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    Preferred Capital Limited ABN 68 101 938 176 Annual Financial Report For the year ended 30 June 2010 Not guaranteed by Commonwealth Bank of Australia


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    Contents 1 Directors’ Report 7 Auditor’s Independence Declaration 9 Statement of Comprehensive Income 10 Statement of Financial Position 11 Statement of Changes in Equity 12 Statement of Cash Flows 13 Notes to the Financial Statements 32 Directors’ Declaration 33 Independent Auditor’s Report to the Members


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    Directors’ Report The Directors of Preferred Capital Limited 7 April 2006 and PERLS III are quoted on (the ‘Company’) submit the following report the ASX. The gross proceeds of $1,166.46 for the year ended 30 June 2010. million received by the Company through the issue of PERLS III have been invested Directors in Convertible Notes issued by the Bank’s The names of the Directors of the Company in New Zealand branch (‘CBA New Zealand’). office during the financial year ended 30 June 2010 and until the date of this report were: Review and results of operations G A Petersen Revenue for the year of $41.21 million M J Venter (2009: $61.42 million) is comprised primarily S P Kinsella of interest income earned on the investment R M McEwan (Resigned 12 February 2010) in Convertible Notes issued by CBA I M Saines (Appointed 12 February 2010) New Zealand. Corporate information The Company recorded a net profit after Preferred Capital Limited is a company tax for the year ended 30 June 2010 of limited by shares that is incorporated and $1.67 million (2009: $7.74 million). domiciled in Australia. In July 2009, the Bank commenced Its immediate and ultimate parent entity is making payments to the Company under Commonwealth Bank of Australia (the ‘Bank’). the ‘Top-up Deed’. These payments will ensure that the Company has sufficient The registered office of Preferred Capital resources to continue making payments Limited is located at Ground Floor, Tower 1, under PERLS III, despite a fall in income 201 Sussex Street, Sydney NSW 2000, due to lower interest rates. Australia. Financial position Principal activities At 30 June 2010 the Company held total The Company’s principal activity is to act as assets of $1,178.26 million (2009: $1,174.77 a special purpose vehicle for capital raising million) and net assets of $1.18 million (2009: purposes as part of the Bank’s capital $0.30 million). The increase in net assets is management program. Capital was raised as a result of a high level of retained earnings. through the issue of Perpetual Exchangeable Repurchaseable Listed Shares (PERLS III) under a prospectus dated 3 March 2006. The Company was subsequently admitted to the Official List of the Australian Securities Exchange (ASX) as an ASX Debt Listing on 1


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    Directors’ Report (continued) Dividends 30 June 2010 30 June 2009 PERLS III $’000 $’000 PERLS III fully franked dividends paid on 6 July 2009 ($1.4532 per share) (7 July 2008: $3.1006 per share) 8,475 18,084 PERLS III fully franked dividends paid on 6 October 2009 ($1.4715 per share) (7 October 2008: $3.1088 per share) 8,582 18,131 PERLS III fully franked dividends paid on 6 January 2010 ($1.6185 per share) (6 January 2009: $2.7766 per share) 9,440 16,194 PERLS III fully franked dividends paid on 6 April 2010 ($1.7882 per share) (6 April 2009: $1.7410 per share) 10,429 10,154 36,926 62,563 Ordinary shares Ordinary shares fully franked dividends paid on 6 July 2009 ($nil per share) (7 July 2008: $323,547.25 per share) – 3,883 Ordinary shares fully franked dividends paid on 6 October 2009 ($nil per share) (7 October 2008: $321,718.20 per share) – 3,861 Ordinary shares fully franked dividends paid on 6 January 2010 ($11,292.12 per share) (6 January 2009: $256,049.12 per share) 136 3,072 Ordinary shares fully franked dividends paid on 6 April 2010 ($53,671.63 per share) (6 April 2009: $43,847.30 per share) 644 526 780 11,342 On 17 June 2010 the Directors resolved to pay a fully franked dividend of $11.23 million (2009: $8.48 million) in respect of PERLS III ($1.9261 per share) (2009: $1.4532 per share) to be payable on 6 July 2010. The dividends were paid on 6 July 2010. Payment of dividends was subject to certain conditions being met on the date prior to payment as set out in the PERLS III Terms of Issue. All necessary conditions were met and payment was made on 6 July 2010. 2


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    Changes in the state of affairs In accordance with commercial practice, In the opinions of the Directors, there were the insurance policy prohibits disclosure of no significant changes in the state of affairs the terms of the policy including the nature of the Company that occurred during the of the liability insured against and the year under review not otherwise disclosed amount of the premium. in this report or the financial report. Directors’ and officers’ indemnity Environmental regulation The Constitution of the Company provides The Company’s operations are not subject for the Company to indemnify each officer to any particular or significant environmental on a full indemnity basis and to the full extent regulations under Commonwealth, State or permitted by law against all losses, liabilities, Territory Law. costs, charges and expenses (‘Liabilities’) incurred by the officer as an officer of the Likely developments, expected results Company. The officers of the Company to of operations and business strategy whom the indemnity presently applies are The Company will continue to act as a any person who is, or has been, a director or vehicle for PERLS III. Expected results are secretary or senior manager of the Company. that the Company will continue to earn The indemnity is enforceable without the interest on Convertible Notes, pay dividends officer having to first incur any expense or on PERLS III in accordance with the PERLS make any payment, is a continuing obligation III Terms of Issue and pay dividends on the and is enforceable by the officer even though ordinary shares provided there is a surplus the officer may have ceased to be an officer after paying dividends on PERLS III. There is of the Company. The extent of indemnity also currently no intention to make any further applies to Liabilities incurred by the officer issue of securities. of the Company both before and after the Directors’ and officers’ insurance adoption of the Constitution. During or since the financial year the The officers of the Company also have the Commonwealth Bank of Australia (‘the benefit of an indemnity, in similar terms to the Bank’), the ultimate parent entity, has paid indemnity in the Constitution of the Company, an insurance premium in respect of a under a deed poll executed by the Bank. contract insuring all current and former directors, secretaries, officers or public officers of the Company and any related bodies corporate (as defined in the insurance policy) against wrongful acts committed or allegedly committed including, but not limited to, a liability for negligence or for reasonable costs and expenses incurred in defending proceedings, whether civil or criminal. 3


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    Directors’ Report – Remuneration Report Remuneration of Directors The Company does not pay remuneration to its Directors or secretaries and has no employees. The Directors of the Company have been determined to be the key management personnel (KMP) within the scope of AASB 124. The Directors are employees of the Bank and their role as KMP is incidental to their role as an employee of the Bank. All Directors’ remuneration is borne by the ultimate parent entity and relates solely to other services performed with respect to their employment by Commonwealth Bank of Australia. Equity holdings of Directors Shareholdings None of the Directors of Preferred Capital Limited hold any shares, options or other interests in the Company. Since the Directors are employees of the Bank, they participate in the Bank’s employee shares plan and may otherwise hold shares in the Bank. Details of shares and other interests held by the Directors in the Bank are as follows: Balance Acquired/ Balance 30 June Granted as Net Change 30 June Name Class (1) 2009 Compensation(1) Other(2) 2010 G A Petersen Ordinary 36,244 – 12,027 48,271 Reward Shares 25,000 76,151 (25,000) 76,151 Deferred Shares 8,765 6,331 – 15,096 M J Venter Ordinary 4,000 5,000 (9,000) – Reward Shares 5,000 – (5,000) – Deferred Shares 8,952 4,497 – 13,449 I M Saines Ordinary 9,224 – 5,695 14,919 Reward Shares 5,000 89,997 (5,000) 89,997 Deferred Shares 26,596 7,597 – 34,193 R M McEwan Ordinary – – – – Reward Shares – 83,074 – 83,074 Deferred Shares 11,951 8,863 – 20,814 S P Kinsella Ordinary – 3,288 – 3,288 Reward Shares 7,742 – – 7,742 Deferred Shares – – – – (1) Reward Shares, for executives other than Mr Kinsella, represents shares granted under the Equity Reward Plan (ERP) and/or the Group Leadership Reward Plan (GLRP), which are subject to performance hurdles. All remaining Reward Shares granted under the ERP vested in full on 14 July 2009. Reward Shares for Mr Kinsella represents shares granted as part of his commencement arrangements. Deferred Shares represents the portion of each executive’s short-term incentive payment which is deferred into shares for three years. (2) ‘Net change other’ incorporates changes resulting from purchases and sales during the year by Directors and 4 vesting of Reward Shares (which became Ordinary shares).


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    Option holdings None of the Directors hold any options over shares in the Bank. No Directors received any shares on the exercise of options during the year ended 30 June 2010. Shares Vested during the year Reward Shares Name Vested G A Petersen 25,000 M J Venter 5,000 R M McEwan – S P Kinsella – I M Saines 5,000 5


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    Directors’ Report (continued) Non-audit services Rounding of amounts There were no non-audit services performed The amounts contained in the Directors’ during the year by our auditors. report and the financial report are presented in Australian Dollars and all values have been Events subsequent to the balance date rounded to the nearest one thousand dollars At the date of this report, the Directors of unless otherwise stated under the option the Company are not aware of any matters available to the Company under Class Order or circumstances that have arisen since 98/0100 (as amended by ASIC Class Orders the end of the financial year which have 99/90, 00/321, 04/667, 05/641, 06/51, significantly affected or may significantly 06/709) issued by the Australian Securities affect the operations of the Company, the and Investments Commission. results of those operations or the Company’s state of affairs, in subsequent financial years. Signed in accordance with a resolution of Directors. Auditor’s independence declaration The Company’s auditor, PricewaterhouseCoopers, has provided the Directors with a declaration of its independence, which is attached to the Directors’ report. Stephen Peter Kinsella Director Sydney, NSW 1 September 2010 6


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    Auditor’s Independence Declaration PricewaterhouseCoopers PricewaterhouseCoopers ABN 52 780 433 757 ABN 52 780 433 757 DarlingPark Darling Park Tower Tower 22 201Sussex 201 Sussex Street Street GPOBOX GPO BOX 2650 2650 SYDNEYNSW SYDNEY NSW11711171 DX 77 Sydney DX 77 Sydney Australia Australia Telephone Telephone +61 +61 2 8266 2 8266 0000 0000 Facsimile Facsimile +61 +61 2 8266 2 8266 9999 9999 www.pwc.com/au Direct Phone Enter your phone number Direct Fax Enter your fax number www.pwc.com/au Auditor’s Independence Declaration As lead auditor for the audit of Preferred Capital Limited for the year ended 30 June 2010, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Preferred Capital Limited. Stuart Scoular Sydney Partner 1 September 2010 PricewaterhouseCoopers Liability limited by a scheme approved under Professional Standards Legislation 7


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    Preferred Capital Limited Financial Report Contents 9 Statement of Comprehensive Income 10 Statement of Financial Position 11 Statement of Changes in Equity 12 Statement of Cash Flows 8


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    Preferred Capital Limited Statement of Comprehensive Income For the year ended 30 June 2010 2010 2009 Notes $’000 $’000 Revenue from continuing operations 3 41,205 61,423 Expenses 3 (39,536) (53,684) Profit before income tax 1,669 7,739 Income tax expense 4 (2) (3) Profit for the year 1,667 7,736 Other comprehensive income – – Total comprehensive income attributable to members of Preferred Capital Limited 1,667 7,736 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 9


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    Preferred Capital Limited Statement of Financial Position As at 30 June 2010 2010 2009 Notes $’000 $’000 ASSETS Current assets Cash and cash equivalents 5 292 287 Receivables 6 11,510 8,023 Total current assets 11,802 8,310 Non-current assets Loans and other receivables 7 1,166,456 1,166,456 Total non-current assets 1,166,456 1,166,456 Total assets 1,178,258 1,174,766 LIABILITIES Current liabilities Payables 8 10,616 8,010 Income tax liabilities 2 3 Total current liabilities 10,618 8,013 Non-current liabilities Interest bearing liabilities 9 1,166,456 1,166,456 Total non-current liabilities 1,166,456 1,166,456 Total liabilities 1,177,074 1,174,469 Net assets 1,184 297 Shareholders’ equity Share capital* 10 – – Retained profits 11 1,184 297 Total equity 1,184 297 * Share capital of $12 has been rounded to nil. The above Statement of Financial Position should be read in conjunction with the accompanying notes. 10


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    Preferred Capital Limited Statement of Changes in Equity For the year ended 30 June 2010 Share Capital* Retained Total Earnings Shareholder’s Equity Notes $’000 $’000 $’000 As at 1 July 2008 - 3,903 3,903 Total Comprehensive income - 7,736 7,736 Transactions with owners in their capacity as owners: Dividends paid 12 - (11,342) (11,342) As at 30 June 2009 - 297 297 Total Comprehensive income - 1,667 1,667 Transactions with owners in their capacity as owners: Dividends paid 12 - (780) (780) As at 30 June 2010 - 1,184 1,184 * Share capital of $12 has been rounded to nil. The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 11


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    Preferred Capital Limited Statement of Cash Flows For the year ended 30 June 2010 2010 2009 Notes $’000 $’000 Cash flows from operating activities Interest income received 37,718 73,920 Interest expense paid (36,927) (62,563) Other expenses paid (3) (3) Income tax paid (3) (4) Net cash inflow from operating activities 18(b) 785 11,350 Cash flows from financing activities Dividends paid (780) (11,342) Net cash outflow from financing activities (780) (11,342) Net increase in cash and cash equivalents held 5 8 Cash and cash equivalents at the beginning of the year 287 279 Cash and cash equivalents at the end of the year 18(a) 292 287 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 12


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    Preferred Capital Limited Notes to the Financial Statements For the year ended 30 June 2010 Contents 14 Note 1. Summary of significant accounting policies 19 Note 2. Segment information 20 Note 3. Revenue and expenses 20 Note 4. Income tax 21 Note 5. Current assets – Cash and cash equivalents 21 Note 6. Current assets – Receivables 21 Note 7. Non-current assets – Loans and other receivables 22 Note 8. Current liabilities – Payables 22 Note 9. Non-current liabilities – Interest bearing liabilities 22 Note 10. Share capital 23 Note 11. Retained profits 23 Note 12. Dividends 24 Note 13. Financial risk management 27 Note 14. Disclosures about the fair value of financial instruments 28 Note 15. Remuneration of auditors 28 Note 16. Directors and key management personnel 29 Note 17. Related party transactions 30 Note 18. Notes to the Statement of Cash Flows 30 Note 19. Capital management 31 Note 20. Contingent assets, liabilities and commitments 31 Note 21. Events after reporting date 13


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    Notes to the Financial Statements For the year ended 30 June 2010 Note 1. Summary of significant best reflects the economic substance of accounting policies the underlying events and circumstances relevant to the Company. General information The General Purpose Financial Report The principal accounting policies adopted in (‘Financial Report’) of Preferred Capital the presentation of these financial statements Limited (the ‘Company’) for the year ended are set out below. These policies have been 30 June 2010, was approved and authorised consistently applied to all years presented, for issue by the Board of Directors on unless otherwise stated. 1 September 2010. The Directors have the a) Bases of accounting power to amend and reissue the financial The Financial Statements for the year statements. These financial statements are ended 30 June 2010 have been prepared the individual financial statements of the in accordance with the requirements of Company as an individual entity. the Corporations Act 2001, Australian The Company is incorporated and domiciled Accounting Standards (‘AAS’s), other in Australia. It is a company limited by shares. authoritative pronouncements of the The address of its registered office is Ground Australian Accounting Standards Board Floor, Tower 1, 201 Sussex Street, Sydney (AASB) and the Urgent Issues Group NSW 2000, Australia. Its immediate and (UIG) Interpretations. ultimate parent entity is Commonwealth Bank The basis of the AASs are the International of Australia (the ‘Bank’). Financial Reporting Standards (‘IFRS’) The Company’s principal activity is to act as as issued by the International Accounting a special purpose vehicle for capital raising Standards Board (‘IASB’). As a result purposes as part of the Bank’s capital of complying with AAS, the Financial management program. It was used to raise Statements comply with IFRS and capital through the issue of Perpetual Interpretations issued by the IASB. Exchangeable Repurchaseable Listed The preparation of the Financial Statements Shares (PERLS III) under a prospectus dated in conformity with AASs requires management 3 March 2006. The gross proceeds of $1.17 to make estimates and assumptions that billion received by the Company through the affect the amounts reported in the Financial issue of PERLS III have been invested in Statements. Further information is included Convertible Notes issued by the Bank’s New in Note 1(m) Critical Accounting Policies and Zealand branch (‘CBA New Zealand’). Estimates. The use of available information The functional and presentational currency and the application of judgement are inherent of the Company has been determined to in the formation of estimates. Actual results be Australian Dollars (AUD) as this currency could differ from these estimates. 14


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    b) Basis of preparation • Revised AASB 101 Presentation of The Financial Statements are prepared Financial Statements which clarifies on the basis of historical cost convention. how to classify the liability component During the year, the Company adopted the of a convertible instrument. The initial revised AASB 101 Presentation of Financial application of this revised standard is Statements and AASB 7 Financial not expected to materially impact the Instruments: Disclosures that were effective financial results of the Company. 1 January 2009. The revised AASB 101 The following standard is not mandatory until standard requires the separate presentation accounting periods on or after 1 January of a Statement of Comprehensive Income 2013, but early adoption is permitted: and a Statement of Changes in Equity. All non-owner changes in equity must now be • AASB 9 Financial Instruments: presented in the Statement of Comprehensive Classification and Measurements which Income. As a consequence, the company replaces the multiple classification and had to change the presentation of its financial measurement models in AASB 139 statements. Comparative information has Financial Instruments: Recognition and been re-presented so that it is also in Measurement with a single model that conformity with the revised standard. has only two classification categories: amortised costs and fair value. The There were no other new standards, Company is assessing the impact of this interpretations or amendments which new standard, as well as the continued were required to be adopted by the project to replace AASB 139. Company during the financial year commencing 1 July 2009. The following standards are not mandatory until accounting periods beginning on or after The Company did not early adopt any standards, interpretations or amendments 1 July 2013, but early adoption is permitted: during the financial year commencing • AASB 1053 Application of Tiers of 1 July 2009. Australian Accounting Standards and The following standards and amendments AASB 2010-2 Amendments to Australian will be applied for the financial year Accounting Standards arising from commencing 1 July 2010: Reduced Disclosure Requirements. This is the first stage of revisions to • Revised AASB 107 Statement of the differential reporting framework in Cash Flows which clarifies that only Australia, and introduces a two-tier expenditure resulting in a recognised differential reporting regime that applies asset can be categorised as a cash to all entities that prepare General flow from investing activities. The initial application of this revised standard is Purpose Financial Statements. AASB not expected to materially impact the 1053 identifies the types of entities that financial results of the Company. must apply full IFRS as adopted in 15


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    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Australia (Tier 1) in preparing General d) Revenue recognition Purpose Financial Statements, including Revenue is recognised and measured at for-profit private sector entities that have the fair value of consideration received or public accountability. Other entities, receivable to the extent that it is probable including for-profit private sector entities that the economic benefits will flow to the that do not have public accountability and Company and the revenue can be reliably all not-for-profit private sector entities, measured. The source of revenue is interest must apply as a minimum the Reduced income and Top-up Payments from the Reporting Requirements (Tier 2) in ultimate parent entity. preparing General Purpose Financial Interest income Statements. On 30 June 2010 the AASB Interest income is recognised on an accruals officially introduced a revised differential basis using the effective interest method. reporting framework in Australia. Under this framework, a two-tier differential Top-up Payments reporting regime applies to all entities that Where the Company does not receive prepare general purpose financial sufficient funds from the Convertible Notes statements. Preferred Capital Limited has to cover payments required on PERLS III, the public accountability as it is listed on the Bank has the right under the ‘Top-up Deed’, ASX and is therefore not eligible to adopt in its absolute discretion to make a Top-up the new Australian Accounting Standards Payment to cover the shortfall. Top-up – Reduced Disclosure Requirements. Payments are recognised only when As a consequence, the two standards approved by the Bank. will have no impact on the financial e) Financial instruments statements of the entity. Financial assets and financial liabilities which There are no other standards, amendments are not at fair value are carried at cost or or interpretations available for early adoption amortised cost. at 1 July 2010 that will be applicable to Under AASB 132 and AASB 139, financial the Company. instruments are required to be classified c) Cash and cash equivalents into certain categories which determine Cash and cash equivalents include cash the accounting treatment of the item. at banks and money at short call with an The company has adopted the following original maturity of three months or less. categories: They are brought to account at the face • Loans and other receivables value or the gross value of outstanding • Liabilities at amortised cost balance. • Equity 16


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    Derecognition of financial instruments h) Income tax The derecognition of a financial instrument Income tax on the profit for the period takes place when the Company no longer comprises current and deferred tax. controls the contractual rights that comprise Income tax is recognised in profit or loss, the financial instrument, which is normally except to the extent that it relates to items the case when the instrument is sold, or all recognised in other comprehensive income the cash flows attributable to the instrument or directly in equity. In this case, the tax is are passed through to an independent third also recognised in other comprehensive party and the risks and rewards have income or directly in equity, respectively. substantially been transferred. Current tax is the expected tax payable on f) Loans and other receivables the taxable income for the year, using tax Loans and other receivables are primarily rates enacted or substantially enacted at financial assets with fixed and determinable the reporting date, and any adjustment to payments that are not quoted on an active tax payable in respect of previous years. market and include Convertible Notes issued by CBA New Zealand. These amounts are Deferred tax is provided using the liability initially recognised at fair value including method, providing for temporary differences direct and incremental transaction costs. between the carrying amounts of assets and They are subsequently valued at amortised liabilities for financial reporting purposes and cost using the effective interest method. the amounts used for taxation purposes. g) Provisions for impairment The amount of deferred tax provided is Loans and other receivables based on the expected manner of realisation The Company assesses at each balance or settlement of the carrying amount of date whether there is any objective evidence assets and liabilities, using tax rates enacted of impairment. If there is objective evidence or substantially enacted at the reporting date that an impairment loss on loans and other and which are expected to apply when the receivables has been incurred, the amount deferred tax asset is realised or the deferred of the loss is measured as the difference tax liability is settled. between the assets’ carrying amount and A deferred tax asset is recognised only the present value of the expected future to the extent that it is probable that future cash flows, discounted at the financial taxable profits will be available against which assets’ original effective interest rate. the asset can be utilised. Deferred tax assets Short-term balances are not discounted. are reduced to the extent that it is no longer Loans and other receivables are presented probable that the related tax benefit will net of provisions for impairment. be realised. 17


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    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Deferred tax assets and liabilities are offset i) Provisions when there is a legally enforceable right to A provision is recognised in the Statement of offset current tax assets and liabilities and Financial Position when the Company has a when the deferred tax balances relate to the legal or constructive obligation as a result of same taxation authority. Current tax assets a past event, and where it is probable that an and tax liabilities are offset where the entity outflow of economic benefits will be required has a legally enforceable right to offset and to settle the obligation and a reliable estimate intends either to settle on a net basis, or to of the amount of the obligation can be made. realise the asset and settle the liability Provision for dividend simultaneously. A provision for dividend payable is recognised The Commonwealth Bank of Australia when dividends are declared in the period in Group (‘the Group’) has elected to be taxed which they are approved by the Company’s as a single entity under the tax consolidation Directors and all terms and conditions set out regime. In addition to the Group electing to in the PERLS III Terms of Issue are met. be taxed as a single entity, the measurement The dividends payable to PERLS III holders and disclosure of deferred tax assets and are expected to be primarily sourced from liabilities has been performed in accordance interest paid on Convertible Notes issued by with the principles in AASB 112, and on a CBA New Zealand. standalone basis under UIG 1052. The Company is part of the Commonwealth j) Interest bearing liabilities Bank of Australia’s tax consolidation group. Interest bearing liabilities include PERLS III issued by the Company. PERLS III are Any current tax liabilities/assets (after the initially recognised at fair value including elimination of intra-group transactions) and direct and incremental transaction costs. deferred tax assets arising from unused tax They are subsequently valued at amortised losses assumed by Commonwealth Bank of cost using the effective interest method. Australia (the ‘Bank’) from the subsidiaries in the tax consolidated group are recognised in PERLS III may be exchanged for ordinary conjunction with any tax funding arrangement shares in the Bank, Bank PERLS III preference amounts. Any difference between these shares or a combination of Bank ordinary amounts is recognised by the Company as shares and cash after 6 April 2016 and, under an equity contribution from or distributions certain circumstances as set out in the to the Bank. PERLS III Terms of Issue. PERLS III offers a non cumulative floating rate return. Dividends The members of the tax consolidated group are reset quarterly commencing on 6 April have entered into a tax funding arrangement 2006 and are payable quarterly in arrears. which sets out the funding obligations of members of the tax consolidated group in respect of tax amounts. 18


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    k) Payables and other liabilities Note 2. Segment information Payables and other liabilities include interest payable which is recognised on a time The Company operates predominantly proportion basis using the effective interest in one geographical area, Australia, and rate method. operates predominantly in one business segment. The Company’s primary activity l) Shareholders’ equity is to invest funds raised from the issue of Ordinary share capital is the amount of paid PERLS III in Convertible Notes issued by up capital from the issue of ordinary shares CBA New Zealand. The Company is and is classified as equity. Redeemable domiciled in Australia. preference shares are classified as liabilities. Retained profits are derived from revenue profits and are available for dividend. m) Critical accounting policies and estimates These notes to the financial statements contain a summary of the Company’s significant accounting policies. Certain of these policies are considered to be more important in the determination of the Company’s financial position, since they may require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. During the year management have not been required to make any decisions of this nature. n) Rounding of amounts The amounts contained in the Director’s report and the financial report are presented in Australian Dollars and all values have been rounded to the nearest one thousand dollars unless otherwise stated under the option available to the Company under Class Order 98/0100 (as amended by ASIC Class Orders 99/90, 00/321, 04/667, 05/641, 06/51, 06/709) issued by the Australian Securities and Investments Commission. 19


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    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Note 3. Revenue and expenses 30 June 2010 30 June 2009 $’000 $’000 Revenue from continuing operations Interest income from ultimate parent entity 11 13 Interest income from CBA New Zealand convertible notes 40,962 61,174 Top-Up Payment from ultimate parent entity 232 236 Total revenue from continuing operations 41,205 61,423 Expenses Interest paid 39,533 53,681 Other operational expenses 3 3 Total expenses 39,536 53,684 Note 4. Income tax 30 June 2010 30 June 2009 $’000 $’000 The major component of income tax expense is: Statement of comprehensive income Current income tax Current tax liability 2 3 Income tax expense reported in statement of comprehensive income 2 3 Reconciliation between aggregate tax expense recognised in the statement of comprehensive income and tax expense calculated per the statutory income tax rate: Profit from ordinary activities before income tax expense 1,669 7,739 20


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    Note 4. Income tax (continued) 30 June 2010 30 June 2009 $’000 $’000 Prima facie tax on profit from ordinary activities at 30% (2009: 30%) 501 2,322 Non-assessable interest income (12,289) (18,352) Non-assessable Top-Up Payment (70) (71) Non-deductible interest expense 11,860 16,104 Total income tax expense 2 3 Note 5. Current assets – Cash and cash equivalents 30 June 2010 30 June 2009 $’000 $’000 Cash at bank with ultimate parent entity 292 287 Note 6. Current assets – Receivables 30 June 2010 30 June 2009 $’000 $’000 Interest receivable from ultimate parent entity 1 1 Interest receivable from CBA New Zealand Convertible Notes 11,509 7,786 Top-Up Payment receivable from ultimate parent entity – 236 11,510 8,023 Note 7. Non-current assets – Loans and other receivables 30 June 2010 30 June 2009 $’000 $’000 Investment in CBA New Zealand Convertible Notes 1,166,456 1,166,456 21


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    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Note 8. Current liabilities – Payables 30 June 2010 30 June 2009 $’000 $’000 Interest payable to PERLS III investors 10,616 8,010 The payment of interest to PERLS III investors is subject to the existence of certain conditions on the date prior to payment as set out in the PERLS III Terms of Issue. Note 9. Non-current liabilities – Interest bearing liabilities 30 June 2010 30 June 2009 $’000 $’000 PERLS III issued to investors 1,166,456 1,166,456 PERLS III may be exchanged for ordinary shares in the Bank, Bank PERLS III Preference shares or a combination of Bank ordinary shares and cash after 6 April 2016 and, under certain circumstances as set out in the PERLS III Terms of Issue. PERLS III offers a non-cumulative floating rate return. Dividends are reset quarterly and are payable quarterly in arrears. Note 10. Share capital 30 June 2010 30 June 2009 30 June 2010 30 June 2009 Shares Shares $’000 $’000 Authorised, issued and paid up capital* 12 12 – – * 12 ordinary shares of $1 each rounded down to nil (2009: 12 ordinary shares of $1 each rounded down to nil). Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. 22


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    Note 11. Retained profits 30 June 2010 30 June 2009 $’000 $’000 Retained profits at the beginning of the financial year 297 3,903 Net profit for the year 1,667 7,736 Dividends paid (780) (11,342) Retained profits at the end of the financial year 1,184 297 Note 12. Dividends 30 June 2010 30 June 2009 $’000 $’000 Ordinary shares fully franked dividends ($nil per share) paid on 6 July 2009 (7 July 2008: $323,547.25 per share) – 3,883 Ordinary shares fully franked dividends ($nil per share) paid on 6 October 2009 (7 October 2008: $321,718.20 per share) – 3,861 Ordinary shares fully franked dividends ($11,292.12 per share) paid on 6 January 2010 (6 January 2009: $256,049.12 per share) 136 3,072 Ordinary shares fully franked dividends ($53,671.63 per share) paid on 6 April 2010 (6 April 2009: $43,847.30 per share) 644 526 780 11,342 23


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    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Note 13. Financial risk management The interest on Convertible Notes and the dividend rate on PERLS III are calculated with Financial risk management is the process of reference to the 90 day Australian Bank Bill identifying, assessing, reporting and taking Swap Rate (‘BBSW’) and interest rate risk action to mitigate risks. The objective is to arising as a result of any movement in BBSW achieve sustainable earnings and growth is generally passed on to the investors. potential for investors. The Company may have an exposure to market, liquidity and However if BBSW falls below 3.39%, the credit risks. These risks are monitored and Company will not receive sufficient funds reported on a regular basis to key from the Convertible Notes to cover management personnel and ultimately payments required on PERLS III. In such the Board of Directors of the Company. a situation, the interest rate risk is managed by requiring payments under the ‘Top-up Market risk Deed’ whereby the Bank will make a Market risk is the risk that the future cash payment to meet any shortfall. The ‘Top-up flows of financial instruments will fluctuate Deed’ payment will only be activated if the due to changes in market variables such as Board of the Bank (or a committee of the interest rates, foreign exchange rates and Board of the Bank) declares or otherwise other prices. resolves to make the Top-up Payment and The Company’s primary source of income if none of the conditions described in the comes from interest payment from the PERLS III Terms of Issue exist. investment in the Convertible Notes issued At 30 June 2010 if Australian Bank Bill Swap by CBA New Zealand branch. The interest rates changed by +/- 1% (2009: +/- Convertible Notes are an Australian Dollar 1%) from the year end rates with all the other denominated, unquoted debt instrument. variables held constant, net profit and equity Hence the Company is not exposed to attributable to members of the Company foreign exchange rate or price risk. would have been affected by $5.61 million Interest rate risk gains/$1.37 million losses (2009: $5.19 Interest rate risk arises from the possibility million losses/$12.17 million losses). that changes in interest rates will affect future cash flows of financial instruments. 24


  • Page 27

    Liquidity risk Balance Sheet liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Company raised its funding through the issuance of PERLS III. Dividends payable to PERLS III holders will be sourced from interest paid on Convertible Notes issued by the Bank through its New Zealand branch. Dividends on PERLS III will only be paid if the Bank pays interest on the Convertible Notes in accordance with Convertible Note Deed. Interest will only be paid if the Board of the Bank declares or otherwise resolves to pay the interest and if no Deferral Condition exists. The Company has an obligation to pay dividends to PERLS III holders only to the extent that the Bank pays interest on the Convertible Notes. Maturity analysis of financial liabilities 0-3 3-12 1-5 Over 5 months months years years Total 2010 $’000 $’000 $’000 $’000 $’000 Financial liabilities PERLS III – – – 1,166,456 1,166,456 Payables and income tax liabilities 10,616 2 – – 10,618 Total 10,616 2 – 1,166,456 1,177,074 2009 Financial liabilities PERLS III – – – 1,166,456 1,166,456 Payables and income tax liabilities 8,010 3 – – 8,013 Total 8,010 3 – 1,166,456 1,174,469 25


  • Page 28

    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Credit risk Credit risk is the potential of loss arising from failure of a debtor or counterparty to meet their contractual obligations. The Company’s exposure to credit risk arises from the creditworthiness of the Bank. The Bank is a diversified financial services conglomerate with a credit rating of A+ by Standard & Poor’s and A3 by Moody’s for long term debt. The maximum credit risk the Company is exposed to at any given time is equal to the carrying value of assets in the Statement of Financial Position. Carrying value of total assets as at 30 June 2010 is $1,178.26 million (2009: $1,174.77 million). This exposure to the credit worthiness of the Bank is passed to investors in PERLS III. The Company has no obligation to make payments under PERLS III if payment is not received on the Convertible Notes. 26


  • Page 29

    Note 14. Disclosures about the fair value of financial instruments These amounts represent estimates of the fair values of the Company’s financial assets and financial liabilities at a point in time based on the following valuation methods and assumptions. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Market prices are used to determine fair value, where an active market (such as a recognised stock exchange) exists, as it is the best evidence of the fair value of a financial instrument. For financial instruments where no market price is available, the fair values presented in the following table have been estimated using present value or other estimation and valuation techniques based on market conditions existing at reporting dates. It is the Company’s intent to hold its financial instruments to maturity and therefore it is not probable that the net fair values shown would be realised in 2010. Carrying value Fair value Carrying value Fair value $’000 $’000 $’000 $’000 30 June 2010 30 June 2010 30 June 2009 30 June 2009 Financial assets Cash and cash equivalents 292 292 287 287 Current assets – Receivables 11,510 11,510 8,023 8,023 Non-current assets – Loans and other receivables 1,166,456 1,008,586 1,166,456 1,036,275 Financial liabilities Payables and income tax liabilities 10,618 10,618 8,013 8,013 Interest bearing liabilities 1,166,456 966,768 1,166,456 991,639 27


  • Page 30

    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Note 15. Remuneration of auditors Compensation of Directors and key management personnel Fees for services rendered by the The Company does not pay remuneration Company’s auditor in relation to the statutory to its Directors or secretaries and has no audit are borne by the ultimate parent entity. employees. The Directors are employees of the Bank and their role as KMP is incidental Note 16. Directors and key to their role as an employee of the Bank. management personnel All Directors’ remuneration is borne by the ultimate parent entity and relates solely to The Directors of the Company have been other services performed with respect to determined to be key management personnel their employment by Commonwealth Bank (KMP) within the scope of AASB 124: Related of Australia. None of the Directors of Party Disclosures. The names of the persons Preferred Capital Limited hold any shares, who were Directors of Preferred Capital options or other interests in the Company. Limited at any time during the financial year were as follows: Loans and other transactions G A Petersen Any loans to Directors and KMP or their related parties are made by the ultimate M J Venter parent entity, a provider of finance on terms R M McEwan and conditions that apply to similar S P Kinsella transactions with other Directors and key I M Saines management personnel of the parent entity. There are no other transactions with There were no changes to key management Directors and KMP or their related parties. personnel after the reporting date and the date the financial report was authorised for issue. 28


  • Page 31

    Note 17. Related party transactions Ultimate parent entity The ultimate parent entity is Commonwealth Bank of Australia. Transactions with related parties The following transactions occurred with related parties: 30 June 2010 30 June 2009 $’000 $’000 Interest revenue Interest income from ultimate parent entity 11 13 Interest income from CBA New Zealand 40,962 61,174 40,973 61,187 Top-up Payment from ultimate parent entity 232 236 Outstanding balances with related parties Investments Investment in CBA New Zealand Convertible Notes 1,166,456 1,166,456 Cash and cash equivalents 292 287 Bank account with ultimate parent entity 292 287 Receivables Interest receivable from CBA New Zealand 11,509 7,786 Interest receivable from ultimate parent entity 1 1 Top-up Payment receivable from ultimate parent entity – 236 11,510 8,023 All transactions with related parties in the Company were made on normal commercial terms and conditions at market rates, except that there are no fixed terms for the repayment of loans between the parties. 29


  • Page 32

    Notes to the Financial Statements (continued) For the year ended 30 June 2010 Note 18. Notes to the Statement of Cash Flows a) Reconciliation of cash and cash equivalents For the purpose of the Statement of Cash Flows, cash and cash equivalents includes cash at bank and money at short call. 30 June 2010 30 June 2009 $’000 $’000 Cash and cash equivalents at the end of year 292 287 b) Reconciliation of net profit after income tax to net cash inflow from operating activities 30 June 2010 30 June 2009 $’000 $’000 Profit from ordinary activities after income tax 1,667 7,736 Changes in assets and liabilities (Increase)/decrease in receivables (3,487) 12,496 Increase/(decrease) in payables 2,606 (8,881) Decrease in income tax liabilities (1) (1) Net cash inflow from operating activities 785 11,350 Note 19. Capital management The Company’s capital management objectives are to ensure sufficient capital resources to support the Company’s business and operational requirements and safeguard the Company’s ability to continue as a going concern. Periodic reviews of the entity’s capital requirements are performed to ensure the Company is meeting its objectives. The Company’s capital is defined as ‘equity’ as shown in the Statement of Financial Position plus net debt and is not subject to any external capital requirements. 30


  • Page 33

    Note 20. Contingent assets, liabilities and commitments There are no outstanding contingent assets, liabilities or commitments as at 30 June 2010 (2009: none). CBA New Zealand and the Company entered into an agreement under which, in consideration for the Company agreeing to subscribe for Convertible Notes, CBA New Zealand agrees to pay all of the Company’s upfront costs and expenses in connection with the offer and the issue of PERLS III including, without limitation, all legal, accounting, share registry, listing, printing, advertising and other expenses. Note 21. Events after reporting date The Directors are not aware of any matter or circumstance that has occurred since the end of the year that has significantly affected or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years. 31


  • Page 34

    Directors’ Declaration 30 June 2010 In accordance with a resolution of the Directors of Preferred Capital Limited, the Directors declare that: (a) the Financial Statements and notes thereto of the Company comply with Accounting Standards and in their opinion are in accordance with the Corporations Act 2001; (b) the Financial Statements and notes thereto also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board, as confirmed in Note 1(a); (c) the Financial Statements and notes thereto give a true and fair view of the Company’s financial position as at 30 June 2010 and of its performance for the year ended on that date; (d) in the opinion of the Directors, 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 (e) the Directors have been given the declarations required under Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2010. Signed in accordance with a resolution of the Directors. Stephen Peter Kinsella Director Sydney, NSW 1 September 2010 32


  • Page 35

    Independent Auditor’s Report to the Members of Preferred Capital Limited PricewaterhouseCoopers PricewaterhouseCoopers ABN 52 780 433 757 ABN 52 780 433 757 DarlingPark Darling Park Tower Tower 22 201Sussex 201 Sussex Street Street GPOBOX GPO BOX 2650 2650 SYDNEYNSW SYDNEY NSW11711171 DX 77 Sydney DX 77 Sydney Australia Australia Telephone Telephone +61 +61 2 8266 2 8266 0000 0000 Facsimile Facsimile +61 +61 2 8266 2 8266 9999 9999 www.pwc.com/au Direct Phone Enter your phone number Direct Fax Enter your fax number Report on the financial report and making accounting estimates that are www.pwc.com/au We have audited the accompanying financial reasonable in the circumstances. In Note 1, report of Preferred Capital Limited (the the directors also state, in accordance with company), which comprises the Statement Accounting Standard AASB 101 of Financial Position as at 30 June 2010, the Presentation of Financial Statements, that Statement of Comprehensive Income, the financial statements comply with Statement of Changes in Equity and International Financial Reporting Standards. Statement of Cash Flows for the year ended Auditor’s responsibility on that date, a summary of significant Our responsibility is to express an opinion on accounting policies, other explanatory notes the financial report based on our audit. We and the directors’ declaration. conducted our audit in accordance with Directors’ responsibility for the Australian Auditing Standards. These financial report Auditing Standards require that we comply The directors of the company are with relevant ethical requirements relating to responsible for the preparation and fair audit engagements and plan and perform presentation of the financial report in the audit to obtain reasonable assurance accordance with Australian Accounting whether the financial report is free from Standards (including the Australian material misstatement. Accounting Interpretations) and the An audit involves performing procedures to Corporations Act 2001. This responsibility obtain audit evidence about the amounts includes establishing and maintaining and disclosures in the financial report. The internal controls relevant to the preparation procedures selected depend on the and fair presentation of the financial report auditor’s judgement, including the that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; Liability limited by a scheme approved under Professional Standards Legislation 33


  • Page 36

    Independent Auditor’s Report to the Members of Preferred Capital Limited (continued) assessment of the risks of material Independence misstatement of the financial report, whether In conducting our audit, we have complied due to fraud or error. In making those risk with the independence requirements of the assessments, the auditor considers internal Corporations Act 2001. control relevant to the entity’s preparation Auditor’s opinion and fair presentation of the financial report in In our opinion: order to design audit procedures that are appropriate in the circumstances, but not for (a) the financial report of Preferred Capital the purpose of expressing an opinion on the Limited is in accordance with the effectiveness of the entity’s internal control. Corporations Act 2001, including: An audit also includes evaluating the (i) giving a true and fair view of the appropriateness of accounting policies used company’s financial position as at 30 and the reasonableness of accounting June 2010 and of their performance estimates made by the directors, as well as for the year ended on that date; and evaluating the overall presentation of the (ii) complying with Australian Accounting financial report. Standards (including the Australian Our procedures include reading the other Accounting Interpretations) and the information in the Annual Report to Corporations Regulations 2001; and determine whether it contains any material (b) the financial report also complies with inconsistencies with the financial report. International Financial Reporting Standards as disclosed in Note 1. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Liability limited by a scheme approved under Professional Standards Legislation 34


  • Page 37

    Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report of Preferred Capital Limited (the company) for the year ended 30 June 2010 included on Commonwealth Bank of Australia web site. The company’s directors are responsible for the integrity of the Commonwealth Bank of Australia web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report to confirm the information included in the audited financial report presented on this web site. PricewaterhouseCoopers Stuart Scoular Partner PricewaterhouseCoopers Sydney 1 September 2010 Liability limited by a scheme approved under Professional Standards Legislation 35


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    Notes 36


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    37


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    ADB2996 300910 Not guaranteed by Commonwealth Bank of Australia


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