Reserve Bank of Australia Annual Report – 2020 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 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, bond 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 and gold holdings. Other than derivatives, there are no financial liabilities measured at fair value.

AASB 13 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: valuation for Level 1 assets is based on quoted prices in active markets for identical assets; for Level 2 assets, valuation is based on quoted prices or other observable market data not included in Level 1; Level 3 assets include inputs to valuation other than observable market data.

The table below presents the RBA's assets and liabilities measured and recognised at fair value and their classification within the fair value hierarchy at 30 June 2020.

  Fair Value Amortised Cost
$M
Total
$M
Level 1 $M Level 2 $M Level 3 $M
As at 30 June 2020
Financial assets
At fair value through profit or loss
Australian dollar securities 72,880 368 na 73,248
Foreign government securities 32,263 5,664 na 37,927
Foreign currency swaps 204 na 204
At fair value through other comprehensive income
Shares in international and other institutions 521 na 521
At amortised cost na na na 159,273 159,273
  105,143 6,236 521 159,273 271,173
Non-financial assets
Land and buildings 567 12 579
Gold holdings 6,614 na 6,614
Other 305 305
  6,614 567 317 7,498
Total assets 111,757 6,236 1,088 159,590 278,671
Financial liabilities
At fair value through profit or loss
Foreign currency swaps 3 60 na 63
Not at fair value through profit or loss na na na 247,776 247,776
  3 60 247,776 247,839
Non-financial liabilities na na na 500 500
Total liabilities 3 60 248,276 248,339
  Fair Value Amortised Cost
$M
Total
$M
Level 1 $M Level 2 $M Level 3 $M
As at 30 June 2019
Financial assets
At fair value through profit or loss
Australian dollar securities 9,347 52 na 9,399
Foreign government securities 39,102 4,828 na 43,930
Foreign currency swaps 3 112 na 115
At fair value through other comprehensive income
Shares in international and other institutions 476 na 476
At amortised cost na na na 121,900 121,900
  48,452 4,992 476 121,900 175,820
Non-financial assets
Land and buildings 540 na 540
Gold holdings 5,159 na 5,159
Other 289 289
  5,159 540 289 5,988
Total assets 53,611 4,992 1,016 122,189 181,808
Financial liabilities
At fair value through profit or loss
Foreign currency swaps 115 477 na 592
Not at fair value through profit or loss na na na 151,898 151,898
  115 477 151,898 152,490
Non-financial liabilities na na na 406 406
Total liabilities 115 477 152,304 152,896

The RBA's Level 2 financial instruments include foreign currency swaps priced with reference to an active market yield or rate, but which have been interpolated to reflect maturity dates. Prices for some Australian dollar and foreign currency-denominated securities are derived from markets that are not considered active.

Level 3 assets include the RBA's shareholding in the BIS and its property (excluding leased property which is recorded at amortised cost). The 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 a Hague Arbitral Tribunal decision on compensation paid to former private shareholders in 2002, which remains the latest repurchase conducted by the BIS. Fair values of the RBA's property incorporate factors such as net market income and capitalisation rates, for property valued using an income capitalisation or a discounted cash flow approach, and depreciation rates for property valued using a depreciable replacement cost methodology.

There were no transfers between levels within the fair value hierarchy during the financial year. Movements in the fair value of the RBA's property during the financial year are detailed in Note 8. Fair value changes in the RBA's shareholdings in international and other institutions solely reflect valuation movements recognised in Other Comprehensive Income.