Summary of Accounting Policies | Financial Statements | Reserve Bank of Australia Annual Report - 1992

Reserve Bank of Australia Annual Report – 1992 Financial Statements Summary of Accounting Policies

RESERVE BANK OF AUSTRALIA
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS –
30 JUNE 1992

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 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. The Bank has not provided a Statement of Cash Flows as outlined in AAS 28 as the purposes of the Standard are not relevant to a central bank.

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, 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 costs 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

The operations of Note Printing Australia (NPA) are carried on as a separate business enterprise following an extensive reorganisation of its 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 are included in the Bank's financial statements, after elimination of transactions between NPA and the rest of the Bank.

(b) Gold and foreign exchange

Gold includes gold on loan to other institutions and is valued at $458.60 an ounce (June 1991 $479.56). 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 16 per cent of the Bank's total gold holdings were extended as gold loans at 30 June (12 per cent at 30 June 1991).

Foreign exchange is invested mainly in government securities and bank deposits but includes International Monetary Fund Special Drawing Rights amounting to the equivalent of $375.1 million at 30 June ($360.3 million a year earlier). Marketable securities are reported at market values on the last business day of June; unrealised market valuation adjustments during the year are taken to the appropriate asset revaluation reserve. The asset value for foreign exchange also includes $233.6 million accrued interest ($351.0 million at 30 June 1991). Earnings on foreign currency investments are translated to Australian dollars using the exchange rate of the date they are received. Any net unrealised loss in the Investments Revaluation Reserve at the end of the year is taken to profit and loss (see Note 1(e), 3).

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 on settlement of the sale transaction.

In recent years, the Bank has made greater use of foreign currency swaps in its foreign exchange operations. At 30 June 1992, the Bank was contracted to sales of $3,980 million of foreign currencies and purchases of $1,807 million in respect of which settlement was not due until after balance date. (The corresponding figures a year earlier were $100 million and $307 million respectively.) About one third of these transactions remain to be finalised after the release date of this report.

(c) Commonwealth Government securities

These securities are valued at market prices on the last business day of June. Unrealised gains or 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), 3). The asset value includes $268.4 million accrued interest ($108.9 million at 30 June 1991). In the course of its market operations, the Bank engages in repurchase agreements involving Commonwealth Government securities. At 30 June 1992, the Bank was contracted to sell $1,029.4 million of securities and to purchase $1,342.0 million after balance date under repurchase agreements. (The corresponding figures a year earlier were $474.5 million and $2,980.1 million respectively.) All of these transactions have since been finalised.

(d) Bank premises and other durable assets

Premises are reported at market valuations determined on a triennial basis. They were last revalued as at 30 June 1992; Australian premises were valued by officers of the Australian Valuation Office and overseas premises by local independent valuers. Valuations are based on the assumption of continued use of these premises by the Bank. The valuations of these assets have declined by $158 million in aggregate, since the previous valuation in 1989. The decline in value is reflected in the Premises Revaluation Reserve (see Note 3); there has been no charge against earnings. Amounts written off in terms of section 78 of the Reserve Bank Act are based on the market values and assessments of useful remaining life.

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.

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 Board is empowered to transfer amounts from the Reserve Fund to Capital. This power was last used in 1964/65.

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 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. At end 1991/92, the market value of the Bank's investments was above their historical cost (see Note 3). Unrealised losses of $80.8 million at end 1990/91 were charged against profit and loss (see Note 2).

Asset revaluation reserves reflect the impact of changes in the market values of the Bank's assets. Movements in Reserves in 1991/92 are set out in Note 3.

(f) Provisions

Provisions are maintained to cover:

♦ major repairs and maintenance of the Bank's buildings;

♦ accrued annual leave; and

♦ long service leave.

Accounting standards no longer support the concept of providing funds out of profit over the period of deterioration of an asset for future expenditure on major building refurbishment. Accordingly, no further augmentation of the Provision for Building Repairs and Maintenance will be made. This Provision will be run down over the next year or so through the costs of current refurbishment programs.

Movements in Provisions in 1991/92 are shown in Note 5.

(g) Other

Periodically, the Bank makes an assessment of the value of Australian bank notes from earlier series which are likely to have been destroyed and otherwise unavailable for presentation. The next such assessment is not scheduled to be made until 1994.