Summary of accounting policies | Financial Statements | Reserve Bank of Australia Annual Report - 1993

Reserve Bank of Australia Annual Report – 1993 Financial Statements Summary of accounting policies

RESERVE BANK OF AUSTRALIA
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS – 30 JUNE 1993

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. Accounting policies and practices are consistent with those followed in the previous year, unless otherwise stated.

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 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). Any amount transferred from the Reserve for Contingencies and General Purposes to the profit and loss appropriation statement 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 conducted 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 $563.00 an ounce (June 1992 $458.60). 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 19 per cent of the Bank's total gold-holdings were extended as gold loans at 30 June (16 per cent at 30 June 1992). At 30 June 1992 the item included $15.2 million representing the value of gold coins held by the Bank. These have now been excluded so that “Gold and Foreign Exchange” as a component of “Official Reserve Assets” accords with international definitions. Gold coins are now included in Other Assets (see Note 9); they are still valued at the market price of their gold content.

Foreign exchange is invested mainly in government securities and bank deposits but includes International Monetary Fund Special Drawing Rights amounting to the equivalent of $133.3 million at 30 June ($375.1 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 $191.9 million accrued interest ($233.6 million at 30 June 1992). Earnings on foreign currency investments are converted 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. 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. 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).

The Bank again utilised foreign currency swaps in its foreign exchange operations in 1992/93. At 30 June 1993, the Bank was contracted to sales of $19,079 million of foreign currencies and purchases of $10,186 million in respect of which settlement (including for undelivered spot transactions) was not due until after balance date. (The corresponding figures a year earlier were $3,980 million and $1,807 million respectively.)

(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 $390.1 million accrued interest ($268.4 million at 30 June 1992). In the course of its market operations, the Bank engages in repurchase agreements involving Commonwealth Government securities. At 30 June 1993, the Bank was contracted to sell $1,605.0 million of securities and to purchase $481.6 million after balance date under repurchase agreements. (The corresponding figures a year earlier were $1,029.4 million and $1,342.0 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 being 30 June 1992; Australian premises were valued by officers of the Australian Valuation Office and overseas premises by local independent valuers. The accounts report the market valuations, which assume continued occupancy by the Bank. 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 1993 had declined by $46 million, in aggregate, since the previous year's valuation. The reduced valuations have been incorporated in the accounts, with some $41 million being reflected against the Premises Revaluation Reserve (see Note 3) and the remainder written off in terms of section 78 of the Reserve Bank Act (depreciation). Annual depreciation is based on these market values and assessments of useful remaining life. On the basis of this information, it is the opinion of the Board that values in the financial statements do not exceed recoverable values.

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

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 the profit and loss appro-priation account. At the end of 1992/93, the market value of the Bank's investments was above their historical cost (see Note 3).

Asset revaluation reserves reflect the impact of changes in the market values of the Bank's assets. Movements in Reserves in 1992/93 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, the last augmentation of the Provision for Building Repairs and Maintenance was made in 1990/91. The Bank's current refurbishment of office buildings will exhaust the remaining balance of the Provision during 1993/94.

Movements in Provisions in 1992/93 are shown in Note 5.