Reserve Bank of Australia Annual Report – 2005 Earnings and Distribution

The Reserve Bank holds a large portfolio of financial assets that it manages in support of its operations to implement monetary policy and which are invested primarily in domestic and overseas securities. The management of these assets is discussed in the chapter on ‘Operations in Financial Markets’), while a discussion of associated risks appears in the chapter on ‘Risk Management’.

Distributable Earnings

Section 30 of the Reserve Bank Act 1959 provides for certain components of the Reserve Bank's total profits to be paid as a dividend to the Australian Government. Specifically, earnings available for distribution comprise underlying earnings – net interest earnings less operating costs – plus any realised gains or losses. Unrealised valuation gains or losses do not affect distributed earnings, but are reflected in the Unrealised Profits Reserve. Valuation gains arise when interest rates decline or – in the case of foreign assets – the Australian dollar depreciates. Valuation losses arise when interest rates rise or the exchange rate appreciates. These gains and losses are realised when assets are sold.

Underlying earnings arise because, while the Reserve Bank earns interest on almost all of its assets, it does not pay interest on a large proportion of its liabilities, such as currency notes in circulation or capital and reserves. In 2004/05, underlying earnings totalled $997 million, compared with $882 million the previous year. This increase in underlying earnings primarily reflected the rise in short-term interest rates in Australia and the United States. As shown in the graph, the small increase in underlying earnings comes after a run of years in which they fell; this reflects the fact that interest rates around the world tended to rise in 2004/05, following a period in which they had generally moved down.

The Reserve Bank realised gains of $366 million in 2004/05, compared with realised losses of $188 million in 2003/04. The main factor in these gains was the sum of $266 million from the sale of foreign exchange, mainly to customers, notwithstanding the appreciation in the Australian dollar during the year. In addition, gains of $157 million were realised on holdings of foreign securities. These gains were partially offset by realised losses of $57 million on domestic investments.

Earnings available for distribution – the sum of underlying earnings and realised gains – amounted to $1,363 million in 2004/05, compared with $694 million the previous year.

Reserves and Dividend

The Reserve Bank Reserve Fund (RBRF) is the Reserve Bank's permanent general reserve. It is available to cover potential losses from a range of risks, especially the substantial market risks faced by the Reserve Bank. The RBRF is also available to cover losses from fraud, operational risks and other risks of the sort that most financial institutions face. The RBRF has been funded over time from transfers from earnings available for distribution and is akin to capital.

Consistent with the Reserve Bank Act 1959, the Treasurer determines, after consultation with the Reserve Bank Board, the amount, if any, to be credited to the RBRF from earnings available for distribution. The balance of distributable earnings is payable to the Australian Government after any such transfers. At 30 June 2005, the balance of the RBRF stood at $6,285 million. As the Board regarded this balance as satisfactory, it did not approach the Treasurer for a transfer from profits in 2004/05. Accordingly, all of the earnings available for distribution in 2004/05 will be paid as a dividend to the Australian Government.

Dividends are usually paid early in the financial year following that in which profits are earned. In some recent years, the Treasurer has decided to defer part of the dividend payable, spreading the payment over two years. The Treasurer deferred the sum of $320 million of the dividend due to be paid in 2004/05 until 2005/06. He has decided this year to defer receipt of $300 million from earnings in 2004/05 until 2006/07; this means that $1,063 million will be paid in August 2005 from earnings in 2004/05. Accordingly, the total amount to be paid to the Australian Government in August 2005 is $1,383 million – the sum of earnings available for distribution from profits in 2004/05 plus the amount deferred from the previous year minus the sum deferred until 2006/07, as summarised below.

Dividend Payment: August 2005

$ million

The table reports dividend payment details for August 2005.

Sum deferred from Earnings in 2003/04 (to be paid in 2005/06)	320
Plus
Total Distributable Earnings from 2004/05 (payable in 2005/06)	1,363
Minus
Earnings from 2004/05 deferred until 2006/07	300
Total Payment in 2005/06	1,383

In addition to the RBRF, the Reserve Bank maintains a number of other financial reserves. Balances in asset revaluation reserves reflect the amount by which the market value of its holdings of gold and property exceed the prices at which they were purchased. At 30 June 2005, balances in these reserves were $1,685 million, $9 million lower than a year earlier.

As noted, under the Reserve Bank Act 1959, and consistent with international practice for central banks, unrealised gains are not available to be distributed but are transferred to the Unrealised Profits Reserve. Balances in this reserve are available to absorb future valuation losses or are realised when relevant assets are sold.

The Reserve Bank recorded an unrealised loss of $1,289 million in 2004/05 as the exchange rate appreciated over the year against both the US dollar and euro. A measure of the exchange rate weighted by the currency composition of holdings of international reserves appreciated by about 11 per cent in 2004/05. This resulted in an unrealised foreign exchange loss of $1,663 million, partly offset by unrealised gains of $374 million on domestic and foreign securities. The unrealised valuation loss in 2004/05 saw the balance in the Unrealised Profits Reserve fall to a level of $1,548 million at 30 June, compared with $2,837 million on the previous balance date.

A number of other central banks that hold a significant proportion of their international reserves in US dollars and with currencies that float against the US dollar have also recently recorded valuation losses, and in some cases overall losses, as the US dollar has depreciated.

Accounting profits

The Reserve Bank follows generally accepted accounting principles so that, in line with the Finance Minister's Orders, issued under the Commonwealth Authorities and Companies Act 1997, it discloses its accounting profits as profits from all sources, including unrealised gains and losses. The unrealised loss in 2004/05 worked to offset distributable earnings, so that accounting profits amounted to $74 million.

The unrealised valuation loss has no implications for earnings available for distribution, or the dividend, since it was fully absorbed within the Unrealised Profits Reserve, leaving a significant credit balance, which remains available to absorb future unrealised losses or to be realised when relevant assets are sold.

Financial Disclosure

Commencing in 2005/06, the Reserve Bank's financial statements will be prepared in accordance with the Australian equivalents to International Financial Reporting Standards (AIFRS). The financial statements for 2004/05, which are presented in the following pages, provide in the notes to the accounts indicative effects of AIFRS if these standards had been adopted for disclosure in the latest financial year.