Reserve Bank of Australia Annual Report – 1996 Financial Statements Summary of accounting policies
Notes to and Forming Part of the Financial Statements –
30 June 1996
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. The financial statements are a general purpose financial report prepared in accordance with Australian Accounting Standards, 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 implications for the relevant asset revaluation reserves are 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 provided market price is greater than cost, in terms of AAS 10. 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). This treatment, which differs from AAS 10, allows all realised gains to be distributed in terms of the Reserve Bank Act. 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 the Australian dollar equivalent of the 3 p.m. fix in the London gold market on the last business day of June. About 46 per cent of the Bank's total gold holdings were extended as gold loans at 30 June (25 per cent at 30 June 1995).
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 $57 million at 30 June ($95 million a year earlier). Marketable securities other than those subject to repurchase agreements 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 $116 million accrued interest ($240 million at 30 June 1995). Earnings on foreign currency investments are converted to Australian dollars using the exchange rate of the date they are received.
In its reserves management operations, the Bank engages in repurchase agreements involving foreign marketable securities. At 30 June 1996, the Bank was contracted to sell under repurchase agreements the equivalent of $3,454 million of securities and to purchase the equivalent of $375 million after balance date, excluding interest income/expense accrued on these transactions. Securities contracted for sale under repurchase agreements are reported on the balance sheet at contract prices. Securities contracted for purchase under repurchase agreements are not reported on the balance sheet in 1995/96 (and earlier years). However, this policy has changed in 1996/97 (Note 16); consistent with this change, such securities were valued at market rates at 30 June 1996, with a corresponding adjustment to the Investments Revaluation Reserve.
The Bank utilised interest rate futures contracts on overseas exchanges in 1995/96 to hedge against the risks of adverse interest rate movements in its reserves management operations. At 30 June 1996, about 10 per cent of the Bank's foreign currency reserves (excluding gold) were hedged through such contracts.
The Bank utilises foreign currency swaps in its foreign exchange operations. At 30 June 1996, the Bank was contracted to sales of $8,674 million of foreign currencies and purchases of $3,325 million in respect of which settlement was not due until after balance date; these included undelivered spot transactions. Foreign currency swap contracts are not shown on the balance sheet. Foreign exchange holdings contracted for sale beyond 30 June 1996 under swap contracts have been valued at contract exchange rates, with a corresponding adjustment to the Foreign Currency Revaluation Reserve.
Assets and liabilities denominated in foreign currency, other than those subject to swap contracts, 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.
(c) Commonwealth Government securities These securities, except when subject to repurchase agreements, 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 $297 million accrued interest ($355 million at 30 June 1995). In the course of its market operations, the Bank engages in repurchase agreements involving Commonwealth Government securities. At 30 June 1996, the Bank was contracted to sell under repurchase agreements $1,675 million of securities and to purchase $586 million after balance date, excluding interest income/expense accrued on these transactions. (The corresponding figures a year earlier were $3,199 million and $1,352 million, respectively.) Securities contracted for sale under repurchase agreements are reported on the balance sheet at contract prices. Securities contracted for purchase under repurchase agreements are not reported on the balance sheet in 1995/96 (and earlier years). However, this policy has changed in 1996/97 (Note 16); consistent with this change, such securities were valued at market rates at 30 June 1996, with a corresponding adjustment to the Investments Revaluation Reserve.
(d) Bank premises and other durable assets A formal valuation of the Bank's premises is conducted on a triennial basis. The most recent valuation was at 30 June 1995, when Australian premises were valued by officers of the Australian Valuation Office and overseas premises were valued 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 1996 had declined by $6.7 million, in aggregate, on the previous year's balance. The reduced valuations have been incorporated in the accounts. An amount of $6.872 million was written off in terms of section 78 of the Reserve Bank Act as depreciation; this was partly offset by an increase of $0.165 million in the Premises Revaluation Reserve (see Note 3). 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, after consultation with the Board, 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 market 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 1995/96, the market value of the Bank's foreign exchange holdings was below their historical cost; the net unrealised loss of $1,010 million in the Foreign Currency Revaluation Reserve was taken to profit and loss (see Note 2, 3). There was no corresponding loss in 1994/95.
Movements in Reserves in 1995/96 are set out in Note 3.
(f) Provisions The Bank maintains provisions for accrued annual leave, calculated on salaries prevailing at balance date and including associated payroll tax. The Bank also maintains provisions for long service leave and post-employment benefits, in the form of health insurance and housing assistance, and associated fringe benefits tax; these provisions are made on a present value basis in accordance with AAS 30. Details are given in Note 5.
On 1 May 1996, the Bank was granted a licence by the Safety, Rehabilitation and Compensation Commission to self-insure its workers' compensation liabilities. In accordance with this licence, the Bank makes provision for future workers' compensation claims in respect of incidents which have occurred before balance date, based on an independent actuarial assessment; for 1995/96, the provision was $40,000. (Refer Note 5.)