Reserve Bank of Australia Annual Report – 1994 Financial Statements Notes to and Forming Part of the Financial Statements

30 June 1994

Note 1 Summary of accounting policies

The financial statements have been prepared in accordance with the Reserve Bank Act and are based on the form prescribed by the Reserve Bank Regulations, supplemented by information shown elsewhere in this Annual Report, 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. Unless otherwise stated, the accounting policies and practices followed in these statements are consistent with those followed in the previous year.

All amounts 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, as well as 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, in terms of AAS10. 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). Revenue and expenses are brought to account on an accrual basis.

(a) Note Printing Australia The operations of Note Printing Australia (NPA) are conducted as a separate business enterprise. NPA, however, is not a separate legal entity and most of its output is purchased by the Bank; its assets, liabilities and profit and loss account are included in the Bank's financial statements, after elimination of transactions internal to NPA and the Bank.

(b) Gold and foreign exchange Gold holdings (including gold on loan to other institutions) are valued at $532.51 an ounce, the Australian dollar equivalent of the 3 p.m. fix in the London gold market on the last business day of June (June 1993 $563.00). About 20 per cent of the Bank's total gold holdings were extended as gold loans at 30 June (19 per cent at 30 June 1993).

Foreign exchange holdings are invested mainly in government securities and bank deposits but include International Monetary Fund Special Drawing Rights amounting to the equivalent of $109.8 million at 30 June ($133.3 million a year earlier). Marketable securities are reported at market values on the last business day of June; unrealised gains and losses arising from changes in market valuations during the year are taken to the appropriate asset revaluation reserve. The asset value for foreign exchange also includes $188.1 million accrued interest ($191.9 million at 30 June 1993). Earnings on foreign currency investments are converted to Australian dollars using the exchange rate of the date they are received.

The Bank made use of interest rate futures contracts on overseas exchanges in 1993/94 to hedge against the risks of adverse interest rate movements in its reserve management operations. At 30 June 1994, about half of the Bank's foreign currency reserves (excluding gold) was hedged through such contracts.

Assets and liabilities denominated in foreign currency are converted to Australian dollar equivalents at exchange rates ruling on the last business day of June. Gains or losses realised on sale of foreign currency are taken to profit and loss on settlement of the sale transaction. Unrealised gains and losses arising from exchange rate fluctuations during the year are taken to the Foreign Currency Revaluation Reserve.

The Bank utilises foreign currency swaps in its foreign exchange operations. At 30 June 1994, the Bank was contracted to sales of $23,304 million of foreign currencies and purchases of $12,510 million in respect of which settlement was not due until after balance date; these included undelivered spot transactions. (The corresponding figures a year earlier were $19,079 million and $10,186 million, respectively.)

In February 1994, the Bank agreed to provide a two-year foreign exchange swap facility to the Bank of Papua New Guinea in response to a request for balance of payments support. Swaps undertaken under this facility involve the exchange of Australian dollars for PNG kina; the Bank has provided $A85 million to the Bank of Papua New Guinea, and received the equivalent amount of kina (K59.1 million) in exchange. The kina are included in the figures for holdings of gold and foreign exchange.

(c) Commonwealth Government securities These securities are valued at market prices on the last business day of June. Unrealised gains or losses resulting from changes in market valuations during the year are taken to the Investments Revaluation Reserve. The asset value includes $316.2 million accrued interest ($390.1 million at 30 June 1993). In the course of its market operations, the Bank engages in repurchase agreements involving Commonwealth Government securities. At 30 June 1994, the Bank was contracted to sell $562.1 million of securities and to purchase $1,574.7 million after balance date under repurchase agreements. (The corresponding figures a year earlier were $1,605.0 million and $481.6 million, respectively.)

(d) Bank premises and other durable assets A formal valuation of the Bank's premises is conducted on a triennial basis, the most recent occurring at 30 June 1992; Australian premises were valued by officers of the Australian Valuation Office and overseas premises by local independent valuers. Valuations are updated annually for developments in the property markets where the Bank's assets are held. Based on the latest valuations, the value of premises as at 30 June 1994 had declined by $33 million, in aggregate, since the previous year's valuation. The reduced valuations have been incorporated in the accounts. Some $27 million was charged against the Premises Revaluation Reserve (see Note 3) and the remainder written off in terms of section 78 of the Reserve Bank Act as depreciation. Annual depreciation is based on market values and assessments of useful remaining life.

Other durable assets are recorded at cost less depreciation, which is calculated at rates appropriate to the estimated useful life of the relevant assets. Depreciation rates are reviewed annually, and adjusted where necessary to reflect the most recent assessments of the useful life of assets.

In the opinion of the Board, values of durable assets in the financial statements do not exceed recoverable values.

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. The Reserve Bank Reserve Fund is a general reserve which provides for potential losses arising from fraud, support of the financial system and other non-insured losses. The Treasurer determines each year the amount to be credited to the Reserve Fund.

The Reserve for Contingencies and General Purposes provides cover against risks relating to events which are contingent and non-foreseeable. The major risks in this category arise from movements in values of the Bank's holding of domestic and foreign securities. Amounts set aside for this Reserve 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 for Contingencies and General Purposes arise, they are charged initially to profit and loss. Subject to Board agreement, an amount might then be transferred from the Reserve to the profit and loss appropriation account.

Asset revaluation reserves reflect the impact of changes in the market values of the Bank's assets. At the end of 1993/94, the market value of the Bank's domestic and foreign securities was below their historical cost; the net unrealised loss of $676.5 million in the Investments Revaluation Reserve was taken to profit and loss (see Notes 2, 3). There was no corresponding loss in 1992/93.

Movements in Reserves in 1993/94 are set out in Note 3.

(f) Provisions Provisions are maintained for accrued annual leave and long service leave.

In line with current accounting standards, there is no longer a provision for major repairs and maintenance of the Bank's buildings. The last transfer from earnings to the Provision for Building Repairs and Maintenance was made in 1990/91 and expenditure during 1993/94 on the Bank's office refurbishment program exhausted the remaining balance of the Provision ($7.1 million at 30 June 1993).

Movements in Provisions in 1993/94 are shown in Note 5.