Reserve Bank of Australia Annual Report – 2018 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 and gold holdings. 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; for Level 2 assets, valuation 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 2018.

  Fair Value Amortised Cost
$M		 Total
$M
Level 1 $M Level 2 $M Level 3 $M
As at 30 June 2018
Financial assets
At fair value through profit or loss
Australian dollar securities 10,572 53 – na 10,625
Foreign government securities 44,038 4,168 – na 48,206
Foreign currency swaps 34 275 – na 309
Available for sale
Shares in other institutions – – 444 na 444
Loans and receivables na na na 121,428 121,428
  54,644 4,496 444 121,428 181,012
Non-financial assets
Land and buildings – – 506 na 506
Gold holdings 4,344 – – na 4,344
Other – – 108 371 479
  4,344 – 614 371 5,329
Total assets 58,988 4,496 1,058 121,799 186,341
Financial liabilities
At fair value through profit or loss
Foreign currency swaps 6 196 – – 202
Not at fair value through profit or loss na na na 160,561 160,561
  6 196 – 160,561 160,763
Non-financial liabilities na na na 201 201
Total liabilities 6 196 – 160,762 160,964
  Fair Value Amortised Cost
$M		 Total
$M
Level 1 $M Level 2 $M Level 3 $M
As at 30 June 2017
Financial assets
At fair value through profit or loss
Australian dollar securities 14,276 75 – na 14,351
Foreign government securities 52,552 4,661 – na 57,213
Foreign currency swaps 111 1,395 – na 1,506
Available for sale
Shares in other institutions – – 416 na 416
Loans and receivables na na na 115,530 115,530
  66,939 6,131 416 115,530 189,016
Non-financial assets
Land and buildings – – 551 na 551
Gold holdings 4,146 – – na 4,146
Other – – – 299 299
  4,146 – 551 299 4,996
Total assets 71,085 6,131 967 115,829 194,012
Financial liabilities
At fair value through profit or loss
Foreign currency swaps – 42 – na 42
Not at fair value through profit or loss na na na 171,946 171,946
  – 42 – 171,946 171,988
Non-financial liabilities na na na 261 261
Total liabilities – 42 – 172,207 172,249

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 which have been interpolated 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. 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 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 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 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.