RNS Number:5010S
National Australia Bank Ld
26 November 2003
PART 6A
54 Remuneration of executives
For the purposes of this note, executives are persons who work in, or mainly in,
Australia and receive gross remuneration in excess of $100,000, and are Board
appointees, executive directors of controlled entities, or Group employees
responsible for the strategic direction and management of major business units.
Aggregate remuneration received or due and receivable, directly or indirectly,
by executives of the Group from the Company and related parties consists of the
following:
Group Company
2003 2002 2003 2002
$'000 $'000 $'000 $'000
Salary package 28,055 28,058 23,599 22,739
Performance-based bonuses (1) 5,139 11,240 3,165 7,866
Other benefits 15,309 25,435 12,108 11,173
Total remuneration of executives 48,503 64,733 38,872 41,778
--------------------
(1) Represents bonuses paid in respect of prior year performance.
For the purposes of this note, remuneration does not include the fair value of
options or performance rights issued to executives under the Company's
executive share option plan no. 2 and performance rights plan. ASIC issued
disclosure guidelines on valuing options in annual directors' reports in
June 2003. ASIC encouraged that these guidelines be applied to all disclosures
of directors' and executives' emoluments. Due to the
impracticability of applying these guidelines to the greater than 700 executives
of the Group, the guidelines have not been applied to this note. The disclosure
of senior executive emoluments in the report of directors has been based on
ASIC's guidelines.
The following table shows the number of executives (as defined above) of the
Group receiving gross remuneration, in each of the ranges stated, from the
Company and related bodies corporate:
Group Company
Remuneration ($) 2003 2002 2003 2002
110,001 - 120,000 - 1 - 1
130,001 - 140,000 2 - - -
140,001 - 150,000 - 1 - 1
150,001 - 160,000 1 - 1 -
160,001 - 170,000 1 1 1 1
170,001 - 180,000 2 2 2 2
190,001 - 200,000 3 1 3 -
200,001 - 210,000 2 - 1 -
210,001 - 220,000 1 1 * 1 1 *
220,001 - 230,000 - 1 - 1
240,001 - 250,000 - 2 - 2
250,001 - 260,000 1 - 1 -
260,001 - 270,000 1 2 * 1 2 *
270,001 - 280,000 2 1 1 1
280,001 - 290,000 3 1 2 1
290,001 - 300,000 - 2 - 2
300,001 - 310,000 1 1 - 1
310,001 - 320,000 3 - 3 -
320,001 - 330,000 - 2 - 2
330,001 - 340,000 - 3 * - 3 *
340,001 - 350,000 1 2 1 2
350,001 - 360,000 - 5 - 5
360,001 - 370,000 - 3 - 1
370,001 - 380,000 1 - 1 -
380,001 - 390,000 2 3 2 3
390,001 - 400,000 5 * 1 * 4 * 1 *
400,001 - 410,000 1 # - 1 # -
410,001 - 420,000 2 3 * 2 2 *
420,001 - 430,000 2 1 2 1
430,001 - 440,000 2 - 2 -
440,001 - 450,000 2 1 2 -
450,001 - 460,000 1 1 - 1
460,001 - 470,000 2 1 2 1
470,001 - 480,000 2 * 1 2 * 1
490,001 - 500,000 - 1 - 1
500,001 - 510,000 1 - 1 -
510,001 - 520,000 - 1 - 1
520,001 - 530,000 2 # - 1 # -
530,001 - 540,000 2 - 2 -
540,001 - 550,000 - 1 * - 1 *
550,001 - 560,000 2 1 - 1
560,001 - 570,000 3 * 1 3 * -
570,001 - 580,000 1 2 1 2
580,001 - 590,000 1 * - - -
590,001 - 600,000 - 1 - 1
610,001 - 620,000 1 - 1 -
630,001 - 640,000 1 - 1 -
640,001 - 650,000 3 - 1 -
660,001 - 670,000 1 1 1 1
670,001 - 680,000 1 - - -
680,001 - 690,000 1 - 1 -
690,001 - 700,000 - 1 - 1
700,001 - 710,000 1 - 1 -
710,001 - 720,000 1 - 1 -
720,001 - 730,000 1 - 1 -
730,001 - 740,000 1 * 1 * 1 * 1 *
740,001 - 750,000 1 * 1 - 1
770,001 - 780,000 1 - 1 -
820,001 - 830,000 1 * - 1 * -
840,001 - 850,000 - 1 - 1
850,001 - 860,000 - 1 - 1
870,001 - 880,000 - 1 - 1
910,001 - 920,000 - 1 - 1
940,001 - 950,000 1 - - -
960,001 - 970,000 1 - 1 -
980,001 - 990,000 - 1 * - 1 *
1,000,001 - 1,010,000 - 1 - 1
1,010,001 - 1,020,000 1 - 1 -
1,050,001 - 1,060,000 1 - 1 -
1,060,001 - 1,070,000 - 1 - -
1,090,001 - 1,100,000 1 - 1 -
1,200,001 - 1,210,000 - 1 - -
1,310,001 - 1,320,000 - 1 - 1
1,350,001 - 1,360,000 1 - 1 -
174
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Group Company
Remuneration ($) 2003 2002 2003 2002
1,360,001 - 1,370,000 - 1 - -
1,390,001 - 1,400,000 - 1 * - 1 *
1,480,001 - 1,490,000 1 - 1 -
1,490,001 - 1,500,000 1 - 1 -
1,530,001 - 1,540,000 - 1 - 1
1,550,001 - 1,560,000 - 1 - -
1,560,001 - 1,570,000 1 - 1 -
1,570,001 - 1,580,000 1 - - -
1,640,001 - 1,650,000 - 1 - -
1,680,001 - 1,690,000 - 1 - -
1,810,001 - 1,820,000 - 1 - -
1,880,001 - 1,890,000 - 1 - -
1,910,001 - 1,920,000 - 1 - -
1,930,001 - 1,940,000 - 1 * - 1 *
2,550,001 - 2,560,000 - 1 * - 1 *
2,560,001 - 2,570,000 - 1 # - 1 #
2,620,001 - 2,630,000 - 1 - 1
2,930,001 - 2,940,000 - 1 - -
3,330,001 - 3,340,000 - 1 * - 1 *
3,520,001 - 3,530,000 - 1 - -
3,960,001 - 3,970,000 1 - 1 -
Total number of executives 84 81 66 64
* Includes retirement, retrenchment and/or other resignation
benefits paid to at least one person in each of these bands.
# Includes expatriate benefits paid to at least one person in
this band.
The remuneration bands are not consistent with the specific remuneration details
set out in the report of the directors as the basis of calculation differs due
to the differing requirements of the Corporations Act 2001 (Cth) and Australian
Accounting Standards.
55 Remuneration of auditor
Group Company
2003 2002 2001 2003 2002
$'000 $'000 $'000 $'000 $'000
Total amounts paid or due and payable to
auditor of the Company for:
Audit and review of the financial 7,879 7,000 7,511 2,790 2,295
statements
Regulatory services (1) 2,940 2,169 1,518 1,135 1,088
Total audit fees 10,819 9,169 9,029 3,925 3,383
Audit-related fees (2) 3,327 4,222 4,087 1,420 2,103
Taxation services (3) 2,782 3,077 1,859 1,669 705
Other services (4) 456 3,751 3,207 204 2,495
17,384 20,219 18,182 7,218 8,686
Total amounts paid or due and payable to
related practices of the auditor of the
Company for:
Consulting (5) - - 7,456 - -
Total remuneration of the auditor and 17,384 20,219 25,638 7,218 8,686
their related practices
Comparatives for the previous corresponding years have been reclassified to
reflect the current basis of presentation.
(1) Includes prudential supervision reviews for central banks and other
regulatory services.
(2) Includes employee benefit plan audits, due diligence related to
mergers and acquisitions, internal control reviews and consultations concerning
financial accounting and reporting standards.
(3) Includes tax compliance and tax advisory services. The auditor did not
undertake any separate taxation engagements in relation to the calculation or
determination of a Group entity's tax expense or tax provision.
(4) Includes Corporate Recovery Services.
(5) Provision of personnel to assist with the development of the corporate
intranet.
The Audit Committee has policies and procedures in place governing approval of
audit and non-audit services. For the 2003 year, audit and non-audit
servicesproposed to be provided by the auditor were approved by the Audit
Committee as part of the Annual External Audit Engagement Letter. Any
additional services proposed to be provided required the specific pre-approval
of the Audit Committee. The Audit Committee has delegated to the Audit
Committee Chairman the authority to pre-approve audit and non-audit services to
be provided by the auditor. The decisions of the Audit Committee Chairman to
specifically pre-approve an audit or non-audit service are presented to the
Audit Committee meeting at its next scheduled meeting.
The Audit Committee approved two non-audit engagements in the other services
category pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of US Regulation S-X.
The fees paid for these services represent 0.06% of the remuneration paid to the
auditor in 2003. These two de minimus engagements were brought to the attention
of the Audit Committee and approved prior to the completion of the audit.
175
By virtue of ASIC Class Order 98/2000 dated September 30, 1998, and amended on
February 8, 2000, the auditors of the Company and its controlled entities, KPMG,
have been exempted from compliance with certain requirements of sections 324(1)
and 324(2) of the Corporations Act 2001 (Cth). The Class Order exemption
applies to allow members of KPMG and bodies corporate in which a member of KPMG
is a substantial shareholder (other than those members and bodies corporate in
which a member of KPMG is a substantial shareholder engaged on the audit of the
Company and/or controlled entities) to be indebted tothe Company and its
controlled entities provided that certain conditions are met, including the
following:
- such indebtedness does not exceed $5,000; and
- section 324(3) of the Act applies to the relevant
indebtedness; and
- the indebtedness arose upon ordinary commercial terms
as to the rate of interest, the terms of repayment of principal and payment of
interest, the security to be provided and otherwise, and it related to a
financial arrangement between the relevant member and the Company and/or its
controlled entities prior to the member becoming a member of KPMG where the
arrangement was not entered into in connection with becoming a member of KPMG.
The Class Order is not currently being utilised, however, it is a requirement
that its existence be disclosed in the financial report.
56 Fiduciary activities
The Group's fiduciary activities consist of investment management and
other fiduciary activities conducted as manager, custodian or trustee for a
number of investments and trusts, including superannuation and approved deposit
funds, and wholesale and retail investment trusts. The aggregate amounts of
funds concerned, which are not included in the Group\'s statement of
financial position, are as follows:
Group
2003 2002
$m $m
Funds under management 15,953 14,575
Funds under trusteeship 4,973 5,123
Funds under custody and investment administration 311,163 359,590
Arrangements are in place to ensure that these activities are managed
independently from all other activities of the Group.
57 Life insurance business disclosures
The Group conducts its life insurance business through a number of controlled
entities including National Australia Financial Management Limited (NAFM), MLC
Limited (MLC) and MLC Lifetime Company Limited (MLC Lifetime) in Australia,
National Australia Life Company Limited in Great Britain and Northern Ireland,
BNZ Life Insurance Limited in New Zealand, MLC (Hong Kong) Limited in Hong Kong,
PT MLC Life Indonesia in Indonesia, Advance MLC Assurance Co. Limited in
Thailand. This note is intended to provide detailed disclosures in relation to
the life insurance business conducted through these controlled entities. The
financial information contained in this note does not represent the entire
Wealth Management business segment and therefore is not intended to reconcile to
note 3.
Appropriately qualified actuaries have been appointed in respect of each life
insurance business within the Group and they have reviewed and satisfied
themselves as to the accuracy of the policy liabilities included in this
financial report, including compliance with the regulations of the Life
Insurance Act 1995 (Cth) where appropriate. Further details are set out in the
various insurance statutory returns of these life insurers.
(a) Details of the solvency position of each life insurer in the Group
Australian life insurers
Under the Life Insurance Act 1995 (Cth), life insurers are required to hold
reserves in excess of policy liabilities to meet certain solvency and capital
adequacy requirements. These additional reserves are necessary to support the
life insurer's capital requirements under its business plan and to
provide a cushion against adverse experience in managing long-term risks. In
Australia, the Life Insurance Actuarial Standards Board has issued Actuarial
Standard AS 2.03 "SolvencyStandard" for determining the level of
solvency reserves. This standard prescribes a minimum capital requirement for
each statutory fund and the minimum levelof assets required to be held in each
statutory fund. Capital adequacy is determined in accordance with Actuarial
Standard AS 3.03 "Capital Adequacy Standard"
The summarised information provided below has been extracted from the financial
statements prepared by each Australian life insurer in the Group for the purpose
of fulfilling reporting requirements prescribed by local acts and prevailing
prudential rules for 2003 and 2002. For detailed solvency information on a
statutory funds basis, users of this annual financial report should refer to the
financial statements prepared by each life insurer.
NAFM MLC MLC
Lifetime
$m $m $m
Solvency reserve as at September 30, 2003 29 125 481
Assets available for solvency as at September 30, 2003 76 243 731
Coverage of solvency reserve (times) 2.6 1.9 1.5
176
Non-Australian life insurers
The non-Australian life insurers in the Group are not governed by the Life
Insurance Act 1995 (Cth) as they are foreign-domiciled life insurance companies.
Each of these companies is required to meet similar tests of capital adequacy
and solvency based on the regulations of relevant local authorities.
(b) Actuarial methods and assumptions - Australian life insurers
(i) Policy liabilities
The policy liabilities have been calculated on the Margin on Services (MoS)
method as set out in Actuarial Standard AS 1.03 "Valuation of policy
liabilities" issued by the Life Insurance Actuarial Standards Board
(refer to note 1(z)).
(ii) Types of business and profit carriers
Product type Actuarial method Profit carrier
Investment-linked Accumulation n/a
Non-investment-linked
Traditional non-participating business Projection Premiums
Lump sum risk- regular premiums Projection Premiums
Lump sum risk- single premiums Projection Claims
Income stream risk Projection Premiums
Annuity business Projection Annuity payments
Traditional participating business Projection Bonuses
(iii) Discount rates
These are the rates used to discount future cash flows under the projection
method to determine the net present value. The discount rates are determined by
the earnings rate of the assets that support the policy liabilities.
NAFM MLC and MLC Lifetime
Discount rates 2003 2002 2003 2002
Traditional business
Ordinary 5.0 % (2) 5.3 % (2) 5.0 % (2) 5.3 % (2)
Superannuation n/a n/a 6.1 % (2) 6.5 % (2)
Term life insurance 4.4 % (1) 5.2 % (1) 4.4 % (1) 5.2 % (1)
Disability business 5.4 % (1) 5.2 % (1) 5.4 % (1) 5.2 % (1)
Annuity business 6.5 % (1) 6.9 % (1) 5.9 % (1) 6.0 % (1)
(1) Before tax.
(2) After tax.
(iv) Future expenses and indexation
Future maintenance expenses have been assumed to increase by a 2.0% (2002: 2.0%)
per annum rate of inflation for NAFM, MLC and MLC Lifetime. Future investment
management fees have been assumed to remain at current rates. Benefits and/or
premiums on certain policies are automatically indexed by the consumer price
index. The policy liabilities assume a future take -up of these indexation
options based on the relevant company's recent experience.
(v) Rates of taxation
Rates of taxation in relation to the Australian life insurance business are
outlined in note 1(pp).
177
(vi) Mortality and morbidity
Future mortality and morbidity assumptions are based on actuarial tables
published by the Institute of Actuaries of Australia, with adjustments to claim
incidence and termination rates based on recent experience as follows:
NAFM MLC and MLC Lifetime
Traditional business Male 131% of IA 95-97 (1) Male 90% of IA 95-97 (1)
Female 131% of IA 95-97 (1) Female 90% of IA 95-97 (1)
Term life insurance Male 59% of IA 95-97 (1) Male 93% of IA 95-97 (1)
Female 59% of IA 95-97 (1) Female 80% of IA 95-97 (1)
Disability income
Income protection benefits Male: Rates similar to 120% of Male: Rates similar to 120% of
incidence and 110% of claim costs of incidence and 130% of claim costs of
IAD 89-93 (2) IAD 89-93 (2)
Female: Rates similar to 85% of Female: Rates similar to 85% of
incidence and 110% of claim costs of incidence and 130% of claim costs of
IAD 89-93 (2) IAD 89-93 (2)
Mortgage-related Total and Male: Rates similar to 180% of n/a
Temporary Disablement benefits incidence and 110% of claim costs of
IAD 89-93 (2)
Female: Rates similar to 180% of
incidence and 110% of claim costs of
IAD 89-93 (2)
Lump sum benefits Various
Annuity business 56.3% of IM 80 and IF 80 (3) 52.5% of IM 80 and IF 80 (3)
Accident plan Australian population rates (adjusted) n/a
(1) IA 95-97 is a mortality table developed by the Institute of Actuaries
of Australia based on Australian insured lives experience from 1995 to 1997.
(2) IAD 89-93 is a disability table developed by the Institute of
Actuaries of Australia based on Australian insured lives disability income
business experience from 1989 to 1993.
(3) IM 80 and IF 80 are mortality tables developed by the Institute of
Actuaries and the Faculty of Actuaries based on UK annuitant lives experience
from 1979 to 1982. The tables refer to male and female lives respectively and
incorporate factors which allow for mortality improvements since the date of the
investigation (There is no standard Australian annuitant mortality table).
(vii) Discontinuances
Assumed future annual rates of discontinuance for the major classes of business
are as follows:
NAFM MLC and MLC Lifetime
Product type 2003 2002 2003 2002
Traditional business - ordinary 4.0 % 5.0 % 7.0 % 5.0 %
Traditional business - superannuation n/a n/a 5.0 % 3.0 %
Term life insurance 11.0 % 11.0 % 11.0 % 11.0 %
Accident business 6.0 % 5.0 % n/a n/a
Superannuation business (1) n/a n/a 13.0 % 12.5 %
Allocated pension (1) n/a n/a 5.0 % 4.0 %
Disability income 14.0 % 15.0 % 12.0 % 13.0 %
(1) Superannuation business and allocation pension products relating to
MLC and MLC Lifetime for 2002 has been restated to correct a numerical error in
the percentages disclosed in the annual financial report 2002. The previous
percentages were 9.0% for superannuation business and 5.0% for allocated
pension.
(viii) Surrender values
Surrender values are based on the provision specified in policy contracts and on
the current surrender value basis for traditional policies, and typically
include a recovery of policy acquisition and maintenance costs. In all cases,
the surrender values specified in the contracts exceed those required by the
Life Insurance Act 1995 (Cth).
178
(ix) Crediting policy and bonus philosophy
For participating business, the Group's policy is to set bonus rates
such that over long periods, the returns to policyholders are commensurate with
the investment returns achieved on relevant assets backing the policies,
together with other sources of profit arising from this business. Pre-tax
profits are split between policyholders and shareholders with the valuation
allowing for shareholders to share in the pre-tax profits at the maximum rate of
20% (15% for certain policies issued before 1980). In applying the
policyholders' share of profits to provide bonuses, consideration is
given to equity between generations of policyholders and equity between various
classes and sizes of policies in force. Assumed future bonus rates included in
policy liabilities were set such that the present value of policy liabilities
equates to the present value of assets supporting the business together with
assumed future investment returns, allowing for the shareholders' right
to participate in future pre-tax profits.
Assumed future annual bonus rates for the major classes of business are:
Ordinary Superannuation
business business
2003 2002 2003 2002
Bonus rate on sum assured 1.2 % 0.95 % 2.0 % 1.75 %
Bonus rate on existing bonuses 1.2 % 0.95 % 2.0 % 1.75 %
(c) Disclosure of assumptions - non-Australian life insurers
The policy liabilities for the Group's non-Australian life insurers have
been determined by the respective entity's actuary in accordance with
the guidelines and standards mandated by their local authorities.
(d) Glossary of terms relating to statutory funds business
Accumulation method - The outstanding calculation of the policy
liability is based on the accumulation of premiums and investment earnings less
fees applicable. Deferred acquisition costs are offset against this liability.
Annuity products - Policies that provide a regular payment to the
policyholder for a specified period or until death of the insured. Policies may
also provide for a payment of a specified amount upon death.
Bonuses - Discretionary amounts added to the benefits currently payable
under participating business. Under the Life Insurance Act 1995 (Cth), bonuses
are a distribution to policyholders of current profits and retained profits and
may take a number of forms including reversionary bonuses, interest credits and
capital growth bonuses (payable on the termination of the policy). The total
amount of policyholders' retained profits distributed in the reporting
period as interim and terminal bonus distributions is included in claims
expense. Bonuses proposed during a year are included in the change in policy
liabilities.
Classes of business - Under the Life Insurance Act 1995 (Cth), there may
be two classes of business in each statutory fund: superannuation business and
ordinary business. Superannuation business is maintained for the purpose of a
superannuation or retirement scheme. Ordinary business is all other business.
Discontinuances - The voluntary termination of policies through
surrender, lapse (surrender value is insufficient to support the debt on the
policy) or forfeiture (non-payment of premiums when the policy has no surrender
value).
Experience profits/(losses) - The profits/(losses) that occur when the
actual experience of business is better (or worse) than that expected according
to the assumptions used in the calculation of policy liabilities or when
once-off events occur which were not allowed for in the assumptions.
Investment account policies - Policies where the benefits are calculated
by reference to an account balance. Interest is added to the account balance
each year as a distribution of profits under the Life Insurance Act 1995 (Cth).
Investment management expenses - The costs of managing the investment
portfolio including principal investment advice, investment management and
custodian expenses.
Maintenance expenses - The costs of all activities which support the
maintenance and servicing of the business currently in force. Maintenance
expenses include the cost of processing policy renewals, the cost of processing
claims and surrender payments, various management costs, renewal commission, and
the cost of maintaining product and administration systems. Maintenance
expenses include all costs that are not policy acquisition costs or investment
management expenses.
Non-participating business - Policies where the policy benefits are
fully specified in the policy document. Profits or losses on this business
accrue solely to the shareholders.
Participating business - Policies where the policy benefits include, in
addition to benefits guaranteed by the policy document, an entitlement to share
(with the shareholders) in the profits of the life company. These profits are
usually distributed by providing additional benefits under the policies eg. by
the addition of bonuses or interest credits. The participating policyholders'
share of the profits is protected by the Life Insurance Act 1995
(Cth). The participating business includes whole of life, endowment insurance,
pure endowment policies and investment account policies.
179
Planned profit - The amount of profit that is expected to be generated
from the profit margins for a particular reporting period.
Policy acquisition costs or new business selling costs - These include
advisory fees, the cost of processing the application, advertising and promotion
of products and services, and the cost of developing and establishing new
products and related activities.
Profit margin - The expected profit under the policy is the profit
margin. It depends upon the premiums charged and the policy benefits provided,
the policy experience to date (including the policy acquisition costs incurred)
and the assumptions used in the calculation of policy liabilities. Under the
requirements of AS 1.03, profit margins are often defined in terms of the value
of another income or expense item (profit carrier). For participating business,
profit margins include those for both policyholders and shareholders. For
non-participating business, all profit margins belong to shareholders.
Projection Method - The calculation of policy liability is performed by
making estimates about future expected cash flows (investment income, premiums,
expenses, redemptions, benefit payments). The expected cash flows are then
discounted to obtain a present value.
Traditional business - Policies such as whole of life insurance,
endowment insurance and pure endowment policies. The sum insured and any
bonuses are payable on death or on reaching a certain age (endowment insurances
and pure endowments). Premiums are normally paid throughout the policy term.
Traditional business, which is normally participating business, is included
within non-investment-linked business.
Whole of life and endowment - Policies where the sum insured and bonuses
are payable on death or on reaching a certain age. Bonuses are added each year
as distribution of profits under the Life Insurance Act 1995 (Cth).
(e) Disaggregated information
The Group's life insurance business is conducted through a number of
life insurance entities in Australia and overseas.
In Australia, under the Life Insurance Act 1995 (Cth), life insurance business
is conducted within separate statutory funds which are distinguished from one
another and from the shareholders' funds. The financial statements of
Australian life insurers are lodged with the relevant Australian regulators and
show all major components of the financial statements disaggregated between each
life insurance statutory fund and the shareholders' funds.
The disaggregated financial statements of the Group's life insurance
businesses for 2003 are summarised below:
Disaggregated statement of financial performance
For the year ended September 30, 2003
Australian statutory funds
Investment- Non- International Total
linked investment- life life
business linked insurance insurance
business funds (1) funds
$m $m $m $m
Premium and related revenue
Total premiums received or receivable (2) 5,505 731 311 6,547
Deduct: Policyholder investment contributions 5,445 - - 5,445
Fee revenue in premiums 60 731 311 1,102
(Add)/Deduct: Outward reinsurance expense (1 ) 130 24 153
Other income - - - -
Total premium and related revenue 61 601 287 949
Investment revenue
Equity securities 2,055 148 47 2,250
Debt securities 342 138 21 501
Property - 8 - 8
Total investment revenue 2,397 294 68 2,759
Total life insurance revenue 2,458 895 355 3,708
180
Australian statutory funds
Investment- Non- International Total
linked investment- life life
business linked insurance insurance
business funds (1) funds
$m $m $m $m
Claims expense
Total claims paid or payable (3) (4,853 ) (886 ) (209 ) (5,948 )
Deduct: Policyholder investment withdrawals 4,853 - - 4,853
Total claims expenses - (886 ) (209 ) (1,095 )
Deduct: Reinsurance claim recoveries - 121 16 137
Net claims expense - (765 ) (193 ) (958 )
Change in policy liabilities (1,845 ) 310 17 (1,518 )
Policy acquisition expense
Commission (95 ) (97 ) (57 ) (249 )
Other (26 ) (60 ) (21 ) (107 )
Policy maintenance expense
Commission (79 ) (41 ) (20 ) (140 )
Other (127 ) (63 ) (27 ) (217 )
Investment management fees (64 ) (7 ) (4 ) (75 )
Interest expense (3 ) (18 ) 1 (20 )
Total life insurance expenses (2,239 ) (741 ) (304 ) (3,284 )
Profit from ordinary activities before income tax 219 154 51 424
expense
Income tax (expense)/benefit relating to ordinary (108 ) (21 ) 3 (126 )
activities
Net profit 111 133 54 298
Net (profit)/loss attributable to outside equity 28 - (12 ) 16
interest
Net profit attributable to parent entity 139 133 42 314
Disaggregated MoS shareholder profit analysis
For the year ended September 30, 2003
Planned profit margins 127 95 18 240
Experience variation and other items (14 ) 16 4 6
Reversal of capitalised losses - 4 6 10
Operating margins 113 115 28 256
Investment earnings on contributed equity and 26 18 14 58
retained profits
Net profit attributable to parent entity 139 133 42 314
Disaggregated statement of financial position
As at September 30, 2003
Assets
Investment assets (1) 31,161 3,908 777 35,846
Other assets 692 444 76 1,212
Total assets 31,853 4,352 853 37,058
Liabilities
Policy liabilities (1) 28,737 3,109 463 32,309
Unvested policyholder benefits - 148 - 148
Other liabilities 130 553 96 779
Total liabilities 28,867 3,810 559 33,236
Net assets 2,986 542 294 3,822
Equity
Contributed equity - - 197 197
Retained profits 441 542 97 1,080
Outside equity interest 2,545 - - 2,545
Total equity 2,986 542 294 3,822
(1) International life insurance funds refers to the financial performance
and position of foreign-domiciled life insurance entities. These non-Australian
life insurers have statutory funds concepts, but they are not directly
comparable to the Life Insurance Act 1995 (Cth) statutory fund concepts.
(2) Premiums received for investment-linked business contain two elements:
firstly, amounts which are in the nature of deposits (ie. policyholder
investment contributions) that are recognised as an increase in policy
liabilities and secondly, the fee component which is recognised as revenue.
(3) Total claims paid or payable for investment-linked business which are
in the nature of policyholder investment withdrawals are recognised as
reductions in policy liabilities.
181
The disaggregated financial statements of the Group's life insurance
businesses for 2002 are summarised below:
Australian statutory funds
Investment- Non- International Total
linked investment- life life
business linked insurance insurance
business funds (1) funds
$m $m $m $m
Disaggregated statement of financial performance
For the year ended September 30, 2002
Premium and related revenue
Total premiums received or receivable (2) 9,363 711 388 10,462
Deduct: Policyholder investment contributions 9,273 3 - 9,276
Fee revenue in premiums 90 708 388 1,186
(Add)/Deduct: Outward reinsurance expense (4 ) 113 30 139
Other income - 80 7 87
Total premium and related revenue 94 675 365 1,134
Investment revenue
Equity securities (1,734 ) (115 ) (28 ) (1,877 )
Debt securities 567 166 26 759
Property 124 20 (14 ) 130
Total investment revenue (1,043 ) 71 (16 ) (988 )
Total life insurance revenue (949 ) 746 349 146
Claims expense
Total claims paid or payable (3) (7,360 ) (853 ) (259 ) (8,472 )
Deduct: Policyholder investment withdrawals 7,360 39 - 7,399
Total claims expenses - (814 ) (259 ) (1,073 )
Deduct: Reinsurance claim recoveries - 92 25 117
Net claims expense - (722 ) (234 ) (956 )
Change in policy liabilities 1,179 387 71 1,637
Policy acquisition expense
Commission (75 ) (87 ) (58 ) (220 )
Other (104 ) (48 ) (34 ) (186 )
Policy maintenance expense
Commission (119 ) (34 ) (23 ) (176 )
Other (56 ) (66 ) (47 ) (169 )
Investment management fees (73 ) (11 ) (2 ) (86 )
Interest expense (4) (5 ) (6 ) - (11 )
Total life insurance expenses 747 (587 ) (327 ) (167 )
Profit/(loss) from ordinary activities before income (202 ) 159 22 (21 )
tax expense
Income tax (expense)/benefit relating to ordinary 307 (55 ) (4 ) 248
activities
Net profit 105 104 18 227
Net profit attributable to outside equity interest - - (6 ) (6 )
Net profit attributable to parent entity 105 104 12 221
182
Australian statutory funds
Investment- Non- International Total
linked investment- life life
business linked insurance insurance
business funds (1) funds
$m $m $m $m
Disaggregated MoS shareholder profit analysis
For the year ended September 30, 2002
Planned profit margins 140 108 15 263
Experience variation and other items (14 ) (19 ) - (33 )
Reversal of new business losses - (4 ) - (4 )
Operating margins 126 85 15 226
Investment earnings on contributed equity and retained (21 ) 19 (3 ) (5 )
profits
Net profit attributable to parent entity 105 104 12 221
Disaggregated statement of financial position
As at September 30, 2002
Assets
Investment assets (1) 26,248 3,910 795 30,953
Other assets 1,219 525 46 1,790
Total assets 27,467 4,435 841 32,743
Liabilities
Policy liabilities (1) 26,302 3,436 562 30,300
Unvested policyholder benefits - 125 - 125
Other liabilities 757 577 28 1,362
Total liabilities 27,059 4,138 590 31,787
Net assets 408 297 251 956
Equity
Contributed equity - - 181 181
Retained profits 408 297 70 775
Total equity 408 297 251 956
(1) International life insurance funds refers to the financial performance
and position of foreign-domiciled life insurance entities. These non-Australian
life insurers have statutory funds concepts, but they are not directly
comparable to the Life Insurance Act 1995 (Cth) statutory fund concepts.
(2) Premiums received for investment-linked business contain two elements:
firstly, amounts which are in the nature of deposits (ie. policyholder
investment contributions) that are recognised as an increase in policy
liabilities and secondly, the fee component which is recognised as revenue.
(3) Total claims paid or payable for investment-linked business which are
in the nature of policyholder investment withdrawals are recognised as
reductions in policy liabilities.
(4) For the puposes of this disaggregated information comparative
information in relation to the interest expense of the non-investment linked
business has been restated.
183
58 Reconciliation with US GAAP and other US GAAP disclosures
In this note, National Australia Bank Limited is referred to as the Company and
the Group consists of the Company and all entities over which it has control
(refer to note 44). A glossary of other key terms is contained at page 215.
The Company files its annual report (Form 20-F) with the United States SEC.
The financial report of the Group is prepared in accordance with Australian GAAP
(refer to note 1), which differ in some respects from US GAAP.
The following are reconciliations of the Group's financial statements
for the last three years to September 30 for any significant adjustments to
Australian GAAP which would be reported in applying US GAAP:
Group
Footnote 2003 2002 2001
$m $m $m
Statement of income
For the year ended September 30
Net profit reported using Australian GAAP 3,955 3,373 2,083
Life insurance accounting adjustments
Movement in excess of net market value over net a(i) 137 224 (639 )
assets of life insurance controlled entities
Amortisation of goodwill a(i) - (166 ) (161 )
Amortisation of present value of future profits a(ii) (137 ) (157 ) (56 )
(PVFP) asset
Difference in revenue recognition, change in life a(iii) (373 ) 317 184
insurance policy liabilities and deferred
acquisition cost asset
Difference in investments relating to life insurance a(iv) (128 ) 77 26
business asset values and unrealised profits on
available for sale securities
Movement in and elimination of deferred tax a(v) 48 21 161
liabilities
Difference in minority interest share of profit a(vi) 16 26 32
Other life insurance accounting adjustments a(vii) 168 49 (7 )
Other adjustments
Difference in depreciation charge for buildings and b 1 20 8
profit/(loss) on sale of land and buildings
Amortisation of goodwill, core deposit intangible c 98 - (9 )
and associated deferred tax liability
Pension expense d (23 ) 30 67
Difference in recognition of profit on sale and e 14 18 8
leaseback transactions
Employee share compensation f (50 ) (18 ) (26 )
Employee option compensation g (58 ) (44 ) (72 )
Difference in lease revenue recognition h (7 ) (17 ) (101 )
Transitional adjustment on adoption of SFAS 133 i - - (352 )
Movements in fair value of derivative financial i (392 ) 292 875
instruments and associated impact on provision for
mortgage servicing rights
Difference in profit on sale of foreign controlled i - (280 ) -
entity
Other - (18 ) 13
Total adjustments before tax expense according to US 3,269 3,747 2,034
GAAP
Total tax impact of adjustments 258 (292 ) (240 )
Net income according to US GAAP (1) 3,527 3,455 1,794
(1) Net income according to US GAAP for 2002 and 2001 have been restated
for the revised interpretation of APB 25 "Accounting for Stock Issued to
Employees". Refer to footnote (g).
184
Group
Footnote 2003 2002 2001
$m $m $m
Comprehensive income
For the year ended September 30
Net income according to US GAAP 3,527 3,455 1,794
Other comprehensive income
Foreign currency translation reserve (1,493 ) (520 ) 192
(Tax: 2003: $640m; 2002: $223m; 2001: $(99)m)
Asset revaluation reserve b 9 (9 ) 2
(Tax: 2003: $(4)m; 2002: $4m; 2001: $(1)m)
Unrealised profits/(losses) on available for sale a(iv), j 161 (47 ) (29 )
securities
(Tax: 2003: $(69)m; 2002: $20m; 2001: $15m)
Foreign currency revaluation surplus a(vii) (164 ) (55 ) 18
(Tax: 2003: $4m; 2002: $6m; 2001: $(9)m)
Shadow policy liabilities adjustment a(iii) 45 (25 ) (6 )
(Tax: 2003: $(19)m; 2002: $11m; 2001: $3m)
Transitional adjustment on adoption of SFAS 133 i - - (17 )
(Tax: 2003: nil; 2002: nil; 2001: $9m)
Movements in fair value of derivative financial i 20 15 (18 )
instruments
(Tax: 2003: $(9)m; 2002: $(6)m; 2001: $9m)
(1,422 ) (641 ) 142
Total comprehensive income according to US GAAP (1) 2,105 2,814 1,936
(1) Total comprehensive income according to US GAAP for 2002 and 2001 has
been restated for the revised interpretation of APB 25 "Accounting for
Stock Issued to Employees". Refer to footnote (g).
Earnings per share according to US GAAP (cents) (1) o
Basic 220.6 211.0 102.8
Diluted 213.1 205.6 104.4
(1) Earnings per share according to US GAAP for 2002 and 2001 has been
restated for the revised interpretation of APB 25 "Accounting for Stock
Issued to Employees". Refer to footnote (g).
Statement of financial position
As at September 30
Equity
Issued and fully paid capital
Contributed equity reported using Australian GAAP 9,728 9,931 10,725
Employee share compensation f 94 44 26
Employee option compensation g 593 535 491
Issued and fully paid capital according to US GAAP 10,415 10,510 11,242
(1)
Reserves
Reserves reported using Australian GAAP 893 2,105 2,427
Asset revaluation reserve b (16 ) (7 ) (16 )
Foreign currency translation reserve 251 (1,242 ) (1,762 )
Reserves according to US GAAP k 1,128 856 649
185
Group
Footnote 2003 2002 2001
$m $m $m
Retained profits
Retained profits less outside equity interest 13,786 11,148 10,337
reported using Australian GAAP
Adjustment to opening retained profits- employee g - (491 ) (419 )
option compensation
Life insurance accounting adjustments
Movement in excess of net market value over net a(i) (4,972 ) (5,081 ) (5,281 )
assets of life insurance controlled entities
Recognition and amortisation of goodwill a(i) 2,964 2,935 3,101
Recognition and amortisation of PVFP asset a(ii) 1,452 1,589 1,746
Difference in revenue recognition, change in life a(iii) (714 ) (478 ) (704 )
insurance policy liabilities and deferred
acquisition cost asset
Difference in investments relating to life insurance a(iv) (27 ) 70 8
business asset values and unrealised profits on
available for sale securities
Movement in and elimination of deferred tax a(v) 299 251 230
liabilities
Recalculation of minority interest a(vi) (115 ) (131 ) (78 )
Movement in net present value of subordinated debt a(vii) (2 ) (2 ) 10
Movement in foreign currency revaluation surplus a(vii) 180 16 (39 )
Other adjustments
Elimination of revaluation surplus of land and b (107 ) (98 ) (109 )
buildings
Adjustment of provision for depreciation on b 91 89 87
buildings revalued
Amortisation of goodwill, core deposit intangible c 98 - -
and associated deferred tax liability
Pension expense d 80 96 75
Unamortised profit on sale and leaseback e (48 ) (59 ) (72 )
transactions
Employee share compensation f (94 ) (44 ) (26 )
Employee option compensation g (593 ) (44 ) (72 )
Difference in lease revenue recognition h (110 ) (103 ) (89 )
Transitional adjustment on adoption of SFAS 133 i (232 ) (232 ) (232 )
Movements in fair value of derivative financial i 635 909 586
instruments and associated impact on provision for
mortgage servicing rights
Provision for final cash dividend l - 1,151 1,054
Difference in profit on sale of foreign controlled i (280 ) (280 ) -
entity
Other (19 ) (41 ) (23 )
Retained profits according to US GAAP (1)(2) 12,272 11,170 10,090
Outside equity interest
Outside equity interest reported using Australian 2,804 67 68
GAAP
Reclassification of minority interest a(vi) (2,804 ) (67 ) (68 )
Outside equity interest according to US GAAP - - -
Accumulated other comprehensive income
Accumulated other comprehensive income reported 1,469 2,006 1,662
using US GAAP at beginning of year (2)
Shadow policy liabilities adjustment a(iii) 45 (25 ) (6 )
Unrealised profits/(losses) on available for sale a(iv), j 161 57 161
securities (2)
Foreign currency translation reserve (1,493 ) (520 ) 192
Asset revaluation reserve b 9 (9 ) 2
Foreign currency revaluation surplus a(vii) (164 ) (55 ) 30
Transitional adjustment on adoption of SFAS 133 i - - (17 )
Movements in fair value of derivative financial i 20 15 (18 )
instruments
Accumulated other comprehensive income according to 47 1,469 2,006
US GAAP
Total equity according to US GAAP 23,862 24,005 23,987
(1) Issued and fully paid capital according to US GAAP and Retained
profits according to US GAAP for 2002 and 2001 have been restated for the
revised interpretation of APB 25 "Accounting for Stock Issued to
Employees". Refer to footnote (g).
(2) The reconciliation item 'Unrealised profit on shares in
entities and other securities', previously reflected as an adjustment to
retained profits, has been reclassified to accumulated other comprehensive
income according to US GAAP.
186
Group
Footnote 2003 2002 2001
$m $m $m
Assets
Total assets reported using Australian GAAP 397,471 377,387 374,720
Life insurance accounting adjustments
Elimination of excess of net market value over net a(i) (4,972 ) (5,081 ) (5,281 )
assets of life insurance controlled entities
Recognition and accumulated amortisation of goodwill a(i) 2,964 2,935 3,101
Recognition and accumulated amortisation of PVFP a(ii) 1,452 1,589 1,746
asset
Restatement and reclassification of deferred a(iii) 372 322 275
acquisition costs
Difference in investments relating to life insurance a(iv) 19 36 20
asset values
Other adjustments
Revaluation surplus of land and buildings b (107 ) (98 ) (109 )
Adjustment of provision for depreciation on b 91 89 87
buildings revalued
Amortisation of goodwill and core deposit intangible c 98 - -
Pension fund adjustment d 80 96 75
Difference in lease revenue recognition h (125 ) (118 ) (101 )
Fair value adjustments to derivative financial i 1,168 2,833 2,417
instruments and associated impact on provision for
mortgage servicing rights
Unrealised profit on shares in entities and other j 424 343 239
securities
Assets of special purpose entity consolidated m 281 38 -
Early pool-buyout reinstatement n - 230 -
Difference in profit on sale of foreign controlled i (280 ) (280 ) -
entity
Other (19 ) (41 ) (22 )
Total assets according to US GAAP 398,917 380,280 377,167
Liabilities
Total liabilities reported using Australian GAAP 370,260 354,136 351,163
Life insurance adjustments
Difference in life insurance policy liabilities and a(iii) 1,094 853 1,007
reclassification of deferred acquisition costs
Elimination of present value discounting on deferred a(v) (299 ) (251 ) (230 )
tax liabilities
Increase in and reclassification of minority a(vi) 2,920 198 143
interest
Subordinated debt revaluation from net present value a(vii) 2 2 (10 )
to cost
Other adjustments
Unamortised profit on sale and leaseback e 48 59 72
transactions
Deferred tax liability associated with difference in h (15 ) (15 ) (12 )
lease revenue recognition
Fair value adjustments to derivative financial i 767 2,070 1,964
instruments
Deferred tax liability associated with fair value i (3 ) 106 137
adjustments to derivative financial instruments
Elimination of dividends provided for but not l - (1,151 ) (1,054 )
formally declared prior to balance date
Liabilities of special purpose entity consolidated m 281 38 -
Proceeds received in advance - early n - 230 -
pool-buyout
Total liabilities according to US GAAP 375,055 356,275 353,180
Net assets according to US GAAP 23,862 24,005 23,987
The following is a summary of the significant adjustments made to the Group
's net profit, equity and net assets to reconcile from Australian GAAP
to US GAAP:
(a) Life insurance accounting
(i) Excess of market value over net assets
For Australian GAAP, the excess of the market value of the interest of life
insurance entities in their controlled entities over the net assets is required
to be recognised as an asset in the balance sheet with any subsequent movements
reflected in the profit and loss account. Deferred tax is provided on the
movement recognised in the profit and loss account. For US GAAP, this treatment
is not permitted. Goodwill resulting from acquisitions of life insurance
companies is recognised on the balance sheet. Goodwill balances are no longer
amortised under US GAAP. Refer to (c) below.
(ii) PVFP asset
Under Australian GAAP, the excess of the market value over the net assets is
recorded as a separate asset as described in note (a)(i), above. For US GAAP, a
PVFP asset is recognised on acquisition of life insurance companies. The PVFP
represents the actuarially-determined present value of estimated future US GAAP
profits in respect of the in force business at acquisition. The PVFP is
amortised over the life of the acquired in force business. The excess of the
purchase price is recorded as goodwill.
187
(iii) Revenue recognition, change in life insurance policy liabilities and
deferred acquisition costs
For Australian GAAP, policy liabilities are calculated on a Margin on Services
(MoS) basis. For US GAAP, policy liabilities are calculated under SFAS 60
"Accounting and Reporting by Insurance Enterprises", SFAS 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases" and SFAS 97
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realised Gains and Losses from the Sale of
Investments", depending on the type of product.
One of the key differences between MoS and US GAAP is that acquisition costs are
amortised within the policy liabilities for MoS rather than as a separately
identifiable asset for US GAAP. For Australian GAAP, deferred acquisition costs
are held within policy liabilities and are not separately disclosed as an asset.
Further, the fixed and variable costs of acquiring new business are included in
deferred acquisition costs. For US GAAP, deferred acquisition costs are shown
as a separate asset and only costs that vary directly with the acquisition of
new business may be deferred. In general, the amounts deferred under Australian
GAAP will be higher than those under US GAAP. Deferred acquisition costs in
existence at the date the Group acquired the MLC group have been eliminated in
accordance with US GAAP purchase accounting rules.
Other differences relate to the parameters used to drive the rate of acquisition
cost amortisation, and that the MoS method operates to produce liabilities that
are consistent with asset values based on market value whereas US GAAP methods
are consistent with historical cost accounting concepts.
(iv) Investments relating to life insurance business
For Australian GAAP, all assets are carried at net market value in the balance
sheet with any movements in the value reflected in the profit and loss account.
For US GAAP, this treatment is not permitted and the accounting treatment for
investments, where different, is set out below:
- investments in leases are recorded using the
provisions within SFAS 13 "Accounting for Leases" in order to
recognise income over the term of the lease in proportion to the outstanding
investment balance; and
- investments classified as available for sale using
the provisions of SFAS 115 "Accounting for Certain Investments in Debt
and Equity Securities" are recorded in the balance sheet at fair value
with unrealised profits and losses recorded as a separate component of
shareholders' equity, being comprehensive income. Income is recognised
in the profit and loss account by amortising the purchase price to the maturity
value over the life of the security.
(v) Deferred tax liabilities
Under Australian GAAP, life insurance tax liabilities are required to be stated
at their net present value and are therefore discounted. US GAAP does not
permit the discounting of deferred tax liabilities.
(vi) Minority interest reclassification and restatement
Under Australian GAAP, outside equity interest is shown as a component of total
equity and does not include a share of the excess of the market value. Under US
GAAP, minority interest is shown as a liability in the balance sheet with all
balance sheet items reported gross of minority interest, including the PVFP
asset.
(vii) Other life insurance accounting adjustments
Foreign currency translation reserve
Under Australian GAAP, in respect of life insurance business, exchange profits
and losses on foreign subsidiaries are taken to the profit and loss account.
Under US GAAP, where the functional currency is not the same as the ultimate
parent's reporting currency, exchange profits and losses are reported
within a foreign currency translation reserve, which is a separate component of
shareholders' equity, being comprehensive income.
Restatement of subordinated debt to a cost basis
Under Australian GAAP, liabilities of life insurance entities are required to be
stated at their net present value with movements taken to the profit and loss
account. US GAAP requires that the subordinated debt be held at principal.
(b) Land and buildings
The Group revalues land and buildings annually (refer to note 1(u)). Any
revaluation increments and decrements are included in the Group's
reserves which form part of total equity. Revalued buildings are depreciated
over their estimated useful lives to the entity (land is not depreciated).
Under US GAAP, revaluation of land and buildings is not permitted. Accordingly,
depreciation charges on revalued buildings and profit or loss on sale of
revalued buildings are adjusted back to a historical cost basis for US GAAP
purposes.
(c) Amortisation of goodwill, core deposit intangible and associated deferred
tax liability
Under Australian GAAP, goodwill is amortised from the date of acquisition by
systematic charges on a straight-line basis to the profit and loss account over
the period in which the benefits are expected to arise, but not exceeding 20
years. The carrying value of goodwill is reviewed at least annually. If the
carrying value of goodwill exceeds the value of the expected future benefits,
the difference is charged to the profit and loss account.
Under US GAAP, prior to October 1, 2002, goodwill was amortised over its
economic life. From October 1, 2002, the Group has adopted SFAS 142 "
Goodwill and Other Intangible Assets". SFAS 142 requires goodwill
currently held on the balance sheet to be separately identified and reviewed
annually for impairment. In addition, goodwill balances are no longer amortised
under SFAS 142. The Group has not identified any impairment of goodwill on
initial adoption of SFAS 142.
188
The following table outlines the effect of non-amortisation of goodwill on US
GAAP net income and earnings per share for 2002 and 2001 to illustrate on a pro
forma basis what these results would have been had SFAS 142 applied then.
2002 2001
$m $m
Net income according to US GAAP - as reported 3,455 1,794
Add back: Goodwill amortisation 267 328
Net income according to US GAAP - pro forma 3,722 2,122
Basic earnings per share - as reported (cents) 211.0 102.8
Basic earnings per share - pro forma (cents) 228.2 124.1
Diluted earnings per share - as reported (cents) 205.6 104.4
Diluted earnings per share - pro forma (cents) 221.7 124.3
Under US GAAP, purchase adjustments that arise in the acquisition of a US
company are required to be reflected in the acquiree's financial report.
Following SEC regulations and guidelines, Michigan National Corporation was
required to separately identify and account for the intrinsic value of its
retail deposit base on acquisition. The recognition of the intrinsic value of
the retail deposit base, which arose from the premium paid to acquire Michigan
National Corporation, was considered to be a component of goodwill under
Australian GAAP. For US GAAP purposes, the intrinsic value of the retail
deposit base was deemed to be a core deposit intangible which was amortised over
a period of 10 years. Under Australian GAAP, the total goodwill (which includes
the core deposit intangible) was amortised over 20 years. In the calculation of
the core deposit intangible under US GAAP, a deferred tax liability was created.
This tax liability was amortised over a 10 year period. Under Australian
GAAP, the deferred tax liability was not recognised. The Group sold Michigan
National Corporation on April 1, 2001.
(d) Pension expense
For defined benefit pension plans, under Australian GAAP, the Group recognises
the pension expense on an actuarial basis. Under this basis, actuarial gains
and losses are taken into account over the average remaining employment period
of plan members, generally between 10 and 15 years. Under US GAAP, pension
expense for defined benefit plans is a function of service and interest cost,
return on plan assets and amortisation of any prior service costs and of any net
gains or losses. US GAAP also requires the accrued pension liability to be
reconciled with the funded status of the pension plan, with the funded status
being the difference between the projected benefit obligation and the fair value
of the plan assets. As a result, under US GAAP, adjustments are required to
reflect the appropriate pension expense for the year (refer to pension and other
post-retirement benefit plans, below).
(e) Profit on sale and leaseback transactions
Under Australian GAAP, profits on sale and leaseback transactions where the
lease is structured as an operating lease are recognised in the period that the
sale takes place. Under US GAAP, profits on sale and leaseback transactions are
required to be recognised over the term of the lease.
(f) Employee share compensation
Under Australian GAAP, an expense is recorded where cash is paid to the
compensation plan trustee to purchase the Company's shares on market.
Where the Company issues shares as compensation, no expense is recorded in the
profit and loss account. Share issues are shown as a movement in contributed
equity under Australian GAAP and no expense is recognised. Under US GAAP, in
accordance with SFAS 123 "Accounting for Stock-Based Compensation",
these share offers would be considered part of employee compensation
and charged to the profit and loss account based on the fair value of the shares
issued at their date of issue.
(g) Employee option compensation
Under Australian GAAP, an expense is not recognised for share options or
performance rights granted.
In accordance with US Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25), the Company adopts
the intrinsic value method for valuing options issued under the executive share
option plan No. 2 and performance rights issued under the performance rights
plan. Under the intrinsic value method, an expense is recognised where the
quoted market price of the Company's shares at the measurement date is
different to the amount, if any, that the employee is required to pay. As both
plans are variable plans under APB 25, the measurement date is the date the
number of options or performance rights that an employee is entitled to receive
is known, which in most instances is the date the respective plan's
performance hurdle is met for that option or performance right grant.
For each grant of options and performance rights, an expense is accrued over the
service period based on the Company's share price at year end assuming
all performance conditions will be met for all options and performance rights
granted. Once the first measurement date occurs, an adjustment is made to the
total expense accrual to reflect both the proportionate number of options and
performance rights that have vested and the closing share price at that date.
If at a later date, performance conditions are further met and it is known that
more or less options may vest under the proportionate terms of the plans, a
subsequent adjustment is made to the total expense accrual on the basis that a
second measurement date has occurred.
189
Historically, the Group's interpretation of APB 25 was that options
granted by the Company were fixed awards. This interpretation was based on the
view that the number of options that would vest was known at grant date. The
Group has revised its interpretation of APB 25 such that options and performance
rights granted by the Company under the respective plans are considered to be
variable awards. As a result of the revised interpretation of APB 25, the 2002
and 2001 comparatives have been restated in the statement of income
reconciliation of net profit reported using Australian GAAP to net income
according to US GAAP to reflect employee option compensation of $44 million in
2002 and $72 million in 2001. In addition, retained profits according to US
GAAP in 2001 has been adjusted by $419 million for the accumulated effect of
employee option compensation relating to years prior to 2001.
The financial effects of the restatements are summarised as follows:
2002 2001
$m $m
Net income according to US GAAP - as previously reported 3,499 1,866
Less: Adjustment for employee option compensation (44 ) (72 )
Net income according to US GAAP - restated 3,455 1,794
Total comprehensive income according to US GAAP - as previously reported 2,858 2,008
Less: Adjustment for employee option compensation (44 ) (72 )
Total comprehensive income according to US GAAP - restated 2,814 1,936
Issued and fully paid capital according to US GAAP - as previously reported 9,975 10,751
Add: Adjustment for employee option compensation - opening retained profits 491 419
Add: Adjustment for employee option compensation - current year net income 44 72
Issued and fully paid capital according to US GAAP - restated 10,510 11,242
Retained profits according to US GAAP - as previously reported 12,048 10,820
Less: Adjustment for employee option compensation - opening retained profits (491 ) (419 )
according to US GAAP
Less: Adjustment for employee option compensation - current year net income (44 ) (72 )
according to US GAAP
Less: Reclassification of 'unrealised profit on shares in entities and other (343 ) (239 )
securities' to accumulated other comprehensive income (1)
Retained profits according to US GAAP - restated 11,170 10,090
There is no impact on total equity according to US GAAP.
Earnings per share according to US GAAP (cents):
Basic earnings per share - as previously reported (cents) 213.9 107.4
Basic earnings per share - restated (cents) 211.0 102.8
Diluted earnings per share - as previously reported (cents) 208.3 108.7
Diluted earnings per share - restated (cents) 205.6 104.4
(1) The reconciliation item 'Unrealised profit on shares in
entities and other securities' was previously reflected as an adjustment
to retained profits. It has been reclassified to other comprehensive income
according to US GAAP.
SFAS 123 "Accounting for Stock-Based Compensation" pro forma
disclosures:
SFAS 123 allows an alternative valuation method, known as the fair value method
for measurement of employee option compensation. SFAS 123 requires disclosure
of the fair value of options where the Company adopts the intrinsic value method
under APB 25. Under the fair value method, options issued on March 21, 2003 and
August 8, 2003 were valued at $4.51 each (June 14, 2002: $6.38 each, September
14, 2001: $5.33 each, March 23, 2001: $4.91 each). Performance rights issued on
March 21, 2003 and August 8, 2003 were valued at $22.02 each.
If the fair value basis of accounting had been applied to account for employee
option compensation, the following net income and earnings per share would have
been disclosed:
2003 2002 2001
$m $m $m
Net income according to US GAAP - as reported 3,527 3,455 1,794
Add back: Employee option compensation determined under APB 25, net of 58 44 72
any tax effect
Less: Total share -based employee compensation determined under SFAS (62 ) (51 ) (44 )
123, net of any tax effect
Net income according to US GAAP - pro forma 3,523 3,448 1,822
Basic earnings per share - as reported (cents) 220.6 211.0 102.8
Basic earnings per share - pro forma (cents) 220.4 210.5 104.6
Diluted earnings per share - as reported (cents) 213.1 205.6 104.4
Diluted earnings per share - pro forma (cents) 212.9 205.2 106.1
190
(h) Lease revenue recognition
The Group's accounting policy for finance lease income receivable is to
allocate income to reporting periods so as to give a constant periodic rate of
return on the investment. Under US GAAP, finance lease income is recognised so
as to give a level rate of return on the investment in the lease without taking
into account any associated income tax cash flows.
(i) Derivative financial instruments and associated impact
Under Australian GAAP, derivative financial instruments held or issued for
trading purposes are recognised on the balance sheet at fair value, with the
resultant gains and losses recognised in the profit and loss account.
Derivative financial instruments that are held or issued for purposes other than
trading may have hedge accounting treatment applied if the hedging derivatives
are effective at reducing the risk associated with the exposure being hedged and
are designated as a hedge at the inception of the contract. Hedging derivatives
are accounted for in a manner consistent with the accounting treatment of the
hedged items.
The Group adopts SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities" for US GAAP reconciliation purposes only. SFAS 133,
as amended, standardises the accounting for derivative instruments and hedging
activities and requires that all derivative instruments be recognised as assets
and liabilities at fair value. If certain conditions are met, hedge accounting
may be applied and the derivative instruments may be specifically designated as:
(a) a hedge of the exposure to changes in the fair value of a recognised asset
or liability or an unrecognised firm commitment (fair value hedge); (b) a hedge
of the exposure to variability of cash flows of a recognised asset, liability or
forecasted transaction (cash flow hedge); or (c) a hedge of certain foreign
currency exposures. In the case of a qualifying fair value hedge, changes in
the value of the derivative instruments that have been highly effective are
recognised in current earnings along with the change in value of the designated
hedge item. In the case of a qualifying cash flow hedge, changes in the value
of the derivative instruments that have been highly effective are recognised in
other comprehensive income, until such time that earnings are affected by the
cash flows of the underlying hedged item. In either a fair value hedge or a
cash flow hedge, net earnings are impacted to the extent the changes in the
value of the derivative instruments do not perfectly offset the changes in the
value of the hedge items (so called ineffectiveness). Derivative instruments
that are non-designated or do not meet the relevant hedge accounting criteria
are accounted for at fair value with gains and losses recorded to current
earnings.
Accordingly, in the reconciliation to US GAAP disclosures, all derivative
instruments are recognised on the balance sheet at fair value and are either
designated as fair value hedges, cash flow hedges or are non-designated pursuant
to the Group's risk management policies. The hedge accounting
conditions are more strict under SFAS 133 than Australian GAAP and inter-company
derivatives generally do not meet these conditions. At October 1, 2000, the
Group recognised a cumulative-effect transitional adjustment of $232 million
(net of tax) to decrease net income according to US GAAP for the effect of the
change in accounting principle. This transitional adjustment largely arose due
to the extent of inter-company derivatives used in the Group's risk
management activities. Additionally, the Group recognised a cumulative-effect
transitional adjustment to reduce other comprehensive income by $17 million (net
of tax). The on-going reconciliation adjustment is primarily due to the
difference in treatment between Australian GAAP and US GAAP for inter-company
derivatives. Inter-company derivatives are used extensively in the Group
's risk management activities and are accounted for at fair value with
gains and losses recorded in current earnings for US GAAP. For external hedges
that meet the hedge accounting criteria under SFAS 133, the derivatives and the
hedged item are accounted for as detailed above.
The impact of the accounting for risk management activities pursuant to SFAS 133
is expected to create a level of ongoing volatility in reported financial
results reconciled to US GAAP.
The Group has not entered into any cash flow hedges during 2003 under US GAAP.
Cash flow hedges of the Group entered into in prior reporting periods related to
HomeSide US, which was sold on October 1, 2002.
In addition to the above, the application of SFAS 133 affected the US GAAP
accounting treatment for HomeSide US's mortgage servicing rights in 2002
and 2001 under SFAS 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". On October 1,
2002, the Group sold all mortgage servicing rights and associated risk
management derivative contacts. Under Australian GAAP, the carrying value of
mortgage servicing rights includes deferred hedge gains and losses as certain
risk management derivative contracts qualify for Australian GAAP hedge
accounting. Under US GAAP, the risk management derivative contracts related to
mortgage servicing rights did not qualify for fair value hedge accounting under
SFAS 133 and on this basis, a fair value adjustment to the underlying mortgage
servicing rights asset arising from the hedged risk was not permitted. As a
result of the impact of SFAS 133, the carrying value of the mortgage servicing
rights asset exceeded its fair value at September 30, 2002 and an additional
provision for impairment of this asset of $2,625 million (2001: $1,895 million)
was required under SFAS 140 for US GAAP reconciliation purposes.
As mortgage servicing rights risk management derivative contracts were eligible
for hedge accounting under Australian GAAP, hedge gains or losses were deferred
against the mortgage servicing rights asset. The mortgage servicing rights risk
management derivative contracts did not qualify for fair value hedge accounting
under SFAS 133 and consequently as at September 30, 2002 a gain of $3,055
million (2001: $1,757 million gain) was required to reflect these derivative
instruments at fair value under US GAAP.
The net effect of the combined SFAS 133 adjustment on mortgage servicing rights
risk management derivative contracts together with the related SFAS 140
adjustment to the mortgage servicing rights provision for 2002 was a $430
million gain (2001: $138 million loss) to earnings. This net effect was
included in the caption entitled movements in fair value of derivative financial
instruments and associated impact on provision for mortgage servicing rights.
As a result of the differences between Australian and US GAAP in relation to
SFAS 133 and SFAS 140, as described above, the carrying value of the Group
's investment in SR Investment, Inc. was $280 million higher under US
GAAP at September 30, 2002. The profit on sale of SR Investment, Inc. was
therefore $280 million lower under US GAAP.
191
(j) Available for sale securities
Under Australian GAAP, shares in entities and other securities are carried at
original cost less any provision for diminution in value. In addition, under
Australian GAAP, available for sale debt securities are carried at the lower of
aggregate cost or market value with unrealised losses in respect of market value
adjustments recognised in the profit and loss account.
Under US GAAP, these securities are deemed to be available for sale securities
which are carried at market value with unrealised profits and losses in respect
of market value adjustments recognised as a separate component of shareholders
' equity, being comprehensive income. These securities have been
restated to market value with unrealised profits/(losses) recognised in other
comprehensive income.
(k) General reserve
As with retained profits, the general reserve represents a retention of
distributable profits available for general use in the business.
(l) Provisions
The term provisions is used in Australian GAAP to designate accrued expenses
with no definitive payment date. Provisions disclosed in note 30 to the
financial statements comply in all material respects with US GAAP with the
exception of the provision for final cash dividend, prior to October 1, 2002.
Under US GAAP and Australian GAAP from October 1, 2002, dividends are recorded
as liabilities only if declared prior to balance date. Under Australian GAAP
prior to October 1, 2002, a provision for final cash dividend was recognised
when it was declared shortly after balance date.
(m) Special purpose entities
Under Australian GAAP, a company is required to consolidate special purpose
entities (SPEs) that it controls. Control is defined as the capacity of a
company to dominate decision making in relation to the financial and operating
policies of the SPE, so as to enable the SPE to operate with it in pursuing the
objectives of the group and is based on the substance of the relationship not
merely its legal form.
Under US GAAP, for SPEs that the Group obtained an interest in or were created
after January 31, 2003, FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46) has been applied. This
interpretation applies to SPEs that are identified as variable interest entities
(VIEs). VIEs have one or both of the following characteristics:
- equity that is not sufficient to finance its
activities without additional financial support from other parties; and/or
- equity investors lack the ability to make decisions
about the entity, or do not absorb expected losses or residual returns of the
entity.
A VIE is required to be consolidated where the Group is identified as the
primary beneficiary. The primary beneficiary has a variable interest in the VIE
such that it will absorb the majority of the VIEs expected losses if they occur,
receive a majority of expected returns if they occur, or both.
The effect of US GAAP is that in some cases sponsors of, or transferors to, an
SPE may be required to consolidate that SPE even if they do not in substance
control that SPE.
As a result of the application of FIN 46, Medfin Trust has been consolidated for
the purposes of US GAAP. The Group manages Medfin Trust as part of its
multi-seller securitisation conduit, Titan (refer to the financial review
section in the financial report for additional information). For the purposes
of Australian GAAP, the Group does not have the capacity to control Medfin
Trust. The debt instruments issued by Medfin Trust do not represent liabilities
of the Group. The Group does not provide guarantees in relation to the
obligations of the Trust or payment of interest or repayment of principal due on
the issued notes. Accordingly, under Australian GAAP, these instruments are not
reported on the Group's statement of financial position. There is no
material impact on US GAAP net income as a result of the consolidation of Medfin
Trust.
For SPEs that existed prior to February 1, 2003, FIN 46 applies for reporting
periods in the first financial year ending after December 15, 2003 and as such
consolidation under US GAAP has been evaluated in accordance with SFAS 94
"Consolidation of All Majority-Owned Subsidiaries" and other US
accounting pronouncements. Control for consolidation purposes is generally
based on majority voting interest in an SPE. In addition, consolidation is
required where the majority owner of the issued capital of the SPE makes only a
nominal capital investment and a substantive residual capital investment in the
SPE has not been made by an independent third party.
The Group sponsors a repackaging securitisation vehicle, Script Securitisation
Pty Ltd (Script). For the purposes of Australian GAAP, the Group does not have
the capacity to control Script. Script acquires debt instruments and, through
the application of derivatives, generates master-funded repackaged debt
instruments for sale to customers of the Group. The Group has no interest in
the debt instruments acquired, and under Australian GAAP these instruments are
not reported on the Group's statement of financial position. Similarly,
the Group does not guarantee the payment of interest or repayment of principal
due on the securities issued by Script and accordingly under Australian GAAP
these instruments are not reported on the Group's statement of financial
position. For the purposes of US GAAP, the Group is required to consolidate
Script. There is no impact on US GAAP net income as a result of the
consolidation of Script.
192
(n) Early pool-buyout
Under Australian GAAP, assets are derecognised when the reporting entity no
longer controls the future economic benefits related to those assets.
Under US GAAP, SFAS 140 sets out strict asset derecognition rules. Prior to its
sale, the Group held loans eligible for repurchase in relation to HomeSide US.
Following the sale of HomeSide US on October 1, 2002 the Group no longer holds
such loans. When certain eligibility requirements were met, HomeSide US had the
unilateral right to repurchase these loans from the securitisation investor
pools. As a result, these loans were subject to the removal-of-accounts
provisions of SFAS 140 and were recognised on the balance sheet. A
corresponding liability was also required to be recognised.
(o) Earnings per share
Under Australian GAAP, basic earnings per share is calculated by dividing net
profit by the weighted average number of fully paid equivalent ordinary shares
outstanding during the year after adjusting for the bonus element of rights and
other issues. The fully diluted earnings per share reflects dilution by
exercisable options and performance rights issued under the Group's
employee incentive plans, adjusted for notional interest on uncalled capital
associated with partly paid shares and exercisable options and performance
rights, and dilution by potential conversion of the exchangeable capital units
adjusted for the interest expense on these units. For the purpose of US GAAP,
the options and performance rights issued are considered common stock
equivalents and are therefore included in the calculation of diluted earnings
per share. Net income has been adjusted for notional interest on uncalled
capital associated with partly paid shares and exercisable options and
performance rights, and dilution by potential conversion of the exchangeable
capital units adjusted for the interest expense on these units. The bonus
element of rights issues is excluded from US GAAP computations.
Group
2003 2002 2001
Basic Diluted Basic Diluted Basic Diluted
US GAAP earnings per share
Earnings ($m)
Net income according to US GAAP 3,527 3,527 3,455 3,455 1,794 1,794
Distributions on other equity (183 ) (183 ) (187 ) (187 ) (213 ) (213 )
instruments
Adjustment for notional interest on - 138 - 133 - 138
uncalled capital on partly paid
shares and exercisable options and
performance rights, and interest
expense saving on exchangeable
capital units
Adjusted earnings 3,344 3,482 3,268 3,401 1,581 1,719
Weighted average ordinary shares
(no. '000)
Weighted average ordinary shares 1,515,871 1,515,871 1,549,136 1,549,136 1,538,633 1,538,633
Potential dilutive ordinary shares
Options and performance rights - 51,974 - 38,674 - 41,389
Partly paid ordinary shares - 811 - 1,063 - 1,119
Exchangeable capital units - 65,460 - 65,460 - 65,460
Total weighted average ordinary 1,515,871 1,634,116 1,549,136 1,654,333 1,538,633 1,646,601
shares
Earnings per share (cents) (1) 220.6 213.1 211.0 205.6 102.8 104.4
(1) Earnings per share according to US GAAP for 2002 and 2001 has been
restated for the revised interpretation of APB 25 "Accounting for Stock
Issued to Employees". Refer to footnote (g).
193
Reconciliation of balance sheet categories
The following reconciliations are of significant adjustments to Australian GAAP
balance sheet categories disclosed on the statement of financial position and
which would be reported in accordance with US GAAP:
Group
Footnote 2003 2002 2001
$m $m $m
Assets
Shares in entities and other securities reported 1,445 1,199 1,412
using Australian GAAP
Available for sale debt securities reported using 6,513 6,192 6,665
Australian GAAP
Unrealised profit on available for sale securities j 424 343 239
Available for sale securities according to US GAAP 8,382 7,734 8,316
Property, plant and equipment reported using 2,498 2,640 2,869
Australian GAAP
Revaluation surplus of land and buildings b (107 ) (98 ) (109 )
Provision for depreciation on buildings revalued b 91 89 87
Property, plant and equipment according to US GAAP 2,482 2,631 2,847
Goodwill reported using Australian GAAP 740 775 876
Recognition and accumulated amortisation of goodwill a(i) 2,964 2,935 3,101
for life insurance business
Amortisation of goodwill and core deposit intangible c 98 - -
Other (19 ) (19 ) (23 )
Goodwill according to US GAAP 3,783 3,691 3,954
Other assets reported using Australian GAAP 10,050 14,151 38,965
Elimination of excess of net market value over net a(i) (4,972 ) (5,081 ) (5,281 )
assets of life insurance controlled entities
Recognition and amortisation of PVFP asset a(ii) 1,452 1,589 1,746
Restatement and reclassification of deferred a(iii) 372 322 275
acquisition costs
Pension fund adjustment d 80 96 75
Fair value adjustment to derivative financial i 1,168 2,833 2,417
instruments and associated impact on provision for
mortgage servicing rights
Other assets according to US GAAP 8,150 13,910 38,197
Liabilities
Life insurance policy liabilities reported using 32,457 30,425 30,257
Australian GAAP
Difference in policy liabilities and a(iii) 1,094 853 1,007
reclassification of deferred acquisition costs as an
asset reported under US GAAP
Life insurance policy liabilities according to US 33,551 31,278 31,264
GAAP
Other liabilities reported using Australian GAAP 14,239 13,618 35,731
Increase in minority interest a(vi) 116 131 75
Reclassification of minority interest as a liability a(vi) 2,804 67 68
Subordinated debt revaluation from net present value a(vii) 2 2 (10 )
to cost
Unamortised profit on sale and leaseback e 48 59 72
transactions
Fair value adjustment to derivative financial i 767 2,070 1,964
instruments and associated impact on provision for
mortgage servicing rights
Other liabilities according to US GAAP 17,976 15,947 37,900
194
Pension and other post-retirement benefit plans
The Company and its controlled entities provide substantially all employees with
superannuation and pension benefits.
Set out below are the disclosure requirements of SFAS 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
for the Group's significant defined benefit pension plans, for the last
three years, as at September 30:
Pension benefits
2003 2002 2001
$m $m $m
Change in benefit obligation
Benefit obligation at beginning of year 4,512 4,781 5,242
Service cost 153 157 182
Interest cost 266 279 292
Plan participants' contributions 1 1 1
Administrative expenses (12 ) (6 ) (8 )
Actuarial gain 736 236 (641 )
Acquisition - - 54
Benefits paid (165 ) (210 ) (179 )
Benefit obligation at end of year 5,491 5,238 4,943
Change in plan assets
Fair value of plan assets at beginning of year 4,614 6,173 7,184
Actual return on plan assets (330 ) (714 ) (747 )
Acquisition - - 53
Employer contributions 100 90 71
Plan participants' contributions 1 - 1
Administrative expenses (12 ) (6 ) (9 )
Benefits paid (165 ) (210 ) (179 )
Fair value of plan assets at end of year 4,208 5,333 6,374
Funded status (1,283 ) 96 1,432
Unrecognised net actuarial loss 2,119 850 (579 )
Unrecognised prior service cost 2 26 45
Income taxes 53 53 49
Prepaid pension cost 891 1,025 947
Weighted average assumptions
Discount rate (per annum) 5.5 % 6.1 % 6.1 %
Expected return on plan assets (per annum) 8.0 % 7.6 % 7.6 %
Rate of compensation increase (per annum) 4.0 % 3.8 % 3.8 %
Components of net periodic pension cost/(income)
Service cost 163 156 169
Interest cost 282 268 270
Expected return on plan assets (374 ) (448 ) (493 )
Amortisation of transitional liability 20 21 21
Recognised net actuarial loss 31 (13 ) (33 )
Net periodic pension cost/(income) 122 (16 ) (66 )
The Group also sponsors accumulation benefit plans covering Australian and New
Zealand employees (refer to note 48). The Group's contributions are
based on salary and amounted to $125 million in 2003 (2002: $80 million, 2001:
$111 million).
195
Accounting for income taxes
Set out below are the disclosure requirements of SFAS 109 "Accounting
for Income Taxes" as at September 30:
2003 2002
$m $m
Deferred tax assets reported using Australian GAAP 1,203 1,292
Add: Additional deferred tax assets
Carryforward Australian and US capital losses 1,893 1,110
Carryforward Australian operating losses 55 -
Deductible temporary differences 19 -
Deferred tax assets according to US GAAP 3,170 2,402
Less: Valuation allowance (1,967 ) (1,110 )
Net deferred tax assets according to US GAAP 1,203 1,292
A valuation allowance is required to reduce deferred tax assets if, based on the
weight of available evidence, it is more likely than not (a likelihood of more
than 50%) that some portion or all of the deferred tax assets will not be
realised. The valuation allowance should be sufficient to reduce the deferred
tax asset to the amount that is more likely than not to be realised. Based on
the available evidence, the Group considers the realisation of the additional
deferred tax assets reported above is not more likely than not as at September
30, 2003.
Capital losses incurred by the Group under US Federal tax law can be carried
forward for a maximum of five years. Operating and capital losses incurred by
the Group under Australian tax law can be carried forward indefinitely.
59 Events subsequent to balance date
At the date of this report, the Company had not made the decision to elect to
consolidate for Australian income tax purposes. If such an election is made,
the Company would be the head entity in a tax-consolidated group comprising the
Company and all of its Australian wholly-owned subsidiaries. The financial
effects of the tax consolidation legislation cannot be estimated reliably at
this point in time and have not been brought to account in the financial
statements for the year ended September 30, 2003, except as stated in note 23 of
the financial report.
On October 1, 2003 the Company announced its intention to buy back ordinary
shares on market approximately equal to the number of shares issued under the
Company's dividend package plans and staff share and option plans. The
Company expects this to be up to approximately 25,500,000 ordinary shares. The
period of the buy-back is expected to be from November 11, 2003 until September
30, 2004.
At the Company's annual general meeting to be held on December 19, 2003,
the Company will seek shareholder approval to buy back the total of 36,008,000
fully paid non-converting non-cumulative preference shares of the Company issued
in connection with the issue of 18,004,000 Trust Units Exchangeable for
Preferred SharesTM of the Group. The financial effect of the buy back has not
been recognised in the financial statements for the year ended September 30,
2003. Subject to shareholder approval, the buy-back will be at a price of
US$12.50 per share, plus certain incidental costs. If the buy-back occurs,
contributed equity of the Group will be reduced by $730 million, with the excess
of the acquisition costs and incidental costs of the buy-back directly reducing
retained profits of the Group at the date of the buy-back.
196
Director's declaration
The directors of National Australia Bank Limited declare that:
1. (a) the financial statements and the notes thereto as set out on pages 82 to 196, comply with Accounting
Standards and the Corporations Act 2001 (Cth);
(b) the financial statements and notes thereto give a true and fair view of the financial position of the
Company and the Group as at September 30, 2003, and of the performance of the Company and the Group for
the year ended September 30, 2003; and
(c) in the opinion of the directors, at the date of this declaration, there are reasonable grounds to believe
that the Company will be able to pay its debts as and when they become due and payable; and
2. there are reasonable grounds to believe that the Company and certain controlled entities will, as a group, be
able to meet any obligations or liabilities to which they are or may become subject by virtue of the deed of
cross guarantee between the Company and those controlled entities pursuant to Australian Securities and
Investments Commission Class Order 98/1418 dated August 13, 1998 (refer to notes 44 and 45 to the financial
statements for further details).
Dated at Melbourne this 11 day of November, 2003 and signed in accordance with a
resolution of the directors.
/s/ D Charles K Allen /s/ Frank J Cicutto
D Charles K Allen Frank J Cicutto
Chairman Managing Director
197
Independent auditor's report
Independent auditor's report to the members of National Australia Bank
Limited
Scope
We have audited the financial report of National Australia Bank Limited for the
financial year ended September 30, 2003 consisting of the statements of
financial performance, statements of financial position, statements of cash
flows, accompanying notes (1 to 59), and the directors' declaration.
The financial report includes the consolidated financial statements of the
Group, comprising the Company and the entities it controlled at the end of the
year or from time to time during the financial year. The Company's
directors are responsible for the financial report. We have conducted an
independent audit of this financial report in order to express an opinion on it
to the members of the Company.
Our audit has been conducted in accordance with the Auditing Standards of
Australia and the United States of America to provide reasonable assurance
whether the financial report is free of material misstatement. Our procedures
included examination, on a test basis, of evidence supporting the amounts and
other disclosures in the financial report, and the evaluation of accounting
policies and significant accounting estimates. These procedures have been
undertaken to form an opinion whether, in all material respects, the financial
report is presented fairly in accordance with accounting standards and other
mandatory professional reporting requirements and statutory requirements in
Australia so as to present a view which is consistent with our understanding of
the Company's and the Group's financial position, and
performance as represented by the results of their operations and their cash
flows.
The audit opinion expressed in this report has been formed on the above basis.
Audit opinion
In our opinion, the financial report of National Australia Bank Limited is in
accordance with:
(a) the Corporations Act 2001 (Cth), including:
(i) giving a true and fair view of the
Company's and the Group's financial position as at September 30,
2003 and 2002, of the Company's performance for the financial years
ended September 30, 2003 and 2002, and of the Group's performance for
the financial years ended September 30, 2003, 2002 and 2001;
(ii) complying with Accounting Standards in
Australia and Corporations Regulations 2001 (Cth); and
(b) other mandatory professional reporting
requirements in Australia.
Accounting principles generally accepted in Australia vary in certain respects
from accounting principles generally accepted in the United States of America.
An explanation of the major differences between the two sets of principles is
presented in note 58 to the financial statements. The application of the United
States principles would have affected the determination of consolidated net
profit for each of the three years in the period ended September 30, 2003 and
the determination of consolidated financial position as at September 30, 2003,
2002 and 2001 to the extent summarised in note 58 to the financial statements.
/s/ KPMG /s/ PJ Matthey
KPMG PJ Matthey
Partner
Melbourne
November 11, 2003.
198
Shareholder information
The Company, incorporated and domiciled in Australia, is a publicly listed
company limited by shares.
Major shareholders
The Company is not directly or indirectly controlled by another entity or person
or any foreign government.
There are no arrangements known to the Company, the operation of which may after
the date of this annual financial report result in a change in control of the
Company.
Shareholdings of individual directors of the Company are set out in the report
of the directors. Aggregate shareholdings of directors of the Company and
senior executive officers of the Group, listed below, as at the date of this
annual financial report are as follows:
Title of class of shares Identity of person or group No. of shares % of class of
held shares
Ordinary shares, fully paid Directors and senior executive 811,088 0.05
officers (22 persons)
Ordinary shares, partly paid to 25 Senior executive officers (3 persons) 16,810 -
cents
Total number of ordinary shares held 827,898 0.05
(1)
(1) 82,940 fully paid ordinary shares and all of the partly paid ordinary
shares held by the executive directors and senior executive officers are held
under employee share plans of the Company.
Directors
The directors of the Company at September 30, 2003 were:
Position Name Age Position Directorship
held since held since
Chairman D Charles K Allen 67 2001 1992
Managing Director Frank J Cicutto 52 1999 1998
Other directors J Brian Clark 54 2001
Peter JB Duncan 62 2001
Graham J Kraehe 61 1997
Kenneth J Moss 58 2000
John M Stewart (1) 54 2003
Geoffrey A Tomlinson 56 2000
Edward D Tweddell 62 1998
Catherine M Walter 51 1995
(1) Mr John Stewart was appointed to the Board as an executive director in
August 2003.
Subsequent to the end of the year, Mr John G Thorn was appointed as an
independent non-executive director.
Senior executives
The senior executives of the Group at the date of this annual financial report
are:
Chief Executive Officer
Frank J Cicutto
BCom, FAIBF, FCIBS
Age 52
Chief Executive Officer and Managing Director - position held since calendar
1999
Joined the Group in calendar 1968. Prior to his current position, he held the
positions of Head of Credit Bureau, State Manager New South Wales, Chief
Executive Clydesdale Bank, and Chief General Manager, Australian Financial
Services. He has 35 years experience in banking and finance in Australia and
internationally and was appointed Executive Director and Chief Operating Officer
in 1998.
Executive General Managers
John M Stewart
BA, ACII, FCIB
Age 54
Executive Director of National Australia Bank Limited, since calendar 2003.
Managing Director and Chief Executive Officer, National Australia Group Europe
Limited - position held since calendar 2003
Joined the Group in calendar 2003. Prior to joining the Group, he held senior
positions with Woolwich PLC including Group Chief Executive and Deputy Group
Chief Executive of Barclays plc following its acquisition of Woolwich plc.
199
Executive General Managers
Ian R Crouch
BCom, BSc, CA
Age 50
Chief Information Officer - position held since calendar 2002
Joined the Group in calendar 2002. Prior to joining the Group, he held senior
positions at AT Kearney/EDS (London), including Head of the European Strategic
Information Technology Practice. He has extensive experience in financial
services and has worked with a range of financial institutions including
Citibank, American Express and ING.
Michael T Laing
BCom, MCom
Age 45
Executive General Manager, Corporate Development - position held since calendar
2002
Joined the Group in calendar 1987. Prior to his current position, he held the
position of General Manager Global Cards and Global Payments, as well as other
senior positions in Bank of New Zealand.
Christopher D Lewis
BEc, CA
Age 44
Executive General Manager, Risk Management - position held since calendar 2001
Joined the Group in calendar 2001. Prior to joining the Group, he was a senior
partner at KPMG.
Ian G MacDonald
Age 49
Executive General Manager, Financial Services Australia - position held since
calendar 2002
Joined the Group in calendar 1971. Prior to his current position, he held the
positions of Executive General Manager, National Shared Services, Global General
Manager, Operational Services, and Chief Operating Officer, Yorkshire Bank and
other senior positions both in Australia and overseas.
Peter A McKinnon
BA, Grad Dip Psych, MA (Psych)
Age 49
Executive General Manager, People and Culture - position held since calendar
1999
Joined the Group in calendar 1987. He has 26 years strategic management
experience in corporate human resources, holding senior positions both within
the Company and National Mutual Holdings (now AXA Australia Holdings).
Richard E McKinnon
BEc (Hons), Grad Dip Acct, FCPA
Age 53
Chief Financial Officer - position held since calendar 2000
Joined the Group in calendar 1986. Prior to his current position, he held the
positions of Chief Officer, Investments and Advisory and Chief Manager, Mergers
and Acquisitions in the Company's wholly-owned investment bank, First
National Limited. Prior to joining the Group, he also worked in the investment
banking industry, including JP Morgan (in Australia).
Ross E Pinney
BCom, MBA, FCA
Age 55
Executive General Manager, Financial Services Europe - position held since
calendar 2003.
Joined the Group in calendar 1990. Prior to his current position, he held the
positions of Executive General Manager, Office of the CEO, Executive General
Manager, Specialist and Emerging Businesses, Executive General Manager, Products
and Services, and Managing Director, National Australia Group Europe Limited and
various other senior positions within Australia and overseas.
Ian F Scholes
CA
Age 48
Executive General Manager, Corporate & Institutional Banking - position held
since calendar 2002
Joined the Group in calendar 2002. Prior to joining the Group, he held senior
positions at Merrill Lynch Investment Banking (in Australia), including Managing
Director.
Peter B Scott
BEng (Hons), MES, FIE (Australia)
Age 49
Executive General Manager, Wealth Management - position held since calendar 2000
Joined the Group in calendar 2000, when the Company acquired the MLC group from
Lend Lease Corporation Limited. He previously held senior positions within Lend
Lease Corporation Limited including Chief Executive Officer, MLC Funds
Management and Chief Operating Officer, MLC Limited.
Peter L Thodey
Age 53
Executive General Manager, Financial Services New Zealand - position held since
calendar 2002. Chief Executive Officer, Bank of New Zealand - position held
since calendar 2000
Joined the Group in calendar 1980. Prior to his current position, he held the
positions of General Manager, Business Financial Services at Bank of New Zealand
and various other senior positions in New Zealand. Prior to joining the Group,
he held management positions with General Finance Ltd.
Chief General Counsel
David M Krasnostein
BJuris (Hons), LLB, LLM
Age 49
Chief General Counsel - position held since calendar 1996
Joined the Group in calendar 1996. Prior to joining the Group, he held the
position of General Counsel, Telstra Corporation Limited and partner/attorney
positions with legal firms in the US.
200
Company Secretary
Garry F Nolan
MBus, FAICD, FCIS, FAIBF, ASIA, CFTP (Snr)
Age 56
Company Secretary - position held since calendar 1992
Joined the Group in calendar 1970. He has senior management experience in
financial management, capital markets, corporate strategy, new business
development, corporate restructuring, board affairs, corporate governance,
shareholder services and globalisation of business. Prior to joining the Group,
he obtained branch banking experience with a major commercial bank and corporate
restructuring experience with a firm of chartered accountants.
The directors of the Company are classified as either executive or
non-executive, with the former being those directors engaged in the
full-time employment of the Company. Mr Cicutto and Mr Stewart are the only
executive directors.
The aggregate remuneration paid by the Group during the year ended September 30,
2003 to the directors who held office during that period, the senior executive
officers listed above, and those senior executive officers who held positions
but retired or resigned during the year, as a group, was $20.0 million in
respect of 24 positions (2002: $35.7 million paid to directors and senior
executive officers in respect of 30 positions).
During the year ended September 30, 2003, 6,103,750 share options and 1,551,082
performance rights were issued to 842 senior employees. Of these, 29,750 share
options and 7,438 performance rights lapsed during the year. The share options
issued include a total of 1,592,500 share options issued. There were 423,125
performance rights issued to the executive directors and other senior executive
officers listed above, and those senior executive officers who held positions
but retired or resigned during the year, as a group. In 2002, 11,263,500 share
options were issued to 751 senior employees, of which 2,500 lapsed. The issue
included 2,600,000 share options to the senior executive officers.
Trading market
Ordinary shares and options over ordinary shares
The fully paid ordinary shares of the Company are quoted for trading on the
stock market of ASX, which in part, is a self-regulatory organisation governing
the open market quotation, purchase and sale of the fully paid ordinary shares
in Australia. ASX is the principal market for the Company's fully paid
ordinary shares, and operates in the following cities in Australia: Melbourne,
Sydney, Brisbane, Perth, Adelaide and Hobart.
The fully paid ordinary shares are also quoted on stock markets of London Stock
Exchange plc; Stock Exchange, New Zealand; Tokyo Stock Exchange and (in the case
of ADSs) New York Stock Exchange, Inc.
A summary of the rights attaching to the ordinary shares appears under the
heading 'the Company's constitution' below.
As at October 17, 2003, the Company had on issue 678,592 unquoted partly paid
ordinary shares held by 1,526 holders, 46,267,500 unquoted share options
outstanding under the National Australia Bank Executive Share Option Plan No. 2
held by 4,803 option holders. There were 1,543,644 performance rights
outstanding granted under the National Australia Bank Performance Rights Plan
held by 1,543,644 rights holders. Where a person holds partly paid ordinary
shares or options or performance rights issued at different times, they are
categorised as a separate holder for each share, or performance rights option
holding.
There are also 39,999,800 exchangeable capital units issued by the Group held by
a single holder of record, being The Depositary Trust Company, which holds them
on behalf of participants. These units may be exchanged for fully paid ordinary
shares in the Company or, at the Company's option, cash.
American depositary shares representing ordinary shares (ADSs)
The Company's fully paid ordinary shares are traded in the US in the
form of ADSs. ADSs are evidenced by American depositary receipts issued by The
Bank of New York Company, Inc., as depositary, pursuant to an amended and
restated deposit agreement dated as of November 14, 1997, or Morgan Guaranty
Trust Company of New York, its predecessor depositary, pursuant to a deposit
agreement dated January 16, 1987, as amended as of June 24, 1988. Each ADS
represents five fully paid ordinary shares. The ADSs are quoted on the stock
market of New York Stock Exchange, Inc. (NYSE), which is the principal market in
the US for the trading of the ADSs. The ADSs trade on the NYSE under the symbol
'NAB'. At October 17, 2003, 3,488,204 ADSs representing
17,441,020 fully paid ordinary shares, or approximately 1.16% of the fully paid
ordinary shares outstanding on such date, were held by 236 holders with
registered addresses in the US.
Trust Units Exchangeable for Preferred SharesTM (TrUEPrSSM)
On September 30, 1998, the Company issued 32,008,000 fully paid non-converting
non-cumulative preference shares with a liquidation preference of US$12.50 per
share (TrUEPrS preference shares) in connection with an issuance of 16,004,000
TrUEPrS by NAB Exchangeable Preferred Trust. This trust is a non-diversified
closed-end managed investment company registered under the US Investment Company
Act of 1940. The underwriters with respect to the TrUEPrS preference shares
subsequently exercised an option resulting in a further issuance of 4,000,000
TrUEPrS preference shares.
The TrUEPrS preference shares are represented by American depositary shares,
each representing two TrUEPrS preference shares. The TrUEPrS preference shares
and the American depositary shares representing the TrUEPrS preference shares
have been approved for quotation on the NYSE when exchanged for TrUEPrS
preference shares. There will be no public market for quotation of the TrUEPrS
preference shares and the American depositary shares representing the TrUEPrS
preference shares on the NYSE until the TrUEPrS are exchanged for the TrUEPrS
preference shares and American depositary shares.
A summary of the rights attaching to TrUEPrS preference shares appears under the
heading 'the Company's constitution' below.
TrUEPrSSM is a service mark of Merrill Lynch & Co., Inc.
201
National Income Securities (NIS)
The NIS were quoted on July 8, 1999 for trading on ASX. ASX is the principal
market for the NIS.
A summary of the rights attaching to the preference shares forming part of the
NIS appears under the heading 'The Company's constitution' below.
Trust Preferred Securities
On September 29, 2003, the Group raised GBP400 million through the issue by
National Capital Trust I (a controlled entity formed in Delaware) of 400,000
Trust Preferred Securities at GBP1,000 each. The Trust Preferred Securities are
traded on the Luxembourg Stock Exchange. A summary of the rights attaching to
the Trust Preferred Securities, including the redeemable preference shares which
may be issued in certain limited circumstances, appears under the heading
'the Company's constitution' below.
Price histories
The following table sets forth, for the months, calendar quarters and financial
years indicated, the high and low sale prices of the fully paid ordinary shares
as reported by the ASX; the high and low sale prices per ADS as reported on the
NYSE composite tape; and the high and low sale prices of the NIS as reported by
the ASX:
Ordinary shares ADSs NIS
High Low High Low High Low
$ $ US$ US$ $ $
By month
October 2003 (1) 31.48 30.72 107.70 106.97 100.70 99.65
September 2003 31.37 30.20 105.00 98.55 99.99 98.50
August 2003 33.12 30.80 109.00 100.33 99.70 98.30
July 2003 34.11 31.85 116.00 104.90 99.45 97.70
June 2003 34.42 32.65 114.60 108.76 99.25 96.14
May 2003 33.30 31.05 108.45 100.40 96.30 94.40
By quarter
December quarter 2003 (1) 31.48 30.72 107.70 106.67 100.70 99.65
September quarter 2003 34.11 30.20 116.00 98.55 99.99 97.70
June quarter 2003 34.42 31.05 114.10 97.26 99.25 93.70
March quarter 2003 32.94 28.36 96.18 85.77 95.25 93.50
December quarter 2002 34.35 31.00 89.55 88.79 93.73 93.20
September quarter 2002 35.99 30.87 98.15 87.18 95.20 93.00
June quarter 2002 36.78 32.85 105.69 87.27 96.00 94.40
March quarter 2002 35.85 30.95 92.20 80.67 95.30 91.20
December quarter 2001 33.08 25.80 84.55 66.40 92.10 87.10
September quarter 2001 35.13 23.80 92.40 59.55 92.40 86.60
June quarter 2001 35.05 28.32 90.58 69.70 93.75 89.75
March quarter 2001 30.97 26.91 82.50 67.20 96.00 92.10
By year
2003 34.42 28.36 116.00 60.05 100.70 93.50
2002 36.78 30.87 105.79 80.67 96.00 91.10
2001 35.13 23.80 92.40 59.55 96.00 86.60
2000 30.30 19.88 83.06 61.31 97.404 90.00
1999 30.28 21.61 97.75 70.06 103.60 90.00
(1) Represents the period from October 1 to October 17, 2003.
On October 17, 2003 the closing price on ASX was $31.14 per fully paid ordinary
share, with 1,503,975,500 fully paid ordinary shares (excluding partly paid
ordinary shares) outstanding, held by 326,823 holders. On October 17, 2003, the
closing price per ADS as reported on the NYSE composite tape was US$107.70. On
October 17, 2003 the closing price on ASX was $100.70 per NIS, with 20,000,000
NIS outstanding, held by 45,530 shareholders.
202
The Company's constitution
The following is a summary of some of the key aspects of the constitution of the
Company.
Objects and purposes
The Company was incorporated on June 23, 1893, in the state of Victoria,
Australia. The Company is registered with ASIC and its Australian Company
Number is 004 044 937. The constitution does not specify the objects and
purposes of the Company. Under the Corporations Act 2001 (Cth), the Company has
the legal capacity and powers of an individual.
Directors
The constitution regulates various matters concerning the directors of the
Company:
(a) Matters in which the director has a material personal interest
A director who has a material personal interest in a matter that is being
considered at a directors' meeting cannot be present while the matter is
being considered at the meeting or vote on the matter, except in the following
four circumstances permitted by the constitution and the Corporations Act 2001
(Cth):
(i) directors who do not have a material personal interest in the matter have passed a resolution
identifying the relevant director, the nature and extent of that director's personal
interest and its relation to the affairs of the Company and stating that the remaining directors
are satisfied that the relevant director's material personal interest should not disqualify
the director from voting or being present;
(ii) ASIC has made a declaration or order under the Corporations Act 2001 (Cth) which permits the
director to be present and vote notwithstanding the director's material personal interest;
(iii) there are not enough directors to form a quorum for a directors' meeting because of the
disqualification of the interested directors, in which event one or more of the directors
(including a director with a material personal interest in the matter) may call a general meeting
to deal with the matter; and
(iv) the matter is of a type which the Corporations Act 2001 (Cth) specifically permits the director to
vote upon and to be present at a director's meeting during consideration of the matter
notwithstanding the directors' material personal interest.
(b) Compensation of non-executive directors
The aggregate remuneration of non-executive directors is determined by the
Company in general meeting. That aggregate remuneration is to be divided among
the non-executive directors as they agree on or, in the absence of agreement,
equally. The division of aggregate remuneration among non-executive directors
does not require an independent quorum.
In addition, each non-executive director is entitled to be reimbursed for
reasonable travelling, accommodation and other expenses incurred while
travelling to or from meetings or when otherwise engaged on the business of the
Company.
(c) Borrowing powers exercisable by directors
Under the constitution, the business of the Company is to be managed by the
directors, who may exercise all such powers of the Company as are not required
by the Corporations Act 2001 (Cth) or the constitution to be exercised by the
Company in general meeting. The directors are specifically authorised to
exercise all the powers of the Company to borrow or raise money, to charge any
property or business of the Company or any or all of its uncalled capital and to
issue debentures or give any other security for a debt, liability or obligation
of the Company or of any other person. These powers can only be altered by an
amendment to the constitution, which would need to be approved by the passage of
a special resolution of the Company's members at a general meeting.
(d) Retirement of directors under an age limit requirement
No person over the age of 70 years may be appointed as a director of the
Company. A director who attains the age of 70 is deemed to have retired from
the Company on that day, unless the remaining directors have previously resolved
that the director's retirement will occur at the conclusion of the next
annual general meeting of the Company.
(e) Share qualification
Within two months after a director's appointment, the director must hold
at least 2,000 fully paid ordinary shares in the Company in the director
's own right.
(f) Re-election of directors
Each year at least one-third of the non-executive directors retire from office
at the annual general meeting. The retiring non-executive directors may be
eligible for re-election.
This information is provided by RNS
The company news service from the London Stock Exchange
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