Reserve Bank of Australia Annual Report – 2014 Financial Statements Note 16 – Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. This is determined by the quoted market price, if one is available. The RBA's financial assets measured at fair value include its holdings of Australian dollar securities, foreign government securities, interest rate futures, foreign currency swap contracts and its shareholding in the BIS. Non-financial assets carried on the balance sheet at fair value include the RBA's property, plant and equipment. There are no financial liabilities, other than derivatives, measured at fair value. The RBA's repurchase agreements, BIS deposits, cash and cash equivalents, payables, receivables, notes on issue and deposit liabilities are carried on the balance sheet at face value, which is equivalent to their amortised cost using the effective interest method; this approximates fair value.

AASB 7 requires that the fair value of financial assets and liabilities be disclosed according to their accounting classification under AASB 139.

2014 $M 2013 $M
Financial assets accounted for under AASB 139    
At fair value through profit or loss 62,855 47,960
Loans and receivables 74,189 46,421
Available for sale 348 367
Assets accounted for under other standards 4,093 3,779
Total assets as at 30 June 141,485 98,527
Financial liabilities accounted for under AASB 139    
At fair value through profit or loss 45 287
Not at fair value through profit or loss 122,771 88,038
Liabilities accounted for under other standards 359 480
Total liabilities as at 30 June 123,175 88,805

AASB 13 – Fair Value Measurement requires financial and non-financial assets and liabilities measured at fair value to be disclosed according to their position in the fair value hierarchy. This hierarchy has three levels: Level 1 is based on quoted prices in active markets for identical assets; Level 2 is based on quoted prices or other observable market data not included in Level 1; Level 3 valuations include inputs other than observable market data. The following table presents the RBA's assets and liabilities measured and recognised at fair value and their classification within the fair value hierarchy at 30 June 2014. There were no transfers between levels within the fair value hierarchy during the financial year.

Level 1 $M Level 2 $M Level 3 $M Total $M
As at 30 June 2014
Financial assets
At fair value through profit or loss
Australian dollar securities 7,284 1,097 8,381
Foreign government securities 52,823 1,564 54,387
Foreign currency swaps 7 80 87
Available for sale        
Shares in international financial institutions 348 348
60,114 2,741 348 63,203
Non-financial assets        
Land and buildings 361 361
Plant and equipment 162 162
523 523
Financial liabilities        
At fair value through profit or loss        
Foreign currency swaps 1 44 45
1 44 45
As at 30 June 2013
Financial assets        
At fair value through profit or loss        
Australian dollar securities 4,083 3,958 8,041
Foreign government securities 38,809 1,098 39,907
Foreign currency swaps 12 12
Available for sale        
Shares in international financial institutions 367 367
42,892 5,068 367 48,327
Non-financial assets        
Land and buildings 349 349
Plant and equipment 142 142
491 491
Financial liabilities        
At fair value through profit or loss        
Foreign currency swaps 15 272 287
15 272 287

The fair value of Level 2 financial instruments is determined by reference to observable inputs from active markets or prices from markets not considered active. Australian dollar-denominated discount securities and some foreign currency swaps are priced with reference to an active market yield or rate, but with an adjustment applied to reflect maturity dates. Prices for some Australian dollar and foreign currency-denominated securities are derived from markets that are not considered active.

The RBA's shareholding in the BIS is valued using the net asset value, as published in annual financial statements of the BIS, less a discount of 30 per cent. The discount applied is based on the 2001 Hague Arbitral Tribunal decision on compensation to be paid to former private shareholders, and subsequent transactions involving the re-allocation of BIS shares. This financial asset is classified as a Level 3 financial instrument.

Level 3 non-financial assets include the RBA's property, plant and equipment reflecting the use of unobservable market inputs in their valuation.

The following table presents the changes in Level 3 assets during 2013/14 for recurring fair value measurements of financial and non-financial assets.

Financial Assets Non-financial Assets
Shareholding
in the BIS
$M
Land and
Buildings
$M
Plant and
Equipment
$M
Opening Balance as at 1 July 2013 367 349 142
Transfers
Additions 13 41
Disposals (4) (1)
Depreciation (9) (21)
Gains or losses recognised in Net Profit 1
Gains or losses recognised in Other Comprehensive Income (19) 11 1
Closing Balance as at 30 June 2014 348 361 162

The following table provides information about the significant unobservable inputs used in Level 3 fair value measurements, including the sensitivity of fair value measurements to changes in the noted unobservable inputs.

Valuation Technique Unobservable Inputs Range of Inputs Fair Value Movement Due to +/–Change in Unobservable Input:
Increase Decrease
BIS Shares Net asset value Discount rate 30.0% Decrease Increase
Land and
Buildings
Income capitalisation
and Discounted
Cash Flow methods
Net market income
Discount rate
Terminal yield
Capitalisation rate
$86/m2 to $546/m2
8.3% to 10.0%
6.9% to 13.0%
6.8% to 12.0%
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Increase
Increase
Depreciated replacement cost Depreciation rate 2.0% Decrease Increase
Plant and Equipment Depreciated
replacement cost
Indexation rate
Depreciation rate
0.2% to 5.3%
4.8% to 25.0%
Increase
Decrease
Decrease
Increase