Reserve Bank of Australia Annual Report – 2016 Financial Statements Note 16 – Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. This is the quoted market price if one is available. The RBA's financial assets measured at fair value include its holdings of Australian dollar securities, foreign government securities, interest rate futures, foreign currency swap contracts and its shareholding in the BIS. Non-financial assets carried on the balance sheet at fair value include the RBA's property, plant and equipment. Other than derivatives, there are no financial liabilities measured at fair value.
AASB 13 requires financial and non-financial assets and liabilities measured at fair value to be disclosed according to their position in the fair value hierarchy. This hierarchy has three levels: valuation for Level 1 assets is based on quoted prices in active markets for identical assets; that for Level 2 assets is based on quoted prices or other observable market data not included in Level 1; Level 3 assets include inputs to valuation other than observable market data.
The table below presents the RBA's assets and liabilities measured and recognised at fair value and their classification within the fair value hierarchy at 30 June 2016.
| Fair Value | Amortised Cost | Total | |||
|---|---|---|---|---|---|
| Level 1 $M |
Level 2 $M |
Level 3 $M |
$M | $M | |
| As at 30 June 2016 | |||||
| Financial assets | |||||
| At fair value through profit or loss | |||||
| Australian dollar securities | 5,083 | 67 | – | na | 5,150 |
| Foreign government securities | 48,021 | 5,438 | – | na | 53,459 |
| Foreign currency swaps | – | 10 | – | na | 10 |
| Available for sale | |||||
| Shares in other institutions | – | – | 415 | – | 415 |
| Loans and receivables | na | na | na | 103,561 | 103,561 |
| 53,104 | 5,515 | 415 | 103,561 | 162,595 | |
| Non-financial assets | |||||
| Land and buildings | – | – | 453 | na | 453 |
| Plant and equipment | – | – | 187 | na | 187 |
| Gold holdings not on loan | 4,165 | – | – | na | 4,165 |
| Other | – | – | – | 89 | 89 |
| 4,165 | – | 640 | 89 | 4,894 | |
| Total assets | 57,269 | 5,515 | 1,055 | 103,650 | 167,489 |
| Financial liabilities | |||||
| At fair value through profit or loss | |||||
| Foreign currency swaps | 200 | 1,661 | – | na | 1,861 |
| Not at fair value through profit or loss | na | na | na | 141,093 | 141,093 |
| 200 | 1,661 | – | 141,093 | 142,954 | |
| Non-financial liabilities | na | na | na | 623 | 623 |
| Total liabilities | 200 | 1,661 | – | 141,716 | 143,577 |
| Fair Value | Amortised Cost | Total | |||
|---|---|---|---|---|---|
| Level 1 $M |
Level 2 $M |
Level 3 $M |
$M | $M | |
| As at 30 June 2015 | |||||
| Financial assets | |||||
| At fair value through profit or loss | |||||
| Australian dollar securities | 9,379 | 617 | – | na | 9,996 |
| Foreign government securities | 54,535 | 4,582 | – | na | 59,117 |
| Foreign currency swaps | 50 | 367 | – | na | 417 |
| Available for sale | |||||
| Shares in other institutions | – | – | 401 | – | 401 |
| Loans and receivables | na | na | na | 82,521 | 82,521 |
| 63,964 | 5,566 | 401 | 82,521 | 152,452 | |
| Non-financial assets | |||||
| Land and buildings | – | – | 382 | – | 382 |
| Plant and equipment | – | – | 167 | – | 167 |
| Gold holdings not on loan | 3,866 | – | – | – | 3,866 |
| Other | – | – | – | 46 | 46 |
| 3,866 | – | 549 | 46 | 4,461 | |
| Total assets | 67,830 | 5,566 | 950 | 82,567 | 156,913 |
| Financial liabilities | |||||
| At fair value through profit or loss | |||||
| Foreign currency swaps | – | 198 | – | na | 198 |
| Not at fair value through profit or loss | na | na | na | 132,594 | 132,594 |
| – | 198 | – | 132,594 | 132,792 | |
| Non-financial liabilities | na | na | na | 252 | 252 |
| Total liabilities | – | 198 | – | 132,846 | 133,044 |
The RBA's Level 2 financial instruments include Australian dollar-denominated discount securities and some foreign currency swaps priced with reference to an active market yield or rate, but with an adjustment applied to reflect maturity dates. Prices for some Australian dollar and foreign currency denominated securities are derived from markets that are not considered active.
Level 3 assets include the RBA's shareholding in the BIS and its property, plant and equipment, as fair values for these assets are determined by reference to inputs that cannot be directly observed. The shareholding in the BIS is valued using the net asset value, as published in annual financial statements of the BIS, less a discount of 30 per cent. The discount applied is based on a Hague Arbitral Tribunal decision on compensation paid to former private shareholders, and subsequent transactions involving the re-allocation of BIS shares. Fair values of the RBA's property, plant and equipment incorporate factors such as net market income and capitalisation rates, for property valued using an income capitalisation or a discounted cash flow approach, and depreciation rates for property and plant and equipment valued using a depreciable replacement cost methodology.
There were no transfers between levels within the fair value hierarchy during the financial year. Movements in the fair value of the RBA's property, plant and equipment assets during the financial year are detailed in Note 8; the increase in value of the RBA's shareholding in the BIS solely reflects a valuation gain recognised in Other Comprehensive Income.