Summary of accounting policies | Financial Statements | Reserve Bank of Australia Annual Report - 1991

Reserve Bank of Australia Annual Report – 1991 Financial Statements Summary of accounting policies

RESERVE BANK OF AUSTRALIA
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
AS AT 30 JUNE 1991

NOTE 1 SUMMARY OF ACCOUNTING POLICIES

The financial statements have been prepared in accordance with the Reserve Bank Act and based on the form prescribed by the Reserve Bank Regulations supplemented by information, including these Notes, which form part of the statements. Australian Accounting Standards are followed to the extent that they do not conflict with the Reserve Bank Act and are relevant to a central bank.

All amounts are shown in $'000 and are expressed in Australian dollars unless another currency is indicated. Current market values are used for the Bank's major assets including domestic and foreign marketable securities, gold and foreign currency, and also for premises and shares in international financial institutions. The impact on the relevant asset revaluation reserves is shown in Note 3. In other cases, an historical cost basis of accounting is used.

Income measurement is based on realised gains/losses passing through the profit and loss account; unrealised gains/losses are passed to/from revaluation reserves while market price is greater than cost. Where market values are below cost at the end of the financial year the net difference is transferred from asset revaluation reserves and charged against the profit and loss account. 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 is transferred to the profit and loss account for inclusion in the calculation of net operating earnings. (See Note 3.) Any amount transferred from the Reserve for Contingencies and General Purposes to offset, or partially offset, such losses recorded in the profit and loss account is determined by the Board. (See Note 1(e).) Revenue and expenses are brought to account on an accrual basis.

(a) Note Printing Australia

From 1 July 1990, the operations of Note Printing Australia (NPA) have been carried on as a separate business enterprise. This followed extensive reorganisation of the operations in 1989/90. NPA is not, however, a separate legal entity and most of its output continues to be for Bank use; its assets, liabilities and profit and loss account continue to be included in the Bank's financial statements, after elimination of transactions between NPA and the rest of the Bank.

(b) Gold, foreign exchange and foreign currency translation

Gold includes gold on loan to other institutions and is valued at $A479.56 an ounce (June 1990 $A446.39). This is the Australian dollar equivalent of the 3 p.m. fix in the London gold market on the last business day of June. About 12 per cent of the Bank's total gold holdings were gold loans at 30 June (7 per cent at 30 June 1990).

Foreign exchange is mainly invested in various types of government securities and bank deposits; it also includes International Monetary Fund Special Drawing Rights amounting to the equivalent of $360.3 million at 30 June ($379.4 million at 30 June 1990). Marketable securities are reported at market values on the last business day of June; accrued interest on coupon securities is also included in the item Gold and Foreign Exchange. Unrealised market valuation adjustments during the year are taken to the appropriate asset revaluation reserve. The net unrealised loss in the Investments Revaluation Reserve at the end of the year was taken to profit and loss. (See Note 1(e), 3.) Earnings on foreign currency investments are translated to Australian dollars using the exchange rate of the date they are received.

Assets and liabilities denominated in foreign currency are converted to Australian dollar equivalents at exchange rates ruling on the last business day of June. Unrealised gains and losses arising from exchange rate fluctuations during the year are taken to the Foreign Currency Revaluation Reserve. Any net unrealised loss in foreign currency denominated assets and liabilities at the end of the year is taken to profit and loss. (See Note 1(e), 3.)

Gains or losses realised on sale of foreign currency are taken to profit and loss at the time of sale. At 30 June, the Bank was a party to contracts for the sale/purchase of foreign currencies in respect of which settlement had yet to be effected.

(c) Commonwealth Government securities

These securities are valued at market prices on the last business day of June. Unrealised gains and losses resulting from such valuations during the year are taken to the Investments Revaluation Reserve. Any net unrealised loss at the end of the year is taken to profit and loss. (See Note 1(e).) The asset value includes $108.9 million accrued interest ($74.0 million at 30 June 1990). In the course of its market operations, the Bank engages in repurchase agreements involving Commonwealth Government securities. At 30 June 1991, the Bank was contracted to sell $474.5 million of securities and to purchase $2,980.1 million after balance date under repurchase agreements; the corresponding figures a year earlier were $100.7 million and $2,455.4 million respectively.

(d) Bank premises and other durable assets

Premises are reported at market valuations determined on a triennial basis by independent valuers. A revaluation was conducted in 1989. Amounts written off in terms of section 78 of the Reserve Bank Act are based on these market values and annual reassessments of useful life remaining.

Other durable assets are recorded at cost less depreciation, which is calculated at rates appropriate to estimated useful life.

Details of annual net expenditure, revaluation adjustments and write off/depreciation of these assets are included in Note 6.

(e) Reserves

Reserves are maintained to cover the broad range of risks to which the Bank is exposed. During 1990/91, the structure of the Bank's Reserves and Provisions was reviewed and modified.

The Reserve for Contingencies and General Purposes provides cover against risks relating to events which are contingent and non-foreseeable. Such risks are not easily quantifiable, but are broadly predictable from experience. Risks relating to movements in values of the Bank's assets are a major item in this category.

Previously, these risks were partly covered by the Provision for the Effects of Movements in Exchange Rates and the Provision for the Effects of Movements in Market Yields. Balances held in these provisions were transferred to the Reserve for Contingencies and General Purposes.

Amounts set aside for the Reserve for Contingencies and General Purposes are determined by the Board with the Treasurer's approval in terms of section 78 of the Reserve Bank Act.

When losses of the type covered by the Reserve arise, they are charged initially to profit and loss. Subject to Board agreement an amount might then be transferred from the Reserve to profit and loss prior to determination of Net Profit in terms of the Reserve Bank Act. During 1990/91, net unrealised losses of $80.8 million arising from a fall in the market value of the Bank's investments below their historical cost, were taken to profit and loss (see Note 2). In 1989/90, unrealised losses totalling $199.2 million were charged against specific provision accounts, but did not affect net operating earnings.

Asset revaluation reserves reflect the impact of changes in the market values of the Bank's assets.

Movements in Reserves over 1990/91 are set out in Note 3.

(f) Provisions

The accounts include provisions which are maintained to cover:

major repairs and maintenance of the Bank's buildings;
accrued annual leave; and
long service leave.

As mentioned in Note 1(e), the provision accounts relating to market yields and exchange rates have been discontinued and balances in them were transferred to the Reserve for Contingencies and General Purposes as at 30 June 1991.

Movements in Provisions over 1990/91 are shown in Note 5.

(g) Other

Periodically, the Bank makes an assessment of the value of Australian bank notes, from series whose issue ceased at least ten years previously, likely to have been destroyed and, therefore, unavailable for presentation. No assessment was required in 1990/91. (At 30 June 1990 an amount of $35 million was transferred to profit and loss and included in Other Revenues in Note 2.)