Reserve Bank of Australia Annual Report – 1973 Financial Statements Notes on Financial Statements

Changes in the parity of the Australian and United States dollars and in market rates of exchange over the year resulted in book losses totalling some $766 million. These arose from valuation adjustments, that is, the writing down of the Australian currency value of holdings of gold and foreign currencies and of foreign currencies delivered under forward exchange contracts. In the case of sterling, adjustments were partly offset by the compensation payment of $24 million received in January under the terms of the Sterling Guarantee Agreement of September 1968 (see page 28). Total net downward adjustments for the year in respect of United States dollars approximated $518 million, sterling $250 million; the adjustment for gold and International Monetary Fund Special Drawing Rights was approximately $11 million. There was an offset gain approximating $13 million on other foreign currencies. Because of the magnitude of the adjustments and their extraordinary nature, they have been charged to a valuation adjustment account and have not been included in the profit and loss accounts for the year.

At 30 June the Bank applied towards reduction of the valuation adjustments an amount of $20 million from the Reserve Bank Reserve Fund and amounts totalling about $186 million from the inner reserves of the Central Bank and Note Issue Department. These included most of the amounts allocated from this year's earnings.

Valuation adjustments not provided for at 30 June approximated $560 million and are included in the balance sheets under the heading “All other assets (including unfunded adjustments arising from fluctuations in exchange rates)”. The intention is for them to be progressively liquidated over future years as resources become available.

Forward exchange contracts outstanding with the Bank at 30 June would, if the exchange rates ruling at that date were in effect at the time of delivery under the contracts, result in further downward valuation adjustments of approximately $36 million.

Balance Sheets

In the Reserve Bank aggregate balance sheet the group of items which comprise the major part of official reserve assets increased by about $490 million—they are

Major influences affecting the level of these assets are discussed in the section headed Balance of Payments (see page 22).

Foreign currency holdings are valued at current market rates of exchange. Gold and International Monetary Fund Special Drawing Rights are valued on the basis of official parity relationships.

Where applicable, these items include accrued interest (1972 figures have been adjusted) and, for 1973, marketable securities are included at current market values. Previously, marketable securities were generally included at the lesser of cost or face value.

AUSTRALIAN GOVERNMENT SECURITIES (INCLUDING TREASURY BILLS) increased by $110 million; Treasury notes decreased by $44 million and other Australian Government securities increased by $154 million. Factors affecting these items are discussed in the sub-section headed Public Finance (see page 30). Securities originally issued for less than 12 months are included at face value; other securities at the lesser of cost or face value. No Australian Government Treasury bills were held at the end of June in either 1972 or 1973.

LOANS, ADVANCES AND BILLS DISCOUNTED decreased by $59 million reflecting net reductions of $55 million in loans made by Rural Credits Department (see page 42) and a decrease of $4 million in other loans and advances. These include loans to dealers in the short-term money market, Australian Resources Development Bank and other Reserve Bank customers.

BANK PREMISES increased by $8 million, reflecting capital expenditure during the year related mainly to progress payments on new buildings in Perth, Brisbane and Hobart (see page 44), offset by the writing down of book value of premises by approximately $1 million.

BILLS RECEIVABLE AND REMITTANCES IN TRANSIT increased $31 million mainly reflecting exchange clearances on 29 June.

ALL OTHER ASSETS, which increased by $565 million, includes unfunded adjustments arising from fluctuations in exchange rates.

RESERVE FUNDS decreased by $19 million. The decrease of $20 million in the Reserve Bank Reserve Fund was applied towards reduction of valuation adjustments; the increase of about $649,000 in the Rural Credits Department Reserve Fund was a transfer from net profits of the department in terms of Section 63 of the Reserve Bank Act.

SPECIAL RESERVE–INTERNATIONAL MONETARY FUND SPECIAL DRAWING RIGHTS decreased by $9 million as a result of the change in the par value of the Australian dollar offset by a small amount arising from net settlements with the International Monetary Fund for interest and charges for the year.

AUSTRALIAN NOTES ON ISSUE rose by $259 million (see page 42).

DEPOSITS, BILLS PAYABLE AND ALL OTHER LIABILITIES increased by $917 million.

There was an increase in the STATUTORY RESERVE DEPOSIT ACCOUNTS OF TRADING BANKS of $230 million and decreases in TERM LOAN FUND ACCOUNTS and FARM DEVELOPMENT LOAN FUND ACCOUNTS of $29 million and $22 million respectively. The rise in STATUTORY RESERVE DEPOSIT ACCOUNTS was the net result of a reduction in the SRD ratio in November 1972 (replenishment of banks' farm development loan funds), an increase in the ratio in April 1973 and strong growth in trading bank deposits. DEPOSITS OF SAVINGS BANKS increased by $520 million. These deposits are mainly interest-bearing term deposits which may form part of the investments by savings banks of 10 per cent of their Australian depositors' balances as required under the Banking (Savings Banks) Regulations. DEPOSITS OF OVERSEAS INSTITUTIONS decreased by $3 million. This item reflects the Australian currency working balances of overseas central banks and international financial institutions and the movement is mainly due to Australian currency transactions between the International Monetary Fund and other countries. OTHER (INCLUDING AMOUNTS PROVIDED FOR CONTINGENCIES) increased by $221 million. The item includes deposits of Australian governments and other Reserve Bank customers together with provisions for contingencies and miscellaneous liabilities for the three sections of the Bank. Special deposits lodged with the Bank as a proportion of proceeds of overseas borrowings are also shown under this heading (see page 25). At 30 June 1973 deposits held by the Bank in this category were less than $1 million.

Inter-departmental accounts amounting to $982 million have been offset in the aggregate balance sheet. These comprise mainly:

1. Deposits lodged with the Central Bank by the Note Issue Department which increased by $8 million. These funds are included under BALANCES WITH CENTRAL BANK in the Note Issue Department balance sheet and OTHER LIABILITIES in the Central Banking Business balance sheet. These deposits, which attract interest, are maintained to alleviate investment management problems which arise because of the statutory limitation on the types of overseas investments which Note Issue Department may hold.
2. Advances to Rural Credits Department by the Central Bank which decreased by $58 million; they appear in ALL OTHER LIABILITIES in the Rural Credits Department balance sheet and in LOANS, ADVANCES AND BILLS DISCOUNTED in the Central Banking Business balance sheet.

Profit and Loss Appropriation Statement

The whole of the net earnings for Central Banking Business and Note Issue Department in 1972/73 was applied internally by the Bank. After providing for the writing down of bank premises the balance was transferred to reserves for contingencies in each section. Amounts transferred from these reserves towards reducing valuation adjustment accounts have been determined in the light of the general operating requirements of the Bank.

Earnings from Central Banking Business and in the Note Issue Department in 1972/73 were higher than in 1971/72, mainly reflecting increases in the level of funds invested in overseas centres on which earning rates were generally higher. There was some offset in the reduced value, expressed in terms of Australian currency, of overseas earnings and in an increase in the amount of interest paid on higher deposits with the Bank in Australia.

Net profits in the Rural Credits Department fell slightly in 1972/73 to $1,298,304 mainly as a result of a lower average level of outstanding advances. The net profit was distributed equally between the Rural Credits Department Reserve Fund and the Rural Credits Development Fund.