Reserve Bank of Australia Annual Report – 1988 Financial Statements Notes to and Forming Part of the Financial Statements

30 June 1988

Note 1 Summary of Accounting Policies

The financial statements have been prepared in accordance with the Reserve Bank Act and based on the forms 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. 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 earnings for inclusion in the calculation of income. (See Note 3.) Income and expenditure are brought to account on an accrual basis.

(a) Allocation of assets between Central Bank and Note Issue Department

From 30 June 1987, all investible funds of Note Issue Department have been held on deposit with the Central Bank. A rate of interest related to the net return on the Bank's holdings of gold, domestic and foreign securities has been paid on these funds.

(b) Gold, foreign exchange and foreign currency translation

Gold includes gold loans and is valued at $A568.43 an ounce (June 1987 $A624.17). This is the Australian dollar equivalent, on the last business day of June, of the average London gold price per fine ounce for the month of June. About 2.5 per cent of the Bank's total gold holdings are gold loans.

Foreign exchange is mainly invested in various types of government securities and bank deposits; it includes International Monetary Fund special drawing rights amounting to the equivalent of $420.3 million at 30 June ($471.4 million at 30 June 1987). 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 are taken to the appropriate asset revaluation reserve. Income on such assets is translated to Australian dollars using the exchange rate of the date it is 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 are taken to the Foreign Currency Revaluation Reserve. This practice differs from Australian Accounting Standards.

Gains or losses realised on sale of foreign currency are taken to profit and loss.

These securities are valued at market prices on the last business day of June. Unrealised gains and losses resulting from such valuations are taken to the Investments Revaluation Reserve. This item includes $82.5 million accrued interest ($189.0 million in 1986/87). In previous years, accrued interest was included in other assets; in this report the 1987 figures have been recast to include them in Commonwealth Government securities.

(d) Bank premises and other durable assets

Premises are reported at market valuations determined on a triennial basis by independent valuers. The last valuation was made in 1986. 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 increments and write off/depreciation of these assets are included in Note 6.

(e) Asset revaluation reserves

Asset revaluation reserves reflect unrealised gains and losses resulting from changes in the market values of the Bank's major assets. These reserves reflect largely in the balance sheet devoted to Central Banking Business. Note Issue Department's only major asset aside from its deposit with Central Bank is premises.

Movements in the reserves over 1987/88 are set out in Note 3 to the accounts.

(f) Provisions

The accounts include specific provisions for:

movements in market yields (Commonwealth Government securities and foreign investments);
movements in exchange rates;
major repairs and maintenance of the Bank's buildings;
notes not presented;
accrued annual leave;
long service leave.

The Provision for the Effects of Movements in Market Yields, in conjunction with the Investments Revaluation Reserve, provides against losses arising from fluctuations in the prices of securities held by the Bank. The Provision for the Effects of Movements in Exchange Rates, in conjunction with the Foreign Currency Revaluation Reserve, provides against losses arising from fluctuations in exchange rates. Amounts are set aside for each of these provisions, with the approval of the Treasurer, before the determination of net profit (Section 78 of the Reserve Bank Act). Charges against both Provisions were necessary in 1987/88 because the current market values of the relevant assets fell below average cost. (See Note 3, 5.)

Provision for notes not presented comprises the value of Australian notes of a denomination not exceeding One pound or Two dollars that have been on issue for more than 20 years and Australian notes of a denomination exceeding One pound or Two dollars that have been on issue for more than 40 years. Amounts in this Provision have been transferred from the item “Australian notes on issue”.

Provisions are assessed at balance date to determine their appropriateness at that time. Any transfers out of these provisions and supplementary allocations from 1987/88 earnings are shown in Note 5.

(g) Officers' Superannuation Fund

The assets of the Reserve Bank Officers' Superannuation Fund are held by the Bank in accordance with the Reserve Bank (Officers' Superannuation) Rules made pursuant to Section 70 of the Reserve Bank Act, but are not included in these statements. The Bank's contributions to the Fund in accordance with the Rules are included in staff costs in Note 2.