparable business		2,823			2,673			2,128			2,031
Which new Bank		—			50			—			50

Total Staff Expenses		2,823			2,723			2,128			2,081


Occupancy and Equipment Expenses
Operating lease rentals		338			331			284			266
Depreciation:
Buildings		22			21			21			20
Leasehold improvements		56			58			46			46
Equipment		64			63			38			29
Operating lease assets		9			8			—			—
Repairs and maintenance		73			71			67			64
Other		59			61			32			40

Comparable business		621			613			488			465
Which new Bank		—			13			—			13

Total Occupancy and Equipment Expenses		621			626			488			478


Information Technology Services
Projects and development		364			331			332			298
Data processing		227			248			200			221
Desktop		137			150			134			148
Communications		201			204			173			174
Amortisation of software assets		43			17			36			18
IT equipment depreciation		13			6			13			6

Comparable business		985			956			888			865
Which new Bank		—			52			—			52

Total Information Technology Services		985			1,008			888			917


Other Expenses
Postage		118			112			104			98
Stationery		98			108			74			79
Fees and commissions		636			614			406			402
Advertising, marketing and loyalty		307			288			249			234
Amortisation of other intangible assets (excluding software)		6			3			—			—
Non lending losses		116			103			110			103
Other		284			249			157			111

Comparable business		1,565			1,477			1,100			1,027
Which new Bank		—			35			—			35

Total Other Expenses		1,565			1,512			1,100			1,062


Comparable business		5,994			5,719			4,604			4,388
Which new Bank		—			150			—			150

Total Operating Expenses		5,994			5,869			4,604			4,538

Defined benefit superannuation plan expense		(35	)		(75	)		(35	)		(75	)

Profit before income tax		5,859			5,012			5,243			3,909

116 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 4 Average Balances and Related Interest

The following table lists the major categories of interest earning assets and interest bearing liabilities of the Bank together with the respective interest earned or paid and the average interest rate for each of the years ended 30 June 2006 and 30 June 2005. Averages used were predominately daily averages. Interest is accounted for based on product yield, while all trading gains and losses are disclosed as trading income within other banking income.

Where assets or liabilities are hedged, the amounts are shown net of the hedge, however individual items not separately hedged may be affected by movements in exchange rates.

The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities.

Non-accrual loans were included in interest earning assets under loans, advances and other receivables.

The official cash rate in Australia increased by 25 basis points during the year ended 30 June 2006, while rates in New Zealand increased by a total of 50 basis points during the year.


	2006								2005
	Average						Average		Average			Average
	Balance			Interest			Rate		Balance			Interest			Rate
Average Interest Earning Assets and Income	$M			$M			%		$M			$M			%

Cash and liquid assets
Australia		3,581			221			6.2		3,716			178			4.8
Overseas		908			29			3.2		1,077			20			1.9
Receivables due from other financial institutions
Australia		3,016			145			4.8		2,394			61			2.5
Overseas		4,007			188			4.7		3,791			168			4.4
Assets at fair value through Income Statement — Trading
Australia		12,161			725			6.0		11,535			603			5.2
Overseas		3,388			185			5.5		3,850			182			4.7
Assets at fair value through Income Statement — Other
Australia		355			22			6.2		—			—			—
Overseas		3,241			254			7.8		—			—			—
Investment securities
Australia		—			—			—		4,375			296			6.8
Overseas		—			—			—		8,538			427			5.0
Available-for-sale investments
Australia		5,010			349			7.0		—			—			—
Overseas		6,508			336			5.2		—			—			—
Loans, advances and other receivables
Australia		192,086			13,527			7.0		171,249			11,822			6.9
Overseas		40,537			3,012			7.4		34,183			2,427			7.1
Intragroup loans
Australia		—			—			—		—			—			—
Overseas		9,623			338			3.5		5,793			92			1.6

Average interest earning assets and interest income including intragroup		284,421			19,331			6.8		250,501			16,276			6.5
Intragroup eliminations		(9,623	)		(338	)		3.5		(5,793	)		(92	)		1.6

Total average interest earning assets and interest income		274,798			18,993			6.9		244,708			16,184			6.6
Securitisation Home Loan Assets		10,887			765			7.0		8,568			597			7.0


Average Non-Interest Earning Assets

Bank acceptances
Australia		18,014								16,263
Overseas		—								—
Assets at fair value through Income Statement — Insurance
Australia		20,529								22,929
Overseas		3,468								4,542
Property, plant and equipment
Australia		978								893
Overseas		158								144
Other assets
Australia		20,699								23,822
Overseas		5,113								3,303
Provisions for impairment
Australia		(1,144	)							(1,430	)
Overseas		(86	)							(142	)

Total average non-interest earning assets		67,729								70,324

Total average assets		353,414								323,600

Percentage of total average assets applicable to overseas operations (%)		19. 0								18.3

118 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 4 Average Balances and Related Interest (continued)

2006

2005

Average

Average Interest Bearing Liabilities and Loan

Balance

Interest

Rate

Balance

Interest

Rate

Capital and Interest Expense

Time deposits

Australia

60,725

3,533

5.8

61,826

3,183

5.1

Overseas

15,732

935

5.9

17,716

1,356

7.7

Savings deposits

Australia

31,832

603

1.9

31,304

586

1.9

Overseas

2,597

119

4.6

2,927

119

4.1

Other demand deposits ⁽¹⁾

Australia

44,544

1,905

4.3

41,235

1,653

4.0

Overseas

4,637

293

6.3

4,859

166

3.4

Payables due to other financial institutions

Australia

1,982

119

6.0

1,707

2.9

Overseas

7,649

356

4.7

6,292

207

3.3

Liabilities at fair value through Income Statement

Australia

2,038

192

9.4

—

Overseas

13,266

779

5.9

—

Debt issues ⁽¹⁾

Australia

46,315

2,547

5.5

34,853

2,095

6.0

Overseas

14,603

577

4.0

16,540

462

2.8

Loan capital ⁽¹⁾

Australia

7,936

450

5.7

5,566

321

5.8

Overseas

1,244

165

13.3

772

3.9

Intragroup borrowings

Australia

9,623

338

3.5

5,793

1.6

Overseas

—

Average interest bearing liabilities and loan capital and interest expense including intragroup

264,723

12,911

4.9

231,390

10,320

4.5

Intragroup eliminations

(9,623

)

(338

)

3.5

(5,793

)

(92

)

1.6

Total average interest bearing liabilities and loan capital and interest expense

255,100

12,573

4.9

225,597

10,228

4.5

Securitisation Debt Issues

11,541

671

5.8

9,911

527

5.3

Non-Interest Bearing Liabilities

Deposits not bearing interest

Australia

5,797

5,512

Overseas

1,170

1,121

Liabilities on bank acceptances

Australia

18,014

16,263

Overseas

—

Insurance policy liabilities

Australia

20,731

20,732

Overseas

3,040

3,900

Other liabilities

Australia

11,476

14,607

Overseas

4,552

3,927

Total average non-interest bearing liabilities

64,780

66,062

Total average liabilities and loan capital

331,421

301,570

Shareholders’ equity

21,993

22,030

Total average liabilities, loan capital and Shareholders’ equity

353,414

323,600

Percentage of total average liabilities and Loan Capital applicable to overseas operations (%)

20.7

19.3


(1)		Comparison between reporting periods are impacted by hedge accounting.

Commonwealth Bank of Australia Annual Report 2006 119

Notes to the Financial Statements

Note 4 Average Balances and Related Interest (continued)

2006

2005

Avg Bal

Income

Yield

Avg Bal

Income

Yield

Net Interest Margin

Total interest earning assets excluding securitisation

274,798

18,993

6.91

244,708

16,184

6.61

Total interest bearing liabilities excluding securitisation

255,100

12,573

4.93

225,597

10,228

4.53

Net interest income & interest spread (excluding securitisation)

6,420

1.98

5,956

2.08

Benefit of free funds

0.36

0.35

Net interest margin

2.34

2.43

2006

2005

Jun 06 vs

Reconciliation of Net Interest Margin

Jun 05 %

Net margin as reported ⁽¹⁾

2.34

2.43

(9)bpts

AIFRS volatility ⁽²⁾

0.02

—

2bpts

Underlying net interest margin pro-forma basis

2.36

2.43

(7)bpts


(1)		Refer page 102 for a reconciliation of Net Interest Income (AIFRS to AGAAP equivalent).

(2)		Represents AIFRS impact (mainly hybrid distributions and hedge accounting).

Geographical analysis of key categories

Full Year Ended

2006

2005

Avg Bal

Income

Yield

Avg Bal

Income

Yield

Loans, Advances and Other Receivables

Australia

192,086

13,527

7.04

171,249

11,822

6.90

Overseas

40,537

3,012

7.43

34,183

2,427

7.10

Total

232,623

16,539

7.11

205,432

14,249

6.94

Non Lending Interest Earning Assets

Australia

24,123

1,462

6.06

22,020

1,138

5.17

Overseas

18,052

992

5.50

17,256

797

4.62

Total

42,175

2,454

5.82

39,276

1,935

4.93

Interest Bearing Deposits

Australia

137,101

6,041

4.41

134,365

5,422

4.04

Overseas

22,966

1,347

5.87

25,502

1,641

6.43

Total

160,067

7,388

4.62

159,867

7,063

4.42

Other Interest Bearing Liabilities

Australia

58,271

3,308

5.68

42,126

2,466

5.85

Overseas

36,762

1,877

5.11

23,604

699

2.96

Total

95,033

5,185

5.46

65,730

3,165

4.82

The overseas component comprises overseas branches of the Bank and overseas domiciled controlled entities. Overseas intragroup borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Non-accrual loans were included in interest earning assets under loans, advances and other receivables.

In calculating net interest margin, assets, liabilities, interest income and interest expense related to securitisation vehicles have been excluded. This has been done to more accurately reflect the Bank’s underlying net margin.


	Year Ended
	2006 vs 2005
	Increase/(Decrease)
Change in Net Interest	$M

Due to changes in average volume of interest earning assets and interest bearing liabilities		718
Due to changes in interest margin		(254	)

Change in net interest income		464

120 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 4 Average Balances and Related Interest (continued)

June 2006 vs June 2005

Changes in Net Interest Income:

Volume

Rate

Total

Volume and Rate Analysis

Interest Earning Assets

Cash and liquid assets

Australia

)

Overseas

)

Receivables due from other financial institutions

Australia

Overseas

Assets at fair value through Income Statement — Trading

Australia

122

Overseas

(24

)

Assets at fair value through Income Statement — Other

Australia

Overseas

127

254

Investment securities

Australia

(148

)

(148

)

(296

)

Overseas

(214

)

(213

)

(427

)

Available-for-sale investments

Australia

174

175

349

Overseas

168

336

Loans, advances and other receivables

Australia

1,453

252

1,705

Overseas

462

123

585

Intragroup loans

Australia

—

Overseas

148

246

Changes in interest income including intragroup

2,255

800

3,055

Intragroup eliminations

(98

)

(148

)

(246

)

Changes in interest income

2,035

774

2,809

Securitisation home loan assets

162

168

Interest Bearing Liabilities and Loan Capital

Time deposits

Australia

(60

)

410

350

Overseas

(135

)

(286

)

(421

)

Savings deposits

Australia

Overseas

(14

)

—

Other demand deposits

Australia

137

115

252

Overseas

(11

)

138

127

Payables due to other financial institutions

Australia

Overseas

149

Liabilities at fair value through income Statement

Australia

192

Overseas

390

389

779

Debt issues

Australia

660

(208

)

452

Overseas

(65

)

180

115

Loan capital

Australia

136

)

129

Overseas

135

Intragroup borrowings

Australia

148

246

Overseas

—

Changes in interest expense including intragroup

1,556

1,035

2,591

Intragroup eliminations

(98

)

(148

)

(246

)

Changes in interest expense

1,396

949

2,345

Changes in net interest income

718

(254

)

464

Securitisation debt issues

144

Commonwealth Bank of Australia Annual Report 2006 121

Notes to the Financial Statements

Note 4 Average Balances and Related Interest (continued)

Changes in Net Interest Income: Volume and Rate Analysis

The preceding table shows the movement in interest income and expense due to changes in volume and changes in interest rates. Volume variances reflect the change in interest from the prior period due to movement in the average balance. Rate variance reflects the change in interest from the prior year due to changes in interest rates.

Volume and rate variance for total interest earning assets and liabilities have been calculated separately (rather than being the sum of the individual categories).


	2006		2005
Geographical analysis of key categories	%		%

Australia
Interest spread ⁽¹⁾		2.21		2.33
Benefit of net free liabilities, provisions and equity ⁽²⁾		0.24		0.25

Australia interest margin ⁽³⁾		2.45		2.58


Overseas
Interest spread ⁽¹⁾		0.97		1.03
Benefit of net free liabilities, provisions and equity ⁽²⁾		0.67		0.68

Overseas interest margin ⁽³⁾		1.64		1.71


Group
Interest spread ⁽¹⁾		1.98		2.08
Benefit of net free liabilities, provisions and equity ⁽²⁾		0.36		0.35

Group interest margin ⁽³⁾		2.34		2.43


(1)		Difference between the average interest rate earned and the average interest rate paid on funds.

(2)		A portion of the Group’s interest earning assets is funded by net interest free liabilities and shareholders’ equity. The benefit to the Group of these interest free funds is the amount it would cost to replace them at the average cost of funds.

(3)		Net interest income divided by average interest earning assets for the year.

122 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 5 Income Tax Expense


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Profit from ordinary activities before Income Tax
Banking		4,594			4,057			5,278			3,984
Funds management		643			508			—			—
Insurance		657			522			—			—
Defined benefit superannuation plan expense		(35	)		(75	)		(35	)		(75	)

		5,859			5,012			5,243			3,909

Prima Facie Income Tax at 30%
Banking		1,378			1,217			1,584			1,195
Funds management		193			153			—			—
Insurance		197			157			—			—
Defined benefit superannuation plan expense		(11	)		(23	)		(11	)		(23	)

		1,757			1,504			1,573			1,172


Tax effect of expenses that are non-deductible/income non-assessable in determining taxable profit:

Current period
Taxation offsets and other dividend adjustments		(29	)		(48	)		(615	)		(309	)
Tax adjustment referable to policyholder income		232			160			—			—
Non assessable income — life insurance transitional fee relief		—			(30	)		—			—
Non—assessable gains		(43	)		—			—			—
Tax losses recognised		(35	)		(9	)		(14	)		(2	)
Other		3			25			32			36

		128			98			(597	)		(275	)

Prior periods
Other		15			—			—			—

Total income tax expense		1,900			1,602			976			897


Income Tax Attributable to Profit from ordinary activites
Banking		1,328			1,197			976			897
Funds management		139			88			—			—
Insurance		102			89			—			—

Corporate tax expense		1,569			1,374			976			897
Policyholder tax expense		331			228			—			—

Total income tax expense		1,900			1,602			976			897


	%		%		%		%

Effective Tax Rate
Total — corporate		28.4		28.7		18.6		22.9
Banking — corporate		29.1		30.1		18.6		22.9
Funds management — corporate		30.8		21.8		—		—
Insurance — corporate		19.7		22.4		—		—


	$M		$M			$M		$M

Recognised in the Income Statement
Australia
Current tax expense		1,366		1,403			655		1,036
Deferred tax expense		382		(5	)		318		(148	)

Total Australia		1,748		1,398			973		888

Overseas
Current tax expenses		114		175			3		9
Deferred tax expense		38		29			—		—

Total Overseas		152		204			3		9

Total income tax expense		1,900		1,602			976		897

The share of associates’ income tax expense included in total income tax expense in Income Statement is $1 million for 2006 (2005: $2 million)

Commonwealth Bank of Australia Annual Report 2006 123

Notes to the Financial Statements

Note 5 Income Tax Expense (continued)


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

The significant temporary differences are as follows ⁽¹⁾ :
Deferred tax assets arising from:
Provision for employee benefits		261			261			245			240
Provisions for Which new Bank		11			41			11			41
Provisions for impairment on loans, advances and other receivables		350			431			341			425
Other provisions not tax deductible until expense incurred		135			71			74			59
Recognised value of tax losses carried forward		9			—			9			—
Financial instruments		195			153			62			73
Other		297			133			209			182
Set off of tax		(608	)		(439	)		(559	)		(421	)

Total deferred tax assets		650			651			392			599
Intergroup deferred tax receivable (Note 22)		—			—			—			549

Deferred tax liabilities arising from:
Property asset revaluations		29			29			29			29
Lease financing		312			296			144			292
Defined benefit superannuation plan surplus		368			215			368			215
Intangible assets		10			11			—			—
Financial instruments		626			409			586			311
Other		599			400			72			446
Set off of tax		(608	)		(439	)		(559	)		(421	)

Total deferred tax liabilities (Note 26)		1,336			921			640			872
Intergroup deferred tax payable (Note 30)		—			—			—			60


Deferred tax assets opening balance:		651			564			599			423
1 July 2004 AIFRS Transitional Adjustment		—			23			—			23

Restated opening balance		651			587			599			446
Movement in temporary differences during the year:
Provisions for employee benefits		—			29			5			28
Provisions for Which new Bank		(30	)		(11	)		(30	)		(11	)
Provisions for impairment on loans, advances and other receivables		(81	)		8			(84	)		12
Other provisions not tax deductible until expense incurred		64			42			15			95
Tax value of loss carry-forwards utilised		9			—			9			—
Financial instruments		42			(50	)		(11	)		(58	)
Other		164			(180	)		27			(52	)
Set off of tax		(169	)		226			(138	)		139

Deferred tax assets closing balance ⁽¹⁾		650			651			392			599


Deferred tax liabilities opening balance:		921			384			872			332
1 July 2004 AIFRS Transitional Adjustment		—			188			—			197

Restated opening balance		921			572			872			529
Movements in temporary differences during the year:
Property asset revaluations		—			29			—			29
Lease financing		16			(43	)		(148	)		(47	)
Defined benefit superannuation plan surplus		153			25			153			25
Intangible assets		(1	)		11			—			—
Financial instruments		217			(234	)		275			(156	)
Other		199			335			(374	)		353
Set off of tax		(169	)		226			(138	)		139

Deferred tax liabilities closing balance ⁽¹⁾(Note 26)		1,336			921			640			872


(1)		Exchange differences on deferred foreign tax balances are taken to income to match the treatment of exchange differences on the underlying assets and liabilities.


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Deferred tax assets not taken to account ⁽¹⁾
Valuation allowance
Opening balance		159			170			79			94
Prior year adjustments		(40	)		(33	)		7			(33	)
Benefits now taken to account		(35	)		(9	)		(14	)		(2	)
Benefits arising duning the year not recognised		47			31			—			20

Closing balance		131			159			72			79

124 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 5 Income Tax Expense (continued)


	Group				Bank
	2006		2005		2006		2005
Expiration of carry-forward losses	$M		$M		$M		$M

At 30 June 2006 carry-forward losses expire as follows:
From one to two years		2		3		—		1
From two to four years		14		3		10		—
After four years		30		36		29		34
Losses that do not expire under current tax law		85		117		33		44

Total		131		159		72		79

Potential future income tax benefits of the company arising from:

•		Capital losses arising under the tax consolidations systems; and

•		Tax losses and timing differences in offshore centres have not been recognised as assets because recovery is not probable.

These benefits could amount to:

•		$72 million (2005: $44 million) in capital losses; and

•		$59 million (2005: $115 million) in offshore centres.

These potential tax benefits will only be obtained if:

•		The company derives future capital gains and assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised;

•		The company continues to comply with the conditions for claiming capital losses and deductions imposed by tax legislation; and

•		No changes in tax legislation adversely affect the Company in realising the benefit from deductions for the losses.

Tax Consolidation

Tax consolidation legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as single entities for Australian tax purposes. The Commonwealth Bank of Australia has elected to be taxed as a single entity with effect from 1 July 2002.

New Zealand Subsidiaries

Certain subsidiaries of the Bank in New Zealand are being audited by the Inland Revenue Department (IRD) as part of an industry-wide review of structured finance transactions.

An assessment has been received from the IRD in respect of one structured finance investment in relation to the year ended 30 June 2001. Notices of proposed adjustment have been received for other similar investments for other years.

The Bank is confident that the tax treatment it has adopted for these investments is correct, and any assessments received will be disputed.

Commonwealth Bank of Australia Annual Report 2006 125

Notes to the Financial Statements

Note 6 Dividends


	Group						Bank
	2006			2005				2006			2005
	$M			$M				$M			$M

Ordinary Shares
Interim ordinary dividend (fully franked) (2006: 94 cents, 2005: 85 cents) Interim ordinary dividend paid — cash component only		992			883				992			883
Interim ordinary dividend paid — dividend reinvestment plan		219			200				219			200

Total dividends paid		1,211			1,083				1,211			1,083


Preference Shares ⁽¹⁾
Preference dividends paid (fully franked) (2005: 1,115 cents)		—			29				—			29
Provision for preference dividend		—			10				—			10

Other Equity Instruments ⁽¹⁾
Dividends paid		—			92				—			34


Total dividends provided for, reserved or paid		1,211			1,214				1,211			1,156

Other provision carried		6			4				6			4

Dividends proposed and not recognised as a liability (fully franked) (2006: 130 cents, 2005: 112 cents) ⁽²⁾		1,668			1,434				1,668			1,434

Provision for dividends
Balance as at 1 July 2005		14			14				14			14
Provisions made during the year		2,646			2,437				2,646			2,437
Provisions used during the year		(2,645	)		(2,437	)			(2,645	)		(2,437	)
Provisions reversed during the year		(9	)		—				(9	)		—

Balance at 30 June 2006 (Note 27)		6			14				6			14


(1)		Reclassified to loan capital on adoption of AIFRS from 1 July 2005.

(2)		The 2005 final dividend was satisfied by cash disbursements of $1,173 million and the issue of $261 million of ordinary shares through the dividend reinvestment plan. The 2006 final dividend is expected to be satisfied by cash disbursements of $1,365 million and the estimated issue of $303 million of ordinary shares through the dividend reinvestment plan.

Dividend Franking Account

After fully franking the final dividend to be paid for the year ended 30 June 2006 the amount of credits available, at the 30% tax rate as at 30 June 2006 to frank dividends for subsequent financial years is $nil (2005: $194 million). This figure is based on the combined franking accounts of the Bank at 30 June 2006, which have been adjusted for franking credits that will arise from the payment of income tax payable on profits for the year ended 30 June 2006, franking debits that will arise from the payment of dividends proposed for the year and franking credits that the Bank may be prevented from distributing in subsequent financial periods.

The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue to fully frank future dividend payments. These calculations have been based on the taxation law as at 30 June 2006.

Dividend History


									Full Year				DRP
					Half-year		Full Year		Payout Ratio				Participation
	Cents Per				Payout Ratio⁽¹⁾		Payout Ratio⁽¹⁾		Cash Basis⁽²⁾		DRP		Rate⁽³⁾
Half Year Ended	Share		Date Paid		%		%		%		Price		%

31 December 2003		79		30/03/04		82. 7		—		—		31.61		18. 8
30 June 2004		104		24/09/04		103. 8		93.5		73. 9		30.14		18. 7
31 December 2004		85		31/03/05		65. 6		—		—		35.90		18. 6
30 June 2005		112		23/09/05		88. 6		77.0		74. 9		37.19		18. 2
31 December 2005		94		05/04/06		60. 6		—		—		43.89		18. 1
30 June 2006		130		⁽⁴⁾		86. 5		73. 3		71. 0		—		—


(1)		Dividend Payout Ratio: dividends divided by statutory earnings.

(2)		Payout ratio based on net profit after tax before defined benefit superannuation plan expense and treasury shares mismatch. Includes Which new Bank expenses for the year ended 30 June 2005 and the profit on sale of CMG Asia for the year ended 30 June 2006.

(3)		DRP Participation Rate: the percentage of total issued share capital participating in the Dividend Reinvestment Plan.

(4)		Dividend expected to be paid on 5 October 2006.

126 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 7 Earnings Per Share


	Group
	2006		2005
	C		C

Earnings per Ordinary Share
Basic		308. 2		259. 6
Fully diluted		303. 1		255. 3


	$M			$M

Reconciliation of earnings used in the calculation of earnings per share
Profit after income tax		3,959			3,410
Less: Preference share dividends		—			(39	)
Less: Other equity instrument dividends		—			(76	)
Less: Other dividends — ASB preference shares		—			(16	)
Less: Minority interests		(31	)		(10	)

Earnings used in calculation of basic earnings per share		3,928			3,269

Add: Profit impact of assumed conversions
Preference shares		—			23
Other equity instruments		—			67
Loan capital		100			—

Earnings used in calculation of fully diluted earnings per share		4,028			3,359


	Number of Shares
	2006		2005
	M		M

Weighted average number of ordinary shares (net of treasury shares) used in the calculation of basic earnings per share		1,275		1,260
Effect of dilutive securities — share options and convertible loan capital instruments		54		56

Weighted average number of ordinary shares (net of treasury shares) used in the calculation of fully diluted earnings per share		1,329		1,316


	C		C

Cash Basis Earnings Per Ordinary Share
Basic		315. 9		264. 8
Fully diluted		310. 5		260. 5


	$M		$M

Reconciliation of earnings used in the calculation of basic cash basis earnings per share
Earnings used in calculation of earnings per share (as above)		3,928		3,269
Add: Defined benefit superannuation plan expense after income tax		25		53
Add: Treasury shares mismatch after income tax		100		39

Earnings used in calculation of basic cash basis earnings per share		4,053		3,361

Add: Profit impact of assumed conversions
Preference shares		—		23
Other equity instruments		—		67
Loan capital		100		—

Earnings used in calculation of fully diluted cash basis earnings per share		4,153		3,451


	Number of Shares
	2006		2006
	M		M

Weighted average number of ordinary shares (net of treasury shares) used in calculation of basic cash basis earnings per share		1,283		1,269
Effect of dilutive securities — share options and convertible loan capital instruments		55		56

Weighted average number of ordinary shares (net of treasury shares) used in calculation of fully diluted cash basis earnings per share		1,338		1,325

Basic earnings per share amounts are calculated by dividing net profit for the year attributed to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amount are calculated by dividing net profit attributable to ordinary shareholders (after deducting interest on the convertible redeemable loan capital instruments) by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of diluted options and diluted convertible non-cumulative redeemable loan capital instruments).

Commonwealth Bank of Australia Annual Report 2006 127

Notes to the Financial Statements

Note 8 Cash and Liquid Assets

Group

Bank

2006

2005

2006

2005

Australia

Notes, coins and cash at bankers

1,629

1,831

1,210

1,474

Money at short call

—

Securities purchased under agreements to resell

2,629

2,598

2,629

2,598

Bills received and remittances in transit

131

372

133

371

Total Australia

4,393

4,804

3,972

4,443

Overseas

Notes, coins and cash at bankers

Money at short call

356

307

210

Securities purchased under agreements to resell

308

876

633

1,243

Total Overseas

738

1,251

847

1,293

Total Cash and Liquid Assets

5,131

6,055

4,819

5,736

Note 9 Receivables from Other Financial Institutions

Group

Bank

2006

2005

2006

2005

Australia

Placements with and loans to other banks and financial institutions

3,191

3,573

3,700

4,000

Total Australia

3,191

3,573

3,700

4,000

Overseas

Deposits with regulatory authorities ⁽¹⁾

Other placements with and loans to other banks and financial institutions

3,842

2,469

3,761

1,971

Total Overseas

3,916

2,514

3,764

1,972

Total Receivables from Other Financial Institutions

7,107

6,087

7,464

5,972


(1)		These at call deposits are required by law for the Bank to operate in these regions.

128 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 10 Assets at Fair Value through Income Statement

Group

Bank

2006

2005

2006

2005

Trading

15,758

14,631

13,926

12,432

Insurance

24,437

27,484

—

Other

2,944

—

396

—

Total Assets at Fair Value through Income Statement

43,139

42,115

14,322

12,432


	Group					Bank
	2006		2005			2006		2005
Trading	$M		$M			$M		$M

Australia
Market Quoted:
Australian Public Securities
Commonwealth and States		422		283			422		283
Local and semi-government		860		505			860		505
Bills of exchange		2,982		1,346			2,982		1,346
Certificates of deposit		5,031		5,980			5,031		5,977
Medium term notes		2,846		1,949			2,846		1,949
Other securities		43		196			24		181
Non-Market Quoted:
Commercial paper		648		767			800		878

Total Australia		12,832		11,026			12,965		11,119

Overseas
Market Quoted:
Government securities		361		358			220		248
Eurobonds		349		502			349		502
Certificates of deposit		1,408		1,559			—		—
Medium term notes		60		—			—		—
Floating rate notes		392		563			392		563
Commercial paper		82		367			—		—
Non-Market Quoted:
Commercial paper		138		6			—		—
Bills of exchange		135		240			—		—
Other securities		1		10			—		—

Total Overseas		2,926		3,605			961		1,313

Total Trading Assets		15,758		14,631			13,926		12,432


Thereof can be repledged or resold by counter party		1,192		n/a	⁽¹⁾		1,192		n/a	⁽¹⁾


(1)		No comparative balances are provided due to the exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

Commonwealth Bank of Australia Annual Report 2006 129

Notes to the Financial Statements

Note 10 Assets at Fair Value through Income Statement (continued)

Investments

Backing Life

Risk

Investment

Contracts

Group

2006

2005

Insurance

Equity Security Investments:

Direct

685

2,013

2,698

2,791

Indirect

1,156

5,725

6,881

6,467

Total Equity Security Investments

1,841

7,738

9,579

9,258

Debt Security Investments:

Direct

579

1,924

2,503

3,918

Indirect

2,598

5,497

8,095

8,116

Total Debt Security Investments

3,177

7,421

10,598

12,034

Property Investments:

Direct

182

313

495

Indirect

463

854

1,317

2,442

Total Property Investments

645

1,167

1,812

2,445

Other Assets

2,361

2,448

3,747

Total Life Insurance Investment Assets

5,750

18,687

24,437

27,484

Direct investments refer to positions held directly in the issuer of the investment. Indirect investments refer to investments that are held through unit trusts or similar investment vehicles.

Disclosure on Asset Restriction

Investments held in the Australian statutory funds may only be used within the restrictions imposed under the Life Insurance Act 1995.

The main restrictions are that assets in a fund may only be used to meet the liabilities and expenses of the fund, to acquire investments to further the business of the fund, or as distributions when solvency and capital adequacy requirements are met.

Participating policyholders can receive a distribution when solvency requirements are met, whilst shareholders can only receive a distribution when the higher levels of capital adequacy requirements are met.

All financial assets within the life statutory funds have been determined to back either life insurance or life investment contracts.

These investment assets held in the statutory funds are not available for use by the Commonwealth Bank’s operating businesses.

The Group also holds investments in the Colonial First State Property Trust Group and Colonial Mastertrust Wholesale funds (including Fixed Interest, Australian Shares, International Shares, Property Securities, Capital Stable, Balanced and Diversified Growth funds) through controlled life insurance entities, which have been designated as Assets at Fair Value through Income Statement instead of being accounted for under the equity accounting method.

Instead, these investments are brought to account at fair value at Balance Sheet date in compliance with the requirements of AASB 1038: Life Insurance Business.


	Group		Bank
	2006		2006
Other ⁽¹⁾	$M		$M

Fair value structured transactions		1,005		369
Receivables due from financial institutions		1,144		—
Term loans		616		—
Other lending		179		27

Total Other Financial Instruments		2,944		396


(1)		Under AIFRS, certain assets have been designated at fair value through Income Statement from 1 July 2005 as they are managed by the Group on a fair value basis.

130 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities

Derivative contracts

Each derivative is classified as either held for “Trading” purposes or for “Hedging” purposes. Derivatives classified as “Hedging” are transactions entered into in order to manage the risks arising from non traded assets, liabilities and commitments in Australia and offshore centres. Other derivatives are those held in relation to a portfolio designated at fair value through Income Statement.

Derivatives transacted for hedging purposes

The Group enters into other derivative transactions, which are designated and qualify as either fair value or cash flow hedges for recognised assets or liabilities or forecast transactions. It also enters into derivative transactions which provide economic hedges for risk exposures but do not meet the accounting requirements for hedge accounting treatment. As stated in Note 1 (ff) Derivative financial instruments, the Group uses Credit Default Swaps (CDSs) and equity swaps as economic hedges to manage credit risk in the asset portfolio and risks associated with both the capital investment in equities and the related yield respectively, but cannot apply hedge accounting to such positions. Gains or losses on these CDSs and equity swaps have therefore been recorded in trading income.

Derivatives designated and accounted for as hedging instruments

The Group’s accounting policies for derivatives designated and accounted for as hedging instruments are explained in Note 1 (ff) where terms used in the following sections are explained.

Fair value hedges

The Group’s fair value hedges principally consist of interest rate swaps, cross currency swaps and futures. Fair value hedges are used to limit the Group’s exposure to changes in the fair value of its fixed-rate interest bearing assets or liabilities that are due to interest rate or foreign exchange volatility.

For the year ended 30 June 2006, the Group recognised a net loss of $20 million (reported within other operating income in the Financial Statements), which represents the ineffective portion of fair value hedges.

As at 30 June 2006, the fair value of outstanding derivatives designated as fair value hedges was $594 million of assets and $2,741 million of liabilities.

Cash flow hedges

The Group uses interest rate swaps and cross currency swaps to minimise the variability in cash flows of interest-earning assets, interest-bearing liabilities or forecasted transactions caused by interest rate or foreign exchange fluctuations. For the year ended 30 June 2006 there has been no material gain or loss associated with ineffective portions of cash flow hedges.

Gains and losses on derivative contracts designated as cash flow hedges are initially recorded in Shareholders’ equity but are reclassified to current period earnings when the hedged cash flows occur, as explained in Note 1 (ff) Derivative financial instruments. As at 30 June 2006, deferred net gains on derivative instruments designated as cash flow hedges accumulated in Shareholders’ equity were $88 million. The amount recognised in Shareholders’ equity at 30 June 2006, related to cash flows expected to occur within one month to approximately 30 years of the balance sheet date, with the main portion expected to occur within 3 years.

As at 30 June 2006, the fair value of outstanding derivatives designated as cash flow hedges was $537 million of assets and $193 million of liabilities. Amounts reclassified from gains/(losses) on cash flow hedging instruments recognised in equity to current period earnings due to discontinuation of hedge accounting were immaterial.

Commonwealth Bank of Australia Annual Report 2006 131

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities (continued)


	Group
	2006							2005
	Face Value		Fair Value		Fair Value			Face Value		Fair Value			Fair Value
			Asset		Liability					Asset			Liability
	$M		$M		$M			$M		$M			$M

Derivative Assets and Liabilities
Held for trading		972,789		8,257		(7,779	)		645,203		12,145	⁽¹⁾		(11,916	) ⁽¹⁾
Held for hedging		114,612		1,131		(2,934	)		n/a		n/a			n/a
Other derivatives		31,646		287		(107	)		n/a		n/a			n/a

Total recognised derivative assets and liabilities		1,119,047		9,675		(10,820	)		n/a		n/a			n/a


Derivatives held for trading
Exchange rate related contracts:
Forward contracts		245,943		2,179		(2,067	)		164,491		1,532			(1,686	)
Swaps		104,942		2,735		(2,095	)		85,978		6,602			(6,177	)
Futures		8,063		15		—			25		1			—
Options purchased and sold		17,051		190		(193	)		21,523		146			(191	)

Total exchange rate related contracts		375,999		5,119		(4,355	)		272,017		8,281			(8,054	)


Interest rate related contracts:
Forward contracts		64,865		1		(2	)		25,312		2			(2	)
Swaps		404,493		2,443		(2,824	)		273,456		3,727			(3,761	)
Futures		83,075		3		(29	)		44,362		10			(28	)
Options purchased and sold		34,899		94		(119	)		26,659		108			(50	)

Total interest rate related contracts		587,332		2,541		(2,974	)		369,789		3,847			(3,841	)


Credit related contracts:
Swaps		3,073		6		(8	)		3,002		4			(8	)

Total credit related contracts		3,073		6		(8	)		3,002		4			(8	)


Equity related contracts:
Options purchased and sold		—		—		—			395		13			(13	)

Total equity related contracts		—		—		—			395		13			(13	)


Commodity related contracts:
Forward contracts		1,919		244		(190	)		—		—			—
Swaps		2,944		299		(200	)		—		—			—
Options purchased and sold		1,522		48		(52	)		—		—			—

Total commodity related contracts		6,385		591		(442	)		—		—			—

Total derivative assets/liabilities held for trading		972,789		8,257		(7,779	)		645,203		12,145	⁽¹⁾		(11,916	) ⁽¹⁾


(1)		The fair value of derivative assets and liabilities for 2005 has been included in Note 11 for comparative purposes only. For the 2005 financial year these fair values are disclosed as other assets and other liabilities respectively.

132 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities (continued)

Group

2006

2005

Face Value

Fair Value

Face Value

Fair Value

Asset

Liability

Asset

Liability

Derivatives designated as fair value hedges

Exchange rate related contracts:

Forward contracts

—

Swaps

15,251

375

(543

)

Futures

—

Options purchased and sold

101

—

Total exchange rate related contracts

15,368

375

(543

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Swaps

44,171

215

(2,187

)

Futures

1,500

—

Total interest rate related contracts

45,671

218

(2,187

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Equity related contracts:

Swaps

159

—

(10

)

Total equity related contracts

159

—

(10

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Commodity related contracts:

Swaps

)

Total commodity related contracts

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total fair value hedges

61,245

594

(2,741

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Derivatives designated as cash flow hedges

Exchange rate related contracts:

Forward contracts

1,237

—

Swaps

980

281

—

Total exchange rate related contracts

2,217

284

—

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Swaps

51,150

253

(193

)

Total interest rate related contracts

51,150

253

(193

)

Total cash flow hedges

53,367

537

(193

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total derivative assets/liabilities held for hedging

114,612

1,131

(2,934

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾


(1)		No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

Commonwealth Bank of Australia Annual Report 2006 133

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities (continued)

Group

2006

2005

Face Value

Fair Value

Face Value

Fair Value

Asset

Liability

Asset

Liability

Other Derivatives

Exchange rate related contracts:

Forward contracts

6,802

171

(28

)

Swaps

5,838

(20

)

Options purchased and sold

252

)

Total exchange rate related contracts

12,892

260

(54

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Forward contracts

7,691

)

Swaps

8,069

(27

)

Futures

1,916

—

Options purchased and sold

627

—

)

Total interest rate related contracts

18,303

(30

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Credit related contracts:

Swaps

275

—

Total credit related contracts

275

—

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Equity related contracts:

Options purchased and sold

171

)

Total equity related contracts

171

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Commodity related contracts:

Forward contracts

)

Total commodity related contracts

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Identified embedded derivatives

—

(21

)

Total other derivatives

31,646

287

(107

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total recognised derivative assets/liabilities

1,119,047

9,675

(10,820

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾


(1)		No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

134 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities (continued)

Bank

2006

2005

Face Value

Fair Value

Face Value

Fair Value

Asset

Liability

Asset

Liability

Derivative Assets and Liabilities

Held for trading

1,004,062

8,944

(8,179

)

Held for hedging

94,052

991

(2,755

)

Other derivatives

2,788

(21

)

Total derivative assets and liabilities

1,100,902

9,938

(10,955

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Derivatives held for trading

Exchange rate related contracts:

Forward contracts

245,943

2,179

(2,067

)

Swaps

104,435

2,733

(1,962

)

Futures

8,063

—

Options purchased and sold

17,051

190

(193

)

Derivatives held with controlled entities

18,877

327

(406

)

Total exchange rate related contracts

394,369

5,444

(4,628

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Forward contracts

64,865

)

Swaps

404,470

2,443

(2,824

)

Futures

83,075

(29

)

Options purchased and sold

34,899

(119

)

Derivatives held with controlled entities

12,926

362

(127

)

Total interest rate related contracts

600,235

2,903

(3,101

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Credit related contracts:

Swaps

3,073

)

Total credit related contracts

3,073

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Commodity related contracts:

Forward contracts

1,919

244

(190

)

Swaps

2,944

299

(200

)

Options purchased and sold

1,522

(52

)

Total commodity related contracts

6,385

591

(442

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total derivative assets/liabilities held for trading

1,004,062

8,944

(8,179

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾


(1)		No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

Commonwealth Bank of Australia Annual Report 2006 135

Notes to the Financial Statements

Note 11 Derivative Assets and Liabilities (continued)

Bank

2006

2005

Face Value

Fair Value

Face Value

Fair Value

Asset

Liability

Asset

Liability

Derivatives designated as fair value hedges

Exchange rate related contracts:

Swaps

13,544

341

(534

)

Derivatives held with controlled entities

229

—

)

Total exchange rate related contracts

13,773

341

(538

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Swaps

24,896

110

(1,962

)

Futures

1,500

—

Derivatives held with controlled entities

803

(45

)

Total interest rate related contracts

27,199

115

(2,007

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Equity related contracts:

Swaps

159

—

(10

)

Total equity related contracts

159

—

(10

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Commodity related contracts:

Swaps

)

Total commodity related contracts

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total fair value hedges

41,178

457

(2,556

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Derivatives designated as cash flow hedges

Exchange rate related contracts:

Swaps

980

281

—

Derivatives held with controlled entities

744

—

)

Total exchange rate related contracts

1,724

281

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Interest rate related contracts:

Swaps

51,150

253

(193

)

Total interest rate related contracts

51,150

253

(193

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total cash flow hedges

52,874

534

(199

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾

Total derivative assets/liabilities held for hedging

94,052

991

(2,755

)

n/a

⁽¹⁾

n/a

⁽¹⁾

n/a

⁽¹⁾


(1)		No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

136 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 12 Available-for-Sale Investments


	Group			Bank
	2006			2006
	$M			$M

Australia
Market Quoted:
Australian Public Securities:
Local and semi-government		1,892			1,894
Shares and equity investments		511			502
Medium term notes		415			407
Floating rate notes		465			—
Mortgage backed securities		1,576			1,576
Other securities		800			510

Non-Market Quoted:
Australian Public Securities:
Local and semi-government		84			—
Medium term notes		70			61
Shares and equity investments		217			158
Other securities		2			941

Total Australia		6,032			6,049

Overseas
Market Quoted:
Government securities		265			63
Bills of exchange		244			244
Certificates of deposit		2,390			2,366
Eurobonds		391			354
Medium term notes		456			243
Floating rate notes		571			430
Other securities		509			84

Non-Market Quoted:
Government securities		9			—
Certificates of deposit		17			17
Eurobonds		31			31
Floating rate notes		118			45
Other securities		192			—

Total Overseas		5,193			3,877

Less specific allowances for impairment		(22	)		(12	)

Total Available-for-Sale investments		11,203			9,914

Available-for-sale assets revalued to fair value resulted in a gain of $51 million recognised directly in equity. As a result of sale, derecognition or impairment of available-for-sale assets, losses of $36 million were removed from equity and reported in profit and loss for the year.

138 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 12 Available-for-Sale Investments (continued)

Group

At 30 June 2006

Amortised

Gross
Unrealised

Fair

Cost

Gains

Losses

Value

Australia

Australian Public Securities:

Local and semi-government

1,892

—

1,976

Medium term notes

486

—

)

485

Floating rate notes

465

—

465

Mortgage backed securities

1,576

—

1,576

Other securities and equity investments

1,481

(28

)

1,530

Provisions

(22

)

(15

)

(21

)

Total Australia

5,878

177

(44

)

6,011

Overseas

Government securities

275

—

)

274

Bills of exchange

244

)

244

Certificates of deposit

2,408

—

)

2,407

Eurobonds

421

)

422

Medium term notes

457

—

)

456

Floating rate notes

688

—

689

Other securities and equity investments

703

)

701

Provisions

—

)

Total Overseas

5,196

)

5,192

Total Available-for-sale Investments

11,074

182

(53

)

11,203

Available-for-sale investments are carried at fair value with changes in fair value recognised in equity after hedging adjustments.

Maturity Distribution and Average Yield

The following table analyses the maturities and weighted average yields of the Group’s holdings of available-for-sale investments.


	Group
	Maturity Period at 30 June 2006
																									Non-
	0 to 3 months					3 to 12 months					1 to 5 years					5 to 10 years					10 years or more				Maturing		Total
	$M			%		$M			%		$M			%		$M			%		$M		%		$M		$M

Australia
Australian Public Securities:
Local and semi-government		—			—		100			5. 60		1,702			6. 22		108			7. 17		66		6. 14		—		1,976
Medium term notes		17			5. 69		—			—		309			6. 09		110			5. 93		49		6. 05		—		485
Floating rate notes		75			6. 08		88			6. 08		242			6. 08		—			—		60		6. 08		—		465
Mortgage backed securities		—			—		—			—		—			—		—			—		1,576		6. 04		—		1,576
Other securities, commercial paper and equity investments		64			4. 59		—			—		331			6. 68		19			7. 11		—		—		1,116		1,530
Provisions		(2	)		—		(11	)		—		(6	)		—		(2	)		—		—		—		—		(21	)

Total Australia		154			—		177			—		2,578			—		235			—		1,751		—		1,116		6,011

Overseas
Government securities		125			8. 95		61			11. 29		80			2. 55		8			3. 04		—		—		—		274
Bills of exchange		160			2. 94		84			3. 24		—			—		—			—		—		—		—		244
Certificates of deposit		1,660			4. 62		706			3. 90		41			4. 48		—			—		—		—		—		2,407
Eurobonds		123			6. 75		81			5. 09		218			5. 20		—			—		—		—		—		422
Medium term notes		20			6. 88		24			5. 75		412			5. 66		—			—		—		—		—		456
Floating rate notes		36			4. 20		102			3. 86		522			4. 06		28			5. 12		1		7. 12		—		689
Other securities and equity investments		—			—		20			5. 50		681			5. 79		—			—		—		—		—		701
Provisions		—			—		—			—		—			—		(1	)		—		—		—		—		(1	)

Total Overseas		2,124			—		1,078			—		1,954			—		35			—		1		—		—		5,192

Total Available-for-Sale Investments		2,278			—		1,255			—		4,532			—		270			—		1,752		—		1,116		11,203

Additional Disclosure

Proceeds at or close to maturity of available-for-sale investments in 2006 were: $24,831 million.

Proceeds from sale of Available-for-sale investments in 2006 were: $646 million.

Commonwealth Bank of Australia Annual Report 2006 139

Notes to the Financial Statements

Note 13 Investment Securities (continued)

The following table sets out the gross unrealised gains and losses of the Group’s investment securities.


							Group
	At 30 June 2005
			Gross		Gross
	Amortised		Unrealised		Unrealised		Fair
	Cost		Gains		Losses		Value
Gross Unrealised Gains and Losses of Group (comparatives only)	$M		$M		$M		$M

Australia
Australian Public Securities:
Commonwealth and States		2,281		54		1		2,334
Medium term notes		783		4		—		787
Mortgage backed securities		1,055		—		—		1,055
Other securities and equity investments ⁽¹⁾		1,018		64		—		1,082

Total Australia		5,137		122		1		5,258

Overseas
Government securities		303		3		—		306
Certificates of deposit		1,376		—		—		1,376
Eurobonds		1,113		21		1		1,133
Medium term notes		632		6		1		637
Floating rate notes		1,071		4		—		1,075
Preference shares		744		—		—		744
Other securities and equity investments		462		8		—		470

Total Overseas		5,701		42		2		5,741

Total Investment Securities		10,838		164		3		10,999


(1)		Equity derivatives were in place to hedge equity market risk in respect of structured equity products for customers. There were $42 million of net deferred losses on these contracts which offset the above unrealised gains and these are disclosed within Note 43. At the end of the financial year there were no net deferred gains or losses included in the amortised cost value.

Investment securities were carried at cost or amortised cost and were purchased with the intent of being held to maturity. The investment portfolio was managed in the context of the full balance sheet of the Group.

Additional Disclosure

Proceeds at or close to maturity of investments in 2005 were: $22,799 million.

Proceeds from sale of investments in 2005 were: $392 million.

2005: realised capital gain $9 million and realised capital losses $1 million.

Commonwealth Bank of Australia Annual Report 2006 141

Notes to the Financial Statements

Note 14 Loans, Advances and Other Receivables


				Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Australia
Overdrafts		2,672			2,564			2,672			2,564
Housing loans ⁽¹⁾		144,834			129,913			141,121			125,452
Credit card outstandings		6,997			6,682			6,997			6,682
Lease financing		4,924			5,055			1,352			1,724
Bills discounted		2,779			3,399			2,779			3,399
Term loans		56,950			46,451			52,579			41,447
Redeemable preference share financing		1			9			1			9
Other lending		597			389			949			750

Total Australia		219,754			194,462			208,450			182,027

Overseas
Overdrafts		2,435			2,660			—			—
Housing loans		22,287			20,765			87			54
Credit card outstandings		428			406			—			—
Lease financing		139			195			137			127
Bills discounted		7			—			7			—
Term loans		15,282			12,804			5,730			3,686
Redeemable preference share financing		1,194			—			—			—
Other lending		8			192			—			—
Other securities		438			—			24			—

Total overseas		42,218			37,022			5,985			3,867

Gross loans, advances and other receivables		261,972			231,484			214,435			185,894

Less
Provisions for impairment (Note 15):
Collective provisions ⁽²⁾		(1,046	)		(1,390	)		(938	)		(1,218	)
Individually assessed provisions against loans and advances ⁽²⁾		(171	)		(157	)		(157	)		(134	)
Unearned income:
Term loans		(934	)		(889	)		(510	)		(426	)
Lease financing		(645	)		(683	)		(131	)		(172	)
Interest reserved ⁽³⁾		—			(19	)		—			(19	)

		(2,796	)		(3,138	)		(1,736	)		(1,969	)

Net loans, advances and other receivables		259,176			228,346			212,699			183,925


(1)		Includes securitised loan balances for 2006 of $12,007 million (2005: $10,818 million) in the Group and $9,977 million (2005: $7,290 million) in the Bank. Liabilities of similar values are included in debt issues (Group) and due to controlled entities (Bank).

(2)		Collective provisions and individually assessed provisions recalculated under AIFRS for 2006.

(3)		Interest reserved is not recognised under AIFRS from 1 July 2005

Group

Bank

2006

2005

2006

2005

Finance Leases

Minimum lease payments receivable:

No later than one year

1,271

1,602

501

822

Later than one year but not later than five years

2,792

2,884

838

969

Later than five years

1,000

764

150

Lease financing

5,063

5,250

1,489

1,851

142 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 14 Loans, Advances and Other Receivables (continued)

Group

Maturity Period at 30 June 2006

Maturing

Between

Maturing

One Year

One & Five

After Five

or Less

Years

Total

Australia

Government and other public authorities

234

1,287

1,528

Agricultural, forestry and fishing

1,053

1,495

759

3,307

Financial, investments and insurance

3,758

4,617

1,308

9,683

Real estate:

Mortgage ⁽¹⁾

14,570

12,724

117,540

144,834

Construction ⁽²⁾

1,107

768

210

2,085

Personal

6,522

8,932

547

16,001

Lease financing

1,222

2,707

995

4,924

Other commercial and industrial

16,351

16,855

4,186

37,392

Total Australia

44,817

49,385

125,552

219,754

Overseas

Government and other public authorities

291

380

Agricultural, forestry and fishing

517

780

1,797

3,094

Financial, investments and insurance

1,808

3,175

3,020

8,003

Real estate:

Mortgage ⁽¹⁾

3,142

2,769

16,376

22,287

Construction ⁽²⁾

125

268

Personal

386

127

521

Lease financing

139

Other commercial and industrial

4,399

2,547

580

7,526

Total Overseas

10,718

9,636

21,864

42,218

Gross Loans, Advances and Other Receivables

55,535

59,021

147,416

261,972

Interest Rate Sensitivity of Lending

Australia

14,724

26,215

46,999

87,938

Overseas

4,252

4,492

4,526

13,270

Total Variable Interest Rates

18,976

30,707

51,525

101,208

Australia

30,092

23,170

78,553

131,815

Overseas

6,467

5,144

17,338

28,949

Total Fixed Interest Rates

36,559

28,314

95,891

160,764

Gross Loans, Advances and Other Receivables

55,535

59,021

147,416

261,972


(1)		Principally Owner occupied housing. While most of these loans would have a contractual term of 20 years or more, the actual average term of the portfolio is less than five years.

(2)		Financing real estate and land development projects.

Commonwealth Bank of Australia Annual Report 2006 143

Notes to the Financial Statements

Note 15 Provisions for Impairment


	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Provisions for impairment
Collective provisions
Opening balance ⁽¹⁾		1,021			1,393			915			1,242
Charge against profit and loss		398			322			380			292
Transfer to individually assessed provisions		(440	)		(352	)		(404	)		(326	)
Impairment losses recovered		127			81			90			60
Adjustments for exchange rate fluctuations and other items		(7	)		2			(1	)		(1	)

		1,099			1,446			980			1,267
Impairment losses written off		(53	)		(56	)		(42	)		(49	)

Closing balance		1,046			1,390			938			1,218


Individually assessed provisions
Opening balance ⁽¹⁾		191			143			174			121
Transfer from collective provisions for:
New and increased provisioning		468			408			427			378
Less write-back of provisions no longer required		(28	)		(56	)		(23	)		(52	)

Net transfer		440			352			404			326

Adjustment for exchange rate fluctuations and other items		(16	)		(3	)		(15	)		—
Impairment losses		(444	)		(335	)		(406	)		(313	)

Closing balance		171			157			157			134

Total provisions for impairment		1,217			1,547			1,095			1,352
General Reserve for Credit Losses (pre-tax equivalent) ⁽²⁾		500			—			500			—

Total provisions including General Reserve for Credit Losses		1,717			1,547			1,595			1,352


(1)		The opening balance at 1 July 2005 includes the impact of adopting AIFRS 132, AIFRS 137 and AIFRS 139 which have not been applied to the 2005 comparatives in accordance with AASB 1.

(2)		The General Reserve for Credit Loss has been established to satisfy the current APRA prudential requirement for banks to maintain a general reserve for credit loss, and allowable collective provisions, at a minimum level of 0.5% of risk weighted assets.


Coverage Ratios	%		%		%		%

Collective provisions as a % of risk weighted assets		0.48		—		0.44		—
General provisions as a % of risk weighted assets		—		0.73		—		0.68
Collective provisions plus general reserve for credit losses (pre-tax equivalent) as a % of risk weighted assets		0.71		—		0.68		—
Individually assessed provisions for impairment as a % of gross impaired assets		52.5		—		51.3		—
Specific provisions for impairment as a % of gross impaired assets net of interest reserved ⁽¹⁾		—		41.76		—		37.81
Total provisions for impairment as % of gross impaired assets net of interest reserved ⁽¹⁾		373.3		411.44		357.5		381.49
Total provisions for impairment plus general reserve for credit losses (pre-tax equivalent) as a % of gross impaired assets		526.7		—		520.9		—


(1)		Interest reserved not recognised under AIFRS.

Coverage Ratios under AIFRS

The re-measurement of impairment provisions under AIFRS has resulted in a lower level of total provisions than previously assessed using Australian GAAP. However the Australian prudential regulator, APRA, has proposed for the 2005/2006 financial year, that banks maintain a provisioning benchmark of 0.5% of risk weighted assets to adequately cover potential losses.

The Group has consequently established a General Reserve for Credit Losses within equity, which together with the Collective Provisions (net of deferred tax) will satisfy this requirement.

144 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 15 Provisions for Impairment (continued)


				Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Total bad debts expense		398			322			380			292
The charge is required for:
Individually assessed provisioning
New and increased provisioning		468			408			427			378
Less provisions no longer required		(28	)		(56	)		(23	)		(52	)

Net individually assessed provisions		440			352			404			326
Provided from collective provisioning		(440	)		(352	)		(404	)		(326	)

Charge to profit and loss		—			—			—			—

Collective Provisioning
Direct write-offs		53			56			42			49
Recoveries of amounts previously written off		(127	)		(81	)		(90	)		(60	)
Movement in collective provision		32			(5	)		24			(23	)
Funding of individually assessed provisions		440			352			404			326

Charge to profit and loss		398			322			380			292



Total charge to profit and loss for bad debts expense		398			322			380			292

Individually Assessed Provisions for Impairment by Industry Category

The following table sets out the Group’s specified provisions for impairment by industry category as at 30 June 2005 and 2006.


			Group
	2006		2005
	$M		$M

Australia
Government and public authorities		—		—
Agriculture, forestry and fishing		4		16
Financial, investment and insurance		1		1
Real estate
Mortgage ⁽¹⁾		19		3
Construction ⁽²⁾		2		7
Personal		97		63
Lease financing		1		5
Other commercial and industrial		42		49

Total Australia		166		144

Overseas
Government and public authorities		—		—
Agriculture, forestry and fishing		—		—
Financial, investment and insurance		1		1
Real estate
Mortgage ⁽¹⁾		2		11
Construction ⁽²⁾		—		—
Personal		2		1
Lease financing		—		—
Other commercial and industrial		—		—

Total Overseas		5		13

Total individually assessed provisions		171		157


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

Commonwealth Bank of Australia Annual Report 2006 145

Notes to the Financial Statements

Note 16 Credit Risk Management

The Bank has clearly defined credit policies for the approval and management of credit risk. Credit underwriting standards, which incorporate income/repayment capacity, acceptable terms and security and loan documentation tests exist for all major lending areas.

The Bank relies, in the first instance, on the assessed integrity and ability of the debtor or counterparty to meet its contracted financial obligations for repayment. Collateral security, in the form of real property or a floating charge is generally taken for business credit except for major government, bank and corporate counterparties of strong financial standing. Longer term consumer finance is generally secured against real estate while short term revolving consumer credit is generally unsecured.

A centralised exposure management system records all significant credit risks borne by the Bank. The Risk Committee of the Board operates under a charter of the Board in terms of which the Committee oversees the Bank’s credit management policies and practices. The Committee usually meets every two months, and more often if required.

The credit risk portfolio is divided into two segments, retail and credit risk rated.

The retail segment generally comprises facilities of less than $1m for housing loan, credit card, personal loan and some leasing products. Secured commercial lending within this limit is currently being trialled. These exposures are generally not individually reviewed unless arrears occur. The portfolios are reviewed by the Business Credit Support and Monitoring unit with an overview by the Portfolio Quality Assurance unit.

Facilities in the retail segment become classified for remedial management by centralised units based on arrears status.

Credit risk rated exposures generally comprise business and corporate exposures, including bank and government exposures. Each exposure is assigned an internal risk rating that is based on an assessment of the risk of default and the risk of loss in the event of default. Credit risk rated exposures are generally required to be reviewed annually, unless they are small transactions that are managed on a behavioural basis after their initial rating at origination. The risk rated segment is subject to inspection by the Portfolio Quality Assurance unit, which is independent of the business units and which reports quarterly on its findings to the Board Risk Committee.

Credit processes, including compliance with policy and underwriting standards, and application of risk ratings, are examined, and reported where cases of non-compliance are observed.

Impairment of Financial Assets

Under AASB 139 impairment losses are recognised to reduce the carrying amount of loans and advances to their estimated recoverable amounts. Individually assessed provisions are made against individually significant financial assets and those that are not individually significant including groups of financial assets with similar credit risk characteristics. The Bank creates an individually assessed provision for impairment when there is objective evidence that it will not be able to collect all amounts due. The amount of the impairment is the difference between the carrying amount and the recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate.

Therefore, interest will continue to be accrued on impaired loans based on the revised carrying amounts and using appropriate effective interest rates.

Risk rated portfolios are assessed at each balance sheet date for objective evidence that the financial asset or portfolio of assets is impaired. Impaired assets in the credit risk rated segment are those facilities where an individually assessed provision for impairment has been raised, the facility is maintained on a cash basis, a loss of principal or interest is anticipated, facilities have been restructured or other assets have been accepted in satisfaction of an outstanding debt. Loans are generally classified as non-accrual when receivership, insolvency or bankruptcy occurs. Impaired assets in the retail segment are those “classified” facilities that are not well secured and past due 180 days or more. Most of these facilities are written off immediately on becoming past due 180 days or more.

The Bank creates a further “portfolio impairment” where there is objective evidence that components of the loan portfolio contain probable losses at the balance sheet date, will be identified in the future, or where insufficient data exists to reliably determine whether such losses exist. The estimated probable losses are based upon historical patterns of losses. The calculation is based on statistical methods of credit risk measurement and takes into account current cyclical developments as well as economic conditions in which the borrowers operate.

The occurrence of actual credit losses is erratic in both timing and amount and those that arise usually relate to transactions entered into in previous accounting periods. In order to make the business ultimately accountable for any credit losses they suffer but also to give them the incentive to align their credit risk decisions and risk adjusted pricing with the medium term risk profile of their credit transactions, the Bank uses the concept of “expected loss” for management purposes. Expected loss is a statistically based measure intended to reflect the annual cost that will arise, on average, over time, from transactions that become impaired, and is a function of the probability of default (given by the rating), current and likely future exposure to the counterparty and the likely severity of the loss should default actually occur.

The Bank uses a portfolio approach to the management of its credit risk. A key element is a well diversified portfolio. The Bank uses various portfolio management tools, including a centralised portfolio model that assesses risk and return on an overall portfolio and segmented basis, to assist in diversifying the credit portfolio. The Bank is involved in credit derivative transactions, has purchased various assets in the market, and has carried out various asset securitisations and a Collateralised Loan Obligation issue.

For further information about accounting policy for allowance and provision for credit losses see Note 1 (n).

Master Netting Arrangements

The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities as transactions are usually settled on a gross basis. However, the credit risk associated with favourable contacts is reduced by a master netting arrangement to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. As at 30 June 2006, master netting arrangements reduced the credit risk by approximately $3.7 billion (2005: $4.7 billion).

148 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

Total Gross Credit Risk by Industry

The following table sets out the Group’s total gross credit risk by industry as at 30 June 2005 and 2006.


				Group
	2006			2005
Industry	$M			$M

Australia
Government and public authorities		6,765			7,125
Agriculture, forestry and fishing		5,227			5,029
Financial, investment and insurance		30,114			38,588
Real estate:
Mortgage ⁽¹⁾		149,958			134,913
Construction ⁽²⁾		3,501			2,211
Personal		16,566			14,970
Lease financing		4,924			5,055
Other commercial and industrial		68,253			54,837

Total Australia		285,308			262,728

Overseas
Government and public authorities		904			1,385
Agriculture, forestry and fishing		3,097			3,392
Financial, investment and insurance		21,469			18,250
Real estate:
Mortgage ⁽¹⁾		23,267			21,747
Construction ⁽²⁾		294			346
Personal		524			581
Lease financing		139			195
Other commercial and industrial		14,686			10,667

Total Overseas		64,380			56,563


Total Gross Credit Risk		349,688			319,291
Less unearned income		(1,579	)		(1,572	)

Total Credit Risk		348,109			317,719


Charge for Bad debts		398			322
Loss Rate (%) ⁽³⁾		0.11			0.10


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

(3)		The loss rate is the charge as a percentage of the credit risk.

The Group has a good quality and well diversified credit portfolio, with 49.8% of the exposure in mortgage loans and a further 14.8% in finance, investment and insurance (primarily banks). 18.6% of exposure is overseas, of which 35.9% is in mortgage loans.

Overall over 68% of individually rated exposures in the commercial portfolio (including government and finance) are of investment grade or equivalent quality.

Commonwealth Bank of Australia Annual Report 2006 149

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2006.

Assets at

Fair Value

Loans

Bank

through

Available

Advances

Acceptances

Income

For Sale

and Other

Contingent

Statement

Investments

Receivables

customers

Derivatives

Liabilities

Total

Australia

Government and public authorities

1,282

3,551

1,528

344

6,765

Agriculture, forestry and fishing

—

3,307

1,814

5,227

Financial, investment and insurance

8,013

122

9,683

1,103

6,518

1,484

26,923

Real estate:

Mortgage ⁽¹⁾

—

144,834

—

5,124

149,958

Construction ⁽²⁾

—

2,085

411

143

862

3,501

Personal

—

16,001

429

133

16,566

Lease financing

—

4,924

—

4,924

Other commercial and industrial

3,537

2,338

37,392

14,545

2,486

7,955

68,253

Total Australia

12,832

6,011

219,754

18,310

9,240

15,970

282,117

Overseas

Government and public authorities

361

—

380

—

904

Agriculture, forestry and fishing

—

3,094

—

3,097

Financial, investment and insurance

1,543

518

8,003

—

4,352

3,137

17,553

Real estate:

Mortgage ⁽¹⁾

—

22,287

—

980

23,267

Construction ⁽²⁾

—

268

—

294

Personal

—

521

—

524

Lease financing

—

139

—

139

Other commercial and industrial

1,022

4,674

7,526

—

195

1,269

14,686

Total Overseas

2,926

5,192

42,218

—

4,621

5,507

60,464

Gross Balances

15,758

11,203

261,972

18,310

13,861

21,477

342,581

Other Risk Concentrations

Receivables due from other financial in stitutions

7,033

Deposits with regulatory authorities

Total Gross Credit Risk

349,688


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

Risk concentrations for contingent liabilities are based on the credit equivalent balance in Note 42. Contingent liabilities, assets and commitments. Risk concentrations for derivatives are based on the credit equivalent balance in Note 43, Market Risk.

150 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

Total Gross Credit Risk by Industry

The following table sets out the Group’s credit risk by industry and asset class as at 30 June 2005.


	Assets at
	Fair Value				Loans
	through				Advances		Bank
	Income		Investment		and Other		Acceptances				Contingent
	Statement		Securities		Receivables		of customers		Derivatives		Liabilities		Total
	$M		$M		$M		$M		$M		$M		$M

Australia
Government and public authorities		788		2,281		3,000		10		227		819		7,125
Agriculture, forestry and fishing		—		—		3,213		1,741		35		40		5,029
Financial, investment and insurance		7,326		837		5,882		1,167		15,240		4,563		35,015
Real estate:
Mortgage ⁽¹⁾		—		—		129,913		—		—		5,000		134,913
Construction ⁽²⁾		—		—		1,694		274		27		216		2,211
Personal		—		—		14,504		380		2		84		14,970
Lease financing		—		—		5,055		—		—		—		5,055
Other commercial and industrial		2,912		2,019		31,201		13,214		2,150		3,341		54,837

Total Australia		11,026		5,137		194,462		16,786		17,681		14,063		259,155

Overseas
Government and public authorities		558		303		216		—		49		259		1,385
Agriculture, forestry and fishing		—		—		3,372		—		7		13		3,392
Financial, investment and insurance		1,798		2,122		7,027		—		3,277		1,512		15,736
Real estate:								—
Mortgage ⁽¹⁾		—		—		20,765		—		—		982		21,747
Construction ⁽²⁾		—		—		271		—		6		69		346
Personal		—		—		552		—		2		27		581
Lease financing		—		—		195		—		—		—		195
Other commercial and industrial		1,249		3,276		4,624		—		461		1,057		10,667

Total Overseas		3,605		5,701		37,022		—		3,802		3,919		54,049

Gross Balances		14,631		10,838		231,484		16,786		21,483		17,982		313,204


Other Risk Concentrations
Receivables due from other financial institutions														6,042
Deposits with regulatory authorities														45

Total Gross Credit Risk														319,291


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

Commonwealth Bank of Australia Annual Report 2006 151

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

Impaired Assets by Industry and Status

The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2006.


					Provisions
			Impaired		for							Net
	Total Risk		Assets		Impairment		Write-offs		Recoveries			Write-offs
Industry	$M		$M		$M		$M		$M			$M

Australia
Government and public authorities		6,765		—		—		1		—			1
Agriculture, forestry and fishing		5,227		12		4		8		(1	)		7
Financial, investment and insurance		26,923		2		1		1		(2	)		(1	)
Real estate:
Mortgage ⁽¹⁾		149,958		40		19		9		(1	)		8
Construction ⁽²⁾		3,501		7		2		5		—			5
Personal		16,566		56		97		388		(100	)		288
Lease financing		4,924		12		1		6		(1	)		5
Other commercial and industrial		68,253		183		42		68		(17	)		50

Total Australia		282,117		312		166		486		(122	)		364

Overseas
Government and public authorities		904		—		—		—		—			—
Agriculture, forestry and fishing		3,097		1		—		—		—			—
Financial, investment and insurance		17,553		—		1		—		—			—
Real estate:
Mortgage ⁽¹⁾		23,267		6		2		—		—			—
Construction ⁽²⁾		294		4		—		—		—			—
Personal		524		2		2		7		(5	)		2
Lease financing		139		—		—		—		—			—
Other commercial and industrial		14,686		1		—		4		—			4

Total Overseas		60,464		14		5		11		(5	)		6

Gross Balances		342,581		326		171		497		(127	)		370


Other Risk Concentrations
Receivables due from other financial institutions		7,033
Deposits with regulatory authorities		74

Total Gross Credit Risk		349,688


(1)		Principally owner occupied housing .

(2)		Primarily financing real estate and land development projects.

152 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

The following table sets out the Group’s impaired asset position by industry and status as at 30 June 2005.


					Provisions
			Impaired		for							Net
	Total Risk		Assets		Impairment		Write-offs		Recoveries			Write-offs
Industry	$M		$M		$M		$M		$M			$M

Australia
Government and public authorities		7,125		—		—		—		—			—
Agriculture, forestry and fishing		5,029		76		16		1		(2	)		(1	)
Financial, investment and insurance		35,015		6		1		4		(3	)		1
Real estate:
Mortgage ^{(1) (3)}		134,913		32		3		8		(1	)		7
Construction ⁽²⁾		2,211		2		7		4		(1	)		3
Personal		14,970		46		63		280		(60	)		220
Lease financing		5,055		8		5		4		(1	)		3
Other commercial and industrial ⁽³⁾		54,837		211		49		83		(8	)		75

Total Australia		259,155		381		144		384		(76	)		308

Overseas
Government and public authorities		1,385		—		—		—		—			—
Agriculture, forestry and fishing		3,392		1		—		—		—			—
Financial, investment and insurance		15,736		—		1		—		—			—
Real estate:
Mortgage ⁽¹⁾		21,747		7		11		6		—			6
Construction ⁽²⁾		346		—		—		—		—			—
Personal		581		4		1		—		(4	)		(4	)
Lease financing		195		—		—		—		—			—
Other commercial and industrial		10,667		2		—		1		(1	)		—

Total Overseas		54,049		14		13		7		(5	)		2

Gross Balances		313,204		395		157		391		(81	)		310


Other Risk Concentrations
Receivables due from other financial institutions		6,042
Deposits with regulatory authorities		45

Total Gross Credit Risk		319,291


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

(3)		Certain of these loans have been reclassified for consistency.

Large Exposures

Concentrations of exposure to any debtor or counterparty group are controlled by a large credit exposure policy. All exposures outside the policy are approved by the Board Risk Committee.

The following table shows the aggregated number of the Bank’s counterparty Corporate and Industrial exposures (including direct and contingent exposures) which individually were greater then 5% of the Group’s capital resources (Tier One and Tier Two capital):


	2006		2005
	Number		Number

5% to less than 10% of Group’s capital resources		—		1
10% to less than 15% of Group’s capital resources		—		—

Commonwealth Bank of Australia Annual Report 2006 153

Notes to the Financial Statements

Note 16 Credit Risk Management (continued)

Credit Portfolio Receivables by Industry

The following table sets out the distribution of the Group’s loans, advances and other receivables (excluding bank acceptances) by industry at 30 June 2005 and 2006.


	2006			2005
Industry	$M			$M

Australia
Government and public authorities		1,528			3,000
Agriculture, forestry and fishing		3,307			3,213
Financial, investment and insurance		9,683			5,882
Real estate:
Mortgage ⁽¹⁾		144,834			129,913
Construction ⁽²⁾		2,085			1,694
Personal		16,001			14,504
Lease financing		4,924			5,055
Other commercial and industrial		37,392			31,201

Total Australia		219,754			194,462

Overseas
Government and public authorities		380			216
Agriculture, forestry and fishing		3,094			3,372
Financial, investment and insurance		8,003			7,027
Real estate:
Mortgage ⁽¹⁾		22,287			20,765
Construction ⁽²⁾		268			271
Personal		521			552
Lease financing		139			195
Other commercial and industrial		7,526			4,624

Total Overseas		42,218			37,022

Gross loans, Advances and Other Receivables		261,972			231,484


Provisions for bad debts, unearned income, interest reserved and unearned tax remissions on leveraged leases ⁽³⁾		(2,796	)		(3,138	)

Net Loans, Advances and Other Receivables		259,176			228,346


(1)		Principally owner occupied housing.

(2)		Primarily financing real estate and land development projects.

(3)		Interest reserved not recognised under AIFRS from 1 July 2005.

154 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 17 Asset Quality

Impaired Assets

The Group follows the Australian disclosure requirements for impaired assets contained in AASB 130: Disclosures in the Financial Statements of Banks and similar Financial Institutions.

There are three classifications of impaired assets:

(a) Non Performing comprising:

•

Any credit risk facility against which an individually assessed provision for impairment has been raised;

•

Any credit risk facility maintained on a cash basis because of significant deterioration in the financial position of the borrower; and

•

Any credit risk facility where loss of principal or interest is anticipated.

All interest charged in the relevant financial period that has not been received in cash is reversed from profit and loss when facilities become classified as non-performing. Interest on these facilities is then only taken to profit if received in cash.

(b) Restructured Facilities, comprising:

•

Credit risk facilities on which the original contractual terms have been modified due to financial difficulties of the borrower. Interest on these facilities is taken to profit and loss. Failure to comply fully with the modified terms will result in immediate reclassification to non-performing.

•

Other Real Estate Owned (OREO), comprising real estate where the Group assumed ownership or foreclosed in settlement of a debt; and

•

Other Assets Acquired through Securities Enforcement (OAATSE), comprising assets other than real estate where the Group has assumed ownership or foreclosed in settlement of a debt.


	2006		2005
	%		%

Impaired Asset Ratios
Gross impaired asset ratios net of interest reserved as a % of risk weighted assets		0.15		0.20
Net impaired assets as % of:
Risk weighted assets		0.07		0.12
Total shareholders’ equity		0.73		0.97

Colonial State Bank

Indemnified Loan Book

Pursuant to the Sale Agreement between Colonial and the New South Wales Government, Colonial State Bank’s loan book as at 31 December 1994 and any further loan losses (including interest) arising are indemnified by the NSW Government. This indemnity is to the extent of 90% of the losses after an initial $60 million (which was provided for by the Colonial State Bank as at 31 December 1994).

All loans (other than impaired loans) were covered for a period of three years from 31 December 1994 and for the duration of the loan in the case of impaired loans so classified as at 31 December 1997. The sale agreement also allows for loans to be withdrawn from the indemnity provided the withdrawal is approved by Colonial Sate Bank and the NSW Government and the due processes followed.

Pursuant to the agreement, the costs of funding and managing non-performing loans that are covered by the loan indemnities are reimbursed by the NSW Government on a quarterly basis.

Commonwealth Bank of Australia Annual Report 2006 155

Notes to the Financial Statements

Note 17 Asset Quality (continued)

Impaired Assets

The following table sets out the Group’s impaired assets as at 30 June 2005 and 2006.


				Group
	2006			2005
	$M			$M

Australia
Non-Performing loans:
Gross balances		312			381
Less interest reserved ⁽¹⁾		—			(19	)

Gross balances (net of interest reserved)		312			362
Less provisions for impairment		(166	)		(144	)

Net Non-Performing Loans		146			218


Restructured loans:
Gross balances		—			—
Less interest reserved ⁽¹⁾		—			—

Gross balances (net of interest reserved)		—			—
Less specific provisions		—			—

Net Restructured Loans		—			—


Assets Acquired Through Security Enforcement (AATSE):
Gross balances		—			—
Less provisions for impairment		—			—

Net AATSE		—			—

Net Australian Impaired assets		146			218


Overseas
Non-Performing loans
Gross balances		14			14
Less interest reserved ⁽¹⁾		—			—

Gross balances (net of interest reserved)		14			14
Less provisions for impairment		(5	)		(13	)

Net Non-Performing Loans		9			1


Restructured loans:
Gross balances		—			—
Less interest reserved ⁽¹⁾		—			—

Gross balances (net of interest reserved)		—			—
Less specific provisions		—			—

Net Restructured Loans		—			—


Asset Acquired Through Security Enforcement (AATSE)
Gross Balance		—			—
Less provisions for impairment		—			—

Net AATSE		—			—

Net overseas impaired assets		9			1


Total Net Impaired Assets		155			219


(1)		Interest reserved not recognised under AIFRS from 1 July 2005.

156 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 17 Asset Quality (continued)

Movement in Impaired Asset Balances

The following table provides an analysis of the movement in the gross impaired asset balances for financial years 2005 and 2006.


	Group
	2006			2005
Gross Impaired Assets	$M			$M

Gross impaired assets at beginning of period		395			363
New and increased		745			769
Balances written off		(450	)		(350	)
Returned to performing or repaid		(364	)		(387	)

Gross Impaired Assets at Period End		326			395

The following amounts comprising loans less than $250,000 are reported in accordance with regulatory returns to APRA. They are not classified as impaired assets and therefore not included within the above impaired assets summary.


	Group
	2006		2005
Loans Performing Past Due 90 Days or More	$M		$M

Housing loans		155		183
Other loans		137		119

Total Loans Performing Past Due		292		302


			Group
	2006		2005
Net Interest Forgone on Impaired Assets	$M		$M

Australia non-performing facilities		11		13
Overseas non-performing facilities		—		—

Total Interest Forgone		11		13


	Group
	2006		2005
Interest Taken to Profit on Impaired Assets	$M		$M

Australia
Non-performing facilities		11		9
Restructured facilities		—		—
Overseas
Non-performing facilities		—		—
Other real estate owned		—		—

Total Interest Taken to Profit		11		9

Commonwealth Bank of Australia Annual Report 2006 157

Notes to the Financial Statements

Note 17 Asset Quality (continued)

Impaired Assets


	Group
	Australia			Overseas			Total			Australia			Overseas			Total
	2006			2006			2006			2005			2005			2005
	$M			$M			$M			$M			$M			$M

Non-Performing Loans
With provisions		172			10			182			235			14			249
Without provisions		140			4			144			146			—			146

Gross balances		312			14			326			381			14			395
Less interest reserved ⁽¹⁾		—			—			—			(19	)		—			(19	)

Net balances		312			14			326			362			14			376
Less provisions for impairment		(166	)		(5	)		(171	)		(144	)		(13	)		(157	)

Net Non-Performing Loans		146			9			155			218			1			219


Restructured Loans
Gross balances		—			—			—			—			—			—
Less interest reserved ⁽¹⁾		—			—			—			—			—			—

Net balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—

Net Restructured Loans		—			—			—			—			—			—


Other Real Estate Owned (OREO) ⁽²⁾
Gross balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—

Net OREO		—			—			—			—			—			—


Other Assets Acquired Through Security Enforcement (OAATSE) ⁽²⁾
Gross balances		—			—			—			—			—			—
Less provisions for impairment		—			—			—			—			—			—

Net OAATSE		—			—			—			—			—			—


Total Impaired Assets
Gross balances		312			14			326			381			14			395
Less interest reserved		—			—			—			(19	)		—			(19	)

Net balances		312			14			326			362			14			376
Less provisions for impairment		(166	)		(5	)		(171	)		(144	)		(13	)		(157	)

Net Impaired Assets		146			9			155			218			1			219


Non-Performing Loans by Size of Loan
Less than $1 million		140			11			151			119			13			132
$1 million to $10 million		125			3			128			116			1			117
Greater than $10 million		47			—			47			146			—			146

Total		312			14			326			381			14			395


Performing Loans 90 days past due or more ⁽³⁾		250			42			292			267			35			302


(1)		Interest reserved not recognised under AIFRS from 1 July 2005.

(2)		Other real estate owned and other assets acquired through security enforcement are sold through the Bank’s existing disposal processes. These processes are expected to take no longer than 6 months.

(3)		Comprising loans less than $250,000 in accordance with regulatory returns to APRA. They are not classified as Impaired Assets and therefore are not included within Impaired Assets.

158 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 18 Shares in and Loans to Controlled Entities


	Bank
	2006		2005
	$M		$M

Shares in controlled entities		21,619		17,634
Loans to controlled entities		14,531		11,527

Total Shares in and Loans to Controlled Entities		36,150		29,161

Note 19 Investment Property

Group

Bank

2006

2005

2006

2005

Investment Property

258

252

—

Investment properties are carried at fair value with changes in fair value recognised in profit and loss. The fair value of investment properties is based on valuations performed by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and category of investment property being valued.

This investment represents a 50% interest in a long-term freehold lease over property.

Amounts recognised in profit and loss relating to the investment property


	Group
	2006			2005
	$M			$M

Rental income ⁽¹⁾		17			15
Net gains or losses from fair value adjustments ⁽¹⁾		6			—
Direct operating expenses ⁽²⁾		(2	)		(2	)

Total		21			13


(1)		This income is disclosed as part of Other Operating Income – Other in Note 2

(2)		This expense is disclosed as part of Other Operating Income – Other in Note 2


	Group
	2006		2005
Investment Property (reconciliation)	$M		$M

Opening balance		252		252
Net gains or losses from fair value adjustments		6		—

Closing balance		258		252

Commonwealth Bank of Australia Annual Report 2006 159

Notes to the Financial Statements

Note 20 Property, Plant and Equipment


	Group									Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Land and Buildings
Land
At 30 June 2006 valuation		199			—			182			—
At 30 June 2005 valuation		—			174			—			159

Closing balance		199			174			182			159

Buildings
At 30 June 2006 valuation		288			—			263			—
At 30 June 2005 valuation		—			293			—			257

Closing balance		288			293			263			257

Total Land and Buildings		487			467			445			416


Leasehold Improvements
At cost		732			702			633			582
Provision for depreciation		(416	)		(409	)		(362	)		(337	)

Closing balance		316			293			271			245


Equipment
At cost		794			735			511			406
Provision for depreciation		(505	)		(486	)		(301	)		(253	)

Closing balance		289			249			210			153


Assets under Lease
At cost		238			124			100			—
Provision for depreciation		(17	)		(8	)		—			—

Closing balance		221			116			100			—


Assets held for sale
At 30 June 2006 valuation		1			—			1			—
At 30 June 2005 valuation		—			7			—			7

Closing balance		1			7			1			7


Total Property, Plant and Equipment		1,314			1,132			1,027			821


Assets held for sale comprise:
Land		—			5			—			5
Buildings		1			2			1			2

Total Assets Held For Sale		1			7			1			7

Land and buildings are carried at fair value based on independent valuations performed in 2006, refer Note 1 (s). Under the cost model these assets would have been recognised at the carrying amount outlined in the table below.

Group

Bank

2006

2005

2006

2005

Carrying Amount of Land and Buildings under the Cost Model:

Land

125

119

122

115

Buildings

225

229

210

201

Total Land and Buildings

350

348

332

316

160 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 20 Property, Plant and Equipment (continued)

Reconciliation of the carrying amount of Property, Plant and Equipment at the beginning and end of the 2006 and 2005 financial years.


				Group			Bank
	2006			2005			2006			2005
Reconciliation	$M			$M			$M			$M

Land
Opening balance		174			172			159			159
Acquisitions		9			—			8			—
Disposals/transfers to “Assets held-for-sale”		5			(11	)		5			(11	)
Disposals		(6	)		—			(6	)		—
Net revaluations		19			13			16			11
FX translation adjustment		(2	)		—			—			—

Closing balance		199			174			182			159


Buildings
Opening balance		293			288			257			250
Acquisitions		38			22			35			22
Acquisitions attributed to business combinations		2			—			—			—
Disposals/transfers to “Assets held-for-sale”		(13	)		(11	)		1			(12	)
Disposals		(7	)		—			(6	)		—
Net revaluations		(1	)		15			(3	)		17
Depreciation		(22	)		(21	)		(21	)		(20	)
FX translation adjustment		(2	)		—			—			—

Closing balance		288			293			263			257


Leasehold Improvements
Opening balance		293			281			245			235
Acquisitions		87			78			77			62
Acquisitions attributed to business combinations		9			—			—			—
Disposals		(6	)		(8	)		(5	)		(6	)
Transfers		(7	)		—			—			—
Depreciation		(56	)		(58	)		(46	)		(46	)
FX translation adjustment		(4	)		—			—			—

Closing balance		316			293			271			245


Equipment
Opening balance		249			191			153			108
Adjustment to opening balance		(1	)		—			(1	)		—
Acquisitions		136			115			109			80
Disposals/transfers		(13	)		12			—			—
Depreciation		(80	)		(69	)		(51	)		(35	)
FX translation adjustment		(2	)		—			—			—

Closing balance		289			249			210			153


Assets Under Lease
Opening balance		116			75			—			—
Acquisitions		114			71			100			—
Disposals/transfers		—			(22	)		—			—
Depreciation		(9	)		(8	)		—			—

Closing balance		221			116			100			—

Commonwealth Bank of Australia Annual Report 2006 161

Notes to the Financial Statements

Note 21 Intangible Assets


				Group						Bank

	2006			2005			2006			2005
	$M			$M			$M			$M

Intangible Assets
Goodwill		7,200			7,214			2,522			2,522
Computer software costs		229			182			212			153

Other		380			260			4			—

Total Intangible Assets		7,809			7,656			2,738			2,675


Goodwill
Purchased goodwill – Colonial		6,705			6,705			2,229			2,229
Purchased goodwill – other		495			509			293			293

Total goodwill		7,200			7,214			2,522			2,522


Computer Software Costs
Cost		290			206			268			172
Accumulated amortisation		(61	)		(24	)		(56	)		(19	)

Total computer software costs		229			182			212			153


Other ⁽¹⁾
Cost		393			267			4			—
Accumulated amortisation		(13	)		(7	)		—			—

Total other		380			260			4			—


Goodwill (reconciliation)
Opening balance		7,214			7,184			2,522			2,522
Additions		7			30			—			—
Impairment		(21	)		—			—			—

Closing balance		7,200			7,214			2,522			2,522


Computer Software Costs (reconciliation)
Opening balance		182			107			153			78
Additions:
From internal development		90			92			95			87
Amortisation		(43	)		(17	)		(36	)		(12	)

Closing balance		229			182			212			153


Other (reconciliation)
Opening balance		260			250			—			—
Additions:
From acquisitions		126			13			4			—
Amortisation		(6	)		(3	)		—			—

Closing balance		380			260			4			—


(1)		Other principally comprises customer lists and $311 million of management fee rights. Management fee rights have an indefinite useful life under the contractual terms of the management agreements and are subject to an independent valuation for impairment testing purposes. No impairment was required as a result of this valuation.

162 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 21 Intangible Assets (continued)

Segment Allocation of Goodwill

The Group’s carrying amount of goodwill for each segment of business is shown below.


	Group
	2006		2005
Segment	$M		$M

Banking ⁽¹⁾		4,360		4,353
Funds Management ⁽²⁾		2,267		2,288
Insurance ⁽²⁾		573		573

Total		7,200		7,214


(1)		The allocation to banking includes goodwill related to the acquisitions of Colonial, State Bank of Victoria and 25% of ASB Bank.

(2)		The allocation to funds management and insurance principally related to the goodwill on acquisition of Colonial.

Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives

Goodwill has been allocated for impairment testing purposes to cash-generating units in the following business segments: Banking, Funds Management and Insurance. Under AASB 136 a cash-generating unit to which goodwill has been allocated shall be tested for impairment annually.

Whenever the cash-generating unit is impaired, the carrying amounts containing goodwill are written down to the recoverable amount that has been determined based on net selling price less costs to sell, using an applicable earnings multiple.

Group

At 30 June 2006

Funds

Management

Funds

Australian

(Excluding

Management

Life

New Zealand

Retail Banking

Property)

(Property)

Insurance

Banking

Life Insurance

Carrying amount of goodwill

4,149

2,189

131

211

442

Key Assumptions Used in Selling Price less Cost to Sell Calculations

Earnings multiples relating to the Group’s Banking cash-generating units are sourced from publicly available data associated with valuations performed on recent businesses displaying similar characteristics to the Group’s Banking cash-generating units, and are applied to current earnings. Life Insurance (Australian and New Zealand) and Funds Management cash-generating units are valued via an actuarial assessment.

The key assumptions used when completing the actuarial assessment included new business multiples, discount rates, valuation allowances for franking credits, investment market returns, mortality, morbidity, persistency and expense inflation. These have been determined by reference to historical company and industry experience and publicly available data.

Note 22 Other Assets

Group

Bank

2006

2005

2006

2005

Note

Accrued interest receivable

1,346

1,197

1,329

1,503

Shares in other companies

n/a

267

n/a

133

Defined benefit superannuation plan surplus

1,228

717

1,228

717

Accrued fees/reimbursements receivable

669

641

385

507

Securities sold not delivered

1,088

907

659

625

Unrealised gains on trading derivatives

n/a

⁽¹⁾

12,144

n/a

⁽¹⁾

12,043

Intergroup current tax receivable

—

217

Intergroup deferred tax receivable

—

⁽²⁾

549

Other

810

1,561

806

1,022

Total Other Assets

5,141

17,434

4,624

17,154


(1)		Under AIFRS, a gain or loss on trading derivatives, including unrealised amounts, is recognised immediately in profit or loss.

(2)		For 2005, UIG Abstract 52 required current and deferred taxes under tax funding arrangements for tax consolidated subsidiaries to be recognised as inter-company balances. For 2006, UIG Interpretation 1052 requires subsidiaries in a tax consolidated group to recognise deferred taxes relating to temporary differences.

Commonwealth Bank of Australia Annual Report 2006 163

Notes to the Financial Statements

Note 23 Deposits and Other Public Borrowings

Group

Bank

2006

2005

2006

2005

Australia

Certificates of deposit

18,185

16,041

18,185

16,041

Term deposits

43,210

41,582

41,611

39,993

On demand and short term deposit

81,547

75,407

83,913

75,806

Deposits not bearing interest

5,872

5,823

5,876

5,853

Securities sold under agreements to repurchase and short sales

1,380

2,258

1,380

2,258

Total Australia

150,194

141,111

150,965

139,951

Overseas

Certificates of deposit

959

3,105

959

386

Term deposits

13,790

13,617

3,922

2,998

On demand and short term deposits

7,088

8,633

113

Deposits not bearing interest

1,166

1,155

Securities sold under agreements to repurchase and short sales

405

Total Overseas

23,033

26,915

4,991

3,907

Total Deposits and Other Public Borrowings

173,227

168,026

155,956

143,858

Maturity Distribution of Certificates of Deposit and Time Deposits

The following table sets forth the maturity distribution of the Group’s certificates of deposit and time deposits as at 30 June 2006.

Group

At 30 June 2006

Maturing

Three Months

Between Three

Between Six &

After

or Less

& Six Months

Twelve Months

Total

Australia

Certificates of deposit ⁽¹⁾

12,605

1,769

2,388

1,423

18,185

Time deposits

26,137

7,401

8,447

1,225

43,210

Total Australia

38,742

9,170

10,835

2,648

61,395

Overseas

Certificates of deposit ⁽¹⁾

551

390

959

Time deposits

9,479

2,482

1,273

377

13,611

Total Overseas

10,030

2,499

1,663

378

14,570

Total Certificates of Deposit and Time Deposits

48,772

11,669

12,498

3,026

75,965


(1)		All certificates of deposit issued by the Bank are for amounts greater than $100,000.

164 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 24 Payables to Other Financial Institutions

Group

Bank

2006

2005

2006

2005

Australia

3,354

2,708

3,353

2,712

Overseas

7,830

5,315

7,778

5,257

Total Payables to Other Financial Institutions

11,184

8,023

11,131

7,969

Note 25 Liabilities at Fair Value through Income Statement

Group

Bank

2006

2005

2006

2005

Deposits and other borrowings

8,238

2,085

Debt instruments

5,573

—

Total Liabilities at Fair Value through Income Statement ⁽¹⁾

13,811

n/a

2,085

n/a


(1)		Liabilities at fair value through Income Statement have been designated to this category at inception as they are managed on a fair value basis by the Group. Designating these liabilities at fair value through Income Statement has also eliminated an accounting mismatch created by measuring assets and liabilities on a different basis.

Due to the Bank’s constant credit rating over the period there was no change in the fair value of liabilities that is not attributable to changes in benchmark interest rates. The increment on top of the carrying amount that the Group would be contractually required to pay at maturity to the holder of these financial liabilities is $99 million.

Note 26 Income Tax Liability

Group

Bank

2006

2005

2006

2005

Australia

Current tax liability

368

808

329

757

Deferred tax liability (Note 5)

1,234

861

640

872

Total Australia

1,602

1,669

969

1,629

Overseas

Current tax liability

Deferred tax liability (Note 5)

102

—

Total Overseas

112

Total Income Tax Liability

1,714

1,754

974

1,636

Commonwealth Bank of Australia Annual Report 2006 165

Notes to the Financial Statements

Note 27 Other Provisions


					Group				Bank
			2006		2005		2006		2005
	Note		$M		$M		$M		$M

Provision for:
Long service leave				280		296		267		285
Annual leave				186		146		167		126
Other employee entitlements				66		58		66		62
Which new Bank costs				—		91		—		91
Restructuring costs				37		18		37		18
General insurance contract outstanding claims				85		100		—		—
Self insurance/non-lending losses				90		66		87		66
Dividends		6		6		14		6		14
Other				71		82		60		41

Total Other Provisions				821		871		690		703


				Group						Bank
	2006			2005			2006			2005
Reconciliation	$M			$M			$M			$M

Which new Bank costs:
Opening balance		91			208			91			208
Transfers		(46	)		(20	)		(46	)		(20	)
Amounts utilised during the year		(45	)		(97	)		(45	)		(97	)

Closing balance		—			91			—			91


Restructuring costs:
Opening balance		18			—			18			—
Additional provisions		37			22			37			22
Amounts utilised during the year		(18	)		(4	)		(18	)		(4	)

Closing balance		37			18			37			18


General insurance claims:
Opening balance		100			79			—			—
Additional provisions		32			61			—			—
Amounts utilised during the year		(47	)		(40	)		—			—

Closing balance		85			100			—			—


Self insurance/non-lending losses:
Opening balance		66			60			66			59
Additional provisions		26			34			23			34
Amounts utilised during the year		(2	)		(28	)		(2	)		(27	)

Closing balance		90			66			87			66


Other:
Opening balance		82			122			41			49
Additional provisions		59			29			54			24
Amounts utilised during the year		(66	)		(69	)		(35	)		(32	)
FX translation adjustment		(4	)		—			—			—

Closing balance		71			82			60			41

Provision Commentary

Which new Bank Provision

This provision was raised to provide for the implementation of the Which new Bank initiative (refer Note 1 (aa)) which was completed in 2006.

Restructuring costs

This provision was raised to provide for Bank restructures as outlined in Note 1 (aa). This is expected to be utilised by the end of 2008.

General Insurance Claims

This provision is to cover future claims on general insurance contracts that have been incurred but not reported.

Self Insurance and Non-Lending Losses

This provision covers certain non-lending losses and non-transferred insurance risk. The provision is reassessed annually in consultation with actuarial advice.

166 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 28 Debt Issues


			Group				Bank
	2006		2005		2006		2005
	$M		$M		$M		$M

Short Term Debt Issues		22,838		26,864		11,034		9,500
Long Term Debt Issues		55,753		43,901		41,164		31,187

Total Debt Issues		78,591		70,765		52,198		40,687


Short Term Debt Issues
AUD Promissory Notes		1,081		1,214		—		—
AUD Bank Bills		505		624		—		—
US Commercial Paper		6,861		10,661		—		—
Euro Commercial Paper		4,248		4,976		4,248		3,065
Other		6		—		6		—
Long Term Debt Issues with less than one year to maturity		10,137		9,389		6,780		6,435

Total Short Term Debt Issues		22,838		26,864		11,034		9,500


Long Term Debt Issues
USD Medium Term Notes		29,475		22,967		27,172		15,680
AUD Medium Term Notes		12,479		7,122		4,232		6,272
JPY Medium Term Notes		1,785		868		1,785		692
GBP Medium Term Notes		4,088		4,401		2,084		2,736
Other Currencies Medium Term Notes		5,102		6,596		4,897		5,807
Offshore Loans (all JPY)		147		—		147		—
Develop Australia bonds (all AUD)		217		—		—		—
Eurobonds		2,460		1,947		847		—

Total Long Term Debt Issues		55,753		43,901		41,164		31,187


Maturity Distribution of Debt Issues
Less than 3 months		8,138		12,443		5,640		6,006
Between 3 months to 12 months		14,700		17,681		5,394		3,493
Between 1 year and 5 years		40,874		30,656		30,428		21,320
Greater than 5 years		14,879		9,985		10,736		9,868

Total Debt Issues		78,591		70,765		52,198		40,687

The Bank has a Euro Medium Term Note program under which it may issue notes up to an aggregate amount outstanding of USD35 billion. The Bank also has a US Medium Term Note program under which it may issue notes up to an aggregate amount outstanding of USD15 billion. Notes issued under these programs are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework.

Subsequent to 30 June 2006, the Bank has issued:

•		USD medium term notes: between 1 and 5 years — USD 60 million (AUD 81 million); greater than 5 years — USD 258 million (AUD 347 million);

•		CHF medium term notes: between 1 and 5 years — CHF 200 million (AUD 218 million);

•		EUR medium term notes: greater than 5 years — EUR 5 million (AUD 8 million);

•		JPY medium term notes: between 1 and 5 years — JPY 25 billion (AUD 297 million); greater than 5 years — JPY 1.5 billion (AUD 18 million);

•		NZD medium term notes: between 1 and 5 years — NZD 10 million (AUD 8 million);

•		AUD medium term notes: between 1 and 5 years — AUD 6 million;

•		GBP medium term notes: greater than 5 years — GBP 3 million (AUD 7 million); and

•		HKD medium term notes: between 1 and 5 years — HKD 380 million (AUD 66 million).

Where any debt issue is booked in an offshore branch or subsidiary, the amounts have first been converted into the functional currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent.

Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swap or other hedge arrangements have been entered into.

Commonwealth Bank of Australia Annual Report 2006 167

Notes to the Financial Statements

Note 28 Debt Issues (continued)

Short Term Borrowings

The following table analyses the Group’s short term borrowings for the financial years ended 30 June 2005 and 2006.


				Group
	2006			2005
	(AUD Millions, except where
				indicated)

US Commercial Paper
Outstanding at period end ⁽¹⁾		6,861			10,661
Maximum amount outstanding at any month end ⁽²⁾		13,717			10,698
Approximate average amount outstanding		9,754			10,341
Approximate weighted average rate on:
Average amount outstanding		4.4	%		1.2	%
Outstanding at period end		5.2	%		1.5	%

Euro Commercial Paper
Outstanding at period end ⁽¹⁾		4,248			4,976
Maximum amount outstanding at any month end ⁽²⁾		4,441			6,146
Approximate average amount outstanding ⁽²⁾		3,177			3,800
Approximate weighted average rate on:
Average amount outstanding		4.4	%		2.2	%
Outstanding at period end		5.2	%		2.8	%

Other Commercial Paper
Outstanding period end ⁽¹⁾		1,592			1,838
Maximum amount outstanding at any month end ⁽²⁾		2,665			2,110
Approximate average amount outstanding ⁽²⁾		1,880			1,790
Approximate weighted average rate on:
Average amount outstanding		6.3	%		5.8	%
Outstanding at period end		6.4	%		5.7	%


(1)		The amount outstanding at period end is reported on a book value basis (amortised cost).

(2)		The maximum and average amounts over the period are reported on a face value basis because the book values of these amounts are not available. Any differences between face value and book value would not be material given the short term nature of the borrowings.


		As at		As at
		30 June		30 June
Exchange Rates Utilised	Currency	2006		2005

AUD 1.00 =	USD		0.7428		0.7643
	EUR		0.5848		0.6313
	GBP		0.4053		0.4223
	JPY		85.276		84.165
	NZD		1.214		1.090
	HKD		5.770		5.940
	CAD		0.8247		0.9399
	CHF		0.917		0.978
	IDR		6,880		7,425
	THB		28.355		31.531
	FJD		1.304		1.301

168 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 28 Debt Issues (continued)

Guarantee Arrangements

Commonwealth Bank of Australia

The due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the Commonwealth Banks Act 1959 (as amended) at 30 June 1996. This guarantee has been progressively phased out following the sale of the Commonwealth of Australia’s shareholding in the Bank on 19 July 1996.

The transitional arrangements for phasing out the Commonwealth of Australia’s guarantee are contained in the Commonwealth Bank Sale Act 1995.

In relation to the Commonwealth of Australia’s guarantee of the Bank’s liabilities, transitional arrangements provided that:

•		All demand deposits and term deposits were guaranteed for a period of three years from 19 July 1996, with term deposits outstanding at the end of that three year period being guaranteed until maturity; and

•		All other amounts payable under a contract that was entered into, or under an instrument executed, issued, endorsed or accepted by the Bank at 19 July 1996 will be guaranteed until their maturity.

Accordingly, demand deposits are no longer guaranteed. Term deposits outstanding at 19 July 1999 remain guaranteed until maturity. The run-off of the Government guarantee has no effect on the Bank’s access to deposit markets.

Commonwealth Development Bank

On 24 July 1996, the Commonwealth of Australia sold its 8.1% shareholding in the Commonwealth Development Bank of Australia Limited (CDBL) to the Bank for $12.5 million.

Under the arrangements relating to the purchase by the Bank of the Commonwealth of Australia’s shareholding in the CDBL:

•		All lending assets as at 30 June 1996 have been quarantined in CDBL, consistent with the charter terms on which they were written;

•		The CDBL’s liabilities continue to remain guaranteed by the Commonwealth of Australia; and

•		CDBL ceased to write new business or incur additional liabilities from 1 July 1996. From that date, new business that would have previously been written by CDBL is being written by the rural arm of the Bank.

The due payment of all monies payable by CDBL to a person other than the Commonwealth of Australia is guaranteed by the Commonwealth of Australia under Section 117 of the Commonwealth Banks Act 1959 (as amended). This guarantee will continue to be provided by the Commonwealth of Australia whilst quarantined assets are held. The value of the liabilities under the guarantee will diminish as quarantined assets reach maturity and are repaid.

State Bank of NSW (also known as Colonial State Bank)

The enabling legislation for the sale of the State Bank of New South Wales Limited (SBNSW), the State Bank (Privatisation) Act 1994 — Section 12 and the State Bank (Corporatisation) Act 1989 — Section 12 (as amended), provides in general terms for a guarantee by the NSW Government in respect of all funding liabilities and off balance sheet products (other than demand deposits) incurred or issued prior to 31 December 1997 by SBNSW until maturity and a guarantee for demand deposits accepted by SBNSW up to 31 December 1997. Other obligations incurred before 31 December 1994 are also guaranteed to their maturity. On 4 June 2001 Commonwealth Bank of Australia became the successor in law to SBNSW pursuant to the Financial Sector Transfer of Business Act 1999. The NSW Government guarantee of the liabilities and products as described above continues unchanged by the succession.

Note 29 Managed Funds Units on Issue

Group

Bank

2006

2005

2006

2005

Managed funds units on issue

1,109

—

⁽¹⁾

—


(1)		Reclassified from Minority Interests under AIFRS, refer Note 34.

Managed funds units on issue represent the liability to minority interest unit holders in funds which have been consolidated by the Group.

Commonwealth Bank of Australia Annual Report 2006 169

Notes to the Financial Statements

Note 30 Bills Payable and Other Liabilities


					Group				Bank
			2006		2005		2006		2005
	Note		$M		$M		$M		$M

Bills payable				830		928		773		863
Accrued interest payable				1,587		1,435		1,408		1,226
Accrued fees and other items payable				1,408		1,256		1,057		860
Defined benefit superannuation plan deficit		44		65		79		65		79
Securities purchased not delivered				1,097		1,065		655		796
Unrealised losses on trading derivatives		43		n/a		11,914		n/a		11,854
Intergroup deferred tax payable				—		—		—		60
Other liabilities				1,066		874		341		999

Total Bills Payable and Other Liabilities				6,053		17,551		4,299		16,737

Note 31 Loan Capital

Group

Bank

Currency

2006

2005

2006

2005

Amount (M)

Footnotes

Tier 1 Loan Capital

Exchangeable

FRN

USD38

⁽¹⁾

Exchangeable

FRN

USD71

⁽²⁾

124

Undated

FRN

USD100

⁽³⁾

135

131

135

131

Undated

TPS

USD550

⁽⁴⁾

740

—

740

719

Undated

PERLS II

AUD750

⁽⁵⁾

750

—

750

—

Undated

PERLS III

AUD1,166

⁽⁶⁾

1,166

—

1,166

—

Undated

TPS

USD700

⁽⁷⁾

—

942

—

Total Tier 1 Loan Capital

2,937

304

3,879

1,023

Tier 2 Loan Capital

Extendible

FRN

AUD275

⁽⁸⁾

275

275

275

275

Subordinated

FRN

AUD25

⁽⁹⁾

Subordinated

Notes

USD300

⁽¹⁰⁾

404

549

404

549

Subordinated

EMTN

JPY20,000

⁽¹¹⁾

235

216

235

216

Subordinated

EMTN

USD400

⁽¹²⁾

539

501

539

501

Subordinated

EMTN

GBP200

⁽¹³⁾

493

408

493

408

Subordinated

EMTN

JPY30,000

⁽¹⁴⁾

352

387

352

387

Subordinated

Notes

AUD130

⁽¹⁵⁾

—

130

—

130

Subordinated

Notes

USD350

⁽¹⁶⁾

471

536

471

536

Subordinated

EMTN

GBP150

⁽¹⁷⁾

370

373

370

373

Subordinated

MTN

AUD300

⁽¹⁸⁾

300

300

300

300

Subordinated

FRN

AUD200

⁽¹⁸⁾

200

200

200

200

Subordinated

EMTN

JPY10,000

⁽¹⁹⁾

117

127

117

127

Subordinated

EMTN

USD500

⁽²⁰⁾

673

711

673

711

Subordinated

FRN

AUD300

⁽²¹⁾

300

300

300

300

Subordinated

EMTN

EUR300

⁽²²⁾

513

501

513

501

Subordinated

EMTN

USD61

⁽²³⁾

126

Subordinated

Notes

NZD350

⁽²⁴⁾

288

322

288

322

Subordinated

EMTN

JPY10,000

⁽²⁵⁾

117

—

117

—

Subordinated

FRN

AUD300

⁽²⁶⁾

300

—

300

—

Subordinated

EMTN

CAD300

⁽²⁷⁾

364

—

364

—

Subordinated

Loan

JPY5,000

⁽²⁸⁾

—

Subordinated

EMTN

USD200

⁽²⁹⁾

269

—

269

—

Subordinated

Notes

NZD183

⁽³⁰⁾

151

—

Total Tier 2 Loan Capital

6,896

5,987

6,745

5,987

Fair value hedge and effective yield adjustments

—

Total Loan Capital

9,895

6,291

10,688

7,010

170 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 31 Loan Capital (continued)

⁽¹⁾ USD 300 million undated Floating Rate Notes (FRNs) issued 11 July 1988 exchangeable into dated FRNs.

Outstanding notes at 30 June 2006 were:


Due July 2006	:	USD32.5 million
Undated	:	USD5 million

Subsequent to 30 June 2006, the notes due July 2006 have been switched into undated notes.

⁽²⁾ USD 400 million undated FRNs issued 22 February 1989 exchangeable into dated FRNs. USD24 million matured in February 2006.

Outstanding notes at 30 June 2006 were:


Due February 2008	:	USD7 million
Due February 2011	:	USD64 million

⁽³⁾ USD 100 million undated capital notes issued on 15 October 1986. The Bank has entered into separate agreements with the Commonwealth of Australia relating to each of the above issues (the “Agreements”) which qualify the issues as Tier One capital.

The Agreements provide that, upon the occurrence of certain events listed below, the Bank may issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the relevant note issue or issues plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price of such shares will be determined by reference to the prevailing market price for the Bank’s shares.

Any one or more of the following events may trigger the issue of shares to the Commonwealth of Australia or a rights issue:

•

A relevant event of default (discussed below) occurs in respect of a note issue and the Trustee of the relevant notes gives notice to the Bank that the notes are immediately due and payable;

•

The most recent audited annual financial statements of the Group show a loss (as defined in the Agreements);

•

The Bank does not declare a dividend in respect of its ordinary shares;

•

The Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem a note issue; or

•

In respect of Undated FRNs which have been exchanged to Dated FRNs, the Dated FRNs mature.

Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the relevant notes will trigger the issue of shares to the Commonwealth of Australia to the value of such payment.

The relevant events of default differ depending on the relevant Agreement. In summary, they cover events such as failure of the Bank to meet its monetary obligation in respect of the relevant notes; the insolvency of the Bank; any law being passed to dissolve the Bank or the Bank ceasing to carry on general banking business in Australia; and the Commonwealth of Australia ceasing to guarantee the relevant notes. In relation to Dated FRNs which have matured to date, the Bank and the Commonwealth agreed to amend the relevant Agreement to reflect that the Commonwealth of Australia was not called upon to subscribe for fully paid ordinary shares up to an amount equal to the principal value of the maturing FRNs.

⁽⁴⁾ On 6 August 2003 a wholly owned entity of the Bank issued USD550 million (AUD832 million) of perpetual non-call 12 year trust preferred securities into the US capital markets. These securities offer a non-cumulative fixed rate distribution of 5.805% per annum payable semi-annually. These instruments were previously classified as Other Equity Instruments.

⁽⁵⁾ On 6 January 2004, a wholly owned entity of the Bank (Commonwealth Managed Investments Limited as Responsible Entity of the PERLS II Trust) issued $750 million of Perpetual Exchangeable Resettable Listed Securities (PERLS II). These securities are units in a registered managed investments scheme, perpetual in nature, offering a non-cumulative floating rate distribution payable quarterly. These instruments were previously classified as Other Equity Instruments.

⁽⁶⁾ On 7 April 2006, a wholly owned entity of the Bank (Preferred Capital Limited) issued $1,166,456,200 of Perpetual Exchangeable Repurchaseable Listed Shares (PERLS III).

⁽⁷⁾ On 15 March 2006, the Bank issued USD700 million (AUD947 million) of perpetual non-call 10 year trust preferred securities into the US capital markets. These securities offer a non-cumulative fixed rate distribution of 6.024% per annum payable semi-annually.

⁽⁸⁾ AUD275 million extendible floating rate note issued December 1989, due December 2014;

The Bank has entered into a separate agreement with the Commonwealth of Australia relating to the above issue (the “Agreement”) which qualifies the issue as Tier Two capital. The Agreement provides for the Bank to issue either fully paid ordinary shares to the Commonwealth of Australia or (with the consent of the Commonwealth of Australia) rights to all shareholders to subscribe for fully paid ordinary shares up to an amount equal to the outstanding principal value of the note issue plus any interest paid in respect of the notes for the most recent financial year and accrued interest. The issue price will be determined by reference to the prevailing market price for the Bank’s shares.

Any one or more of the following events will trigger the issue of shares to the Commonwealth of Australia or a rights issue:

•

A relevant event of default occurs in respect of the note issue and, where applicable, the Trustee of the notes gives notice of such to the Bank;

•

The Bank, if required by the Commonwealth of Australia and subject to the agreement of the APRA, exercises its option to redeem such issue; or

•

Any payment made by the Commonwealth of Australia pursuant to its guarantee in respect of the issue will trigger the issue of shares to the Commonwealth of Australia to the value of such payment.

Original issue size was $300 million. $25 million matured in December 2004.

⁽⁹⁾ AUD25 million subordinated FRN, issued April 1999, due April 2029.

⁽¹⁰⁾ USD750 million subordinated notes, issued June 2000, due June 2010; split into USD300 million fixed rate notes and USD450 million floating rate notes. The floating rate notes were called and redeemed in June 2005.

Commonwealth Bank of Australia Annual Report 2006 171

Notes to the Financial Statements

Note 31 Loan Capital (continued)

⁽¹¹⁾ JPY20 billion perpetual subordinated EMTN, issued February 1999.

⁽¹²⁾ USD400 million subordinated EMTN, issued June 1996 due July 2006.

⁽¹³⁾ GBP200 million subordinated EMTN, issued March 1996 due December 2006.

⁽¹⁴⁾ JPY30 billion subordinated EMTN, issued October 1995 due October 2015.

⁽¹⁵⁾ AUD130 million subordinated notes comprised as follows: AUD10 million fixed rate notes issued 12 December 1995, matured 12 December 2005. AUD110 million floating rate notes issued 12 December 1995, matured 12 December 2005. AUD5 million fixed rate notes issued 17 December 1996, matured 12 December 2005. AUD5 million floating rate notes issued 17 December 1996, matured 12 December 2005.

⁽¹⁶⁾ USD350 million subordinated fixed rate note, issued June 2003, due June 2018.

⁽¹⁷⁾ GBP150 million subordinated EMTN, issued June 2003, due December 2023.

⁽¹⁸⁾ AUD500 million subordinated notes, issued February 2004, due February 2014; split into AUD300 million fixed rate notes and AUD200 million floating rate notes.

⁽¹⁹⁾ JPY10 billion subordinated EMTN, issued May 2004, due May 2034.

⁽²⁰⁾ USD500 million subordinated EMTN issued June 2004 (USD250 million) and August 2004 (USD250 million), due August 2014.

⁽²¹⁾ AUD300 million subordinated floating rate notes, issued February 2005, due February 2015.

⁽²²⁾ EUR300 million subordinated EMTN, issued March 2005, due March 2015.

⁽²³⁾ USD100 million subordinated EMTN, issued March 2005, due March 2025. Partial redemption of USD39.5 million in September 2005.

⁽²⁴⁾ NZD350 million subordinated notes, issued May 2005, due April 2015.

⁽²⁵⁾ JPY10 billion subordinated notes, issued November 2005, due November 2015.

⁽²⁶⁾ AUD300 million subordinated floating rate notes, issued November 2005, due November 2015.

⁽²⁷⁾ CAD300 million subordinated notes, issued November 2005, due November 2015.

⁽²⁸⁾ JPY5 billion subordinated loan, issued March 2006, due March 2018.

⁽²⁹⁾ USD200 million subordinated notes, issued June 2006, due July 2016. Treatment as Lower Tier Two Capital commences October 2006.

⁽³⁰⁾ NZD183 million subordinated notes issued June 2006, due June 2016.

172 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 32 Detailed Statements of Changes in Equity


				Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Equity Reconciliations
Ordinary Share Capital
Opening balance		13,486			13,359			13,739			13,359
AIFRS transition adjustment ⁽¹⁾		—			(371	)		—			(126	)

Restated opening balance		13,486			12,988			13,739			13,233
Buyback		(500	)		—			(500	)		—
Dividend reinvestment plan		481			446			481			446
Employee share ownership schemes		50			67			50			67
(Purchase)/sale and vesting of treasury shares ⁽²⁾		(10	)		(14	)		(2	)		(6	)
Issue costs		(2	)		(1	)		(2	)		(1	)

Closing balance		13,505			13,486			13,766			13,739

Preference Share Capital
Opening balance		687			687			687			687
AIFRS transition adjustment ⁽³⁾		(687	)		—			(687	)		—

Restated opening balance		—			687			—			687

Closing balance		—			687			—			687

Other Equity Instruments
Opening balance		1,573			1,573			737			737
AIFRS transition adjustment ⁽³⁾		(1,573	)		—			(737	)		—

Restated opening balance		—			1,573			—			737
Issue of instruments		947			—			1,895			—
Issue costs		(8	)		—			—			—

Closing balance		939			1,573			1,895			737

Retained Profits
Opening balance		3,843			2,840			2,992			1,805
AIFRS transition adjustment ^{(4) (5)}		(780	)		9			(437	)		534

Restated opening balance		3,063			2,849			2,555			2,339
Actuarial gains and losses from defined benefit superannuation plan		387			110			387			112
Realised gains and dividend income on treasury shares held within the Bank’s life insurance statutory funds recognised directly in retained profits		85			21			—			—
Operating profit attributable to members of the Bank		3,928			3,400			4,267			3,012

Total available for appropriation		7,463			6,380			7,209			5,463
Transfers to general reserve		(239	)		(8	)		—			—
Transfers to general reserve for credit loss		(92	)		—			(92	)		—
Interim dividend — cash component		(992	)		(883	)		(992	)		(883	)
Interim dividend — dividend reinvestment plan		(219	)		(200	)		(219	)		(200	)
Payment of final dividend prior year — cash component		(1,172	)		(1,069	)		(1,172	)		(1,069	)
Payment of final dividend prior year — dividend reinvestment plan		(262	)		(246	)		(262	)		(246	)
Other dividends		—			(131	)		—			(73	)

Closing balance		4,487			3,843			4,472			2,992


(1)		Relates to the initial recognition of treasury shares held within the employee share scheme trust and the life insurance statutory funds.

(2)		Relates to movements in treasury shares held within the employee share scheme trust and the life insurance statutory funds.

(3)		Reclassification of hybrid financial instruments from equity to liabilities.

(4)		Comprises the following items detailed in Note 1 (nn):

	•		Actuarial and other movements within the defined benefit superannuation plan surplus;

	•		Net movement in the calculation of life insurance policyholder liabilities;

	•		Adjustment in respect of realised gains and dividend income on treasury shares;

	•		Deferral of initial entry fee income earned by life insurance entities;

	•		Adjustment to the fair value calculation for assets held by the life insurance business;

	•		Adjustment in respect of derivative financial instruments;

	•		Deferral of previously recognised net income and expenses within the banking business;

	•		Transfer of foreign currency translation reserve to retained profits on 1 July 2004;

	•		Foreign exchange adjustment on the reclassification of hybrid financial instruments;

	•		Transfer to establish the general reserve for credit loss; and

	•		Adjustment to fair value calculation for trading assets within the banking portfolios and for other financial instruments designated as fair value through profit and loss.


(5)		Due to a change in functional currency the estimates of AIFRS transition adjustments were revised. The net impact of this was $51 million increase in FCTR, $51 million decrease in retained profits.

Commonwealth Bank of Australia Annual Report 2006 173

Notes to the Financial Statements

Note 32 Detailed Statements of Changes in Equity (continued)


				Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Reserves
General Reserve
Opening balance		982			3,810			570			570
AIFRS transition adjustment ⁽¹⁾		—			(2,836	)		—			—

Restated opening balance		982			974			570			570
Appropriation from retained profits		239			8			—			—

Closing balance		1,221			982			570			570

Capital Reserve
Opening balance		282			280			1,533			1,531
Reversal of revaluation surplus on sale of property		3			2			3			2

Closing balance		285			282			1,536			1,533

Asset Revaluation Reserve
Opening balance		119			61			99			43
AIFRS transition adjustment ⁽²⁾		—			31			—			29

Restated opening balance		119			92			99			72
Revaluation of properties		19			29			14			29
Transfers on sale of properties		(3	)		(2	)		(3	)		(2	)
Tax on revaluation of properties		(4	)		—			(3	)		—

Closing balance		131			119			107			99

Foreign Currency Translation Reserve
Opening balance		(141	)		(205	)		1			4
AIFRS transition adjustments ^{(3) (4)}		78			205			1			(1	)

Restated opening balance		(63	)		—			2			3
Currency translation adjustments		(232	)		(141	)		(8	)		(2	)
Transfer to the Income Statement		41			—			—			—
Tax on translation adjustments		13			—			—			—

Closing balance		(241	)		(141	)		(6	)		1

Cash Flow Hedge Reserve
Opening balance		—			—			—			—
AIFRS transition adjustment ⁽⁵⁾		39			—			1			—

Restated opening balance		39			—			1			—
Gains/(losses) on cash flow hedging instruments:
Recognised in equity		89			—			58			—
Transferred to Income Statement		(58	)		—			(51	)		—
Tax on cash flow hedging instruments		(11	)		—			(2	)		—

Closing balance		59			—			6			—

Employee Compensation Reserve
Opening balance		23			—			23			—
AIFRS transition adjustments ⁽⁶⁾		—			47			—			47

Restated opening balance		23			47			23			47
Current period movement		11			(24	)		11			(24	)

Closing balance		34			23			34			23

General Reserve for Credit Loss ⁽⁷⁾
Opening balance		—			—			—			—
AIFRS transition adjustment		258			—			258			—

Restated opening balance		258			—			258			—
Appropriation from retained profits		92			—			92			—

Closing balance		350			—			350			—


(1)		Net write down of the internally generated appraisal value of the life insurance and funds management business.

(2)		Change in valuation methodology for owner-occupied property.

(3)		Transfer to retained profits on 1 July 2004; and re-translation on 1 July 2005 due to change in recognition and measurement of financial instruments.

(4)		Due to change in functional currency, the estimates of the AIFRS transition adjustments were revised. The net impact of this was $51million increase in FCTR, $51million decrease in retained profits.

(5)		Initial recognition of the cash flow hedge reserve on 1 July 2005.

(6)		Initial recognition of employee equity compensation reserve on 1 July 2004.

(7)		The opening balance of the general reserve for credit loss has been appropriated from retained profits. The amount is the tax effected difference between the former general provision at 30 June 2005, $1,390 million, and the opening transition balance of the collective provision, $1,021 million. The general reserve for credit loss has been established to satisfy the current APRA prudential requirement for banks to maintain a general reserve for credit loss, and allowable collective provisions, at a minimum level of 0.5% of risk weighted assets.

174 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 33 Share Capital


				Group						Bank
	2006			2005			2006			2005
Issued and Paid Up Ordinary Capital	$M			$M			$M			$M

Ordinary Share Capital
Opening balance (excluding Treasury Shares deduction)		13,871			13,359			13,871			13,359
Dividend Reinvestment Plan: Final Dividend prior year		262			246			262			246
Dividend Reinvestment Plan: Interim Dividend		219			200			219			200
Share Buyback		(500	)		—			(500	)		—
Exercise of executive options		50			67			50			67
Issue costs		(2	)		(1	)		(2	)		(1	)

Closing balance (excluding Treasury Shares deduction)		13,900			13,871			13,900			13,871
Less Treasury Shares		(395	)		(385	)		(134	)		(132	)

Closing balance		13,505			13,486			13,766			13,739


	Number			Number			Number			Number

Shares on Issue
Opening balance (excluding Treasury Shares deduction)		1,280,276,172			1,264,006,062			1,280,276,172			1,264,006,062
Dividend reinvestment plan issues:
2004/2005 Final Dividend fully paid ordinary shares at $37.19		7,032,857			—			7,032,857			—
2005/2006 Interim Dividend fully paid ordinary shares at $43.89		4,979,668			—			4,979,668			—
2003/2004 Final Dividend fully paid ordinary shares at $30.14		—			8,172,546			—			8,172,546
2004/2005 Interim Dividend fully paid ordinary shares at $35.90		—			5,581,364			—			5,581,364
Share buyback		(11,139,988	)					(11,139,988	)
Exercise under executive option plan		1,756,200			2,516,200			1,756,200			2,516,200

Closing balance (excluding Treasury Shares deduction)		1,282,904,909			1,280,276,172			1,282,904,909			1,280,276,172
Less Treasury Shares		(11,085,258	)		(13,511,769	)		(2,353,514	)		(4,613,116	)

Closing balance		1,271,819,651			1,266,764,403			1,280,551,395			1,275,663,056

Terms and Conditions of Ordinary Share Capital

Ordinary shares have the right to receive dividends as declared and in the event of winding up the company, to participate in the proceeds from sale of surplus assets in proportion to the number of and amounts paid up on shares held.

A shareholder has one vote on a show of hands and one vote for each fully paid share on a poll. A shareholder may be present at a general meeting in person or by proxy or attorney, and if a body corporate, it may also authorise a representative.

Preference Share Capital

Group

Bank

2006

2005

2006

2005

PERLS

PERLS Capital issued and paid up

—

687

—

687

Number

Number

Number

Number

—

3,500,000

—

3,500,000

PERLS Redemption

On 6 April 2006, the Bank redeemed the $700 million PERLS. PERLS, which qualified as Tier One capital of the Bank, were replaced with PERLS III, refer Note 31.

Group

Bank

2006

2005

2006

2005

Other Equity Instruments

Other equity instruments issued and paid up

939

⁽²⁾

1,573

⁽¹⁾

1,895

737

⁽¹⁾

Number

Number

Number

Number

700,000

4,300,000

1,400,000

550,000


(1)		Reclassified to Loan Capital under AIFRS, refer Note 31.

(2)		Net of issue costs.

Trust Preferred Securities 2006

On 15 March 2006 the Bank issued USD 700 million (AUD 947 million) of trust preferred securities into the US capital markets. These securities offer a non-cumulative fixed rate of distribution of 6.024% per annum payable semi-annually. These securities qualify as Tier One capital of the Bank. A related instrument was issued by the Bank to a subsidiary for AUD 956 million and eliminates on consolidation.

176 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 33 Share Capital (continued)

Dividends

•

As declared in the 30 June 2005 profit announcement, a fully franked final dividend of 112 cents per share amounting to $1,434 million was paid on 23 September 2005. The payment comprised cash disbursements of $1,172 million with $262 million being reinvested by participants through the Dividend Reinvestment Plan; and

•

Share Buyback

On 16 June 2006 the Bank announced the successful completion of an on-market share buyback. A total of 11,139,988 shares were bought back at a total cost of $500 million. Shares were purchased for between $41.08 and $46.79.

Dividend Reinvestment Plan

The Bank expects to issue around $303 million of shares in respect of the Dividend Reinvestment Plan for the final dividend for 2005/06.

The Dividend Reinvestment Plan continues to be capped at 10,000 shares per shareholder.

Record Date

The register closed for determination of dividend entitlement and for participation in the dividend reinvestment plan at 5pm on 18 August 2006 at Link Market Services Limited, Locked Bag A14, Sydney South, 1235.

Ex Dividend Date

The ex dividend date was 14 August 2006.

Employee Share Plans

The Bank has in place the following employee share plans:

•

Commonwealth Bank Employee Share Acquisition Plan (“ESAP”);

•

Commonwealth Bank Equity Participation Plan (“EPP”);

•

Commonwealth Bank Equity Reward Plan (“ERP”); and

•

Commonwealth Bank Non-Executive Directors Share Plan (“NEDSP”).

The current ESAP and ERP arrangements were each approved by Shareholders at the Annual General Meeting (“AGM”) on 26 October 2000. Shareholders’ consent was not required for either the EPP or NEDSP but details were included in the Explanatory Memorandum to the 2000 meeting to ensure Shareholders were fully informed.

Employee Share Acquisition Plan (“ESAP”)

The ESAP was introduced in 1996 and provides employees with up to $1,000 worth of free shares per annum subject to a performance target being met. The performance target is growth in annual profit of the greater of 5% or the consumer price index (CPI change) plus 2%. Whenever annual profit growth exceeds CPI change, the Board may use its discretion in determining whether any grant of shares will be made.

Under ESAP, shares granted are restricted for sale for three years or until such time as the participating employee ceases employment with the Group, whichever is earlier. Shares granted under the ESAP receive full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares granted.

Effective from 1 July 2002, shares granted under ESAP offers have been expensed through the profit and loss. In the current year, 646,412 shares were granted to eligible employees in respect of the 2005 grant.

The Bank has determined to allocate each eligible employee shares up to a value of $1,000 in respect of the 2006 grant. As a result, a total expense of $27 million will be accrued by the grant date in respect of the 2006 grant, $23 million of which has been accrued as at 30 June 2006. The shares will be purchased on-market at the then market price.

Commonwealth Bank of Australia Annual Report 2006 177

Notes to the Financial Statements

Note 33 Share Capital (continued)

From 1 July 2000 to 30 June 2002, details of issues under ESAP were:


	Bonus Ordinary				Shares issued
Issue Date	Shares Issued ⁽¹⁾		No. of Participants		to Each Participant ⁽²⁾		Issue Price ⁽²⁾

13 October 2000		872,620		24,932		35	$	27.78
20 December 2000		805		23		35	$	27.78
31 October 2001		893,554		26,281		34	$	28.95
3 December 2001		3,876		114		34	$	28.95
31 January 2002		1,938		57		34	$	28.95


From 1 July 2002, details of shares purchased under ESAP were:

	Ordinary				Shares allocated
Issue Date	Shares Purchased		No. of Participants		to Each Participant ⁽³⁾		Allocation Price ⁽³⁾

31 October 2002		830,874		25,178		33	$	29.71
22 January 2003		1,584		48		33	$	29.71
31 October 2003		683,617		23,573		29	$	27.53
29 October 2004		699,918		22,578		31	$	31.52
9 September 2005		646,412		24,862		26	$	37.68


(1)		For Offers in 2000 and 2001 both new and existing shareholders were granted Bonus Ordinary Shares issued from the Share Capital Account.

(2)		The Issue Price x Shares issued to each Participant effectively represents about $1,000 of free shares.

(3)		The Allocation Price for the offer is equal to the market value which is determined by calculating the weighted average of the prices at which the shares were traded on the ASX during the 5 trading day period up to and including the grant date. The Allocation Price x Shares allocated to each participant effectively represents about $1,000 of free shares for the 2002, 2004 and 2005 Offers and $800 of free shares for the 2003 Offer.

Equity Participation Plan (“EPP”)

The EPP facilitates the voluntary sacrifice of both fixed remuneration and annual short term incentives (STI) to be applied in the acquisition of shares. The plan also previously facilitated the mandatory sacrifice of 50% of STI payments for some employees. However, the mandatory component of EPP ceased for the year ended 30 June 2005 and was replaced with a separate cash STI deferral arrangement for eligible employees.

Under the voluntary component of the EPP, shares purchased are restricted for sale for two years or when a participating employee ceases employment with the Bank, whichever is earlier. Shares purchased under the voluntary component of the EPP carry full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares.

Under the mandatory component of the EPP, fully paid ordinary shares are purchased and held in Trust until such time as the vesting conditions have been met. The vesting condition attached to the shares specifies that participants must generally remain employees of the Bank until the vesting date. Shares previously granted under the mandatory component of the EPP remain subject to their vesting conditions.

Each participant of the mandatory component of the EPP for whom shares are held by the Trustee on their behalf has a right to receive dividends. Once the shares vest, dividends which have accrued during the vesting period are paid to participants. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period. Where participating employees do not satisfy the vesting conditions, shares and dividend rights are forfeited.

Shares acquired under both the voluntary and mandatory components of the EPP have been expensed against the profit and loss account. In the current year, $5 million was expensed against the profit and loss account to reflect the cost of allocations under the Plan.

All shares acquired by employees under the EPP are purchased on-market at the current market price. A total number of 8,090,094 shares have been acquired under the EPP since the plan commenced in 2001.

Details of purchases under the EPP from 1 July 2005 to 30 June 2006 were as follows:


Allotment Date	Participants		Shares Purchased		Average Purchase Price

1 September 2005		131		93,437	$	37.58
9 November 2005		2		35,911	$	40.46
15 March 2006		56		8,469	$	44.19

The movement in shares purchased under the mandatory component of the EPP has been as follows:


Details of Movements	2005			2006

Shares held under the Plan at the beginning of year		2,790,353			2,616,771
Shares allocated during year		2,067,281			56
Shares vested during year		(2,016,790	)		(1,736,939	)
Shares forfeited during year		(224,073	)		(56,804	)

Shares held under the Plan at end of year		2,616,771			823,084

178 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 33 Share Capital (continued)

Equity Reward Plan (“ERP”)

The Board has envisaged that up to a maximum of 500 employees would participate each year in the ERP.

Previous grants under the ERP were in two parts, comprising grants of options and grants of shares. Since 2001/02, no options have been issued under the ERP. From 2002/03, Reward Shares have only been issued under this plan.

The exercise of previously granted options and the vesting of employee legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle. The ERP performance hurdle is based on relative Total Shareholder Return (“TSR”) with the Bank’s TSR performance being measured against a comparator group of companies.

The prescribed performance hurdle for options and Reward Shares issued prior to 2002/03 was:

•		The Bank’s TSR (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of TSR achieved by the comparator group of companies. The comparator group (previously companies represented in the ASX’s “Banks and Finance Accumulation Index” excluding the Bank) was widened in 2001/02 to better reflect the Bank’s business mix; and

•		If the performance hurdle is not reached within that three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within five years from the grant date.

Details of options issued and shares acquired under 2000 and 2001 grants of the ERP as well as movements in the options and shares are as follows:

Options


	Commencement				Options
Year of Grant	Date	Issue Date	Options Issued		Outstanding ⁽¹⁾		Participants		Exercise Price		Exercise Period

2000	13 Sep 2000	7 Feb 01		577,500		187,500	16	$	26.97	⁽²⁾	14 Sep 2003 to
											13 Sep 2010 ⁽³⁾
	13 Sep 2000	31 Oct 01		12,500		—	1	$	26.97	⁽²⁾	14 Sep 2003 to
											13 Sep 2010 ⁽³⁾
2001	3 Sep 2001	31 Oct 01		2,882,000		741,000	61	$	30.12	⁽²⁾	4 Sep 2004 to
											3 Sep 2011 ⁽⁴⁾
	3 Sep 2001	31 Jan 02		12,500		12,500	1	$	30.12	⁽²⁾	4 Sep 2004 to
											3 Sep 2011 ⁽⁴⁾
	3 Sep 2001	15 Apr 02		100,000		—	1	$	30.12	⁽²⁾	4 Sep 2004 to
											3 Sep 2011 ⁽⁴⁾


(1)		Options outstanding as at the date of the report.

(2)		The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.

(3)		Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.

(4)		Performance hurdle was satisfied on 3 October 2004 and options may be exercised up to 3 September 2011.


Options — Details of Movements				July 2004 – June 2005						July 2005 – June 2006
Year of Grant	2000			2001			2000			2001

Held by participants at the start of year		402,500			2,235,200			247,500			1,801,600
Granted during year		—			—			—			—
Exercised during year		(155,000	)		(403,900	)		(60,000	)		(1,008,300	)
Lapsed during year		—			(29,700	)		—			(39,800	)

Outstanding at the end of year		247,500			1,801,600			187,500			753,500

Granted from 30 June to the date of report		—			—			—			—
Exercised from 30 June to date of report		—			(50,000	)		—			—
Lapsed from 30 June to the date of report		—			—			—			—

Outstanding as at the date of report		247,500			1,751,600			187,500			753,500

For Reward Shares granted from 2002/03 to 2005/06 inclusive, a tiered vesting scale was applied so that 50% of the allocated shares vest if the Bank’s TSR return is equal to the 50th percentile, 75% vest at the 67th percentile and 100% when the Bank’s return is in the top quartile.

Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time.

Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%.

In 2006 the Bank reviewed these arrangements and will implement a change to retesting and the vesting scale for future ERP grants. A straight line vesting scale will be introduced, with 50% vesting at the 51st percentile, through to 100% vesting at the 75th percentile for future ERP grants. Retesting will be restricted from four occasions to one, 12 months after initial testing.

Reward Shares acquired under the share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed through the profit and loss over a five year period, reflecting the maximum vesting period. In the current year, $3 million has been expensed through the profit and loss. The expense for the current year is lower than previous years due to the new accounting treatment required under AIFRS.

Executive options issued up to September 2001 have not been recorded as an expense by the Group.

Commonwealth Bank of Australia Annual Report 2006 179

Notes to the Financial Statements

Note 33 Share Capital (continued)

Reward Shares


											Average
		Shares			Shares						Purchase
Year of Grant	Purchase Date	Purchased		Allocated			Participants		Vesting Period		Price ⁽⁹⁾

2000	20 Feb 2001		361,100		361,100			61	14 Sep 2003 to Sep 2005	⁽⁶⁾	$	29. 72
	31 Oct 2001		2,000		2,000			1	14 Sep 2003 to 3 Sep 2005	⁽⁶⁾	$	29. 25
2001	31 Oct 2001		652,100		661,500	⁽¹⁾		241	4 Sep 2004 to 3 Sep 2006	⁽⁷⁾	$	29. 25
2002	22 Nov 2002		357,500		545,500	⁽²⁾		195	3 Sep 2005 to 2 Sep 2007	⁽⁸⁾	$	28. 26
2003	12 Nov 2003		285,531		595,600	⁽³⁾		255	2 Sep 2006 to 1 Sep 2008	⁽⁸⁾	$	28. 33
2004	11 Nov 2004		225,934		522,290	⁽⁴⁾		259	23 Aug 2007 to 23 Aug 2009	⁽⁸⁾	$	29. 87
2005	11 Nov 2005		18,306		557,253	⁽⁵⁾		260	15 Jul 2005 to 15 Jul 2010	⁽⁸⁾	$	29. 30


(1)		In October 2001, 11,400 Reward Shares were re-allocated to participants receiving the 2001 grant as a result of Reward Shares forfeited from previous ERP grant.

(2)		In November 2002, 188,000 shares were re-allocated to participants receiving the 2002 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2002 represents 50% of the maximum entitlement that participants may receive. The 2002 grant did not meet the performance hurdle at the first measurement point and therefore did not vest. If it reaches the required performance hurdle at a subsequent measurement date, a maximum of 50% only of the original grant will vest. Further details of ERP arrangements are provided in the Bank’s Remuneration Report.

(3)		In November 2003, 310,069 shares were re-allocated to participants receiving the 2003 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2003 represents 50% of the maximum entitlement that participants may receive. It is intended that Reward Shares required to meet obligations under ERP will be acquired by the Trust on-market during the three years prior to the first measurement point of the performance hurdle.

(4)		In November 2004, 296,356 shares were re-allocated to participants receiving the 2004 Grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2004 represents 50% of the maximum entitlement that participants may receive – refer to footnote 3 above for further information.

(5)		In November 2005, 538,947 shares were re-allocated to participants receiving the 2005 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2005 represents 50% of the maximum entitlement that participants may receive – refer to footnote 3 above for further information.

(6)		Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant.

(7)		Performance hurdle was satisfied on 3 October 2004 and as a result 423,500 shares vested to participants of the 2001 grant.

(8)		Performance hurdle must be satisfied within the vesting period, otherwise shares will be forfeited.

(9)		Average Purchase Price refers to the average price of all shares allocated for that grant, including the original purchase price of any reallocated shares.

Reward Shares – Details of Movements


	July 2004 – June 2005												July 2005 – June 2006
Year of Grant
Total Reward Shares	2001			2002			2003			2004			2002			2003			2004			2005

Held by participants at the start of year		437,000			445,825			557,500			—			376,850			462,850			544,900			—
Granted during year ⁽¹⁾		—			—			—			597,975			—			—			—			557,253
Vested during year		(423,500	)		—			—			—			—			—			—			—
Lapsed during year		(13,500	)		(68,975	)		(94,650	)		(53,075	)		(135,000	)		(114,200	)		(121,215	)		(34,505	)

Outstanding at the end of year		—			376,850			462,850			544,900			241,850			348,650			423,685			522,748

Granted from 30 June to date of report		—			—			—			—			—			—			—			—
Vested from 30 June to date of report		—			—			—			—			—			—			—			—
Lapsed from 30 June to date of report		—			(11,400	)		(8,950	)		(8,750	)		(7,750	)		(11,250	)		(15,125	)		(18,175	)

Outstanding as at the date of report		—			365,450			453,900			536,150			234,100			337,400			408,560			504,573


(1)		The total number of shares granted during the year represents 50% of the maximum entitlement that participants may receive.

During the vesting period, Reward Shares are held in Trust. Each participant on behalf of whom Reward Shares are held by the Trustee, has a right to receive dividends. Once the shares vest dividends are paid in relation to those accrued during the vesting period. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period.

For a limited number of executives including overseas based staff a cash-based “share replicator” ERP scheme is operated by way of grants of performance units. A performance unit is a monetary unit with a value linked to the share price of Commonwealth Bank shares. Performance Unit grants are subject to the same vesting conditions as the Reward Share component of the ERP. On meeting the vesting condition, a cash payment is made to executives whereby the value is determined based on the current share price on vesting plus an accrued dividend value. An amount of $4 million has been expensed to the profit and loss account in respect of the year ended 30 June 2006 to reflect future payments which may be required under the “share replicator” plan.

Executive Option Plan (“EOP”)

As previously notified to shareholders, this plan was discontinued in 2000/01.

Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who, being able by virtue of their responsibility, experience and skill to influence the generation of shareholder wealth, were declared by the Board of Directors to be eligible to participate in the Plan. Non-executive Directors were not eligible to participate in the Plan.

Options cannot be exercised before each respective exercise period and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate.

The performance hurdle is the same TSR comparator hurdle as outlined above for the Equity Reward Plan (“ERP”) grants prior to 2002/03.

The EOP was discontinued in 2000/2001 and no options have been granted under the plan during the last five reporting periods. The last grant under EOP was made in September 2000. The performance hurdles for the August 1999 grant and the September 2000 grant were met in 2004.

180 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 33 Share Capital (continued)

Details of issues made under EOP as well as movements for 2004/2005 and 2005/2006 are as follows:

Executive Option Plan (“EOP”)


Commencement				Options
Date	Issue Date	Options Issued		Outstanding		Participants		Exercise Price⁽¹⁾			Exercise Period

3 Nov 1997	11 Dec 1997		2,875,000		—		27	$	15.53	⁽²⁾	4 Nov 00 to 3 Nov 02
25 Aug 1998	30 Sep 1998		3,275,000		—		32	$	19.58	⁽²⁾	26 Aug 01 to 25 Aug 03
24 Aug 1999	24 Sep 1999		3,855,000		190,600		38	$	23.84	⁽²⁾	25 Aug 02 to 24 Aug 09	⁽³⁾
13 Sep 2000	13 Oct 2000		2,002,500		175,800		50	$	26.97	⁽²⁾	14 Sep 03 to 13 Sep 10	⁽⁴⁾


(1)		The Exercise Price is the market value at the commencement date. Market value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the commencement date.

(2)		Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.

(3)		Performance hurdle for the 1999 grant was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009.

(4)		Performance hurdle for the 2000 grant was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.

Details of Movements


				July 2004 – June 2005						July 2005 – June 2006
Year of Grant	1999			2000			1999			2000

Total options:
Held by participants at start of year		1,875,000			1,144,600			450,000			637,300
Exercised during year		(1,425,000	)		(507,300	)		(250,000	)		(437,900	)
Lapsed during year		—			—			(9,400	)		(23,600	)

Outstanding at the end of year		450,000			637,300			190,600			175,800

Granted from 30 June to date of report		—			—			—			—
Exercised from 30 June to date of report		—			(75,400	)		—			—
Lapsed from 30 June to date of report		—			—			—			—

Outstanding as at the date of report		450,000			561,900			190,600			175,800

Summary of shares issued during the period 1 July 2005 to the date of the report as a result of options being exercised are:


Option Issue Date	Shares Issued		Price Paid per Share		Total Consideration Paid

24 September 1999		250,000	$	23. 84	$	5,960,000
13 October 2000		437,900	$	26. 97	$	11,810,163
7 February 2001		60,000	$	26. 97	$	1,618,200
30 October 2001		908,300	$	30. 12	$	27,357,996
15 April 2002		100,000	$	30. 12	$	3,012,000

No amount is unpaid in respect of the shares issued upon exercise of the options during the above period.

Under the Bank’s EOP and ERP an option holder generally has no right to participate in any new issue of securities of the Bank or of a related body corporate as a result of holding the option. The only exception is when there is a pro rata issue of shares to the Bank’s shareholders by way of a bonus issue involving capitalisation (other than in place of dividends or by way of dividend reinvestment).

In this case an option holder is entitled to receive additional shares upon exercise of the options being the number of bonus shares that the option holder would have received if the options had been exercised and shares issued prior to the bonus issue.

Commonwealth Bank of Australia Annual Report 2006 181

Notes to the Financial Statements

Note 33 Share Capital (continued)

Non-Executive Directors Share Plan (“NEDSP”)

The NEDSP provides for the acquisition of shares by Non-Executive Directors through the mandatory sacrifice of 20% of their annual fees (paid on a quarterly basis). Shares purchased are restricted for sale for 10 years or when the Director leaves the Board, whichever is earlier. In addition, Non-Executive Directors can voluntarily elect to sacrifice up to a further 50% of their fees for the acquisition of shares.

Shares are purchased on-market at the current market price and a total of 50,061 shares have been purchased under the NEDSP since the plan commenced in 2001. Since March 2005, shares are now acquired under the plan on a six monthly basis.

Shares acquired under the plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under the NEDSP.

Details of grants under the NEDSP from 1 July 2005 to 30 June 2006 were as follows:


Period	Total Fees Sacrificed		Participants		Shares Purchased		Average Purchase Price

1 April to 30 June 2005	$	112,127		9		2,984	$	37.58
1 July to 31 December 2005	$	226,849		9		5,134	$	44.19

For the current year, $348,000 was expensed through the profit and loss reflecting shares purchased and allocated under the NEDSP.

Note 34 Minority Interests


	Group
	2006		2005
	$M		$M

Controlled entities:
Share capital ⁽¹⁾		508		623
Retained profits and reserves		—		8
Life insurance statutory funds ⁽²⁾		—		1,158

Total Minority Interests		508		1,789


(1)		ASB Perpetual Preference Shares — $505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative. On 22 December 2004, ASB Capital No.2 Ltd, a New Zealand subsidiary, issued NZD350 million (AUD323 million) of perpetual preference shares. Such shares are non-redeemable and carry limited voting rights. Dividends are payable quarterly and are non-cumulative.

(2)		Reclassified to Managed Funds Units on Issue under AIFRS, refer Note 29.

182 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 35 Capital Adequacy

Commonwealth Bank of Australia (“the Bank”) is subject to regulation by the Australian Prudential Regulation Authority (“APRA”) under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks that are consistent with the Basel Accord. These requirements define what is acceptable as capital and provide for standard methods of measuring the risks incurred by the Bank. APRA has set minimum ratios that compare the regulatory capital with risk-weighted on and off balance sheet assets. Regulatory capital requirements are measured for the Bank (known as “Level 1”) and for the Bank and its banking subsidiaries (known as “Level 2”). The life insurance and funds management businesses are not consolidated for capital adequacy purposes.

Regulatory capital is divided into Tier One and Tier Two Capital. Certain deductions are made from the sum of Tier One and Tier Two Capital to arrive at the Capital Base. Tier One Capital primarily consists of shareholders’ equity plus other capital instruments acceptable to APRA, less goodwill and less the intangible element of the investment in life insurance and funds management businesses. Tier Two Capital primarily consists of the collective provision for impairment losses, the General Reserve for Credit Loss and other hybrid and debt instruments acceptable to APRA. The tangible element of the investment in life insurance and funds management businesses is deducted from the sum of Tier One and Tier Two Capital to arrive at the Capital Base.

In accordance with APRA’s methodology, measuring risk requires one of a number of risk weights to be applied to each asset on the balance sheet and to off-balance sheet obligations. The risk weights are 100%, 50%, 20% and 0%. It should be noted that the risk weights are not consistent with the loss experience of the Bank and its subsidiaries. In addition, there is an agreed method for measuring market risk for traded assets.

The Bank actively manages its capital to balance the requirements of various stakeholders (regulators, rating agencies and shareholders). This is achieved by optimising the mix of capital while maintaining adequate capital ratios throughout the financial year.

The regulatory capital ratios of the Bank are shown on page 185. Details of the principal movements in the capital ratios are shown on pages 185 and 186.

Dividends

Banks may not pay dividends if immediately after payment, they are unable to meet the minimum capital requirements. Banks cannot pay dividends from Retained Profits without APRA’s prior approval. Under APRA guidelines, the expected dividend must be deducted from Tier One Capital.

Regulatory Capital Requirements for Other ADIs in the Group

ASB Bank Limited is subject to regulation by the Reserve Bank of New Zealand (“RBNZ”). RBNZ applies a similar methodology to APRA in calculating regulatory capital requirements. At 30 June 2006 ASB Bank Limited had a Tier One ratio of 9.8% and a Total Capital ratio of 10.6%.

Regulatory Capital Requirements for Life Insurance and Funds Management Business

The Group’s life insurance businesses in Australia are regulated by APRA. The Life Insurance Act 1995 includes a framework for the calculation of the regulatory capital requirements for life insurance companies. There are two tiers to the regulatory capital requirements – ‘solvency’ and ‘capital adequacy’. The capital adequacy test for statutory funds is always equal to or greater than the solvency test ⁽¹⁾. At 30 June 2006, for Australian life insurance companies, the estimated excess over capital adequacy within life insurance statutory funds amounted to $191 million in aggregate.

The Group owns two life insurance companies in Australia: Commonwealth Insurance Holdings Limited (“CIHL”), and the Colonial Mutual Life Assurance Society Limited (“CMLA”).

There are no regulatory capital requirements for life insurance companies in New Zealand, though the directors of any company must certify its solvency under the Companies Act 1993. The Group determines the minimum capital requirements for its New Zealand life insurance business according to the Prudential Reserving Guidance Note of the New Zealand Society of Actuaries.

Fund managers in Australia are subject to responsible entity regulation by the Australian Securities and Investment Commission (“ASIC”). The regulatory capital requirements vary for responsible entities depending on the type of Australian Financial Services or Authorised Representatives’ Licence held, but a requirement of up to $5 million of net tangible assets applies.

APRA supervises approved trustees of superannuation funds and requires them to also maintain net tangible assets of at least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity.

The total Group’s life and funds management companies held an estimated $642 million excess over regulatory capital requirements at 30 June 2006 in aggregate.

Regulatory Changes

Basel II

In June 2004, the Basel Committee on Banking Supervision (“the Basel Committee”) issued the Revised Framework for the calculation of capital adequacy for banks, commonly known as Basel II. The objective of the Basel II Framework is to develop capital adequacy guidelines that are more accurately aligned with the individual risk profile of banks.

The Basel II Framework is based on three “pillars”. Pillar 1 covers the capital requirements for banks, Pillar 2 covers the supervisory review process and Pillar 3 relates to market disclosure. The Basel II Framework introduces a capital requirement for operational risk and, for both credit and operational risk, allows a choice between three approaches. The Bank is intending to implement the Advanced Internal Ratings Based Approach (“AIRB”) for credit risk and the Advanced Measurement Approach (“AMA”) for operational risk. Under both these approaches the Bank will be allowed to use its internal models and data for calculating regulatory capital. The Basel II Framework has also introduced a requirement to calculate a capital charge for Interest Rate Risk in the Banking Book. Other than this change, the current capital requirements for market risk are not expected to be significantly affected.

(1) The shareholders fund is subject to a separate capital requirement.

Commonwealth Bank of Australia Annual Report 2006 183

Notes to the Financial Statements

Note 35 Capital Adequacy (continued)

The Bank lodged its Accreditation application for the AIRB and AMA Approaches with APRA on 30 September 2005 and is well advanced in finalising solutions to the remaining requirements. The Bank is working closely with APRA through the Accreditation process. The implementation of Basel II in Australia is expected to take place on 1 January 2008.

International Financial Reporting Standards

The Bank adopted the Australian equivalent of International Financial Reporting Standards (“AIFRS”) on 1 July 2005. However, APRA required reporting under AGAAP accounting principles to continue for regulatory capital purposes until the introduction of revised prudential standards, which take effect on 1 July 2006.

The revised prudential standards will impact Tier One Capital and the Capital Base. However, APRA has granted transition relief in relation to changes to their prudential regulations from 1 July 2006 until 31 December 2007.

Total transition relief is $1,715 million comprised of $1,641 million relief for Tier One Capital and $74 million relief for Upper Tier Two Capital.

Transition relief principally relates to:

•

Excess of Market Value Over Net Assets (“EMVONA”) $1,339 million;

•

Software capitalised expenses $229 million; and

•

Defined benefit deficit $45 million.

The Adjusted Common Equity (“ACE”) ratio at 30 June 2006 was 4.50%. At 1 July 2006, ACE was 4.39% as Standard & Poor’s has not granted transition relief for the impact of software capitalised expenses and defined benefit deficit. EMVONA is already excluded from ACE.

Conglomerate Groups

APRA has advised that a third level of capital adequacy (“Level 3”) will be implemented to coincide with the introduction of Basel II. APRA defines a conglomerate group as a group of companies containing one or more Australian incorporated Authorised Deposit-taking Institutions (“ADIs”). The Bank is an ADI and the Commonwealth Bank Group falls within APRA’s definition of a conglomerate group. Each conglomerate group will be required to hold capital that corresponds to the corporate structure of that conglomerate. The calculation will have regard to all group members and the capacity to move surplus capital from one group entity to another.

The regulatory capital requirements for each conglomerate group will be specific to that group.

The proposals indicate that the use of internal capital estimation and allocation models may be permitted. However, APRA has not yet specified their requirements for internal models, nor when they will complete their review of the Bank’s models.

Whilst the Bank considers that it is strongly capitalised (as evidenced by its credit ratings), no assurance can be given that our models will meet APRA’s requirements or that the Bank meets the Level 3 capital requirements.

Active Capital Management

The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 7.46% to 7.56% during the year reflecting the issue of hybrid securities during the second half of the year. The Total Capital Ratio decreased from 9.75% at 30 June 2005 to 9.66% at 30 June 2006 impacted by the growth in Risk Weighted Assets. Risk Weighted Assets increased from $190 billion at 30 June 2005 to $216 billion at 30 June 2006 due to strong growth in lending assets particularly in the business/corporate sector. The Bank’s credit ratings remained unchanged.

The following significant initiatives were undertaken to actively manage the Bank’s capital:

Tier One Capital

•

Issue of $262 million and $219 million shares in October 2005 and April 2006 respectively to satisfy the Dividend Reinvestment Plan (“DRP”) in respect of the final dividend for 2004/05 and interim dividend for 2005/06;

•

In accordance with APRA guidelines, the estimated issue of $303 million shares to satisfy the DRP in respect of the final dividend for 2005/06;

•

Issue of US$700 million Tier One hybrid in March 2006;

•

Redemption of $700 million PERLS in April 2006;

•

Issue of $1,166 million PERLS III in April 2006; and

•

Completion of a $500 million on-market share buyback.

Tier Two Capital

•

Issue of the equivalent of $840 million Lower Tier Two Capital;

•

In accordance with APRA guidelines, the reduction in Tier Two note and bond issues of $278 million due to amortisation;

•

The call and maturity of the equivalent of $78 million of Tier Two note and bond issues; and

•

Increase in the value of Tier Two note and bond issues of $66 million resulting from changes in foreign exchange movements (whilst these notes are hedged, the unhedged value is included in the calculation of regulatory capital in accordance with APRA regulations).

Deductions from Total Capital

The following movements in deductions have occurred during the period:

•

An increase in deductions due to the Bank’s acquisition of a 19.9% interest in Hangzhou City Commercial Bank for $102 million;

•

An increase in deductions due to a $291 million increase in net tangible assets arising from the retention of profits in the Colonial Group; and

•

A decrease in deductions due to the $145 million profit realised on the sale of CMG Asia in October 2005 being repatriated to the Bank. The balance of the proceeds of sale of $463 million was used to repay part of the non-recourse debt funding in the Bank’s life and funds management business.

184 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 35 Capital Adequacy (continued)


	Group
	2006			2005
	Actual			Actual
Risk-Weighted Capital Ratios	%			%

Tier One		7.56			7.46
Tier Two		3.10			3.21
Less deductions		(1.00	)		(0.92	)

Total		9.66			9.75

Adjusted Common Equity ⁽¹⁾		4.50			4.91


	2006			2005
Regulatory Capital	$M			$M

Tier One Capital
Shareholders’ equity		21,343			26,060
Reverse effect to shareholders’ equity of AIFRS transition ⁽²⁾		7,183			—
Reverse effect of AIFRS during the period to 30 June 2006: ⁽²⁾
Purchase/(sale) and vesting of treasury shares		10			—
Actuarial (gains)/losses from defined benefit superannuation plan		(387	)		—
Realised gains and dividend income on treasury shares held within the Bank’s life insurance statutory funds		(85	)		—
Cash flow hedge reserve		(20	)		—
Employee compensation reserve		(11	)		—
General reserve for credit loss		(92	)		—
Available-for-sale investments		(9	)		—
Defined benefit superannuation plan expense		25			—
Treasury share valuation adjustment		100			—
Preference share capital		(687	)
Issue of hybrid instruments		1,147
Other		(6	)		—

Adjusted shareholders’ equity per APRA’s transitional arrangements		28,511			26,060
Eligible loan capital		281			304
Estimated reinvestment under Dividend Reinvestment Plan ⁽³⁾		303			272
Foreign currency translation reserve related to non-consolidated subsidiaries		160			211
Deduct:
Asset revaluation reserve ⁽⁴⁾		(131	)		(92	)
Expected dividend		(1,668	)		(1,434	)
Goodwill ⁽⁵⁾		(4,416	)		(4,394	)
Intangible component of investment in non–consolidated subsidiaries ⁽⁶⁾		(5,397	)		(5,397	)
Minority interests in entities controlled by non–consolidated subsidiaries		—			(111	)
Minority interests in insurance statutory funds and other funds		(1,158	)		(1,158	)
Capitalised expenses		(122	)		(107	)
Other		(9	)		(13	)

Total Tier One Capital		16,354			14,141

Tier Two Capital
Collective provision for impairment losses ⁽⁷⁾		1,046			—
General reserve for credit loss (pre-tax equivalent) ⁽⁷⁾		500			—

General provision for bad debts		1,546			1,389
FITB related to general provision for bad debts		(464	)		(414	)
Asset revaluation reserve ⁽⁴⁾		131			92
Upper Tier Two note and bond issues		235			237
Lower Tier Two note and bond issues ^{(8) (9)}		5,335			4,783
Other		(58	)		—

Total Tier Two Capital		6,725			6,087

Total Capital		23,079			20,228


(1)		Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with Standard & Poor’s methodology at 30 June 2006.

(2)		APRA requires regulatory capital to continue to be calculated in accordance with AGAAP accounting principles until 1 July 2006. As such, all material changes to capital resulting from the Bank adopting AIFRS accounting standards on 1 July 2005 have been reversed from regulatory capital.

(3)		Based on reinvestment experience related to the Bank’s Dividend Reinvestment Plan.

(4)		The Bank agreed with APRA to adopt AIFRS on 1 July 2005 for the reporting of the Asset Revaluation Reserve.

(5)		Consistent with APRA requirements goodwill is reported on an AGAAP basis.

(6)		Per APRA’s transitional arrangements, it was agreed to deduct the value as at 30 June 2005 of the intangible component of the carrying value of the life insurance and funds management business from Tier One Capital until 1 July 2006.

(7)		In line with current APRA requirements the Bank has established a General Reserve for Credit Loss.

(8)		APRA requires these Lower Tier Two note and bond issues to be included as if they were un–hedged.

(9)		For regulatory capital purposes, Lower Tier Two note and bond issues are amortised by 20% of the original amount during each of the last five years to maturity.

Commonwealth Bank of Australia Annual Report 2006 185

Notes to the Financial Statements

Note 35 Capital Adequacy (continued)


	Group
	2006			2005
Regulatory Capital	$M			$M

Total Capital		23,079			20,228
Deduct:
Investment in non–consolidated subsidiaries (net of intangible component deducted from Tier One Capital):
Shareholders’ net tangible assets in life and funds management businesses		(1,902	)		(2,513	)
Reverse effect of transition to AIFRS ⁽¹⁾		(592	)		—
Capital in other non-consolidated subsidiaries		(256	)		(348	)
Value of acquired inforce business ⁽²⁾		(1,339	)		(1,152	)
Less: non-recourse debt		2,077			2,292

		(2,012	)		(1,721	)
Other deductions		(151	)		(28	)

Capital Base		20,916			18,479


(1)		APRA requires regulatory capital to continue to be calculated in accordance with AGAAP accounting principles until 1 July 2006. As such, all material changes to capital resulting from the Bank adopting AIFRS accounting standards on 1 July 2005 have been reversed from regulatory capital.

(2)		Per APRA’s transitional arrangements, it was agreed to deduct the value as at 30 June 2005 of acquired inforce business from Total Capital, until 1 July 2006. However, values as at 30 June 2005 have been adjusted to reflect the acquisition of the Gandel Group interests in Colonial First State Property Retail Trust and Gandel Retail Management Trust.


	Group
	2006			2005
Adjusted Common Equity ⁽¹⁾	$M			$M

Tier One Capital		16,354			14,141
Deduct:
Eligible loan capital		(281	)		(304	)
Preference share capital		—			(687	)
Other equity instruments		(3,659	)		(1,573	)
Minority interests (net of minority interests component deducted from Tier One Capital)		(508	)		(520	)
Investment in non–consolidated subsidiaries (net of intangible component deducted from Tier One Capital)		(2,012	)		(1,721	)
Other deductions		(151	)		(28	)

Total Adjusted Common Equity		9,743			9,308


(1)		Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Bank’s credit rating. The ACE ratio has been calculated in accordance with the pre AIFRS Standard & Poor’s methodology at 30 June 2006.

186 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 35 Capital Adequacy (continued)

Group

Risk–Weighted

Face Value

Risk Weights

Balance

2006

2005

2006

2005

Risk-Weighted Assets

On Balance Sheet Assets

Cash, claims on Reserve Bank, short term claims on Australian Commonwealth and State Government and Territories, and other zero–weighted assets

23,301

27,447

—

Claims on OECD banks and local governments

16,742

14,754

3,348

2,951

Advances secured by residential property ⁽¹⁾

157,962

143,746

78,981

71,873

All other assets ⁽¹⁾

110,971

92,510

100

110,971

92,510

Total On Balance Sheet Assets – Credit Risk ^{(2) (3)}

308,976

278,457

193,300

167,334

Group

Risk-Weighted

Face Value

Credit Equivalent

Balance

2006

2005

2006

2005

2006

2005

Off Balance Sheet Exposures

Direct credit substitutes

3,598

3,308

3,598

3,308

2,786

2,622

Trade and performance related items

2,365

1,280

999

584

964

540

Commitments

82,634

76,581

16,604

13,839

12,049

10,328

Foreign exchange, interest rate and other market related transactions

1,027,846

885,700

14,342

20,814

3,892

5,881

Total Off Balance Sheet Exposures – Credit Risk ⁽⁴⁾

1,116,443

966,869

35,543

38,545

19,691

19,371

Total Risk-Weighted Assets – Credit Risk

212,991

186,705

Risk-Weighted Assets – Market Risk

3,447

2,854

Total Risk-Weighted Assets

216,438

189,559


(1)		For loans secured by residential property approved after 5 September 1994, a risk weight of 100% applied where the loan to valuation ratio is in excess of 80%. Effective from 28 August 1998, a risk weight of 50% applies to these loans if they are totally insured by an acceptable lender’s mortgage insurer. Loans that are risk-weighted at 100% are reported under “All other assets”.

(2)		The difference between total on balance sheet assets and the Group’s balance sheet reflects the alternative treatment of some assets and provisions as prescribed in APRA’s capital adequacy guidelines; principally goodwill, collective provision for impairment losses, General Reserve for Credit Loss, and investments in life insurance and funds management business.

(3)		Total on balance sheet assets exclude debt and equity securities in the trading book and all on balance sheet positions in commodities, as they are included in the calculation of notional market risk-weighted assets.

(4)		Off balance sheet exposures secured by the residential property account for $8.9 billion of off balance sheet credit equivalent assets ($4.2 billion of off balance sheet risk-weighted assets).

Commonwealth Bank of Australia Annual Report 2006 187

Notes to the Financial Statements

Note 36 Maturity Analysis of Monetary Assets and Liabilities

The maturity distribution of monetary assets and liabilities is based on contractual terms. The majority of the longer term monetary assets are variable rate products, with actual maturities shorter than the contractual terms.

Therefore this information is not relied upon by the Bank in the management of its interest rate risk in Note 43.

Group

Maturity Period At 30 June 2006

0 to 3

3 to 12

1 to 5

Over 5

Not

At Call

Overdrafts

months

years

Specified

Total

Assets

Cash and liquid assets

2,016

—

3,115

—

5,131

Receivables due from other financial institutions

—

5,923

1,156

—

7,107

Assets at fair value through Income Statement:

Trading ⁽¹⁾

—

15,758

—

15,758

Insurance

153

—

995

1,900

2,653

1,945

16,791

24,437

Other

182

—

2,124

576

—

2,944

Derivative assets

—

7,484

986

833

372

—

9,675

Available-for-sale investments

—

2,278

1,255

4,532

2,022

1,116

11,203

Loans, advances and other receivables ⁽²⁾

15,182

5,107

16,643

18,115

58,373

146,802

(1,046

)

259,176

Bank acceptances of customers

—

17,531

779

—

18,310

Other monetary assets

—

3,803

255

4,176

Total monetary assets

17,562

5,107

75,654

24,334

66,973

151,171

17,116

357,917

Liabilities

Deposits and other public borrowings⁽³⁾

97,262

—

48,772

24,167

2,938

—

173,227

Payables to other financial institutions

1,380

—

8,999

805

—

11,184

Liabilities at fair value through Income Statement

1,987

—

5,426

2,677

2,880

841

—

13,811

Derivative liabilities

—

6,471

877

1,047

2,425

—

10,820

Bank acceptances

—

17,531

779

—

18,310

Insurance policy liabilities

—

22,225

Debt issues and loan capital

—

9,478

14,700

42,838

21,470

—

88,486

Managed funds units on issue

—

1,109

Other monetary liabilities

—

5,056

209

469

420

205

6,369

Total monetary liabilities

100,639

—

101,733

44,214

50,172

25,244

23,539

345,541


(1)		Trading assets are purchased without the intention to hold until maturity and are categorised as maturing within 3 months.

(2)		$141 billion of this figure represents owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio has historically been less than 5 years.

(3)		Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 43.

188 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 36 Maturity Analysis of Monetary Assets and Liabilities (continued)


	Group
	Maturity Period At 30 June 2005
					0 to 3		3 to 12		1 to 5		Over 5		Not
	At Call		Overdrafts		months		months		years		years		Specified			Total
	$M		$M		$M		$M		$M		$M		$M			$M

Assets
Cash and liquid assets		970		—		5,085		—		—		—		—			6,055
Receivables due from other financial institutions		371		—		4,943		408		50		315		—			6,087
Trading securities ⁽¹⁾		—		—		14,631		—		—		—		—			14,631
Investment securities		—		—		1,467		1,325		5,279		2,767		—			10,838
Loans, advances and other receivables ⁽²⁾		4,837		5,225		21,766		30,518		57,143		110,247		(1,390	)		228,346
Bank acceptances of customers		—		—		16,387		399		—		—		—			16,786
Life assets		179		—		4,128		477		3,471		3,130		16,099			27,484
Other monetary assets		1		—		15,479		20		1		17		115			15,633

Total monetary assets		6,358		5,225		83,886		33,147		65,944		116,476		14,824			325,860


Liabilities
Deposits and other public borrowings ⁽³⁾		93,682		—		39,974		29,957		4,274		139		—			168,026
Payables to other financial institutions		809		—		6,054		1,160		—		—		—			8,023
Bank acceptances		—		—		16,387		399		—		—		—			16,786
Life liabilities		—		—		—		—		—		—		24,694			24,694
Debt issues and loan capital		—		—		11,978		18,164		33,467		13,447		—			77,056
Other monetary liabilities		8		—		16,807		30		9		7		174			17,035

Total monetary liabilities		94,499		—		91,200		49,710		37,750		13,593		24,868			311,620


(1)		Trading securities are purchased without the intention to hold until maturity and are categorised as maturing within 3 months.

(2)		$125 billion of this figure represents owner occupied housing loans. While most of these loans would have a contractual term of 20 years or more, and are analysed accordingly, the actual average term of the portfolio has historically been less than 5 years.

(3)		Includes substantial “core” deposits that are contractually at call customer savings and cheque accounts. History demonstrates such accounts provide a stable source of long term funding for the Bank. Also refer to Interest Rate Risk Sensitivity table in Note 43.

Commonwealth Bank of Australia Annual Report 2006 189

Notes to the Financial Statements

Note 37 Financial Reporting by Segments

Group

Year Ended 30 June 2006

Primary Segment

Funds

Business Segments

Banking

Management

Insurance

Total

Income Statement

Interest income

19,758

—

19,758

Premium and related revenue

—

1,052

Other income

3,036

3,687

1,031

7,754

Total revenue

22,794

3,687

2,083

28,564

Interest expense

13,244

—

13,244

Segment result before income tax

4,559

643

657

5,859

Income tax expense

(1,328

)

(331

)

(241

)

(1,900

)

Segment result after income tax

3,231

312

416

3,959

Minority interests

(28

)

—

(31

)

Segment result after income tax and minority interests

3,203

309

416

3,928

Net profit attributable to shareholders of the Bank

3,203

309

416

3,928

Non–Cash Expenses

Intangible asset amortisation

—

Bad debts expense

398

—

398

Depreciation

157

164

Defined benefit superannuation plan expense

—

Other

—

Balance Sheet

Total assets

340,254

19,201

9,648

369,103

Acquisition of property, plant & equipment, intangibles and other non–current assets

510

612

Associate investments

106

190

Total liabilities

324,185

16,423

7,152

347,760

190 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 37 Financial Reporting by Segments (continued)

Group

Secondary Segment

Year Ended 30 June

Geographical Segments

2006

2005

Income Statement

Revenue

Australia

22,802

79.8

20,003

79.5

New Zealand

4,021

14.1

3,361

13.4

Other countries ⁽¹⁾

1,741

6.1

1,783

7.1

Total Revenue

28,564

100.0

25,147

100.0

Net Profit Attributable to Shareholders of the Bank

Australia

3,200

81.5

2,778

81.7

New Zealand

387

9.8

363

10.7

Other countries ⁽¹⁾

341

8.7

259

7.6

Total Net Profit Attributable to Shareholders of the Bank

3,928

100.0

3,400

100.0

Assets

Australia

304,831

82.6

280,255

83.0

New Zealand

43,318

11.7

41,383

12.3

Other countries ⁽¹⁾

20,954

5.7

15,766

4.7

Total Assets

369,103

100.0

337,404

100.0

Acquisition of Property, Plant & Equipment, Intangibles and Other Non–Current Assets

Australia

564

92.2

303

86.6

New Zealand

5.5

10.6

Other countries ⁽¹⁾

2.3

2.8

Total

612

100.0

350

100.0


(1)		Other countries were: United Kingdom, United States of America, Japan, Singapore, Malta, Hong Kong, Grand Cayman, Fiji, Indonesia, China and Vietnam.

The geographical segment represents the location in which the transaction was booked.

192 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 38 Life Insurance Business

The following information is provided to disclose the statutory life insurance business transactions contained in the Group financial statements and the underlying methods and assumptions used in their calculations.

All financial assets within the life statutory funds have been determined to back either life insurance or life investment contracts. Also refer to Note 1 (hh). The insurance segment result is prepared on a business segment basis, refer to Note 37.

Life Insurance

Life Investment

Contracts

Group

2006

2005

2006

2005

2006

2005

Summarised Income Statement

Premium and related revenue

949

414

1,363

1,500

Outward reinsurance premiums expense

(176

)

(179

)

(231

)

Claims expense

(526

)

(127

)

(653

)

(422

)

Reinsurance recoveries

128

—

128

122

Investment revenue (excluding investments in subsidiaries)

Equity securities

205

1,686

1,891

1,635

Debt securities

230

372

602

795

Property

174

169

343

353

Other

(48

)

413

365

411

Increase/(decrease) in insurance policy liabilities

(192

)

(2,165

)

(2,357

)

(2,686

)

Operating income

744

759

1,503

1,477

Acquisition expenses

163

184

295

Maintenance expenses

173

191

364

413

Management expenses

Other expense

Operating profit before income tax

376

511

887

690

Income tax attributable to operating profit

148

255

403

314

Operating profit after income tax

228

256

484

376

Minority interests in operating profit after income tax

—

)

Net profit after income tax

228

n/a

⁽¹⁾

256

n/a

⁽¹⁾

484

371

Sources of life insurance operating profit

The operating profit after income tax is represented by:

Emergence of planned profit margins

104

200

304

206

Difference between actual and planned experience

(41

)

(21

)

Effects of changes to underlying assumptions

—

Reversal of previously recognised losses or loss recognition on groups of related products

—

Investment earnings on assets in excess of policyholder liabilities

167

Other movements ⁽²⁾

121

—

Operating profit after income tax

228

n/a

⁽¹⁾

256

n/a

⁽¹⁾

484

371

Life insurance premiums received and receivable

2,649

3,112

Life insurance claims paid and payable

4,803

4,632


(1)		No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.

(2)		Includes profit on sale of the Hong Kong insurance business.

The disclosure of the components of operating profit after income tax expense are required to be separated between policyholders’ and shareholders’ interests. As policyholder profits are an expense of the Group and not attributable to shareholders, no such disclosure is required.

Commonwealth Bank of Australia Annual Report 2006 193

Notes to the Financial Statements

Note 38 Life Insurance Business (continued)

Life Insurance

Life Investment

Contracts

Group

Reconciliation of movements in

2006

2005

2006

2005

2006

2005

policy liabilities

Contract policy liabilities

Gross policy liabilities opening balance

25,241

—

25,241

AIFRS transition adjustment

(19,108

)

19,108

—

Net increase/(decrease) in contract liabilities reflected in the summarised Income Statement

135

2,165

2,300

Contract contributions recognised in policy liabilities

1,329

1,389

Contract withdrawals recognised in policy liabilities

(281

)

(4,133

)

(4,414

)

Non cash movements

(1,361

)

(559

)

(1,920

)

FX translation adjustment

(97

)

(126

)

(223

)

Gross policy liabilities closing balance

4,589

n/a

⁽¹⁾

17,784

n/a

⁽¹⁾

22,373

n/a

⁽¹⁾

Liabilities ceded under reinsurance

Opening balance

(205

)

—

(205

)

Decrease/(increase) in reinsurance assets reflected in the summarised Income Statement

—

Closing balance

(148

)

n/a

⁽¹⁾

—

n/a

⁽¹⁾

(148

)

n/a

⁽¹⁾

Net policy liabilities at 30 June

Expected to be realised within 12 months

545

3,625

4,170

Expected to be realised in more than 12 months

3,896

14,159

18,055

Total Insurance Policy Liabilities

4,441

n/a

⁽¹⁾

17,784

n/a

⁽¹⁾

22,225

n/a

⁽¹⁾


(1)		No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.

194 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 38 Life Insurance Business (continued)

Sensitivity Analysis

The Group conducts sensitivity analyse’s to quantify the exposure to risk of changes in the key underlying variables such as interest rate, equity prices, mortality, morbidity and inflation. The valuations included in the reported results and the Group’s best estimate of future performance are calculated using certain assumptions about these variables.

The movement in any key variable will impact the performance and net assets of the Group and as such represents a risk.


Variable		Impact of movement in underlying variable

Expense risk		An increase in the level or inflationary growth of expenses over assumed levels will decrease profit and shareholder equity.

Interest rate risk		Depending on the profile of the investment portfolio, the investment income of the Group will decrease as interest rates decrease. This may be offset to an extent by changes in the market value of fixed interest investments. The impact on profit and shareholder equity depends on the relative profiles of assets and liabilities, to the extent that these are not matched.

Mortality rates		For insurance contracts that pay a death benefit, higher rates of mortality increase the claim cost and therefore reduce both profit and shareholder equity. For lifetime annuity contracts, lower mortality rates increase the duration of annuity payments and therefore reduce both profit and shareholder equity.

Morbidity rates		The cost of health-related claims depends on both the incidence of policyholders becoming ill and the duration which they remain ill. Higher than expected incidence and duration would be likely to increase claim costs, reducing profit and shareholders’ equity.

Discontinuance		The impact of the discontinuance rate assumption depends on a range of factors including the type of contract, the surrender value basis (where applicable) and the duration in force. For example, an increase in discontinuance rates at earlier durations of life insurance contracts usually has a negative effect on performance and net assets. However, due to the interplay between the factors, there is not always an adverse outcome from an increase in discontinuance rates.

Market Risk		For contracts where benefit payments depend on the value of underlying assets, market risk is borne by policyholders. However, the Group derives fee income based on the value of the underlying funds; hence revenues are always sensitive to changes in market value. For assets which are not contractually linked to policy liabilities, the Group is exposed to market risk.

The table below shows the sensitivity of insurance contract liabilities (gross and net of reinsurance), current years profits and shareholder equity to changes in assumptions on key variables. The sensitivity of the insurance contract liability to changes in assumptions will be dependent on whether the product is (or remains) in loss recognition after the assumptions change and whether the change is made to an economic assumption. The interest rate sensitivity includes the impact of the change on both the policy liabilities and assets.


	Gross (before reinsurance)									Net (after reinsurance)
				Policy						Policy			Shareholder
	Profit/(loss)			Liabilities			Profit/(loss)			Liabilities			Equity
	2006			2006			2006			2006			2006
	$M			$M			$M			$M			$M

Result of change in variables ⁽¹⁾
Interest rates – 1% increase		(17	)		(10	)		(18	)		(8	)		(18	)
Mortality and morbidity on lump sum products – 10% increase in total costs		(2	)		2			(2	)		2			(2	)
Annuitant mortality – 20% increase in rate of future mortality improvement		(12	)		16			(12	)		16			(12	)
Morbidity on Income Protection – 10% increase in total cost		(7	)		7			(6	)		6			(6	)
Discontinuance – 10% increase in discontinuance rates		—			—			—			—			—
Expenses – 10% increase in maintenance expenses assumption		(1	)		1			(1	)		1			(1	)


(1)		Represents Australia and New Zealand only.

Commonwealth Bank of Australia Annual Report 2006 195

Notes to the Financial Statements

Note 38 Life Insurance Business (continued)

Life Investment Contract Liabilities

Investment contracts consist of a financial instrument and an investment management services element, both of which are measured at fair value. The resulting liability to policyholders is closely linked to the performance and the value of the assets (after tax) that back those liabilities. The fair value of such liabilities is therefore the same as the fair value of those assets, after tax on the basis charged to the policyholders.

Life Insurance Contract Liabilities

Appropriately qualified actuaries have been appointed for each life insurance entity and they have reviewed and satisfied themselves as to the accuracy of the contract liabilities included in this financial report, including compliance with the regulations of the Life Insurance Act (Life Act) 1995 where appropriate. Details are set out in the various statutory returns of these life insurance entities.


	Life Insurance
	Contracts
	2006			2005
Components of life insurance contract liabilities	$M			$M

Future policy benefits ⁽¹⁾		6,205
Future bonuses		1,128
Future expenses		1,810
Future profit margins		1,321
Future charges for acquisition expenses		(407	)
Balance of future premiums		(5,705	)
Provisions for bonuses not allocated to participating policyholders		89

Total Contract Liabilities		4,441			n/a	⁽²⁾


(1)		Including bonuses credited to policyholders in prior years.

(2)		No comparative balances provided as exemption elected when adopting Insurance Contracts AIFRS accounting from 1 July 2005.

Taxation

Taxation has been allowed for in the determination of policy liabilities in accordance with the relevant legislation applicable in each market.

Actuarial Methods and Assumptions

Insurance contract policy liabilities have been calculated in accordance with AASB 1038 (Life Insurance Contracts) and the Margin on Services (MoS) methodology as set out in Actuarial Standard 1.04 — Valuation Standard (‘AS1.04’) issued by the Insurance Actuarial Standards Board (‘LIASB’). The principal methods and profit carriers used for particular product groups were as follows:


Product Type	Method	Profit Carrier

Individual
Conventional Investment account Lump sum risk Income stream risk Immediate annuities	Projection Projection Projection Projection Projection	Bonuses or expected claim payment Bonuses or funds under management Premiums/expected claim payment Expected claim payments Annuity payments

Group
Investment account Lump sum risk Income stream risk	Projection Accumulation Projection	Bonuses or funds under management Not applicable Expected claim payments

The ‘Projection Method’ measures the present values of estimated future policy cash flows to calculate policy liabilities. The policy cash flows incorporate investment income, premiums, expenses, redemptions and benefit payments.

Bonuses were amounts added, at the discretion of the life insurer, to the benefits currently payable under Participating Business. Under the Life Act, bonuses are a distribution to policyholders of profits and may take a number of forms including reversionary bonuses, interest credits and terminal bonuses (payable on the termination of the policy).

196 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 38 Life Insurance Business (continued)

Actuarial Assumptions

Set out below is a summary of the material assumptions used in the calculation of policy liabilities.

Discount Rates

These were the rates used to discount future cash flows to determine their net present value in the policy liabilities. The discount rates were risk free rates or were determined with reference to the expected earnings rate of the assets that support the policy liabilities adjusted for taxation where relevant.

The following table shows the applicable rates for the major classes of business in Australia and New Zealand. The changes relate to changes in long term earnings rates and asset mix.


	June 2006		June 2005
Class of Business ⁽¹⁾	Rate Range %		Rate Range %

Traditional – ordinary business (after tax)		6.00–6. 75		5.52–6. 26
Traditional – superannuation business (after tax)		7.33–8. 26		6.74–7. 67
Annuity based (after tax)		5.79–6. 30		5.71–6. 49
Term insurance – ordinary business (before tax)		5.58–5. 81		5.11–5. 50
Term insurance – superannuation business (before tax)		5.58–5. 81		5.11–5. 50
Income protection business (before tax)		5.58–5. 81		5.11
Investment account – ordinary business (after tax)		4.21		3.74
Investment account – superannuation business (after tax)		5.12		4.55
Investment account – exempt (after tax)		5.98		5.31


(1)		For New Zealand, investment earning rates assumed were 3.9% to 5.6% net of tax.

Bonuses

The valuation assumes that the long-term supportable bonuses will be paid, which is in line with company bonus philosophy. There have been no significant changes to these assumptions.

Maintenance Expenses

The maintenance expenses are based on an internal analysis of experience and are assumed to increase in line with inflation each year and to be sufficient to cover the cost of servicing the business in the coming year after adjusting for one-off expenses. For participating business, expenses continue on the previous charging basis with adjustments for actual experience, and are assumed to increase in line with inflation each year.

Investment Management Expenses

Investment management expense assumptions now vary by asset classes and are based on the recently negotiated investment fees as set out in Fund Management Agreements. There has been no significant change to overall investment fees.

Inflation

The inflation assumption is consistent with the investment earning assumptions.

Benefit Indexation

The indexation rates are based on an analysis of past experience and estimated long term inflation and vary by business and product type. There have been no significant changes to these assumptions.

Taxation

The taxation basis and rates assumed vary by market and product type.

Voluntary Discontinuance

Discontinuance rates were based on recent company and industry experience and vary by market, product, age and duration inforce. The experience has been broadly in line with assumptions. There have been no significant changes to these assumptions.

Surrender Values

Current surrender value bases were assumed to apply in the future. There have been no significant changes to these assumptions.

Mortality and Morbidity

Rates vary by sex, age, product type and smoker status. Rates were based on standard mortality tables applicable to each market e.g. IA95-97 in Australia for risk, IM/IF80 for annuities, adjusted for recent company and industry experience where appropriate. Mortality and morbidity assumptions have been reduced on some products.

Commonwealth Bank of Australia Annual Report 2006 197

Notes to the Financial Statements

Note 38 Life Insurance Business (continued)

Risk Management Policies and Procedures

The financial condition and operating results of the Life Insurance Business in the Group are affected by a number of key financial and non-financial risks. The objectives and policies in respect of managing these risks are set out below.

Insurance risk is controlled by ensuring underwriting standards adequately identify potential risk, retaining the right to amend premiums on risk policies where appropriate and through the use of reinsurance. The experience of the Group’s life insurance business and those of the industry as a whole are reviewed annually.

Terms and Conditions of Insurance Contracts

The nature of the terms of the insurance contracts written is such that certain external variables can be identified on which related cash flows for claim payments depend. The tables below provide an overview of the key variables upon which the related cash flows are dependent.


			Key variables that affect the
		Nature of compensation for	timing and uncertainty of future
Type of Contract	Detail of contract workings	claims	cash flows
Non-participating life insurance contracts with fixed and guaranteed terms (Term Life, Trauma and Disability)	Guaranteed benefits paid on death, ill health or maturity that are fixed and guaranteed and not at the discretion of the issuer.	Benefits, defined by the insurance contracts, are determined by the contract. They are not directly affected by the performance of underlying assets or the performance of the contracts as a whole.	Mortality Morbidity Discontinuance rates Expenses

Life insurance contracts with discretionary participating benefits (endowment and whole of life)	These policies include a clearly defined initial guaranteed sum assured which is payable on death. The guaranteed amount is multiple of the amount that is increased throughout the duration of the policy by the addition of regular annual bonuses which, once added, are not removed. Bonuses are also added on maturity.	Benefits arising from the discretionary participation feature are based on the performance of a specified pool of contracts or a specified type of contract.	Market earnings rates Mortality Discontinuance rates Expenses

Solvency

Australian Life Insurers

Australian life insurers are required to hold prudential reserves in excess of the amount of policy liabilities. These reserves are required to support solvency requirements and provide protection against adverse experience. Actuarial Standard AS2.04 — ‘Solvency Standard’ (‘AS2.04’) prescribes a minimum solvency requirement and the minimum level of assets required to be held in each statutory fund. All controlled Australian insurance entities complied with the solvency requirements of AS2.04. Further information is available from the individual statutory returns of subsidiary life insurers.

Overseas Life Insurers

Overseas life insurance subsidiaries were required to hold reserves in excess of policy liabilities in accordance with local Acts and prudential rules. Each of the overseas subsidiaries complied with local requirements. Further information is available from the individual statutory returns of subsidiary life insurers.

Managed Assets and Fiduciary Activities

Arrangements are in place to ensure that asset management and other fiduciary activities of controlled entities are independent of the life insurance funds and other activities of the Bank.

Disaggregated Information

Life insurance business is conducted through a number of life insurance entities in Australia and overseas. Under the Australian Life Insurance Act 1995, life insurance business is conducted within one or more separate statutory funds, which are distinguished from each other and from the shareholders’ funds. The financial statements of Australian life insurers prepared in accordance with AASB 1038 (and which are lodged with the relevant Australian regulators) show all major components of the financial statements disaggregated between the various life insurance statutory funds and their shareholder funds and as well as between investment linked business and those relating to non-investment linked businesses.

198 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 39 Remuneration of Auditors


	Group					Bank
	2006			2005		2006		2005
	$’000			$’000		$’000		$’000

Amounts paid or due and payable for audit services to:
Ernst & Young		9,481			7,921		7,559		4,084
Other Auditors		176			114		—		—

		9,657			8,035		7,559		4,084
Amounts paid or due and payable for non-audit services to Ernst & Young:
Audit related services		5,122			2,077		1,660		1,664
Taxation services		—			16		—		8
All other services
Other services		1,423			327		782		11

		6,545	⁽¹⁾		2,420		2,442		1,683

Total Remuneration of Auditors		16,202			10,455		10,001		5,767


(1)		An additional amount of $4,056,000 was paid to Ernst & Young by way of fees paid for Non-Audit Services provided to entities not consolidated into the Financial Statements, being managed investment schemes and superannuation funds. $3,923,000 of this amount relates to statutory audits, with the residual relating to reviews attestations and assurances.

The Audit Committee has considered the non-audit services provided by Ernst & Young and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence.

Audit related fees principally include audit of the Group’s US Forms 20-F and 6-K, services in relation to regulatory requirements and other services that only the external auditor can provide, as well as investigations and reviews of internal control systems and financial or regulatory information.

Taxation fees include income tax and GST compliance and related advice, and tax technology and related training.

All other fees principally include transaction support services related to potential and actual acquisition and disposition transactions and advice regarding implementation of revised compliance and regulatory requirements.

Note 40 Commitments for Capital Expenditure Not Provided for in the Accounts


	Group				Bank
	2006		2005		2006		2005
	$M		$M		$M		$M

Not later than one year		36		13		14		13

Total Commitments for Capital Expenditure Not Provided for in the Accounts		36		13		14		13

Commonwealth Bank of Australia Annual Report 2006 199

Notes to the Financial Statements

Note 41 Lease Commitments – Property, Plant and Equipment


	Group				Bank
	2006		2005		2006		2005
	$M		$M		$M		$M

Commitments in respect of non-cancellable operating lease agreements due:
Not later than one year		298		297		258		263
Later than one year but not later than five years		732		635		610		540
Later than five years		255		214		214		165

Total Lease Commitments – Property, Plant and Equipment		1,285		1,146		1,082		968


Group’s share of lease commitments of associated entities due:
Not later than one year		3		—
Later than one year but not later than five years		3		—
Later than five years		2		—

Total Lease Commitments – Property, Plant and Equipment		8		—

Lease Arrangements

Leases entered into by the Group are for the purpose of accommodating the business needs. Leases may be over retail, commercial, industrial and residential premises and reflect the needs of the occupying business and market conditions. All leases are negotiated using either internal or external professional property resources acting for the Group.

Rental payments are determined in terms of relevant lease requirements, usually reflecting market rentals.

The Group as lessee has no purchase options over premises occupied. In a small number of cases, the Group as lessee has a right of first refusal if the premises are to be sold.

There are no restrictions imposed on the Group’s lease of space other than those forming part of the negotiated lease arrangements for each specific premise.

200 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 42 Contingent Liabilities, Assets and Commitments

The Group is involved in a range of transactions that give rise to contingent and/or future liabilities which are distinct from transactions and other events that result in the recognition of liabilities. These transactions meet the financing requirements of customers and include endorsed bills of exchange, letters of credit, guarantees and commitments to provide credit.

Details of contingent liabilities and off balance sheet business are:

These transactions combine varying levels of credit, interest rate, foreign exchange and liquidity risk. In accordance with Bank policy, exposure to any of these transactions is not carried at a level that would have a material adverse effect on the financial condition of the Bank and its controlled entities.

Group

Face Value

Credit Equivalent

2006

2005

2006

2005

Credit risk related instruments

Guarantees

2,592

2,438

2,592

2,438

Standby letters of credit

342

321

342

321

Bill endorsements

230

276

230

276

Documentary letters of credit

613

185

123

Performance related contingents

1,753

1,095

876

547

Commitments to provide credit

82,162

76,162

16,135

13,421

Other commitments

8,048

8,279

1,179

942

Total Credit Risk Related Instruments

95,740

88,756

21,477

17,982

Guarantees represent unconditional undertakings by the Group to support the obligations of its customers to third parties.

Standby letters of credit are undertakings by the Group to pay, against production of documents, an obligation in the event of a default by a customer.

Bill endorsements relate to bills of exchange that have been endorsed by the Group and represent liabilities in the event of default by the acceptor and the drawer of the bill.

Documentary letters of credit represent an undertaking to pay or accept drafts drawn by an overseas supplier of goods against production of documents in the event of payment default by a customer.

Performance related contingents involve undertakings by the Group to pay third parties if a customer fails to fulfil a contractual non-monetary obligation.

Commitments to provide credit include all obligations on the part of the Group to provide credit facilities. These credit facilities are both fixed and variable.

Fixed rate or fixed spread commitments extended to customers that allow net settlement of the change in value of the commitment are written options and are recorded at fair value. Refer Note 11.

Other commitments include the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. Other commitments also include obligations, not already disclosed to extend credit that are irrevocable because they cannot be withdrawn at the discretion of the Bank without the risk of incurring significant penalty or expense. In addition commitments to purchase or sell loans are included in other commitments.

The transactions are categorised and credit equivalents calculated under APRA guidelines for the risk based measurement of capital adequacy. The credit equivalent amounts are a measure of the potential loss to the Group in the event of non-performance by the counterparty.

The credit equivalent exposure from direct credit substitutes (guarantees, standby letters of credit and bill endorsements) is the face value of the transaction, whereas the credit equivalent exposure to documentary letters of credit and performance related contingents is 20% and 50% respectively of the face value. The exposure to commitments to provide credit is calculated by applying given credit conversion factors to the face value to reflect the duration, the nature and the certainty of the contractual undertaking to provide the facility. The amounts reflected assume that the amounts may be fully advanced. The contractual amount of these instruments is the maximum amount at risk if the customer fails to meet its obligations. The risk is similar to the risk involved in extending loan facilities.

As the potential loss depends on the performance of a counterparty, the Group utilises the same credit policies and assessment criteria for off balance sheet business as it does for on balance sheet business and if it is deemed necessary, collateral is obtained based on management’s credit evaluation of the counterparty. If a probable loss is identified, suitable provisions are raised.

Contingent Assets

The credit risk related contingent liabilities of $95,740 million (2005: $88,756 million) detailed above also represent contingent assets of the Group. Such commitments to provide credit may in the normal course convert to loans and other assets of the Group.

Litigation

Neither the Commonwealth Bank nor any of its controlled entities is engaged in any litigation or claim which is likely to have a materially adverse effect on the business, financial condition or operating results of the Commonwealth Bank or any of its controlled entities. Where some loss is probable and reliably estimatable an appropriate provision has been made.

Commonwealth Bank of Australia Annual Report 2006 201

Notes to the Financial Statements

Note 42 Contingent Liabilities, Assets and Commitments (continued)

Fiduciary Activities

The Group and its associated entities conduct investment management and other fiduciary activities as responsible entity, trustee, custodian or manager for numerous investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail trusts. The amounts of funds concerned that are not reported in the Group’s balance sheet are as follows:


	2006		2005
	$M		$M

Funds under administration
Australia		99,000		77,208
United Kingdom		15,526		11,914
New Zealand		9,353		8,579
Asia		6,842		2,404

Total		130,721		100,105

Certain entities within the Group act as responsible entity or trustee of virtually all managed investment schemes (“schemes”), wholesale and retail trusts (“trusts”) managed by the Group in Australia, the United Kingdom and New Zealand. The above funds under administration do not include on balance sheet investments and policyholder liabilities held in the statutory funds of the life insurance business (refer to Note 10) where an entity within the Group may act as a trustee. Where entities within the Group act as responsible entity of managed investment schemes, obligations may exist under the relevant Constitutions whereby upon request from a scheme member, the responsible entity has an obligation to redeem units from the assets of those schemes. Liabilities are incurred by these entities in their capacity as responsible entity or trustee. Rights of Indemnity are held against the schemes and trusts whose assets exceeded their liabilities at 30 June 2006. The Bank does not provide a general guarantee of the performance or obligations of its subsidiaries.

Long Term Contracts

In June 2006, the Bank entered into a 6 year contract with EDS (Australia) Pty Ltd, relating to the provision of Information Technology Services. The contract was signed on 30 June 2006 and it is effective from 1 July 2006.

In 1997, the Bank entered into a ten year contract with EDS (Australia) Pty Ltd, relating to the provision of Information Technology Services. This arrangement is in place for remaining services until 10 October 2006.

In 2000, the Bank entered into a five year agreement with TCNZ Australia Pty Ltd for the provision of telecommunications services. In late 2005, the Bank entered into two separate agreements with Gen-i Pty Ltd for the provision of Network Perimeter Security Services from 1 January 2006 until 1 January 2008 as well as Data Communications Services effective from 1 September 2005 until 1 September 2008. The remainder of telecommunication services, with the exception of Eftpos and Remote Access Services, currently provided under the Telecommunications Services Agreement by Gen-i to the Bank, were extended until 1 September 2008.

In 2004, the Bank entered into an agreement with Optus Pty Ltd for the provision of Eftpos Telecommunications Services from 21 October 2004 until 21 October 2007.

In 2005, the Bank entered into an agreement with Telstra Corporation Pty Ltd for the provision of Remote Access Services from 14 July 2005 until 14 July 2008.

Failure to Settle Risk

The Bank is subject to a credit risk exposure in the event that another financial institution fails to settle for its payments clearing activities, in accordance with the regulations and procedures of the following clearing systems of the Australian Payments Clearing Association Limited: The Australian Paper Clearing System (“Clearing Stream 1”), The Bulk Electronic Clearing System (“Clearing Stream 2”), The Consumer Electronic Clearing System (“Clearing Stream 3”) and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’). This credit risk exposure is unquantifiable in advance, but is well understood, and is extinguished upon settlement at 9am each business day.

Service Agreements

The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and other Group Key Management Personnel at 30 June 2006 was $6.3 million (2005: $7.1 million).

202 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk

The Group in its daily operations is exposed to a number of market risks. Market risk relates to the risk that market rates and prices will change and that this will have an adverse affect on the profitability and/or net worth of the Group, e.g. an adverse interest rate movement. Market risk also includes the operational risks of market access for funding and liquidity.

Under the authority of the Board of Directors, the Risk Committee of the Board ensures that all the market risk exposure is consistent with the business strategy and within the risk tolerance of the Group. Regular market risk reports are tabled before the Risk Committee of the Board.

Within the Group, market risk is greatest in the balance sheets of the banking and insurance businesses. Market risk also arises in the course of its intermediation activities in financial services and in financial markets trading.

Market Risk in Balance Sheet Management

The Risk Committee of the Board approves the Bank’s balance sheet market risk policies and limits. Implementation of the policy is delegated to the Group Executives of the associated business units with senior management oversight by the Group’s Asset and Liability Committee.

For bank balance sheets, market risk includes liquidity risks, funding risks, interest rate risk and foreign exchange risk. On life and general insurance balance sheets, market risk is part of the principal means by which long term liabilities are actuarially managed. In this sense and in contrast to banking, market risk is structural for these businesses.

Liquidity risk

Balance sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group manages liquidity requirements by currency and by geographical location of its operations. Subsidiaries are also included in the Group’s liquidity policy framework.

Liquidity policies are in place to manage liquidity in a day-to-day sense, and also under crisis scenarios.

Under current APRA Prudential Standards, each bank is required to develop a liquidity management strategy that is appropriate for itself, based on its size and nature of operations. The objectives of the Group’s funding and liquidity policies are to:

•		Ensure all financial obligations are met when due;

•		Provide adequate protection, even under crisis scenarios, at lowest cost; and

•		Achieve sustainable, lowest-cost funding within the limitations of funding diversification requirements.

Funding risk

Funding risk is the risk of over-reliance on a funding source to the extent that a change in that funding source could increase overall funding costs or cause difficulty in raising funds. The funding requirements are integrated into the Group’s liquidity and funding policy with its aim to assure the Group has a stable diversified funding base without over-reliance on any one market sector.

Domestically, the Group continues to obtain a large portion of its AUD funding from a stable retail deposit base, which has a lower interest cost than wholesale funds. The relative size of the Group’s retail base has enabled it to source funds at a lower than average rate of interest than the other major Australian banks. Funding diversification is particularly important in offshore markets where the absence of any ‘natural’ offshore funding base means the Group is principally reliant on wholesale money market and capital market sources for funding. The Group has imposed internal prudential constraints on the relative mix of offshore sources of funds.

204 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)

The following table outlines the range of financial instruments used by the Group to raise deposits and borrowings, both within Australia and overseas. Funds are raised from well-diversified sources and there are no material concentrations in these categories.


	Group
	2006		2005
Market Risk	$M		$M

Australia
Cheque accounts		31,962		27,455
Savings accounts		32,070		31,947
Term deposits		43,210		41,582
Cash management accounts		23,387		21,831
Debt issues		65,426		52,384
Bank acceptances		18,310		16,786
Certificates of deposits		18,185		16,038
Life insurance policy liabilities		20,001		20,636
Loan capital		8,887		6,291
Securities sold under agreements to repurchase and short sales		1,380		2,258
Liabilities at fair value through Income Statement		1,948		—
Managed funds units on issue		1,109		—
Other		3,354		2,353

Total Australia		269,229		239,561

Overseas
Deposits and interbank		30,863		32,230
Commercial paper		7,710		12,266
Life insurance policy liabilities		2,224		4,058
Other debt issues		5,455		6,115
Loan capital		1,008		—
Liabilities at fair value through Income Statement		11,863		—

Total Overseas		59,123		54,669

Total Funding Sources		328,352		294,230


Provisions and other liabilities		19,408		20,531

Total Liabilities		347,760		314,761

Commonwealth Bank of Australia Annual Report 2006 205

Notes to the Financial Statements

Note 43 Market Risk (continued)

Interest rate risk (Banking)

Interest rate risk in the bank balance sheet arises from the potential for a change in interest rates to change the expected net interest earnings, in the current reporting period and in future years. Similarly, interest rate risk also arises from the potential for a change in interest rates to cause a fluctuation in the fair value of the financial instruments. Interest rate risk arises from the structure and characteristics of the Group’s assets, liabilities and equity, and in the mismatch in repricing dates of its assets and liabilities. The objective is to manage the interest rate risk to achieve stable and sustainable net interest earnings in the long term.

The Group measures and manages balance sheet interest rate risk from two perspectives:

(a) Next 12 months earnings

The risk to the net interest earnings over the next 12 months for a change in interest rates is measured on a monthly basis. Risk is measured assuming an immediate 1% parallel movement in interest rates across the whole yield curve as well as other interest rate scenarios with variations in size and timing of interest rate movements. Potential variations in net interest earnings are measured using a simulation model that takes into account the projected change in balance sheet asset and liability levels and mix. Assets and liabilities with pricing directly based on market rates are repriced based on the full extent of the rate shock that is applied. Risk on the other assets and liabilities (those priced at the discretion of the Group) is measured by taking into account both the manner the products have repriced in the past as well as the expected change in price based on the current competitive market environment.

The figures in the following table represent the potential change to net interest earnings during the year (expressed as a percentage of expected net interest earnings in the next 12 months) based on a 1% parallel rate shock and the expected change in price of assets and liabilities held for purposes other than trading.


(expressed as a percentage of expected next	2006		2005
12 months’ earnings)	%		%

Average monthly exposure		1.1		1.1
High month exposure		2.1		1.5
Low month exposure		0.2		0.5

(b) Economic value

Some of the Group’s assets and liabilities have interest rate risk that is not fully captured within a measure of risk to the next 12 months earnings. To measure this longer-term sensitivity, the Group utilises an economic value-at-risk (“VaR”) analysis. This analysis measures the potential change in the net present value of cash flows of assets and liabilities. Cash flows for fixed rate products are included on a contractual basis, after adjustment for forecast prepayment activities. Cash flows for products repriced at the discretion of the Group are based on the expected repricing characteristics of those products.

The total cash flows are revalued under a range of possible interest rate scenarios using the VaR methodology. The interest rate scenarios are based on actual interest rate movements that have occurred over one year and five year historical observation periods. The measured VaR exposure is an estimate to a 97.5% confidence level (one-tail) of the potential loss that could occur if the balance sheet positions were to be held unchanged for a one month holding period. For example, VaR exposure of $1 million means that in 97.5 cases out of 100, the expected net present value will not decrease by more than $1 million given the historical movement in interest rates.

The figures in the following table represent the net present value of the expected change in future earnings in all future periods for the remaining term of all existing assets and liabilities held for hedging purposes.


	2006		2005
	$M		$M

Exposure as at 30 June		117		7
Average monthly exposure		53		24
High month exposure		127		78
Low month exposure		7		5

206 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)

The following table represents the Group’s contractual interest rate sensitivity for repricing mismatches as at 30 June 2006 and corresponding weighted average effective interest rates. The net mismatch represents the net value of assets, liabilities and off balance sheet instruments that may be repriced in the time periods shown.

All assets and liabilities are shown according to contractual repricing dates. Options are shown in the mismatch report using the delta equivalents of the option face values.

Interest Rate Risk Sensitivity


	Repricing Period at 30 June 2006
	Balance																	Not			Weighted
	Sheet		0 to 1		1 to 3			3 to 6			6 to 12		1 to 5		Over 5			Interest			Average
	Total		month		months			months			months		years		years			Bearing			Rate
	$M		$M		$M			$M			$M		$M		$M			$M			%

Australia
Assets
Cash and liquid assets		4,393		3,413		—			—			—		—		—			980			5.05
Receivables due from other financial institutions		3,191		2,348		687			37			—		—		—			119			5.31
Assets at fair value through Income Statement:
Trading		12,832		12,763		50			—			—		—		—			19			6.17
Insurance		22,091		660		333			1,800			102		2,099		1,777			15,320			6.28
Other		394		343		38			—			13		—		—			—			6.20
Derivative assets		6,924		—		—			—			—		—		—			6,924			—
Available-for-sale investments		6,011		1,657		385			369			193		2,453		340			614			7.41
Loans, advances and other receivables		217,054		140,016		16,557			6,677			13,371		38,294		3,204			(1,065	)		7.54
Bank acceptances of customers		18,310		—		—			—			—		—		—			18,310			—
Investment property		258		—		—			—			—		—		—			258			—
Property, plant and equipment		1,157		—		—			—			—		—		—			1,157			—
Investment in associates		178		—		—			—			—		—		—			178			—
Intangible assets		7,057		—		—			—			—		—		—			7,057			—
Deferred tax assets		610		—		—			—			—		—		—			610			—
Other assets		4,270		—		—			—			—		—		—			4,270			—

Total Assets		304,730		161,200		18,050			8,883			13,679		42,846		5,321			54,751			6.37

Liabilities
Deposits and other public borrowings		150,194		102,755		19,413			11,508			8,611		1,924		111			5,872			4.53
Payables due to other financial institutions		3,354		2,967		161			215			6		5		—			—			4.70
Liabilities at fair value through Income Statement		1,948		1,948		—			—			—		—		—			—			5.52
Derivative liabilities		8,557		—		—			—			—		—		—			8,557			—
Bank acceptances		18,310		—		—			—			—		—		—			18,310			—
Current tax liabilities		368		—		—			—			—		—		—			368			—
Deferred tax liabilities		1,234		—		—			—			—		—		—			1,234			—
Other provisions		794		—		—			—			—		—		—			794			—
Insurance policy liabilities		20,001		—		—			—			—		—		—			20,001	⁽¹⁾		—
Debt issues		65,426		10,562		25,766			7,791			2,457		14,854		3,938			58			5.99
Managed funds units on issue		1,109		—		—			—			—		—		—			1,109			—
Bills payable and other liabilities		5,156		—		—			—			—		—		—			5,156			—

		276,451		118,232		45,340			19,514			11,074		16,783		4,049			61,459

Loan capital		8,887		1,093		2,484			628			—		1,266		3,416			—			5.22

Total Liabilities		285,338		119,325		47,824			20,142			11,074		18,049		7,465			61,459			4.01


Shareholders’ Equity
Share capital and other equity		19,782		—		—			—			—		—		—			19,782			—
Minority interests		3		—		—			—			—		—		—			3			—

Total Shareholders’ Equity		19,785		—		—			—			—		—		—			19,785			—


Derivatives		⁽²⁾		2,827		(25,735	)		9,069			11,447		1,378		1,014			—			⁽³⁾


Net Mismatch		⁽²⁾		44,702		(55,509	)		(2,190	)		14,052		26,175		(1,130	)		(26,493	)		⁽³⁾
Cumulative Mismatch		⁽²⁾		44,702		(10,807	)		(12,997	)		1,055		27,230		26,100			(393	)		⁽³⁾

(1)		Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.

(2)		No balance sheet amount applicable.

(3)		No rate applicable.

Commonwealth Bank of Australia Annual Report 2006 207

Notes to the Financial Statements

Note 43 Market Risk (continued)

Interest Rate Risk Sensitivity


	Repricing Period at 30 June 2006
	Balance																			Not			Weighted
	Sheet		0 to 1			1 to 3		3 to 6			6 to 12			1 to 5			Over 5			Interest			Average
	Total		month			months		months			months			years			years			Bearing			Rate
	$M		$M			$M		$M			$M			$M			$M			$M			%

Overseas
Assets
Cash and liquid assets		738		630			67		9			—			—			—			32			1.64
Receivables due from other financial institutions		3,916		3,112			445		157			—			7			28			167			3.64
Assets at fair value through Income Statement:
Trading		2,926		467			1,470		513			10			299			166			1			6.20
Insurance		2,346		832			1		3			1			17			23			1,469			2.09
Other		2,550		1,551			911		26			8			9			—			45			7.42
Derivative assets		2,751		—			—		—			—			—			—			2,751			—
Available-for-sale investments		5,192		471			2,493		1,172			352			684			21			(1	)		4.73
Loans, advances and other receivables		42,122		10,102			5,812		5,433			4,981			15,446			419			(71	)		7.37
Property, plant and equipment		157		—			—		—			—			—			—			157			—
Investment in associates		12		—			—		—			—			—			—			12			—
Intangible assets		752		—			—		—			—			—			—			752			—
Deferred tax assets		40		—			—		—			—			—			—			40			—
Other assets		871		—			—		—			—			—			—			871			—

Total Assets		64,373		17,165			11,199		7,313			5,352			16,462			657			6,225			6.25

Liabilities
Deposits and other public borrowings		23,033		10,694			6,937		2,567			1,015			651			3			1,166			5.69
Payables due to other financial institutions		7,830		5,144			1,018		283			178			322			—			885			3.69
Liabilities at fair value through Income Statement		11,863		5,541			3,993		1,271			406			641			11			—			4.83
Derivative liabilities		2,263		—			—		—			—			—			—			2,263			—
Current tax liabilities		10		—			—		—			—			—			—			10			—
Deferred tax liabilities		102		—			—		—			—			—			—			102			—
Other provisions		27		—			—		—			—			—			—			27			—
Insurance policy liabilities		2,224		—			—		—			—			—			—			2,224	⁽¹⁾		—
Debt issues		13,165		4,767			4,093		69			136			4,100			—			—			5.22
Bills payable and other liabilities		897		—			—		—			—			—			—			897			—

		61,414		26,146			16,041		4,190			1,735			5,714			14			7,574

Loan capital		1,008		—			—		—			—			253			740			15			3.96

Total Liabilities		62,422		26,146			16,041		4,190			1,735			5,967			754			7,589			4.65


Shareholders’ Equity
Share capital and other equity		1,053		—			—		—			—			—			—			1,053			—
Minority interests		505		—			—		—			—			—			—			505			—

Total Shareholders’ Equity		1,558		—			—		—			—			—			—			1,558			—


Derivatives		⁽²⁾		5,632			12,782		(2,464	)		(3,650	)		(11,806	)		(494	)		—			⁽³⁾


Net Mismatch		⁽²⁾		(3,349	)		7,940		659			(33	)		(1,311	)		(591	)		(2,922	)		⁽³⁾
Cumulative Mismatch		⁽²⁾		(3,349	)		4,591		5,250			5,217			3,906			3,315			393			⁽³⁾

(1)		Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.

(2)		No balance sheet amount applicable.

(3)		No rate applicable.

208 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)

Interest Rate Risk Sensitivity


	Repricing Period at 30 June 2005
	Balance																			Not			Weighted
	Sheet		0 to 1		1 to 3			3 to 6			6 to 12			1 to 5			Over 5			Interest			Average
	Total		month		months			months			months			years			years			Bearing			Rate
	$M		$M		$M			$M			$M			$M			$M			$M			%

Australia
Assets
Cash and liquid assets		4,804		3,423		—			—			—			—			—			1,381			4.95
Receivables from other financial institutions		3,528		2,816		534			82			—			—			—			96			3.55
Trading securities		11,026		11,015		—			—			—			—			—			11			4.77
Life insurance investment assets		22,771		3,097		882			76			358			2,467			2,123			13,768			4.67
Investment securities		5,137		1,295		136			325			165			2,517			697			2			5.98
Loans, advances and other receivables		191,471		113,394		12,329			9,401			14,707			40,810			2,097			(1,267	)		7.18
Bank acceptances of customers		16,786		—		—			—			—			—			—			16,786			—
Investment property		252																			252			—
Property, plant and equipment		978		—		—			—			—			—			—			978			—
Investment in associates		52																			52			—
Intangible assets		7,249		—		—			—			—			—			—			7,249			—
Deferred tax assets		651																			651			—
Other assets		15,562		—		—			—			—			—			—			15,562			—

Total Assets		280,267		135,040		13,881			9,884			15,230			45,794			4,917			55,521			5.71


Liabilities
Deposits and other public borrowings		141,111		93,698		21,222			12,435			4,479			3,288			136			5,853			4.27
Payables due to other financial institutions		2,708		2,086		544			56			9			13			—			—			3.45
Bank acceptances		16,786		—		—			—			—			—			—			16,786			—
Current tax liabilities		748		—		—			—			—			—			—			748			—
Deferred tax liabilities		921		—		—			—			—			—			—			921			—
Other provisions		830		—		—			—			—			—			—			830			—
Insurance policy liabilities		20,636		—		—			—			—			—			—			20,636⁽¹⁾			—
Debt issues		52,384		7,122		19,389			3,218			2,848			19,298			509			—			5.76
Bills payable and other liabilities		16,777		—		—			—			—			—			—			16,777			—

		252,901		102,906		41,155			15,709			7,336			22,599			645			62,551

Loan capital		6,291		608		2,202			146			—			1,939			1,396			—			7.13

Total Liabilities		259,192		103,514		43,357			15,855			7,336			24,538			2,041			62,551			3.70


Shareholders’ Equity
Share capital and other equity		15,429		—		—			—			—			—			—			15,429			—
Minority interests		1,270		—		—			—			—			—			—			1,270			—

Total Shareholders’ Equity		16,699		—		—			—			—			—			—			16,699			—


Off Balance Sheet Items
Swaps		⁽²⁾		3,296		(17,956	)		4,543			3,322			6,726			69			—			⁽³⁾
Options		⁽²⁾		—		84			(15	)		—			(69	)		—			—			⁽³⁾
Futures		⁽²⁾		—		3,420			3,196			(3,890	)		(2,208	)		(518	)		—			⁽³⁾

Net Mismatch		⁽²⁾		34,696		(43,351	)		1,787			7,166			26,214			2,392			(24,527	)		⁽³⁾
Cumulative Mismatch		⁽²⁾		34,696		(8,655	)		(6,868	)		298			26,512			28,904			4,377			⁽³⁾

(1)		Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.

(2)		No balance sheet amount applicable.

(3)		No rate applicable.

Commonwealth Bank of Australia Annual Report 2006 209

Notes to the Financial Statements

Note 43 Market Risk (continued)

Interest Rate Risk Sensitivity


	Repricing Period at 30 June 2005
	Balance																		Not			Weighted
	Sheet		0 to 1			1 to 3		3 to 6			6 to 12			1 to 5			Over 5		Interest			Average
	Total		month			months		months			months			years			years		Bearing			Rate
	$M		$M			$M		$M			$M			$M			$M		$M			%

Overseas
Assets
Cash and liquid assets		1,251		1,094			82		—			1			—			—		74			2.77
Receivables from other financial institutions		2,559		1,017			1,143		351			—			—			—		48			3.60
Trading securities		3,605		291			2,335		152			97			492			233		5			5.81
Life insurance investment assets		4,713		1,005			64		9			25			433			831		2,346			2.32
Investment securities		5,701		500			3,406		573			151			713			357		1			4.37
Loans, advances and other receivables		36,875		11,633			3,633		3,027			6,449			12,158			98		(123	)		7.49
Property, plant and equipment		154		—			—		—			—			—			—		154			—
Intangible assets		407		—			—		—			—			—			—		407			—
Other assets		1,872		—			—		—			—			—			—		1,872			—

Total Assets		57,137		15,540			10,663		4,112			6,723			13,796			1,519		4,784			6.04

Liabilities
Deposits and other public borrowings		26,915		16,866			4,995		3,220			1,102			542			186		4			5.44
Payables due to other financial institutions		5,315		3,538			670		870			237			—			—		—			4.23
Current tax liabilities		85		—			—		—			—			—			—		85			—
Other provisions		41		—			—		—			—			—			—		41			—
Insurance policy liabilities		4,058					—		—			—			—			—		4,058	⁽¹⁾		—
Debt issues		18,381		3,378			4,059		9,389			387			1,122			46		—			2.28
Bills payable and other liabilities		774		—			—		—			—			—			—		774			—

Total Liabilities		55,569		23,782			9,724		13,479			1,726			1,664			232		4,962			3.80


Shareholders’ Equity
Share capital and other equity		5,425		—			—		—			—			—			—		5,425			—
Minority interests		519		—			—		—			—			—			—		519			—

Total Shareholders’ Equity		5,944		—			—		—			—			—			—		5,944			—


Off Balance Sheet Items
Swaps		⁽²⁾		3,942			9,056		(1,039	)		(3,254	)		(8,832	)		87		39			⁽³⁾
FRAs		⁽²⁾		(459	)		463		(551	)		547			—			—		—			⁽³⁾
Futures		⁽²⁾		—			1,167		(592	)		(575	)		—			—		—			⁽³⁾


Net Mismatch		⁽²⁾		(4,759	)		11,625		(11,549	)		1,715			3,300			1,374		(6,083	)		⁽³⁾
Cumulative Mismatch		⁽²⁾		(4,759	)		6,866		(4,683	)		(2,968	)		332			1,706		(4,377	)		⁽³⁾

(1)		Technically, the insurance policy liabilities are not interest bearing, but the amount of the liability may change in line with changes in interest rates. This is particularly so with investment linked policies.

(2)		No balance sheet amount applicable.

(3)		No rate applicable.

As noted above the cumulative mismatch reflects contractual repricing periods. The balance sheet is managed based on assessments of expected pricing behaviour having regard to historical trends and competitive positioning. The Group has a significant portfolio of loans with fixed interest rates maturing in the one to five years repricing period.

Funding is principally raised from retail deposits with at call variable interest rates. The interest rate risk exposure is managed in accordance with the principles outlined above in this note.

210 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)


	Exchange Rate					Interest Rate
	Related Contracts					Related Contracts						Total
	2006		2005			2006			2005			2006			2005
	$M		$M			$M			$M			$M			$M

Within 6 months		—		(8	)		6			(51	)		6			(59	)
Within 6 months – 1 year		—		(7	)		7			17			7			10
Within 1 – 2 years		—		29			55			(20	)		55			9
Within 2 – 5 years		—		34			(10	)		(208	)		(10	)		(174	)
After 5 years		—		65			30			(87	)		30			(22	)

Net deferred gain/(loss) ⁽¹⁾		—		113			88			(349	)		88			(236	)

(1)

Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further details refer to Note 11. The 2006 data reflects those hedge derivatives classified as Cash Flow hedges which have been deferred into the Cash Flow Hedge Reserve.

Foreign exchange risk

Foreign exchange risk is the risk to earnings and value caused by a change in foreign exchange rates. The Group principally hedges balance sheet foreign exchange risks except for long term investments in offshore subsidiaries.

Net deferred gains and losses (2005 only)

Net deferred unrealised gains and losses arising from derivative hedging contracts entered into in order to manage risk arising from assets, liabilities, commitments of anticipated future transactions, together with the expected term of deferral are shown above.

Net deferred gains and losses are only in respect of derivatives and must be considered in the context of the total interest rate and foreign exchange rate risk of the balance sheet. The deferred gains and losses on both derivatives and on balance sheet assets and liabilities are included in the economic VaR measure outlined above.

Market Risk in Financial Services

Market risk in the life insurance business arises from mismatches between asset returns and guaranteed liability returns on some policy changes (which may not be capable of being hedged through matching assets), adverse movements in market prices affecting fee income on investment-linked policies and from returns obtained from investing the shareholders capital held in each life company. As at 30 June 2005, shareholders funds in the life insurance business are invested 75% in income assets (cash and fixed interest) and 25% in growth assets (shares and property) with the asset mix varying from company to company. Policyholder funds are invested to meet policyholder reasonable expectations without putting the shareholder at undue risk.

The Group provides operating leases to customers on equipment such as motor vehicles, computers and industrial equipment. Residual value risk is the risk that the amount recouped by selling the equipment at lease expiry will be less than the residual value of the lease. In managing this risk the Group utilises policies, limits, controls and industry experts to ensure that the residual value of equipment is prudently estimated at the start of the lease and the Group realises the maximum value of the equipment at lease expiry.

Market Risk in Financial Markets Trading

The Group trades and distributes financial markets products and provides risk management services to clients on a global basis.

The objectives of the Group’s financial markets activities are to:

•

Provide risk management products and services to customers;

•

Efficiently assist in managing the Group’s own market risks; and

•

Conduct profitable trading within a controlled framework, leveraging off the Group’s market presence and expertise.

The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury and capital market instruments, including a broad range of securities and derivatives.

In foreign exchange, the Group is a participant in all major currencies and is a major participant in the Australian dollar market, providing services for central banks, institutional, corporate and retail customers. Positions are also taken in the interest rate, debt, equity and commodity markets based on views of future market movements.

Income is earned from spreads achieved through market making and from taking market risk. All trading positions are valued at fair value and taken to profit and loss on a mark to market basis. Trading profits also take account of interest, dividends and funding costs relating to trading activities. Market liquidity risk is controlled by concentrating trading activity in highly liquid markets.

Assets at fair value through Income Statement — Trading are further detailed in Note 10 to the financial statements. Note 2 to the financial statements details Financial Markets Trading Income contribution to the income of the Group. In addition, this contribution provides important diversification benefits to the Group.

AASB 7 Disclosure

The Trading book of the Banking business measures their market value using a Value-at-Risk (VaR) model. Further discussion around assumptions used in the quantitative analysis is given in the Integrated Risk Management section.

Derivative Contracts (2005 only)

Under AIFRS the Group now discloses all Derivative Assets and Liabilities at fair value on the balance sheet. As a result further disclosure is outlined in Note 11.

Commonwealth Bank of Australia Annual Report 2006 211

Notes to the Financial Statements

Note 43 Market Risk (continued)

The following table details the Group’s outstanding derivative contracts as at the end of the year. Each derivative type is split between those held for ‘Trading’ purposes and those for ‘Hedging’ purposes. Derivatives classified as ‘Hedging’ are transactions entered into in order to manage the risks arising from non traded assets, liabilities and commitments in Australia and offshore centres.

The ‘Face Value’ is the notional or contractual amount of the derivatives. This amount is not necessarily exchanged and predominantly acts as a reference value upon which interest payments and net settlements can be calculated and on which revaluation is based.

The “Credit Equivalent” is calculated using a standard APRA formula and is disclosed for each product class. This amount is a measure of the on balance sheet loan equivalent of the derivative contracts, which includes a specified percentage of the face value of each contract plus the market value of all contracts with an unrealised gain at balance date. The Credit Equivalent does not take into account any benefits of netting exposures to individual counterparties.

The accounting policy for derivative financial instruments is set out in Note 1 (ff).


					Group
	Face Value				Credit Equivalent
	2006		2005		2006		2005
	$M		$M		$M		$M

Derivatives
Exchange rate related contracts
Forwards
Trading		245,943		164,491		4,080		3,542
Fair value through Income Statement		6,802		—		242		—
Hedging ⁽¹⁾		1,253		31,776		16		786

Total Forwards		253,998		196,267		4,338		4,328

Swaps
Trading		104,942		85,978		2,730		7,439
Fair value through Income Statement		5,838		—		334		—
Hedging ⁽¹⁾		16,231		46,969		330		2,165

Total Swaps		127,011		132,947		3,394		9,604

Futures
Trading		8,063		25		—		—
Fair value through Income Statement		—		—		—		—
Hedging		—		—		—		—

Total Futures		8,063		25		—		—

Options purchased and sold
Trading		17,051		21,523		240		304
Fair value through Income Statement		252		—		8		—
Hedging		101		141		3		5

Total Options Purchased and Sold		17,404		21,664		251		309

Total Exchange Rate Related Contracts		406,476		350,903		7,983		14,241

(1)

Derivative book restructured to meet AIFRS hedging guidelines.

212 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)


					Group
			Face Value		Credit Equivalent
	2006		2005		2006		2005
	$M		$M		$M		$M

Interest rate related contracts
Forwards
Trading		64,865		25,312		19		6
Fair value through Income Statement		7,691		—		2		—
Hedging		—		120		—		2

Total Forwards		72,556		25,432		21		8

Swaps
Trading ⁽¹⁾		404,493		273,456		4,031		3,185
Fair value through Income Statement		8,069		—		67		—
Hedging		95,321		146,799		283		2,843

Total Swaps		507,883		420,255		4,381		6,028

Futures
Trading		83,075		44,362		—		—
Fair value through Income Statement		1,916		—		—		—
Hedging		1,500		14,558		—		249

Total Futures		86,491		58,920		—		249

Options purchased and sold
Trading		34,899		26,659		238		185
Fair value through Income Statement		627		—		2		—
Hedging		—		4,098		—		43

Total Options Purchased and Sold		35,526		30,757		240		228

Total Interest Rate Related Contracts		702,456		535,364		4,642		6,513


Credit risk related contracts
Swaps
Trading		3,073		3,002		263		250
Fair value through Income Statement		275		—		—		—
Hedging		—		3,972		—		290

Total Swaps		3,348		6,974		263		540

Total Credit Risk Related Contracts		3,348		6,974		263		540


Equity risk related contracts
Swaps
Hedging		159		276		3		44
Futures
Hedging		—		115		—		115
Options purchased and sold
Trading		—		395		—		27
Fair value through Income Statement		171		—		19		—
Hedging		—		29		—		3

Total Options Purchased and Sold		171		424		19		30

Total Equity Risk Related Contracts		330		815		22		189


Commodity contracts
Forwards
Trading		1,919		—		234		—
Fair value through Income Statement		5		—		1		—

Total Forwards		1,924		—		235		—

Swaps
Trading		2,944		—		563		—
Hedging		47		—		1		—

Total Swaps		2,991		—		564		—

Options purchased and sold
Trading		1,522		—		152		—

Total Options Purchased and Sold		1,522		—		152		—

Total Commodity Contracts		6,437		—		951		—

Total Derivative Exposures		1,119,047		894,056		13,861		21,483

(1)

Derivative book restructured to meet AIFRS hedging guidelines.

The Group has also entered swaps to hedge property values and income related to investment property risk. In the prior year, these had a face value of $252 million and a credit equivalent of $5 million.

Commonwealth Bank of Australia Annual Report 2006 213

Notes to the Financial Statements

Note 43 Market Risk (continued)

Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further details refer Note 11.

The comparatives for the fair or market value of trading derivative contracts, disaggregated into gross unrealised gains and gross unrealised losses, are shown below.

These unrealised gains and losses were recognised immediately in profit and loss, and together with net realised gains on trading derivatives and realised and unrealised gains and losses on trading securities are reported within trading income under foreign exchange earnings, trading securities or other financial instruments (refer to Note 2). In aggregate, derivatives trading was profitable for the Group during the prior year.


							Group
	Fair Value						Average Fair Value
	2006			2005			2006			2005
	$M			$M			$M			$M

Exchange rate related contracts
Forwards contracts:
Gross unrealised gains					1,532						2,147
Gross unrealised losses					(1,686	)					(2,306	)

Total Forwards		n/a	⁽¹⁾		(154	)		n/a	⁽¹⁾		(159	)

Swaps:
Gross unrealised gains					6,603						6,409
Gross unrealised losses					(6,177	)					(5,382	)

Total Swaps		n/a	⁽¹⁾		426			n/a	⁽¹⁾		1,027

Futures:
Gross unrealised gains					1						1
Gross unrealised losses					—						(1	)

Total Futures		n/a	⁽¹⁾		1			n/a	⁽¹⁾		—

Options purchased and sold:
Gross unrealised gains					146						262
Gross unrealised losses					(191	)					(351	)

Total Options Purchased and Sold					(45	)					(89	)

Net Unrealised Gains on Exchange Rate Related Contracts		n/a	⁽¹⁾		228			n/a	⁽¹⁾		779


Interest rate related contracts
Forward contracts:
Gross unrealised gains					2						6
Gross unrealised losses					(2	)					(5	)

Total Forwards		n/a	⁽¹⁾		—			n/a	⁽¹⁾		1

Swaps:
Gross unrealised gains					3,727						3,538
Gross unrealised losses					(3,761	)					(3,792	)

Total Swaps		n/a	⁽¹⁾		(34	)		n/a	⁽¹⁾		(254	)

Futures:
Gross unrealised gains					10						14
Gross unrealised losses					(28	)					(15	)

Total Futures		n/a	⁽¹⁾		(18	)		n/a	⁽¹⁾		(1	)

Options purchased and sold:
Gross unrealised gains					108						74
Gross unrealised losses					(50	)					(48	)

Total Options Purchased and Sold					58						26

Net Unrealised Gains/(Losses) on Interest Rate Related Contracts		n/a	⁽¹⁾		6			n/a	⁽¹⁾		(228	)


Credit related trading derivative contracts
Swaps:
Gross unrealised gains					4						7
Gross unrealised losses					(8	)					(12	)

Net Unrealised Losses on Credit Related Contracts		n/a	⁽¹⁾		(4	)		n/a	⁽¹⁾		(5	)


Equity related contracts
Options purchased and sold:
Gross unrealised gains					13						13
Gross unrealised losses					(13	)					(13	)

Net Unrealised Gains on Equity Related Contracts		n/a	⁽¹⁾		—			n/a	⁽¹⁾		—

Net Unrealised Gains on Trading Derivative Contracts		n/a	⁽¹⁾		230			n/a	⁽¹⁾		546

(1)

Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further details refer Note 11.

214 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 43 Market Risk (continued)

In accordance with the accounting policy set out in Note 1, the above trading derivative contract revaluations for 2005 have been presented on a gross basis on the balance sheet.


				Group
				Fair Value
	2006			2005
	$M			$M

Unrealised gains on trading derivatives (Note 22)					12,144
Unrealised losses on trading derivatives (Note 30)					11,914

Net unrealised gains on trading derivatives		n/a	⁽¹⁾		230

(1)

Following the adoption of AASB 132 and AASB 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further details refer Note 11.

Note 44 Retirement Benefit Obligations


			Date of Last Actuarial
Name of Plan	Type	Form of Benefit	Assessment of the Fund

Officers’ Superannuation Fund	Defined Benefits ⁽¹⁾ and	Indexed pension and
(“OSF”)	Accumulation	lump sum	30 June 2003

Commonwealth Bank of Australia (UK) Staff Benefits	Defined Benefits ⁽¹⁾ and	Indexed pension and
Scheme (“CBA(UK)SBS”)	Accumulation	lump sum	1 July 2005


1)		The defined benefit formulae are generally comprised of final salary and service.

Contributions

For the plans listed in the above table, entities of the Group contribute to the respective plans in accordance with the Trust Deeds following the receipt of actuarial advice.

With the exception of contributions corresponding to salary sacrifice benefits, the Bank ceased contributions to the OSF from 8 July 1994. Further, the Bank ceased contributions to the OSF relating to salary sacrifice benefits from 1 July 1997.

An actuarial assessment of the OSF, as at 30 June 2003 was completed during the year ended 30 June 2004. In line with the actuarial advice contained in the assessment, the Bank does not intend to make contributions to the OSF until further consideration of the next actuarial assessment of the OSF as at 30 June 2006. An actuarial assessment of the OSF at 30 June 2006 is currently in progress.

An actuarial assessment of the CBA(UK)SBS at 1 July 2005 revealed a deficit of GBP32 million (AUD79 million at 30 June 2006 exchange rate). Following from this assessment, the Bank agreed to contribute to the recommended contributions to finance future accruals of defined benefits (dollar contributions estimated at AUD6 million per annum at 30 June 2006 exchange rate) and to continue making additional contributions of GBP3.24 million per annum (AUD8 million per annum at 30 June 2006 exchange rate) payable over 14 years to finance the fund deficit.

Funding Status of Defined Benefit Plans


			CBA (UK)
	OSF ⁽¹⁾		SBS ⁽²⁾			Total
	$M		$M			$M

Net Market Value of Assets ⁽³⁾		6,540		380			6,920
Present Value of Accrued Benefits ⁽⁴⁾		4,593		427			5,020

Difference between Net Market Value of Assets And Present Value of Accrued Benefits		1,947		(47	)		1,900
Differences as a percentage of plan assets (%)		30		(12	)		28
Value of Vested Benefits ⁽⁴⁾		4,593		422			5,015


(1)		The values for the OSF are the fund actuary’s estimates as at 31 March 2006.

(2)		The values for the CBA(UK)SBS are the fund actuary’s estimates as at 31 March 2006.

(3)		These values have been extracted from the latest available fund financial statements (which are unaudited).

(4)		The Present Value of Accrued Benefits and Value of Vested Benefits for the OSF have been calculated in accordance with the Australian Accounting Standard AAS25 – Financial Reporting by Superannuation Plans. For CBA(UK)SBS, the Present Value of Accrued Benefits and Value of Vested Benefits have been calculated in accordance with relevant UK actuarial standards and practices.

Commonwealth Bank of Australia Annual Report 2006 215

Notes to the Financial Statements

Note 44 Retirement Benefit Obligations (continued)

Defined Benefit Superannuation Plans

The amounts reported in the balance sheet are reconciled as follows:


				OSF			CBA(UK)SBS									Total
	2006			2005			2006			2005			2006			2005
	$M			$M			$M			$M			$M			$M

Present value of funded obligations		(3,388	)		(3,593	)		(430	)		(408	)		(3,818	)		(4,001	)
Fair value of plan assets		4,616			4,310			365			329			4,981			4,639

Total pension asset as at 30 June		1,228			717			(65	)		(79	)		1,163			638
Present value of unfunded obligations		—			—			—			—			—			—
Unrecognised prior service cost		—			—			—			—			—			—
Unrecognised actuarial gains/(losses)		—			—			—			—			—			—
Unrecognised past service cost		—			—			—			—			—			—

Asset/(liability) in balance sheet as at 30 June		1,228			717			(65	)		(79	)		1,163			638

Amounts in the balance sheet:
Liabilities (Note 30)		—			—			(65	)		(79	)		(65	)		(79	)
Assets (Note 22)		1,228			717			—			—			1,228			717

Net Asset		1,228			717			(65	)		(79	)		1,163			638


The amounts recognised in the Income Statement are as follows:
Current service cost		(39	)		(48	)		(5	)		(5	)		(44	)		(53	)
Interest cost		(173	)		(197	)		(21	)		(20	)		(194	)		(217	)
Expected return on plan assets		312			298			20			18			332			316
Past service cost		—			—			—			—			—			—
Employer financed benefits within Accumulation Division		(129	)		(121	)		—			—			(129	)		(121	)
Gains/(losses) on curtailment and settlements		—			—			—			—			—			—

Actuarial gains/(losses) recognised in Income Statement		—			—			—			—			—			—
Total included in defined benefit superannuation plan expense		(29	)		(68	)		(6	)		(7	)		(35	)		(75	)

Actual Return on Plan Assets		668			592			22			46			690			638


Changes in the present value of the defined benefit obligation are as follows:

Opening defined benefit obligation		(3,593	)		(3,504	)		(408	)		(398	)		(4,001	)		(3,902	)
Service cost		(36	)		(45	)		(5	)		(4	)		(41	)		(49	)
Interest cost		(173	)		(197	)		(21	)		(20	)		(194	)		(217	)
Member contributions		(14	)		(14	)		—			—			(14	)		(14	)
Actuarial gains/(losses)		184			(142	)		12			(35	)		196			(177	)
(Losses)/gains on curtailments		—			—			—			—			—			—
Liabilities extinguished on settlements		—			—			—			—			—			—
Liabilities assumed in a business combination		—			—			—			—			—			—
Benefits paid		244			309			12			12			256			321
Exchange differences on foreign plans		—			—			(20	)		37			(20	)		37

Closing Defined Benefit Obligation		(3,388	)		(3,593	)		(430	)		(408	)		(3,818	)		(4,001	)


Changes in the fair value of plan assets are as follows:

Opening fair value of plan assets		4,310			4,137			329			321			4,639			4,458
Expected return		312			298			20			18			332			316
Experience gains/(losses)		356			294			2			28			358			322
Assets distributed on settlements		—			—			—			—			—			—
Total contributions		14			14			11			4			25			18
Assets acquired in a business combination		—			—			—			—			—			—
Exchange differences on foreign plans		—			—			15			(30	)		15			(30	)
Benefits and expenses paid		(247	)		(312	)		(12	)		(12	)		(259	)		(324	)
Employer financial benefits within Accumulation Division		(129	)		(121	)		—			—			(129	)		(121	)

Closing Fair Value of Plan Assets		4,616			4,310			365			329			4,981			4,639

216 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 44 Retirement Benefit Obligations (continued)

Defined Benefit Superannuation Plans (continued)


				OSF			CBA(UK)SBS						Total
	2006			2005			2006			2005			2006			2005
	$M			$M			$M			$M			$M			$M

Experience gains/(losses) on plan liabilities		(55	)		448			15			6			(40	)		454
Experience gains/(losses) on plan assets		356			294			2			28			358			322
Gains/(losses) from changes in actuarial assumptions		239			(590	)		(3	)		(41	)		236			(631	)

Total net actuarial gains/(losses)		540			152			14			(7	)		554			145

Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total net actuarial gains recognised in equity from commencement of AIFRS to 30 June 2006 were $699 million.

OSF

CBA(UK)SBS

2006

2005

2006

2005

Economic Assumptions

The above calculations were based on the economic assumptions set out below:

Discount rate at 30 June (gross of tax)

5.80

5. 10

5.25

5.00

Expected return on plan assets at 30 June

8.25

7.50

6.00

5.75

Expected rate salary increases

4.75

⁽¹⁾

4.25

⁽¹⁾

4.10

3.70


(1)		For the OSF, additional age related allowances were made for the expected salary increases from future promotions. At 30 June 2006, these assumptions were broadly between 1.6% and 2.6% per annum for full time employees and 1.0% per annum for part time employees (30 June 2005: 2.6% and 3.6% per annum for full time employees and 1.0% per annum for part time employees).

The return on asset assumption for the OSF is determined as the weighted average of the long term expected returns of each asset class where the weighting is the benchmark asset allocations of the assets backing the defined benefit risks. The long term expected returns of each asset class are determined following receipt of actuarial advice. The discount rate (gross of tax) assumption for the OSF is based on the yield on 10 year Australian government securities. In addition to financial assumptions, the mortality assumptions for pensioners can materially impact the defined benefit obligations. These assumptions are age related and allowances are made for future improvement in mortality. The expected life expectancies for pensioners are:

OSF

CBA(UK)SBS

Expected Life Expectancies for Pensioners

2006

2005

2006

2005

Male pensioners currently aged 60

30.1

31.2

22.9

22.9

Male pensioners currently aged 65

25.3

26.2

18.5

18.5

Female pensioners currently aged 60

33.5

34.6

25.9

25.9

Female pensioners currently aged 65

28.4

29.3

21.4

21.4

Further, the proportion of the retiring members of the main OSF defined benefit division electing to take pensions instead of lump sums may materially impact the defined benefit obligations. 30% of these retiring members were assumed to take pension benefits, increasing to 50% in 2020.

Australian and UK legislation requires that superannuation (pension) benefits be provided through trusts. These trusts (including their investments) are managed by trustees who are legally independent of the employer. The investment objective of the OSF (the Bank’s major superannuation (pension) plan) is “to maximise long term rate of return subject to net returns over rolling five year periods exceeding the growth in Average Weekly Ordinary Time Earnings (AWOTE) 80% of the time”. To meet this investment objective, the OSF Trustee invests a large part of the OSF’s assets in growth assets, such as shares and property. These assets have historically earned higher rates of return than other assets, but they also carry higher risks, especially in the short term. To manage these risks, the Trustee has adopted a strategy of spreading the OSF’s investments over a number of asset classes and investment managers. As at 30 June 2006, the benchmark asset allocations and actual asset allocations for the assets backing the defined benefit portion of the OSF is as follows:


	Benchmark Allocation		Actual Allocation
Asset Allocations	%		%

Australian Equities		27. 5		29. 2
Overseas Equities		21. 0		20. 2
Real Estate		15. 0		14. 3
Fixed Interest Securities		25. 5		26. 6
Cash		5. 0		4. 4
Other ⁽¹⁾		6. 0		5. 3


(1)		These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure investments as well as high yield and emerging market debt.

		The value of the OSF’s equity holding in the Group as at 30 June 2006 was $95 million (2005: $91 million). Amounts on deposit with the Bank at 30 June 2006 totalled $7 million (2005: $13 million). Other financial instruments with the Group at 30 June 2006 totalled $90 million (2005: $108 million).

Commonwealth Bank of Australia Annual Report 2006 217

Notes to the Financial Statements

Note 45 Controlled Entities


	Extent of Beneficial
Entity Name	Interest if not 100%		Incorporated in

Australia
(a) Banking
Commonwealth Bank of Australia			Australia
Controlled Entities:
CBA Investments Limited			Australia
Industrie Limited Partnership			Australia
Luca Limited Partnership		99.84	Australia
CBA Investments (No. 2) Pty Limited			Australia
CBA International Finance Pty Limited			Australia
CBCL Australia Limited			Australia
CBFC Limited			Australia
Collateral Leasing Pty Limited			Australia
Commonwealth Securities Limited			Australia
Homepath Pty Limited			Australia
Commonwealth Investments Pty Limited			Australia
Sparad (No. 24) Pty Limited Australia			Australia
Colonial Finance Limited			Australia
PERLS III Trust (formally Preferred Capital Limited)			Australia
PERLS II Trust			Australia
GT Funding No.1 Pty Ltd			Australia
GT Operating No.1 Pty Ltd			Australia
Loft No.1 Pty Ltd			Australia
Loft No.2 Pty Ltd			Australia
Fringe Pty Ltd			Australia
Lily Pty Ltd			Australia
Medallion 2003-2G			Australia
Broadcasting Infrastructure Asset Partnership			Australia
Greenwood Lending Pty Ltd			Australia
Series 2000-IG Medallion Trust			Australia
Series 2000-2G Medallion Trust			Australia
Series 2001-IG Medallion Trust			Australia
Series 2002-IG Medallion Trust			Australia
Series 2003-IG Medallion Trust			Australia
Series 2004-IG Medallion Trust			Australia
Series 2005-IG Medallion Trust			Australia
Series 2005-2G Medallion Trust			Australia
Hemisphere Lane Pty Ltd			Australia
Medallion Series Trust 2006 1G			Australia
Medallion Trust Series 2005 4P			Australia
GT Operating No. 3 Pty Limited			Australia

(b) Insurance and Funds Management
Commonwealth Insurance Limited			Australia
Colonial Holding Company Limited			Australia
Colonial Holding Company (No. 2) Pty Limited			Australia
Commonwealth Insurance Holdings Limited			Australia
Commonwealth Managed Investments Limited			Australia
Colonial AFS Services Pty Limited			Australia
Colonial First State Group Limited			Australia
Colonial First State Investments Limited			Australia
Avanteos Pty Limited			Australia
Colonial First State Property Limited			Australia
Colonial First State Property Retail Pty Limited			Australia
Colonial First State Property Retail Trust			Australia
Colonial International Holdings Pty Limited			Australia
The Colonial Mutual Life Assurance Society Limited			Australia
Jacques Martin Pty Limited			Australia
Gandel Retail Management Trust			Australia
Commonwealth Financial Planning Limited			Australia

218 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 45 Controlled Entities (continued)


	Extent of Beneficial
Entity Name	Interest if not 100%	Incorporated in

New Zealand
(a) Banking
ASB Holdings Limited		New Zealand
ASB Bank Limited		New Zealand
CBA Funding (NZ) Limited		New Zealand
ASB Capital No. 2 Limited		New Zealand
CBA USD Funding Limited		New Zealand

(b) Insurance and Funds Management
ASB Group (Life) Limited		New Zealand
Sovereign Group Limited		New Zealand
Sovereign Limited		New Zealand
Colonial First State Investments (NZ) Limited		New Zealand
Kiwi Income Properties Limited		New Zealand
Kiwi Property Management Limited		New Zealand

Other Overseas
(a) Banking
CBA Asia Limited		Singapore
CTB Australia Limited		Hong Kong
PT Bank Commonwealth		Indonesia
National Bank of Fiji Limited		Fiji
CBA (Delaware) Finance Incorporated		Delaware USA
CBA Capital Trust 1		Delaware USA
CBA Funding Trust 1		Delaware USA
Capital Trust II		Delaware USA
CBA (Europe) Finance Limited		United Kingdom
Pontoon PLC		United Kingdom
Quay (Funding) PLC		United Kingdom
Burdekin Investments		Cayman Islands
Pavillion Limited		UK
Newport Limited		Malta
CommInternational Limited		Malta
CommCapital S.a.r.l		Luxembourg
CommBank Europe Limited		Malta

(b) Insurance and Funds Management
CMG Asia Life Holdings Limited		Bermuda
Colonial Fiji Life Limited		Fiji
Colonial First State (UK) Holdings Limited		United Kingdom
First State (HK) LLC		United States
First State Investment Holdings (Singapore) Ltd		Singapore

Non-operating and minor operating controlled entities and investment vehicles holding policyholder assets are excluded from the above list.

Commonwealth Bank of Australia Annual Report 2006 219

Notes to the Financial Statements

Note 46 Investments in Associated Entities and Joint Ventures

Group

Extent of

2006

2005

Ownership

Country of

Balance

Interest %

Principal Activities

Incorporation

Date

PT Astra CMG Life

Life Insurance

Indonesia

31 Dec

AMTD Group Limited ⁽¹⁾

Financial Services

Virgin Islands

31 Dec

China Life CMG Life Assurance Company Limited

Life Insurance

China

31 Dec

Bao Minh CMG Life Insurance Company

Life Insurance Investment

Vietnam

31 Dec

CMG CH China Funds Management Limited

Management

Australia

31 Mar

BAC Airports Pty Ltd ⁽²⁾

—

33.3

Airport Services Investment

Australia

30 Jun

452 Capital Pty Limited

—

Management

Australia

30 Jun

Hangzhou City Commercial Bank Limited

102

—

19.9

Commercial Banking

China

31 Dec

Alster & Thames Partnership

—

Leasing

Delaware

31 Dec

First State Cinda Fund Management Company Limited

—

Funds Management

China

31 Dec

Total

190


(1)		Formally Allday Enterprises Ltd.

(2)		Investment sold 2 May 2005.


	Group
	2006			2005
	$M			$M

Share of associates’ profits/(losses)
Operating profits/(losses) before income tax		8			7
Income tax expense		(1	)		(2	)

Operating profits/(losses) after income tax		7			5


Carrying amount of investments in associated entities		190			52


	Group
	2006		2005
	$M		$M

Financial Information of Associates
Assets		9,569		204
Liabilities		9,098		167
Revenues		220		18
Expenses		89		22


	Group
	2006		2005
	$M		$M

Financial Information of Joint Ventures
Assets		122		58
Liabilities		81		32
Revenues		65		26
Expenses		69		30

220 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 47 Director and Executive Disclosures

Details of the Directors’ and Specified Executives’ remuneration, interests in long-term incentive plans, shares, options and loans are included in the Remuneration Report of the Directors’ Report. The company has applied the exemption under Corporations Amendment Regulation 2006 which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in their annual financial reports by AASB 124 Related Party Disclosures. These remuneration disclosures are provided in the Remuneration Report of the Directors’ Report on pages 51 to 68 and are designated as audited.

Note 48 Related Party Disclosures

Ultimate Parent

Commonwealth Bank of Australia is the ultimate Australian parent company in the Group.

Controlled Entities

Transactions with related parties in the Group are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally arise out of the provision of banking services, the acceptance of funds on deposit, the granting of loans and other associated financial activities.

Support services are provided by the Bank such as provision of premises and/or equipment, availability of transfer payment and accounting facilities through data processing etc, and are transfer charged to the respective user entity at commercial rates.


	For the year ended and as at 30 June 2006
				Joint
	Associates			Ventures		Total
Group	$M			$M		$M

Interest and dividend income		—			—		—
Interest expense		—			—		—
Fees and commissions for services rendered		1			11		12
Fees and commissions for services provided		(8	)		11		3

Loans, advances and equity contributions		200			30		230
Derivative assets		—			—		—
Other assets		—			4		4

Deposits		—			—		—
Derivative liabilities		—			—		—
Other liabilities		1			6		7

For the year ended and as at 30 June 2006

Joint

Subsidiaries

Associates

Ventures

Total

Bank

Interest and dividend income

2,739

—

2,739

Interest expense

854

—

854

Fees and commissions for services rendered

—

Fees and commissions for services provided

124

—

125

Loans, advances and equity contributions

36,150

102

—

36,252

Derivative assets

680

—

680

Other assets

2,078

—

2,080

Deposits

38,652

—

38,652

Derivative liabilities

487

—

487

Other liabilities

1,069

—

1,069

Commonwealth Bank of Australia Annual Report 2006 221

Notes to the Financial Statements

Note 48 Related Party Disclosures (continued)


	For the year ended and as at 30 June 2005
			Joint
	Associates		Ventures		Total
Group	$M		$M		$M

Interest and dividend income		—		—		—
Interest expense		—		—		—
Fees and commissions for services rendered		—		4		4
Fees and commissions for services provided		—		6		6

Loans, advances and equity contributions		30		22		52
Derivative assets		—		—		—
Other assets		—		1		1

Deposits		—		—		—
Derivative liabilities		—		—		—
Other liabilities		—		1		1


	For the year ended and as at 30 June 2005
					Joint
	Subsidiaries		Associates		Ventures		Total
Bank	$M		$M		$M		$M

Interest and dividend income		1,715		—		—		1,715
Interest expense		496		—		—		496
Fees and commissions for services rendered		48		—		4		52
Fees and commissions for services provided		126		—		5		131

Loans, advances and equity contributions		29,161		—		—		29,161
Derivative assets		—		—		—		—
Other assets		1,897		—		1		1,898

Deposits		26,428		—		—		26,428
Derivative liabilities		—		—		—		—
Other liabilities		918		—		1		919

Refer to Note 45 for details of controlled entities.

The Bank’s aggregate investment in and loans to controlled entities are disclosed in Note 18.

Amounts due to controlled entities are disclosed in the Balance Sheet of the Bank.

Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2.

All transactions between Group entities are eliminated on consolidation.

222 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 48 Related Party Disclosures (continued)

Equity Holdings of Key Management Personnel

Shareholdings

All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Directors’ Share Plan.

Details of shareholdings of Key Management Personnel (or close family or entities controlled, jointly controlled, or significantly influenced by them, or any entity over which any of the aforementioned hold significant voting power) are as follows:

Shares held by Directors


				Acquired/Granted
		Balance		as		On Exercise of		Net Change			Balance
Name	Class	1 July 2005		Compensation⁽¹⁾		Options		Other⁽²⁾			30 June 2006

Directors
R J Clairs	Ordinary		13,357		776		—		—			14,133
A B Daniels ⁽³⁾	Ordinary		17,669		721		—		301			18,691
C R Galbraith	Ordinary		8,824		740		—		466			10,030
S C H Kay	Ordinary		3,669		721		—		—			4,390
W G Kent	Ordinary		15,286		740		—		87			16,113
D V Murray ⁽⁴⁾	Ordinary		323,638		—		250,000		(78,093	)		495,545
	Deferred STI		21,866		—		—		(21,866	)		—
	Reward Shares		325,000		—		—		(325,000	)		—
R J Norris ⁽⁵⁾	Ordinary		10,000		—		—		—			10,000
	Reward Shares		—		100,328		—		—			100,328
F D Ryan	Ordinary		7,430		812		—		—			8,242
J M Schubert	Ordinary		18,508		2,165		—		515			21,188
F J Swan	Ordinary		5,954		704		—		316			6,974
B K Ward ⁽⁶⁾	Ordinary		5,766		739		—		124			6,629

	Ordinary		430,101		8,118		250,000		(76,284	)		611,935
Total For Directors	Deferred STI		21,866		—		—		(21,866	)		—
	Reward Shares		325,000		100,328		—		(325,000	)		100,328


(1)		For Non-Executive Directors, this represents shares acquired under NEDSP on 2 September 2005 and 15 March 2006 by mandatory sacrifice of fees. All shares acquired through NEDSP are subject to a 10 year trading restriction (shares will be tradeable earlier if the Director leaves the Board). See Note 33 Share Capital to the Financial Statements for further details on the NEDSP. For Mr Norris, this represents Reward Shares granted under the Equity Reward Plan (ERP) and subject to a performance hurdle. The first possible date for meeting the performance hurdle is 15 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 Share Capital to the Financial Statements for further details on the ERP.

(2)		‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and, for Mr Murray, vesting of deferred STI shares on retirement (which became Ordinary shares).

(3)		A related party of Mr Daniels beneficially holds an investment of $62,838 in Colonial First State Global Health and Biotech Fund, $403,860 in Colonial First State Future Leaders Fund and $361,464 in Colonial First State Imputation Fund.

(4)		Mr Murray retired on 22 September 2005. Mr Murray acquired 10,000 PERLS III securities during the year and continued to hold them at 30 June 2006.

(5)		Mr Norris commenced on 22 September 2005.

(6)		Ms Ward continued to hold 250 PERLS II securities at 30 June 2006.

Commonwealth Bank of Australia Annual Report 2006 223

Notes to the Financial Statements

Note 48 Related Party Disclosures (continued)

Shares held by Key Management Personnel


				Acquired/Granted
		Balance		as		On Exercise		Net Change			Balance
Name	Class	30 June 2005		Compensation⁽¹⁾		of Options		Other⁽²⁾			30 June 2006

Executives
M A Cameron	Ordinary		—		—		—		—			—
	Deferred STI		8,094		—		—		(5,246	)		2,848
	Reward Shares		60,430		29,190		—		—			89,620
L G Cupper ⁽³⁾	Ordinary		44,540		—		—		6,815			51,355
	Deferred STI		9,385		—		—		(6,118	)		3,267
	Reward Shares		84,000		22,440		—		—			106,440
S I Grimshaw	Ordinary		16,365		—		100,000		(91,057	)		25,308
	Deferred STI		14,133		—		—		(9,442	)		4,691
	Reward Shares		113,800		35,140		—		—			148,940
H D Harley	Ordinary		25,852		—		87,500		(87,071	)		26,281
	Deferred STI		10,241		—		—		(6,388	)		3,853
	Reward Shares		85,700		32,440		—		—			118,140
M R Harte ⁽⁴⁾	Ordinary		—		—		—		—			—
	Deferred STI		—		—		—		—			—
	Reward Shares		—		—		—		—			—
M A Katz ⁽⁵⁾	Ordinary		303,748		—		250,000		(378,748	)		175,000
	Deferred STI		14,061		—		—		(14,061	)		—
	Reward Shares		139,130		38,380		—		(177,510	)		—
R V McKinnon ⁽⁶⁾	Ordinary		43,991		—		37,500		(81,491	)		—
	Deferred STI		7,083		—		—		(7,083	)		—
	Reward Shares		58,750		17,030		—		(75,780	)		—
G L Mackrell	Ordinary		27,319		—		—		7,611			34,930
	Deferred STI		10,134		—		—		(6,742	)		3,392
	Reward Shares		83,230		27,570		—		—			110,800
J K O’Sullivan	Ordinary		5,565		—		—		3,351			8,916
	Deferred STI		6,702		—		—		(3,351	)		3,351
	Reward Shares		59,440		23,250		—		—			82,690
G A Petersen	Ordinary		8,572		—		—		1,335			9,907
	Deferred STI		5,177		—		—		(3,327	)		1,850
	Reward Shares		35,500		20,280		—		—			55,780

Total for Key Management Personnel	Ordinary		475,952		—		475,000		(619,255	)		331,697
	Deferred STI		85,010		—		—		(61,758	)		23,252
	Reward Shares		719,980		245,720		—		(253,290	)		712,410


(1)		Represents:

•		Deferred STI — acquired under the mandatory component of the Bank’s Equity Participation Plan (EPP). Shares were purchased on 31 October 2004 in two equal tranches, vesting on 1 July 2005 and 1 July 2006 respectively. See Note 33 for further details on the EPP.

•		Reward Shares — granted under the Equity Reward Plan (ERP) and are subject to a performance hurdle. The first possible date for meeting the performance hurdle is 16 July 2008 with the last possible date for vesting being 15 July 2010. See Note 33 for further details on the ERP.

(2)		‘Net change other’ incorporates changes resulting from purchases and sales during the year by Executives and vesting of Deferred STI and Reward Shares (which became Ordinary shares).

(3)		Mr Cupper acquired 6,000 PERLS III securities during the year, and continued to hold them at 30 June 2006.

(4)		Mr Harte commenced on 10 April 2006.

(5)		Mr Katz ceased employment on 24 March 2006. Mr Katz acquired 2,250 PERLS III securities during the year, and continued to hold these and 250 PERLS II securities as at 30 June 2006.

(6)		Mr McKinnon ceased employment on 31 December 2005.

224 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 48 Related Party Disclosures (continued)

Shares Vested and Options Exercised During the Year


					Shares Granted on Exercise of Options
									Value in Excess		Total Value
									of Exercise		of Options
	Deferred STI		Reward Shares				Exercise Price		Price⁽¹⁾		Exercised ⁽²⁾
Name	Vested		Vested		Number		$		$		$

Directors
D V Murray ⁽³⁾		21,866		—		250,000		30.12		10.88		2,720,000
R J Norris ⁽⁴⁾		—		—				—

Executives
M A Cameron		5,246		—		—		—		—		—
L G Cupper		6,118		—		—		—		—		—
S I Grimshaw		9,442		—		100,000		30.12		7.15		715,000
H D Harley		6,388		—		37,500		26.97		16.85		631,875
						50,000		30.12		13.70		685,000
M R Harte ⁽⁵⁾		—		—		—		—		—		—
M A Katz ⁽⁶⁾		14,061		—		125,000		26.97		18.48		2,310,000
						125,000		30.12		15.33		1,916,250
R V McKinnon ⁽⁷⁾		4,696		—		37,500		30.12		13.53		507,375
G L Mackrell		6,742		—		—		—		—		—
J K O’Sullivan		3,351		—		—		—		—		—
G A Petersen		3,327		—		—		—		—		—

Total for Key Management Personnel		81,237		—		725,000		n/a		n/a		9,485,500


(1)		“Value in Excess of Exercise Price” represents the difference between the exercise price and closing market value of CBA shares on date of exercise.

(2)		“Total Value of Options Exercised” represents the number of options exercised multiplied by the “Value in Excess of Exercise Price”. No options were granted or lapsed during the year. Accordingly, this value represents the total value of options that were granted, lapsed and exercised during the year.

(3)		Mr Murray retired on 22 September 2005 and deferred STI vested at this time.

(4)		Mr Norris commenced on 22 September 2005.

(5)		Mr Harte commenced in the role on 10 April 2006.

(6)		Mr Katz ceased employment on 24 March 2006.

(7)		Mr McKinnon ceased employment on 31 December 2005.

226 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 48 Related Party Disclosures (continued)

Loans to Key Management Personnel

All loans to Key Management Personnel (or related entities controlled or significantly influenced by them) have been provided on an arms-length commercial basis including the term of the loan, security required and the interest rate (which may be fixed or variable).

Total Loans to Key Management Personnel


		Year Ended	Balance		Interest		Interest Not				Balance		Number in
	30 June		1 July		Charged		Charged		Write-off		30 June		Group at
			$000s		$000s		$000s		$000s		$000s		30 June

Directors
		2006		—		379		—		—		5,729		1
		2005		2		—		—		—		3		1
Executives
		2006		9,894		550		—		—		9,284		7
		2005		8,706		523		—		—		8,803		6

Total for Key Management Personnel		2006		9,894		929		—		—		15,013		8
		2005		8,708		523		—		—		8,806		7

Individual Loans above $100,000 to Key Management Personnel


											Highest
	Balance		Interest		Interest Not				Balance		Balance
	1 July 2005		Charged		Charged		Write-off		30 June 2006		in Period
	$000s		$000s		$000s		$000s		$000s		$000s

Directors
D V Murray		—		379		—		—		5,729		5,729

Executives
M A Cameron		—		5		—		—		358		546
		—		3		—		—		300		302
S I Grimshaw		1,485		73		—		—		857		1,485
		—		16		—		—		391		394
H D Harley		332		19		—		—		304		334
		243		11		—		—		—		243
		347		7		—		—		—		427
M A Katz		175		11		—		—		175		175
		175		11		—		—		175		175
		500		31		—		—		500		500
		100		—		—		—		100		100
G L Mackrell		1,080		43		—		—		1,017		1,080
J K O’Sullivan		1,500		97		—		—		1,500		1,500
		392		26		—		—		582		587
		696		42		—		—		614		696
		258		17		—		—		274		277
		647		42		—		—		647		647
		200		12		—		—		200		200
		201		7		—		—		—		203
G A Petersen		400		11		—		—		155		400
		800		52		—		—		800		800

Total for Key Management Personnel		9,531		915		—		—		14,678		16,800

Commonwealth Bank of Australia Annual Report 2006 227

Notes to the Financial Statements

Note 49 Notes to the Statements of Cash Flows

Note 49(a) Reconciliation of Operating Profit after Income Tax to Net Cash Provided by Operating Activities


										Year Ended 30 June
	Group						Bank
	2006			2005			2006			2005
	$M			$M			$M			$M

Net profit after income tax		3,959			3,410			4,267			3,012
Net (Increase)/decrease in interest receivable		(99	)		(17	)		219			(667	)
Increase in interest payable		784			64			24			531
Net decrease in trading securities		—			318			—			505
Net (increase) in assets at fair value through Income Statement (excluding life insurance)		(53	)		—			(2,620	)		—
Net (gain) on sale of investments		—			(8	)		—			(4	)
Net (gain)/loss on sale of controlled entities and associates		(163	)		13			—			35
Decrease/(increase) in derivative assets		128			—			(381	)		—
(Gain)/loss on sale property plant and equipment		(4	)		(4	)		2			(4	)
Charge for bad debts		398			322			380			292
Depreciation and amortisation		209			176			155			95
Increase in liabilities at fair value through Income Statement (excluding life insurance)		1,374			—			504			—
(Decrease)/increase in derivative liabilities		(445	)		—			78
(Decrease) in other provisions		(92	)		(86	)		(50	)		(79	)
(Decrease)/increase in income taxes payable		(455	)		406			(430	)		406
Increase/(decrease) in deferred income taxes payable		182			332			(434	)		209
Decrease/(increase) in deferred tax assets		184			(86	)		727			(337	)
(Increase)/decrease in accrued fees/reimbursements receivable		(88	)		(41	)		71			94
Increase in accrued fees and other items payable		133			106			217			9
Amortisation of premium on investment securities		—			(4	)		—			(4	)
Unrealised loss on revaluation of trading securities		—			408			—			454
Unrealised (gain) on revaluation of assets at fair value through Income Statement (excluding life insurance)		(112	)		—			(22	)
Change in life insurance contract policy liabilities		(814	)		56			—			—
Decrease in managed fund units on sale		(46	)		—			—			—
Increase in cash flow hedge reserve		31			—			7			—
Dividend received from controlled entities		—			—			(2,080	)		(988	)
Changes in operating assets and liabilities arising from cash flow movements		(3,458	)		(5,921	)		(2,405	)		(1,420	)
Other		(387	)		220			144			100

Net Cash (used in) Operating Activities		(1,166	)		(336	)		(1,627	)		2,239

Note 49(b) Reconciliation of Cash

For the purposes of the statement of cash flows, cash includes cash, money at short call, at call deposits with other financial institutions and settlement account balances with other banks.

Year Ended 30 June

Group

Bank

2006

2005

2006

2005

Notes, coins and cash

1,703

1,723

1,213

1,318

Other short term liquid assets

491

859

342

415

Receivables due from other financial institutions — at call ⁽¹⁾

4,657

2,893

3,437

2,737

Payables due to other financial institutions — at call ⁽¹⁾

(4,813

)

(4,199

)

(4,751

)

(4,156

)

Cash and cash equivalents at end of year

2,038

1,276

241

314


(1)		At call includes certain receivables and payables due from and to financial institutions within three months.

228 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 49 Notes to the Statements of Cash Flows (continued)

Note 49(c) Disposal of Controlled Entities


	2006			2005
	$M			$M

Disposal Proceeds
Cash received on disposals		608			—

		608			—

Fair value of net tangible assets disposed
Cash and liquid assets		55			—
Assets at fair value through Income Statement
Trading		—			—
Insurance		2,297			—
Other		—			—
Other assets		148			—
Life Insurance policy liabilities		(1,996	)		—
Bills payable and other liabilities		(41	)		—
Profit on sale		145			—

Cash consideration received		608			—

Inflows of cash on disposals
Cash payments		608			—
Less cash and cash equivalents disposed		(55	)		—

Net cash inflow on disposal		553			—

Note 49(d) Non Cash Financing and Investing Activities

Shares issued under the Dividend Reinvestment Plan for 2006 were $481 million.

Note 49(e) Acquisition of Controlled Entities


	2006			2005
	$M			$M

Consideration
Cash paid on acquisitions		414			44

		414			44

Fair value of net tangible assets acquired
Cash and liquid assets		—			4
Other intangibles		122			—
Other assets		167			4
Bills payable and other liabilities		(8	)		(8	)
Minority interests		126			—
Goodwill		7			44

Cash consideration paid		414			44

Outflow/(inflows) of cash on acquisitions
Cash payments		414			44
Less cash and cash equivalents acquired		—			(4	)

Net cash outflow on acquisition		414			40

Note 49(f) Financing Facilities

Standby funding lines are immaterial.

Commonwealth Bank of Australia Annual Report 2006 229

Notes to the Financial Statements

Note 50 Disclosures about Fair Value of Financial Instruments

50(a) Fair Value of Financial Assets and Financial Liabilities

These amounts represent estimates of the fair values of the Group’s financial assets and financial liabilities at balance sheet date based on the following valuation methods and assumptions. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Quoted market prices are used to determine fair value where an active market (such as a recognised stock exchange) exists, as it is the best evidence of the fair value of a financial instrument. Quoted market prices are not, however, available for a significant number of the financial assets and liabilities held and issued by the Group. Therefore, for financial instruments where no quoted market price is available, the fair values presented in the following table have been estimated using present value or other valuation techniques based on market conditions existing at balance sheet dates. These valuation techniques rely on market observable inputs wherever possible, or in a limited number of instances, rely on inputs which are reasonable assumptions based on market conditions at balance date.

While the fair value amounts are designed to represent estimates at which these instruments could be exchanged in a current transaction between willing parties, many of the Group’s financial instruments lack an available trading market as characterised by willing parties engaging in an exchange transaction.

In addition, it is the Bank’s intent to hold most of its financial instruments to maturity and therefore it is not probable that the fair values shown would be realised in a current transaction.

The estimated fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. In addition, the value of long-term relationships with depositors (core deposit intangibles) and other customers (credit card intangibles) are not reflected. The value of these items is considered significant.

Because of the wide range of valuation techniques and the numerous estimates that must be made, it may be difficult to make reasonable comparisons of the Bank’s fair value information with that of other financial institutions. It is important that the many uncertainties discussed above be considered when using the estimated fair value disclosures and to realise that because of these uncertainties, the aggregate fair value amount should in no way be construed as representative of the underlying value of the Commonwealth Bank of Australia.

Group 2006

Group 2005

Carrying

Fair

Carrying

Fair

Value

Assets

Cash and liquid assets

5,131

6,055

Receivables from other financial institutions

7,107

6,087

Assets at Fair Value through Income Statement:

Trading

15,758

14,631

Insurance

24,437

27,484

Other

2,944

—

Derivative assets ⁽¹⁾

9,675

—

Available-for-sale investments

11,203

—

Investment securities

—

10,838

10,999

Loans, advances and other receivables

259,176

258,547

228,346

228,867

Bank acceptances of customers

18,310

16,786

Other assets

5,190

17,056

17,074

Liabilities

Deposits and other public borrowings

173,227

173,108

168,026

168,562

Payables due to other financial institutions

11,184

8,023

Liabilities at Fair Value through Income Statement

13,811

—

Derivative liabilities ⁽¹⁾

10,820

—

Bank acceptances

18,310

16,786

Insurance policy liabilities

22,225

24,694

Debt issues

78,591

76,645

70,765

69,799

Managed fund units on issue

1,109

—

Bills payable and other liabilities

6,053

6,056

17,551

17,548

Loan capital

9,895

9,913

6,291

6,113

Asset and liability hedges — unrealised gains/(losses) ⁽¹⁾

—

(277

)


(1)		Following the adoption of AASB 132 and 139 at 1 July 2005 all derivatives including hedging derivatives are now at fair value on the balance sheet. For further details refer Note 11.

230 Commonwealth Bank of Australia Annual Report 2006

Notes to the Financial Statements

Note 50 Disclosures about Fair Value of Financial Instruments (continued)

50(a) Fair Value of Financial Assets and Financial Liabilities (continued)

The fair value estimates were determined by the following methodologies and assumptions:

Liquid assets and bank acceptances of customers

The carrying values of cash and liquid assets, receivables from other financial institutions and bank acceptances of customers approximate their fair value as they are short term in nature or are receivable on demand.

Receivables from other financial institutions also includes statutory deposits with central banks. The fair value is assumed to be equal to the carrying value as the Group is only able to continue as a going concern with the maintenance of these deposits.

Assets at Fair Value through Income Statement

Assets at fair value through Income Statement are carried at fair value determined using quoted market prices or valuation techniques including discounted cash flow models using market observable and non market observable inputs.

Available-for-sale investments

Assets available-for-sale are measured at fair value determined using quoted market prices. For shares in companies, the estimated fair values are estimated based on market price inputs.

Loans, advances and other receivables

The carrying value of loans, advances and other receivables is net of accumulated collective and individually assessed provisions for impairment.

For variable rate loans, excluding impaired loans, the carrying amount is a reasonable estimate of fair value. The fair value for fixed rate loans was calculated by utilising discounted cash flow models (i.e. the net present value of the portfolio future principal and interest cash flows), based on the maturity of the loans. The discount rates applied were based on the current benchmark rate offered for the average remaining term of the portfolio plus an add-on of the average credit margin of the existing portfolio, where appropriate.

The fair value of impaired loans was calculated by discounting estimated future cash flows using the loan’s original effective interest rate.

Retirement benefit surplus / (liability)

The fair value of the retirement benefit surplus liability is the carrying value at balance sheet date determined using a present value calculation based on assumptions that are outlined in Note 44.

All other financial assets

Included in this category are interest and fees receivable, unrealised income, and investments in associates of $190 million (2005: $52 million), where the carrying amount is considered to be a reasonable estimate of fair value. Other financial assets are net of goodwill and other intangibles, future income tax benefits and prepayments/unamortised payments, as these do not constitute financial instruments.

Deposits and other public borrowings

The carrying value of non interest bearing, call and variable rate deposits, and fixed rate deposits repricing within six months, approximate their value as they are short term in nature or are payable on demand. Discounted cash flow models based upon deposit type and its related maturity, were used to calculate the fair value of other term deposits.

Short term liabilities

The carrying value of payables to other financial institutions and bank acceptances approximate their fair value as they are short term in nature and reprice frequently.

Debt issues and loan capital

The fair values of debt issues and loan capital were calculated using quoted market price at balance sheet date. For those debt issues where quoted market prices were not available, discounted cash flow and option pricing models were used, utilising a yield curve appropriate to the expected remaining maturity of the instrument.

Liabilities at Fair Value through Income Statement

Liabilities at Fair Value through Income Statement are carried at fair value determined using quoted market prices, or valuation techniques including discounted cash flow models using market observable inputs.

Derivative Assets and Liabilities

The fair value of trading and hedging derivative contracts, were obtained from quoted market prices, discounted cash flow models or option pricing models that used market based and non market based inputs.

The fair value of these instruments is disclosed in Note 11.

Life Insurance Policy Holder Liabilities

Life insurance policyholder liabilities are measured on a net present value basis using assumptions outlined in Note 38. This treatment is in accordance with accounting standard AASB 1038: Life Insurance Business.

All other financial liabilities

This category includes interest payable and unrealised expenses payable for which the carrying amount is considered to be a reasonable estimate of net fair value. For liabilities that are long term, fair values have been estimated using the rates currently offered for similar liabilities with remaining maturities. Other provisions including provision for dividend, income tax liability and unamortised receipts are not considered financial instruments.

Other off-balance sheet financial instruments (2005 only)

The fair value of trading and hedging derivative contracts, were obtained from quoted market prices, discounted cash flow models or option pricing models as appropriate. The fair value of these instruments is disclosed in Note 43.

Commonwealth Bank of Australia Annual Report 2006 231

Notes to the Financial Statements

Note 50 Disclosures about Fair Value of Financial Instruments (continued)

50(a) Fair Value of Financial Assets and Financial Liabilities (continued)

Commitments to extend credit, letters of credit, guarantees, warranties and indemnities issued

The fair value of these items was not calculated as estimated fair values are not readily ascertainable. These financial instruments generally relate to credit risk and attract fees in line with market prices for similar arrangements. They are not presently sold or traded. The items generally do not involve cash payments other than in the event of default. The fee pricing is set as part of the broader customer credit process and reflects the probability of default. The fair value may be represented by the present value of fees expected to be received, less associated costs, however the overall level of fees involved is not material.

50(b) The Impact of Fair Values Calculated Using Non-market Observable Assumptions

The Group’s exposure to financial instruments measured at fair value based in full or in part on non-market observable assumptions is restricted to short term loans and margins on trading securities where pricing is counterparty specific.

These financial instruments comprise a small component of the portfolios they are part of and have short tenor, such that any change in the assumptions used to value the instruments to a reasonably possible alternative do not have a material effect on the portfolio balance or the Group’s result.

50(c) The Impact of Profit of the Change in Fair Values of Financial instruments Estimated using a Valuation Technique

The Group holds a large portfolio of trading securities and derivatives that are measured at fair value using quoted market prices and valuation techniques based on market observable assumptions. In addition, the Group holds a smaller portfolio of short term commercial loans and debt issues that have been designated at Fair Value through income Statement using valuation techniques based on market observable assumptions.

The total amount of change in fair value recognised in profit for the period which was determined using valuation techniques was $1,067 million net loss. This comprised an $82 million gain in trading income and a $1,149 million loss in other operating income.

232 Commonwealth Bank of Australia Annual Report 2006

Independent audit report to the members of Commonwealth Bank of Australia

Scope

The financial report, remuneration disclosures and directors’ responsibility

The financial report comprises the balance sheet, income statement, statement of recognised income and expense, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for Commonwealth Bank of Australia (“the Bank”) and the consolidated Group, for the year ended 30 June 2006. The consolidated Group comprises both the Bank and the entities it controlled during that year.

The Bank has disclosed information as required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard 124 Related Party Disclosures (“remuneration disclosures”), under the heading “Remuneration Report” on pages 51 to 68 of the directors’ report, as permitted by Corporations Regulation 2M.6.04.

The directors of the Bank are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the Bank and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are also responsible for the remuneration disclosures contained in the directors’ report.

Audit approach

We conducted an independent audit of the financial report in order to express an opinion to the members of the Bank. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with Accounting Standard AASB 124 Related Party Disclosures. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the Bank’s and the consolidated entity’s financial position, and of their performance as represented by the results of their operations and cash flows and whether the remuneration disclosures comply with Accounting Standard AASB 124 Related Party Disclosures.

We formed our audit opinion on the basis of these procedures, which included:

•

examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and the remuneration disclosures; and

•

assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report and the remuneration disclosures. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors² and management of the Bank.

234 Commonwealth Bank of Australia Annual Report 2006

Independent audit report to the members of Commonwealth Bank of Australia

Independence

We are independent of the Bank and the consolidated entity and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the Bank a written Auditor’s Independence Declaration a copy of which is included in the Directors’ Report. In addition to our audit of the financial report and the remuneration disclosures, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence.

Audit opinion

In our opinion:

1.		the financial report of the Commonwealth Bank of Australia is in accordance with:

a)		the Corporations Act 2001, including:

	i.		giving a true and fair view of the financial position of Commonwealth Bank of Australia and the consolidated Group at 30 June 2006 and of their performance for the year ended on that date; and

	ii.		complying with Accounting Standards in Australia and the Corporations Regulations 2001; and

b)		other mandatory financial reporting requirements in Australia.

2.		the remuneration disclosures that are contained on pages 51 to 68 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures.



Ernst & Young		S J Ferguson
Sydney		Partner

23 August 2006

Commonwealth Bank of Australia Annual Report 2006 235

Shareholding Information

Top 20 Holders of Fully Paid Ordinary Shares as at 18 August 2006


Rank	Name of Holder	Number of Shares		%

1	J P Morgan Nominees Australia Limited		113,464,882		8.84
2	National Nominees Limited		111,655,869		8.70
3	Westpac Custodian Nominees Ltd		72,147,286		5.62
4	Citicorp Nominees Ltd		71,998,891		5.61
5	RBC Dexia Services Australia Nominees Pty Limited		31,846,699		2.48
6	ANZ Nominees Limited		29,898,579		2.33
7	Cogent Nominees Pty limited		22,471,900		1.75
8	Queensland Investment Corporation		16,508,932		1.29
9	AMP Life Limited		11,616,993		0.91
10	HSBC Custody Nominees (Australia) Limited		8,668,658		0.68
11	Australian Foundation Investment Company Limited		8,095,245		0.63
12	Bond Street Custodian Pty Limited		7,183,574		0.56
13	Invia Custodian Pty Limited		6,833,176		0.53
14	Westpac Financial Services Ltd		4,989,074		0.39
15	UBS Wealth Management Australia Nominees Pty Ltd		4,968,605		0.39
16	Australian Reward Investment Alliance		2,935,854		0.23
17	Suncorp Custodian Services Pty Ltd		2,626,440		0.20
18	Perpetual Trustee Co Ltd		2,524,354		0.20
19	Belike Nominees Pty Limited		2,490,207		0.19
20	CSFB Third Nominees Pty		2,428,198		0.19

The top 20 shareholders hold 535,353,416 shares which is equal to 41.72% of the total shares on issue

Stock Exchange Listing

The shares of the Commonwealth Bank of Australia are listed on the Australian Stock Exchange under the trade symbol CBA, with Sydney being the home exchange.

Details of trading activity are published in most daily newspapers, generally under the abbreviation of CBA or C’wealth Bank. The Bank does not have a current on-market buyback of its shares.

Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 18 August 2006


	Number of		Percentage		Number of		Percentage
Range	Shareholders		Shareholders		Shares		Issued Capital

1 – 1,000		525,439		75.19		181,715,794		14. 16
1,001 – 5,000		153,355		21.94		312,046,698		24. 32
5,001 – 10,000		14,017		2.00		96,342,827		7. 51
10,001 – 100,000		5,802		0.83		111,633,195		8. 70
100,001 and over		271		0.04		581,515,795		45. 31

Total		698,884		100.00		1,283,254,309		100. 00

Less than marketable parcel of $500		12,493				15,641

Voting Rights

Under the Bank’s Constitution, each person who is a voting member and who is present at a general meeting of the Bank in person or by proxy, attorney or official representative is entitled:

•

on a show of hands — to one vote; and

•

on a poll — to one vote for each share held or represented.

If a person present at a general meeting represents personally or by proxy, attorney or official representative more than one member, on a show of hands the person is entitled to one vote even though he or she represents more than one member.

If a member is present in person and votes on a resolution, any proxy or attorney of that member is not entitled to vote.

If more than one official representative or attorney is present for a member:

•

none of them is entitled to vote on a show of hands; and

•

on a poll only one official representative may exercise the member’s voting rights and the vote of each attorney shall be of no effect unless each is appointed to represent a specified proportion of the member’s voting rights, not exceeding in aggregate 100%.

•

if a member appoints two proxies and both are present at the meeting:

•

if the appointment does not specify the proportion or number of the member’s votes each proxy may exercise, then on a poll each proxy may exercise one half of the member’s votes;

•

neither proxy shall be entitled to vote on a show of hands; and

•

on a poll each proxy may only exercise votes in respect of those shares or voting rights the proxy represents.

236 Commonwealth Bank of Australia Annual Report 2006

Shareholding Information

Top 20 Holders of Preferred Exchangeable Resettable Listed Securities II (“PERLS II”) as at 18 August 2006


Rank	Name of Holder	Number of Units		%

1	J P Morgan Nominees Australia Limited		336,831		8.98
2	National Nominees Limited		179,669		4.79
3	Citicorp Nominees Pty Limited		114,175		3.04
4	UBS Nominees Pty Ltd		99,570		2.66
5	UBS Warburg Private Clients Nominees Pty Ltd		90,780		2.42
6	Questor Financial Services Limited		67,631		1.80
7	RBC Dexia Services Australia Nominees Limited		65,135		1.74
8	Invia Custodian Pty Limited		51,550		1.37
9	Westpac Custodian Nominees Limited		50,000		1.33
10	Bond Street Custodians Limited		39,754		1.06
11	ANZ Nominees Limited		30,912		0.82
12	The Australian National University Investment Section		25,000		0.67
13	Gordon Merchant No 2 Pty Ltd		24,440		0.65
14	Clycut Pty Ltd		21,892		0.58
15	J Neave Investments Pty Limited		19,697		0.53
16	Cogent Nominees Pty Limited		19,581		0.52
17	Cryton Investments No 9 Pty Ltd		17,600		0.47
18	Tynong Pastoral Co Pty Ltd		17,450		0.47
19	Woodross Nominees Pty Ltd		16,000		0.43
20	Perpetual Trustee Company Limited		15,066		0.40

The top 20 PERLS II unitholders hold 1,302,733 units which is equal to 34.73% of the total units on issue. More than 20 PERLS unitholders are disclosed in the above table due to a number of unitholders having the same number of PERLS II.

Stock Exchange Listing

PERLS II are units in a registered managed investment scheme of which Commonwealth Managed Investments Limited is the responsible entity and are listed on the Australian Stock Exchange under the trade symbol PCBPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers.

Range of Units (PERLS II): 18 August 2006


	Number of		Percentage		Number of		Percentage
Range	Unitholders		Unitholders		Units		Issued Units

1 – 1,000		9,203		96.09		1,531,679		40. 85
1,001 – 5,000		310		3.24		694,594		18. 52
5,001 – 10,000		36		0.38		274,297		7. 31
10,001 – 100,000		26		0.27		732,930		19. 55
100,001 and over		2		0.02		516,500		13. 77

Total		9,577		100.00		3,750,000		100. 00

Less than marketable parcel of $500		3				4

Voting Rights

PERLS II do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the Bank’s ordinary shares are set out on page 236 and Article 3.2.7 of the Bank’s Constitution.

The holders will be entitled to receive notice of any general meeting of the Bank and a copy of every circular or other like document sent out by the Bank to ordinary shareholders and to attend any general meeting of the Bank.

The holders will not be entitled to vote at a general meeting of the Bank except in the following circumstances:

•

If at the time of the meeting, a dividend has been declared but has not been paid in full by the relevant payment date;

•

On a proposal to reduce the Bank’s share capital;

•

On a resolution to approve the terms of a buy-back agreement;

•

On a proposal that affects rights attached to Commonwealth Bank PERLS;

•

On a proposal to wind up the Bank;

•

On a proposal for the disposal of the whole of the Bank’s property, business and undertaking;

•

During the winding up of the Bank; or

•

As otherwise required under the Listing Rules from time to time, in which case the holders will have the same rights as to manner of attendance and as to voting in respect of each unit as those conferred on ordinary shareholders in respect of each ordinary share.

At a general meeting of the Bank, holders are entitled:

•

On a show of hands, to exercise one vote when entitled to vote in respect of the matters listed above; and

•

On a poll, to one vote for each unit.

Commonwealth Bank of Australia Annual Report 2006 237

Shareholding Information

Top 20 Holders of Preferred Exchangeable Resettable Listed Securities III (“PERLS III”) as at 18 August 2006


Rank	Name of Holder	Number of Shares		%

1	AMP Life Limited		375,000		6.43
2	RBC Dexia Services Australia Nominees Pty Limited		169,791		2.91
3	UBS Wealth Management Australia Nominees Pty Ltd		153,734		2.64
4	Cogent Nominees Pty Limited		140,476		2.41
5	J P Morgan Nominees Australia Limited		108,025		1.85
6	Bond Street Custodian Limited		93,909		1.61
7	ANZ Executors & Trustee Company Limited		75,333		1.29
8	Goldman Sachs JB Were Pty Ltd		75,000		1.29
9	Goldman Sachs JB Were Capital Markets Ltd		72,001		1.23
10	Mr Walter Lawton + Mrs Jan Rynette Lawton		60,000		1.03
11	Invia Custodian Pty Limited		54,045		0.93
12	The Australian National University Investment Section		51,282		0.88
13	Mr Reginald Surtees Geary		50,000		0.86
14	National Nominees Limited		42,885		0.74
15	Citicorp Nominees Pty limited		35,320		0.61
16	Questor Financial Services Limited		35,061		0.60
17	Truckmate (Australia) Pty Ltd		35,000		0.60
18	Equity Trustees Limited		30,639		0.53
19	Kerlon Pty Ltd		30,000		0.51
20	Australian Executor Trustees Limited		28,168		0.48

The top 20 PERLS III shareholders hold 1,715,669 shares which is equal to 29.43% of the total shares on issue

Stock Exchange Listing

PERLS III are preference shares issued by Preferred Capital Limited (a wholly-owned subsidiary of the Bank) and are listed on the Australian Stock Exchange under the trade symbol PCAPA, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers.

Range of Shares (PERLS III): 18 August 2006


	Number of		Percentage		Number of		Percentage
Range	Shareholders		Shareholders		Shares		Issued Capital

1 – 1,000		15,397		96.26		2,428,892		41. 65
1,001 – 5,000		510		3.19		1,120,472		19. 21
5,001 – 10,000		38		0.24		300,646		5. 16
10,001 – 100,000		45		0.28		1,222,126		20. 95
100,001 and over		4		0.03		760,145		13. 03

Total		15,994		100.00		5,832,281		100. 00

Less than marketable parcel of $500		16				31

Voting Rights

PERLS III do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 236 and 237 respectively for the Bank’s ordinary shares and preference shares.

Trust Preferred Securities

550,000 Trust Preferred Securities were issued on 6 August 2003. Cede & Co is registered as the sole holder of these securities.

700,000 Trust Preferred Securities were issued on 15 March 2006. Cede & Co is registered as the sole holder of these securities.

The Trust Preferred Securities do not confer any voting rights in the Bank but if they are exchanged for or convert into ordinary shares or preference shares of the Bank in accordance with their terms of issue, the voting rights of the ordinary or preference shares (as the case may be) will be as set out on pages 236 and 237 respectively for the Bank’s ordinary shares and preference shares.

238 Commonwealth Bank of Australia Annual Report 2006

International Representation

Australia
Head Office
Commonwealth Bank of Australia
48 Martin Place,
Sydney NSW 1155
Telephone: (61 2) 9378 2000

New Zealand
ASB Bank Limited
Level 28 ASB Bank Centre
135 Albert Street, Auckland
Telephone: (64 9) 377 8930
Facsimile: (64 9) 358 3511
Managing Director
H Burrett

Sovereign Group Limited
33-45 Hurstmere Road
Takapuna, Auckland
Telephone: (64 9) 487 9000
Facsimile: (64 9) 486 1913
Acting Managing Director
J Raby

Asia Pacific
Fiji Islands
Colonial National Bank
Colonial Life Limited
3 Central Street, Suva
Telephone: (67 9) 3214 400
Facsimile: (67 9) 3303 448
Managing Director
L Mellsop

China
CBA Representative Office
2909 China World Towers 1
1 Jian Guo Men Wai Avenue
Beijing 100004
Telephone: (86 10) 6505 5350
Facsimile: (86 10) 6505 5354
Chief Representative
Y T Au

Room 3805-3806 K.Wah Centre
1010 Huahai (M) Road
Shanghai 200031
Telephone: (86 21) 6103 6500
Facsimile: (86 21) 6103 6598
Head of China Retail Banking
Vicky Liem

CommFinance
Room 3805-3806 K.Wah Centre
1010 Huahai (M) Road
Shanghai 200031
Telephone: (86 21) 6103 6500
Facsimile: (86 21) 6103 6598
Chief Executive Officer
L. Zhang

China Life — CMG Asia Life Assurance Co Ltd
21st Floor
China Insurance Building
166 Lujiazui Dong Road
Shanghai 200120
Telephone: (86 21) 5882 5245
Facsimile: (86 21) 6887 5720
General Manager
C Lee

CBA Representative Office
Room 4007 Bund Center
222 Yan An Road East
Shanghai 200002
Telephone: (86 21) 6335 1686
Facsimile: (86 21) 6335 1766

First State Cinda Fund Management
No. 29 Dong Zhong Street
Dong Cheng District
Beijing
Telephone: (86 10) 6418 1266
Facsimile: (86 10) 6418 1243
Regional Head Asia
L Mann

Hong Kong
15th Floor, Chater House
8 Connaught Place,
Central
Hong Kong
Telephone: (852) 2844 7500
Facsimile: (852) 2845 9194
Regional General Manager Asia
S Poon

Hong Kong Commonwealth Bank of Australia
Room 1501 — 1505, Chater House
8 Connaught Road Centre
Hong Kong
Telephone: (852) 3667 8900
Facsimile: (852) 3667 8939
Executive General Manager
P Fancke

First State Investments (Hong Kong) Limited
Level 6 Three Exchange Square
8 Connaught Place, Central
Hong Kong
Telephone: (852) 2846 7555
Facsimile: (852) 2868 4742/4783
Regional Head Asia
L Mann

India
CBA Representative Office
Unit 201, Level 2 (front portion) of Embassy
Classic
No. 11, Vittal Mallya Road
Bangalore 560001
Telephone: (91 80) 2210 7411
Fascimile: (91 80) 5112 1462
Chief Representative
Ravi Kushan

Indonesia
PT Bank Commonwealth
Ground Flr, Wisma Metropolitan II
Jl. Jendral Sudirman Kav. 29-31
Jakarta 12920
Telephone: (62 21) 5296 1222
Facsimile: (62 21) 5296 2293
President Director
S Brewis-Weston

PT Astra CMG Life
11/F Sentra Mulia
Jl. H.R. Rason Said, Kav X-6 No 8
Jakarta 12940
Telephone: (62 21) 250 0385
Facsimile: (62 21) 250 0389
President Director
Malakai Naiyaga

PT First State Investments Indonesia
29th Floor, Gedung Artha Graha
Sudirman Central Business District
Jl. Jend. Sudirman Kav. 52-53
Jakarta 12190
Telephone: (62 21) 515 0088
Facsimile: (62 21) 515 0033
Regional Head Asia
L Mann

Japan
CBA Branch Office
8th Floor
Toranomon Waiko Building
5-12-1 Toranomon
Minato-ku, Tokyo 105-0001
Telephone: (81 3) 5400 7280
Facsimile: (81 3) 5400 7288
General Manager
L Xia

Singapore
CBA Branch Office
3 Temasek Avenue #20-01
Centennial Tower
Singapore 039190
Telephone: (65) 6349 7000
Facsimile: (65) 6224 5812
General Manager
R Buchan

First State Investments (Singapore)
3 Temasek Avenue
#20-01 Centennial Tower
Singapore 039190
Telephone: (65) 6538 0008
Facsimile: (65) 6538 0800
Regional Head Asia
L Mann

Vietnam
CBA Representative Office
Suite 202-203A
The Central Building
31 Hai Ba Trung, Hanoi
Telephone: (84 4) 826 9899
Facsimile: (84 4) 824 3961

Bao Minh CMG Life Insurance Co Ltd
Level 3, Saigon Riverside Office Center
2A-4A Ton Duc Thang
District 1, Ho Chi Minh City
Telephone: (84 4) 829 1919
Facsimile: (84 4) 829 3131
General Director
R Carkeet

Americas
United States of America
CBA Branch Office
Level 17, 599 Lexington Avenue
New York NY 10022
Telephone: (1 212) 848 9200
Facsimile: (1 212) 336 7725
General Manager, Head of North America
L C Tuzo

Europe
United Kingdom
CBA Branch Office
Senator House
85 Queen Victoria Street
London EC4V 4HA
Telephone: (44 20) 7710 3999
Facsimile: (44 20) 7710 3939
Regional General Manager Europe & North America
P Orchart

First State Investments (UK) Limited
3rd Floor, 30 Cannon Street
London EC4M 6YQ
Telephone: (44 20) 7332 6500
Facsimile: (44 20) 7332 6501

Edinburgh
23 St Andrew Square
Edinburgh EH2 1BB
Telephone: (44 131) 473 2200
Facsimile: (44 131) 473 2222
Managing Partners
S Paul & A Tulloch

Commonwealth Bank of Australia Annual Report 2006 239

Contact Us

www.commbank.com.au

132 221 General Enquiries

For your everyday banking including paying bills using BPAY our automated service is available 24 hours a day, 365 days a year.

From overseas call +61 132 221. Operator assistance is available 24 hours a day, 365 days a year.

13 2224 Home Loans & Investment Home Loans

To apply for a new home loan/investment home loan or to maintain an existing loan. Available from 8am to 10pm, 365 days a year.

131 431 Personal Loan Sales

To apply for a new personal loan.

Available from 8am to 8pm, Monday to Friday.

131 519 CommSec (Commonwealth Securities)

Available from 8am to 7pm (Sydney Time), Monday to Friday.

CommSec provides the information and tools to make smart investment easy, accessible and affordable for all Australians, by phone or Internet at

www.commsec.com.au

131 709 CommSec Margin Loan

Enables you to expand your portfolio by borrowing against your existing shares and managed funds. To find out more simply call 13 17 09 8am to 5pm (Sydney Time) Monday to Friday or visit

www.commsec.com.au.

1800 240 889 Telephone Typewriter Service

A special telephone banking service for our hearing and speech impaired customers. The service covers all the services available on 13 2221. Available from 8am to 8pm, Monday to Friday.

1800 011 217 Lost or Stolen Cards

To report a lost or stolen card 24 hours a day, 365 days a year.

131 998 Business Line

For a full range of business banking solutions.

Available from 8am to 6pm, Monday to Friday.

132 015 Commonwealth Financial Services

For enquires on retirement and superannuation products, or managed investments. Available from 8.30am to 6pm (Sydney Time), Monday to Friday.

Unit prices are available 24 hours a day, 365 days a year.

CommInsure

For all your general insurance needs call 132 423 8am to 8pm (Sydney Time), Monday to Friday — or visit

www.comminsure.com.au

For general claims assistance call 132 420, 24 hours a day, 365 days a year.

For all your life insurance needs call 131 056 8am to 8pm (Sydney Time), Monday to Friday — or visit

www.comminsure.com.au

Internet Banking

You can apply for a home loan, credit card, personal loan, term deposit or a savings account on the internet by visiting our website at www.commbank.com.au available 24 hours a day, 365 days a year.

Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 365 days a year.

To apply for access to NetBank, call 132 828 between 8am and 8pm (Sydney Time), 7 days a week.

240 Commonwealth Bank of Australia Annual Report 2006


Cash EPS Performance 2003-2006 (cents) ⁽¹⁾		Underlying NPAT By Segment ($M) ⁽¹⁾



Banking Underlying Expense to Income		Lending Assets ($B)



Funds Under Administration ($B)		Annual Inforce Premiums – Australia & New Zealand ($M)


Chairman’s Statement			2
Chief Executive Officer’s Statement			4
Highlights			6
Banking Analysis			10
Funds Management Analysis			20
Insurance Analysis			24
Shareholder Investment Returns			27
Presentation of Financial Information			28
Integrated Risk Management			29
Description of Business Environment			33
Corporate Governance			36
Directors’ Report			43
Five Year Financial Summary			71
Financial Statements			73
Income Statements			74
Balance Sheets			75
Statements of Recognised Income and Expense			76
Statements of Cash Flows			77
Notes to the Financial Statements			79
Directors’ Declaration			233
Independent Audit Report			234
Shareholding Information			236
International Representation			239
Contact Us			240
Corporate Directory			241


(1)		2006 and 2005 presented on an AIFRS basis excluding the profit from sale of the Hong Kong insurance business.


(1)		Initial recognition of the available-for-sale investment reserve on 1 July 2005.


(1)		No comparative balances provided as exemption elected when adopting Financial Instruments AIFRS accounting from 1 July 2005.

(2)		These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 23.


								Vested and Exercisable at
	30 June 2006 ⁽¹⁾
	Balance		Options			Balance				Exercise Price
Name	1 July 2005		Exercised			30 June 2006		Number		$

Directors
D V Murray (retired on 22 September 2005)		250,000		(250,000	)		—		—		—
R J Norris (commenced on 22 September 2005)		—		—			—		—		—

Executives
M A Cameron		—		—			—		—		—
L G Cupper		75,000		—			75,000		75,000		30.12
S I Grimshaw		100,000		(100,000	)		—		—		—
H D Harley		87,500		(87,500	)		—		—		—
M R Harte		—		—			—		—		—
M A Katz (ceased employment on 24 March 2006)		250,000		(250,000	)		—		—		—
R V McKinnon (ceased employment on 31 December 2005)		37,500		(37,500	)		—		—		—
G L Mackrell		—		—			—		—		—
J K O’Sullivan		—		—			—		—		—
G A Petersen		—		—			—		—		—

Total for Key Management Personnel		800,000		(725,000	)		75,000		75,000		n/a

(a)		the financial statements and notes thereto of the Bank and the Group, and the additional disclosures included in the Directors’ Report designated as audited, comply with Accounting Standards and in their opinion are in accordance with the Corporations Act 2001;

(b)		the financial statements and notes thereto give a true and fair view of the Bank’s and the Group’s financial position as at 30 June 2006 and of their performance for the year ended on that date;

(c)		in the opinion of the Directors, there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they become due and payable; and

(d)		the directors have been given the declarations required under Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2006