Reserve Bank of Australia Annual Report – 1998 Financial Statements Note 16 – Change in accounting policy – investments

During 1997/98 the Bank conducted a detailed accounting review of the makeup, conditions and turnover associated with the domestic government securities portfolio; the results of this review were:

• the portfolio is now more actively managed;
• there are no explicit restrictions on the Bank taking profit when the opportunity exists, provided this is within the overall broader monetary policy framework of the Bank;
• there is regular movement and turnover in the portfolio;
• the securities are marketable securities.

Based on the results of this review the Bank has determined that the domestic government securities portfolio ought to be treated as current assets. From 1 July 1997, the Bank has therefore commenced accounting for all gains, both realised and unrealised, through the Profit and Loss Account. This change also results in domestic government securities being accounted for on a consistent basis with foreign exchange investments, and thus lends clarity and transparency to the financial statements.

Up to and including 1996/97 unrealised gains/losses on investments (gold and foreign exchange and domestic government securities) were passed to/from revaluation reserves provided market price was greater than cost. The accounting policies included treating domestic government securities as non-current assets. That part of the Investments Revaluation Reserve and/or Foreign Currency Revaluation Reserve relating to investments and/or currencies disposed of in the course of the financial year was transferred to the Profit and Loss Account for inclusion in the calculation of net operating earnings. This treatment allowed all realised gains to be distributed in terms of the Reserve Bank Act.

With recent changes to the Reserve Bank Act, the Bank is now required to retain unrealised gains until they are actually realised, and this had made possible the recognition of gains during the year in the profit and loss account. As of 1 July 1997, the Bank made the following changes to its accounting policy for investments:

• Foreign exchange investments are now accounted for in terms of AAS 20 – all gains and losses are recognised in the profit and loss account when they arise;
• Gold investments are now accounted for in terms of AAS 10 – the Bank will continue to use an asset revaluation reserve to recognise unrealised gains, and transfer any realised gains to the Profit and Loss Appropriation Account;
• Domestic investments – all gains and losses are recognised in the profit and loss account when they arise.

The following table shows the effect of the change in accounting policy on the 1997 published figures.