Reserve Bank of Australia Annual Report – 1997 Financial Statements Note 1
Notes To and Forming Part of the Financial Statements
30 June 1997 Reserve Bank of Australia
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. The 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. 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 and AAS 20, 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, except for gold holdings contracted for sale which are valued at the contract price.
Foreign exchange holdings are invested mainly in government securities and bank deposits. Marketable securities other than those contracted for sale under 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. Earnings on foreign currency investments are converted to Australian dollars using the exchange rate of the date they are received.
The Bank uses interest rate futures contracts on overseas exchanges in its reserves management operations. The Bank also uses foreign currency swap contracts in its foreign exchange operations. Neither type of contract is shown on the balance sheet. Foreign exchange holdings contracted for sale beyond 30 June 1997 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) Domestic government securities These securities consist of Commonwealth Government securities and Australian dollar-denominated securities issued by the central borrowing authorities of State and Territory Governments. Except when contracted for sale under repurchase agreements, 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.
(d) Repurchase agreements In the course of its financial markets operations, the Bank engages in repurchase agreements involving foreign and domestic marketable securities. As from 1 July 1996, the Bank changed its accounting policy for such agreements.
Securities sold but contracted for purchase under repurchase agreements are reported on the balance sheet within the relevant investment portfolio and are valued at market prices; the counterpart obligation to repurchase is included in “Other liabilities”. The difference between the sale and repurchase price is recognised as interest expense in the profit and loss account over the term of the agreement.
Securities held but contracted for sale under repurchase agreements are reported within the relevant investment portfolio at contract amount. The difference between the purchase and sale price is recognised as interest income over the term of the agreement.
Prior to 1 July 1996, repurchase agreements had been treated as outright sales and purchases subject to a contract to reverse the transactions at a future date. The balance sheet at 30 June 1996 has been restated to reflect the change in accounting policy.
(e) 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. 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.
(f) 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.
Asset revaluation reserves reflect the impact of changes in the market values of the Bank's assets.
(g) 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. In addition, 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.
(h) Australian notes on issue The Bank assesses regularly the value of notes still outstanding at least five years after the note issue ceased which are judged to have been destroyed and therefore unavailable for presentation. No amount was written off Australian notes on issue in 1996/97 or 1995/96.