Reserve Bank of Australia Annual Report – 1974 Financial Statements Commentary on Financial Statements

Exchange Valuation Adjustments

The September 1973 change in the parity value of the Australian dollar and changes in market rates of exchange resulted over the year in book losses totalling some $390 million; these arose from the writing down of the Australian currency value of holdings of gold and foreign currencies and of foreign currencies delivered under forward exchange contracts.

The total net downward adjustment for the year in respect of holdings of United States dollars approximated $101 million, sterling $139 million after allowance for a compensation payment of $26 million received in May under the Sterling Guarantee arrangements (see page 20) and other foreign currencies $19 million; the downward adjustment for gold and International Monetary Fund Special Drawing Rights was approximately $11 million. Net deliveries of foreign currencies under forward exchange contracts involved downward adjustments over the year of $120 million. Because of the magnitude and extraordinary nature of the 1973/74 adjustments they have, as in 1972/73, been excluded from the profit and loss accounts and charged to an exchange valuation adjustment account.

The Bank at 30 June applied towards reduction of the exchange valuation adjustments, amounts totalling about $139 million from the inner reserves of the Central Bank and Note Issue Department. These transfers included a substantial part of the amounts allocated from this year's earnings.

Exchange valuation adjustments not provided for at 30 June (including $560 million carried forward from 1972/73) approximated $811 million and are included in the balance sheets under the heading “All other assets (including unfunded adjustments arising from fluctuations in exchange rates)”. It is intended that the adjustments will 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 $14 million.

Gold

The Bank's holdings of some 7.4 million fine ounces is brought to account in the balance sheets at the official parity of US $42.22 per fine ounce ($A28.38 per fine ounce). Based on prices quoted in the London gold market of around US$144 per fine ounce ($A97 per fine ounce) the holdings had a theoretical free market value of around $720 million, some $510 million above the Bank's current valuation. Pending formal international moves to vary the gold parity, the Bank proposes no change in its current valuation of gold.

Balance Sheets

Total assets and liabilities shown in the Reserve Bank Aggregate Balance Sheet at 30 June 1974 were $6,494 million, $748 million higher than at 30 June 1973. Changes in many of the major items in the aggregate balance sheet have been commented on in earlier parts of the Report. A summary of the most significant changes follows–

The group of items which make up the major part of official reserve assets decreased by $694 million

Gold and balances held abroad	Dec. $299 million
International Monetary Fund Special Drawing Rights	Dec. $50 million
Other overseas securities	Dec. $345 million

The main influences affecting the level of these assets are discussed in the Australian Balance of Payments section of the Report (see page 16).

Foreign currency holdings are included in the balance sheets at current market rates of exchange. Gold and International Monetary Fund Special Drawing Rights are included on the basis of official parity relationships. Foreign currency investments include accrued interest and where applicable are valued at current market values.

Australian Government securities (including Treasury bills) increased by $788 million; Treasury notes decreased by $29 million and other Australian Government securities increased by $817 million. No Australian Government Treasury bills were held at 30 June. The Bank's operations in Australian Government securities and the factors affecting these items are discussed in the section headed Financial Developments (see page 27).

Loans, advances and bills discounted increased by $351 million reflecting net reductions of $4 million in loans made by Rural Credits Department (see page 46) and an increase of $355 million in other loans and advances. These include loans to banks, loans to dealers in the short term money market, Australian Resources Development Bank and other Reserve Bank customers. The item also includes $36 million of commercial bills, being the outstanding balance, at face value, of bills purchased from dealers in the short term money market.

Bank premises showed a slight increase for the year. Capital expenditure during the year on new buildings in Perth, Brisbane and Hobart was largely offset by the transfer of premises in Papua New Guinea to the Bank of Papua New Guinea and the writing down of book value of premises by approximately $1 million.

Bills receivable and remittances in transit increased by $28 million, mainly reflecting exchange clearances on 28 June.

All other assets, which increased by $268 million, includes unfunded adjustments arising from fluctuations in exchange rates.

Reserve Funds increased by about $1 million, the amount of the transfer to the Rural Credits Department Reserve Fund from net profits 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 transactions, interest and charges for the year.

Australian notes on issue rose by $396 million (see page 45).

Deposits, bills payable and all other liabilities increased by $359 million. There was an increase in the Statutory Reserve Deposit Accounts of trading banks of $129 million and decreases in Term Loan Fund Accounts and Farm Development Loan Fund Accounts of $15 million and $9 million respectively. The rise in Statutory Reserve Deposit Accounts was the net result of growth in trading bank deposits partly offset by a small net reduction in the ratio. Deposits of savings banks decreased by $270 million. Deposits of overseas institutions decreased by $7 million. Other (including amounts provided for contingencies) increased by $531 million, mainly due to a rise in deposits of Australian governments. The item includes special deposits lodged with the Bank as a proportion of proceeds of overseas borrowings (see page 19).

Inter-departmental accounts amounting to $1,066 million have been offset in the aggregate balance sheet. These comprise mainly:

Deposits lodged with the Central Bank by Note Issue Department which increased by $90 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.
Advances to Rural Credits Department by the Central Bank which decreased by $6 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 net earnings for Central Banking Business and Note Issue Department in 1973/74 were 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 exchange valuation adjustment accounts have been determined in the light of the general operating requirements of the Bank.

Earnings from Central Banking Business in 1973/74 were higher than in 1972/73 but Note Issue Department earnings were slightly lower than last year. The increase in earnings on Central Banking Business was mainly a reflection of higher average funds employed at increased interest rates particularly on non-sterling foreign investments. The slightly lower Note Issue Department earnings reflected a lower net return (after market valuation adjustments) on the Department's sterling investments.

Net profits in the Rural Credits Department increased slightly in 1973/74 to $1,685,536 as the result of higher interest rates on advances from September 1973. The net profit was divided equally between the Rural Credits Department Reserve Fund and the Rural Credits Development Fund.