Transparency in Central Bank Financial Statement Disclosures
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Mr. Kenneth Sullivan
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Author(s) E-Mail Address: ksullivan@imf.org

The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements.

Abstract

The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements.

I. Introduction

The theme for this paper is transparency in central bank financial statement disclosures. While the emphasis is on transparency in the accounting framework and disclosure practices of central banks, it is appropriate to set the broader framework for transparency. The financial crises in Asia convinced the IMF of the value of transparency, which it has set out to promote under the development of the Code of Good Practices on Transparency in Monetary and Financial Policies.2

The introduction of safeguard assessments for users of IMF resources has also increased the importance of transparent reporting in compliance with International Financial Reporting Standards (IFRS).3 This paper offers practical guidance to those responsible for preparing central bank financial statements to enable the publication of statements consistent with international standards.

The working paper is based on the papers presented to a central bank accounting workshop held at the Joint Vienna Institute (JVI) in Vienna in April 2000 and updated in May 2004 to reflect amendments to relevant IFRS.4 Contributors to the paper are Janet Cosier (Bank of Canada), Friedrich Karrer (Austrian National Bank), Richard Perry (Reserve Bank of New Zealand), Arne Petersen (IMF) and Kenneth Sullivan (IMF).

As an example of good disclosure, the paper adopts the 2003 Financial Statements for the Reserve Bank of New Zealand (RBNZ). For a series of years, the RBNZ has won first prize for its annual report in their category in a national competition run by the Institute of Chartered Accountants of New Zealand. Following the sections on relevant disclosures, the paper presents a series of appendices that map out how IFRS are reflected in the RBNZ 2003 Financial Statements, providing a replication of the RBNZ 2003 Financial Statements as well as two appendices that cover accounting issues relevant to central banks arising from the application of IAS 39 Financial Instruments: Recognition and Measurement and IAS 21 The Effects of Changes in Foreign Exchange Rates. The sections, where appropriate, should be read with reference to these appendices. The RBNZ financial statements may also be viewed on the RBNZ web site at www.rbnz.govt.nz.

II. Transparency in Strengthening the International Monetary System and the Role of the IMF5

A. Background

The successive financial crises in different regions of the world over the past two decades have led to much reflection and analysis in various international bodies on ways to strengthen the international financial system. A special G-22 Working Group on Transparency and Accountability was formed in 1998 to focus particular attention on this topic, and it issued a comprehensive report.

A consensus has emerged that inadequate transparency by international organizations, national governmental units, and private sector entities was a contributing force to the serious financial disturbances that have plagued the global economy. The conclusion was reached that markets cannot function efficiently, and that they will continue to be highly vulnerable to instability, in the absence of adequate, reliable, and timely information from all quarters. Lack of accurate and timely information on economic and financial developments and policies, particularly in an environment of economic and financial weakness, aggravates the weakness and contributes to the emergence of crises situations.

From this discussion, the IMF produced the Code of Good Practices on Transparency in Monetary and Financial Policies. In addition, the Fund continues to develop its Special Data Dissemination Standards (SDDS) as another avenue for enhancing international transparency.

Specialist standard-setting bodies dealing with other financial sector-related areas (such as accounting, auditing, banking regulation and supervision, bankruptcy, corporate governance, insurance regulation, payment system and securities market regulation) are also active in developing standards relevant for a better functioning financial system. The focus of these standards typically is broader than transparency. However, transparency and disclosure practices are covered in these standards as well, and thus have relevance to the Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies.

B. The Code —Its Underlying Rationale and Main Elements

What is meant by transparency? For purposes of the Code, transparency for central banks refers to an environment in which the objectives of monetary policy, its legal, institutional, and policy framework, monetary policy decisions and their rationale, data and information related to monetary policies, and the terms of central bank accountability are provided to the public on an understandable, accessible and timely basis. Thus, the code covers a much wider area than transparent accounting. However, transparency in accounting is the basis on which other elements rest.

The Code covers both monetary policies and financial policies (i.e., the policies related to the regulation, supervision, and oversight of banking, insurance, securities, payment systems, and deposit insurance). These two sets of policies are interrelated and often mutually reinforcing. The full benefits to be derived from good transparency practices in the monetary policy area cannot be achieved without complementary good transparency practices in the financial policy area, and vice versa. This section focuses on the part related to central banks.

The first part of the Code, “Good Transparency Practices for Monetary Policy by Central Banks,” is organized into four sections, each representing an aspect of transparency practices: (1) clarity of roles, responsibilities, and objectives of central banks; (2) the processes for formulating and reporting monetary policy decisions; (3) public availability of information on monetary policies; and (4) accountability and assurances of integrity by the central bank.

The design of transparency practices for central banks in the Code rests on two principles. First, monetary policies can be made more effective if the public knows and understands the goals and instruments of policy and if the authorities make a credible commitment to meeting them. Second, good governance calls for central banks to be accountable, particularly where monetary authorities are granted a high degree of autonomy. By publishing adequate information about its activities, the central bank can establish a mechanism for strengthening its credibility by matching its actions to its public statements. It is here that the transparency code and the accounting function intersect. Central bank accounting and reporting systems must be set up in such a way that the central bank provides the public with meaningful and transparent information.

Chairman Alan Greenspan of the U.S. Federal Reserve Board, at the Tercentenary Symposium of the Bank of England in 1994, reflected on the case for transparency for central banks in the following insightful manner:

.... if we are going to have independent central banks then implicit in that independence is accountability. You cannot in a democratic society have an institution which is fully or partly dissociated from the electoral process and which has powers that central banks inherently have. The question really amounts to how does one position the central bank with respect to the issue of disclosure and accountability—which are related questions.

The position that we [the Federal Reserve] take is that the burden of proof is against the central bank: that is, we have to demonstrate that either delayed disclosure or nondisclosure is a policy which is required for us to implement our statutory goals. We have struggled with this, and have concluded that we should make available to the electorate what it is we think, why we are doing what we are doing and in a general way under what conditions we would behave differently” (pp. 252-53, Forest Capie, Charles Goodhart, Stanley Fischer, and Norbert Schnadt, The Future of Central Banking, Cambridge University Press, 1994).

Transparency for central banks is not an end in itself, nor should transparency be considered as a substitute for pursuing sound policies. Transparency and sound policies should be seen as complements.

C. Transparency in Financial Statements of Central Banks

The annual report, including the annual financial statements, is a key for central banks to meet their accountability obligations. These statements reveal the results of the central bank’s functional activities on its balance sheet as well its use of the resources at its disposal. One does not need to look far to see examples of where the central bank’s financial reports have been used by opposition politicians to launch criticisms of both the government and central bank. As the ability to question performance is an essential component of accountability, those preparing annual financial statements carry the responsibility of presenting them so that they provide an accurate picture of the financial results of central bank operations in a manner that can be defended in terms of an internationally credible framework. Such presentation will direct criticism to appropriate areas, so reducing the possibility of the independence of the central bank being constrained and its operational effectiveness reduced.

Experience repeatedly shows that the best defense to criticism is through open and transparent disclosure, since this removes the risk of the hugely damaging consequences that occur when it is revealed that disclosures have been less than total. It is difficult to overstate the importance of the role of transparency in ensuring the maintenance of central bank independence and discharging its accountability obligations.

The importance of transparent reporting practices for central banks extends beyond narrow institutional interests because they make an important contribution to establishing the credibility of a nation’s financial system. As economies evolve and seek to establish their positions in the international market place, the national reporting framework becomes important to an expanded group of users. Central bank financial statements may be published or posted on the Internet where they can be read internationally. Opinions formed on the robustness of financial reporting frameworks from reading such documents contribute to judgments about the integrity and stability of the national financial system.

In the absence of a well-developed set of generally accepted accounting practices (GAAP) within a country, the published reports of authoritative institutions are used to determine what is best practice. By default, central bank disclosures make a material contribution to what is accepted as the nation’s GAAP, as commercial banks and other financial sector participants adopt them. Transparent central bank financial statements make it easier for bank supervisors to demand a similar level of disclosure from the commercial banks that they supervise. Transparent disclosures by commercial banks are an integral part of the process of establishing and maintaining a robust framework for the commercial banking system. In situations of emerging systems of GAAP, central banks have a valuable role to play in advancing the level of clarity and openness of disclosure.

For most transition economies, the accounting profession and the standard-setting framework in terms of market-based disclosures are still evolving. This can create potential problems for the production of internationally credible financial reports. Those who are not market participants and who have a conflict of interest, such as maximizing taxable revenue, may control standard setting. The section recognizes these tensions and seeks to enhance understanding of the conceptual framework upon which central banks base their reporting.

The basis of the section’s framework is the IFRS because these provide an agreed minimum conceptual framework for reporting. IFRS evolved from demands by the international marketplace and are gaining increasing acceptance as the foundation from which all national standards should evolve. Despite some issues for central banks, particularly in the treatment of price and foreign exchange revaluations of financial instruments, their international credibility provides a robust framework upon which to base and defend financial disclosures.

III. Applying IAS 1 and IAS 30 to Central Bank Financial Reporting6

A. Introduction

This section provides an overview of issues associated in applying International Accounting Standard 1—Presentation of Financial Statements (IAS 1) and International Accounting Standard 30—Disclosures in the Financial Statements of Banks and Similar Financial Institutions (IAS 30) to central bank financial reporting. The issues discussed include:

  • an overview of the external reporting model, types of information to be disclosed and the reasons it is required in market economies;

  • the role and main components of financial statements including the fundamental concepts for preparing financial statements;

  • users of central bank financial statements and their needs; and

  • issues in applying aspects of IAS 1 and IAS 30 to each of the main components of the financial statements. This excludes the Statement of Cash Flows, which is subsequently discussed.7

This section should be considered in conjunction with the detailed requirements of IAS 1 and IAS 30. These detailed requirements are presented in Appendix I, which has been designed to assist with the preparation of central bank financial statements in accordance with IAS 1 and IAS 30.8

B. Overview of the External Reporting Model

Public and private sector entities are in business for a variety of reasons such as profit maximization or the achievement of outcomes that can benefit society. The business process will involve each entity entering various business arrangements and transacting with one another in the exchange and consumption of economic resources. These business transactions can range from relatively simple to extremely complex and can be completed in different countries with different laws governing the business arrangements and transactions.

Parties entering business arrangements will be concerned about the overall financial health of the entities with which they undertake business, including the ability of the entity to pay any amounts owing to them, whether the entity will continue to exist in the future, how successful the entity has been in generating profits, and the risks the entity has exposed itself to in various business undertakings. More specifically, external parties will seek information about an entity’s business transactions and performance in order to:

  • make decisions about providing resources to, or doing business with, the entity;

  • assess management’s stewardship of the resources entrusted to it;

  • assess the entity’s current and potential ability to generate profits and cash flows; and

  • assess the entity’s compliance with laws and business contracts to the extent that these affect the outcomes the entity is seeking to achieve.

External parties will generally obtain the above information from the entity’s annual report, which includes general-purpose financial statements. General-purpose financial statements are intended to provide information to users who are not in a position to demand tailored financial reports to meet their specific information needs. This reflects that some users are unable to extract relevant and timely information from their business partners in order to make decisions. Hence, they must rely on the information contained in the financial statements as their major source of financial information to assist them in their decision making. Users that have specific custodial or transaction monitoring requirements are usually able to contract for their specific information purposes as part of the business contract. An example of a specific financial information need is a commercial bank that can require a party to a loan agreement to provide specific information before the loan is provided.

The need for general-purpose financial statements is well recognized internationally. For example, most countries require public companies to publish regular financial statements as a condition of company registration. This is to ensure that information is provided:

  • that is useful to present and potential investors, creditors, and other users in making rational investment, credit, and similar decisions;

  • to help current and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest; the proceeds from the sale, redemption, or maturity of securities or loans; the entity’s capital transactions and other factors that affect liquidity;

  • about the economic resources of an entity, the claims to those resources, and the effects of transactions, events, and circumstances that change resources and claims to those resources;

  • about an entity’s financial performance given by measures of earnings and its components in order to help in assessing the prospects of an entity;

  • about how management has discharged its responsibility to shareholders for the stewardship of the entity’s resources; and

  • that is useful to management in making decisions in the interest of shareholders.

In addition, it is important to consider the connection between developments in financial markets and the consequences for financial reporting. It is generally accepted that, in an efficient market, security and share prices impound all publicly available information. Lack of timely and accurate information can distort prices and heighten uncertainty. This in turn can lead to increases in financial contracting costs as capital providers and capital users try to protect themselves against information uncertainties. It can also lead to costly litigation after the fact, if it may be alleged that vital information was missing or presented an inaccurate picture of the state of the entity’s affairs. In summary, information uncertainties can increase the cost of capital to an entity.

To reduce the likelihood of information uncertainties arising, common frameworks for financial reporting have been developed to facilitate the provision of consistent and reliable financial information. IFRS are accepted as the global standard for financial reporting that provides financial information to meet the diverse needs of general users who cannot require the business entity to provide specific information. IFRS are standards and interpretations adopted by the International Accounting Standards Board and comprise:

  • International Financial Reporting Standards;

  • International Accounting Standards; and

  • Interpretations originated by the International Financial Reporting Interpretation Committee or the former Standing Interpretation Committee.

Users of financial statements generally expect compliance with IFRS, and this is likely to assist entities to avoid the information uncertainties that can otherwise increase the cost of capital.

C. The Role and Components of Financial Statements

IAS 1 describes financial statements as a structured financial representation of the financial position and financial performance of an entity. The objective is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s:

  • assets;

  • liabilities;

  • equity;

  • income and expenses, including gains and losses;

  • other changes in equity; and

  • cash flows.

This information, along with other information in the notes to financial statements, assists users to predict the entity’s future cash flows and in particular the timing and certainty of the generation of cash and cash equivalents.

IAS 1 explains that a complete set of financial statements includes:

  • accounting policies;

  • a balance sheet;

  • an income statement;

  • a statement showing either all changes in equity or changes in equity other than those arising from transactions with equity holders acting in the capacity of equity holders;

  • a cash flow statement; and

  • explanatory notes.

These financial statement components interrelate because they reflect different aspects of the same transactions or other events. Although each component provides information that is different from the others, none is likely to serve only a single purpose or provide all the information needs for all users. Hence, the information contained in the notes to the accounts is of equal importance as the major statements such as the balance sheet and income statement.

In addition, IAS 1 outlines fundamental concepts for account preparation including:

  • Going concern. The assumption that the business will continue to operate into the future (i.e., the business will not be liquidated or cease trading).

  • Accrual basis. Transactions are recognized as they occur and reported in the periods to which they relate. This recognizes that some cash outlays will benefit several future periods—for example, the purchase of an asset will provide benefits to future reporting periods and the costs of the asset are allocated to each period through capitalization and depreciation of the asset.

  • Consistency. Presentation and classification of items in financial statements should be consistent between periods. Where the presentations or classifications are changed, the comparative information should be changed to reflect the new basis.

  • Materiality. Each material item should be presented in the financial statements and immaterial items should be aggregated. It is important to recognize that materiality encompasses both materialities by amount and materiality by nature. For example, entering a low-value transaction may have extremely important risk consequences for the entity that are important to disclose to the users of the financial statements. In this context, information is material if nondisclosure is likely to influence the economic decisions of the financial statement users.

D. Users of Central Bank Financial Statements and Their Needs

To understand the specific objectives of central bank financial statements it is necessary to consider the users of the central bank financial statements and what information they require. For a central bank, the users include:

  • The central bank stakeholders, including taxpayers and government. Stakeholders may be concerned with the central bank stewardship of public monies. Because central banks use public money, they have a responsibility to display an appropriate level of care in managing these funds and using resources efficiently to perform their functions. In particular, these users may wish to assess the accountability of management when deciding whether to reappoint or replace them. Given the increasing independence being granted to central banks, governments may use financial statements as a major means of applying central banks’ accountability. Financial statements may also provide the basis for calculating the annual dividend to be paid to government.

  • Commercial banks. Many central banks prescribe the external reporting requirements of commercial banks. Commercial banks may look to the central bank for examples of appropriate and best practice financial statement disclosure.

  • External suppliers and lenders. The central bank may purchase goods and services, or borrow funds, from other domestic and international suppliers who are interested in the ability of the central bank to meet their obligations as they fall due.

  • Credit rating agencies and financial markets. The relative position of the central bank may provide information to credit rating agencies and financial markets on the resources of the central bank and the ability of the central bank to be effective in meeting its stated policy objectives. This may affect the overall credit rating of the country or risk premium demanded by international financial markets. For example, specific information may be sought on foreign reserves and the ability of the central bank to meet exchange rate objectives.

  • Purchasers of central bank services. Central banks may provide certain services such as payment system mechanisms. Customers of these services will be interested in the extent to which the central bank provides these services on commercial terms and the level of profit generated by such services.

The needs of these users can generally be met by providing information on the:

  • economic resources under control of the central bank;

  • legal and economic obligations of the central bank;

  • inflows and increases in economic resources and consumption or declines in economic resources of the central bank;

  • cost information on central bank operations;

  • future risks to the maintenance of the resources of the central bank;

  • potential obligations and resources not yet measured by the central bank and why;

  • level of transactions with parties related to the central bank including unconsolidated subsidiaries; and

  • methods used to portray and measure the actual economic resources.

This information will generally be provided through various components of the central bank financial statements.

E. Accounting Policies

Accounting policies allow the users of central bank financial statements to understand how the economic resources of the central bank have been measured and portrayed in the financial statements. In particular, the accounting policies should describe the measurement basis used in preparing the financial statements and disclose each specific accounting policy that is necessary for a proper understanding of the financial statements.

It is suggested that the accounting policies should be the first component of the financial statements to be presented. This recognizes that the accounting policies will determine how the financial statements measure and portray the position and performance of the central bank. On this basis, they can be considered as the “window” through which the financial statements portray and interpret the actual events and transactions of the central bank.

In deciding whether a specific accounting policy should be disclosed, consideration should be given to whether disclosure would assist users in understanding the way in which transactions and events are reflected in the reported performance and financial position. For example, it is important to understand the basis on which assets are valued and how both realized and unrealized gains and losses are treated in the income statement and balance sheet.

An objective for preparers of central bank financial statements is to select accounting policies so that the financial statements comply with the requirements of IFRS. Where there is no specific requirement, accounting policies should ensure that the financial statements provide information that is relevant to the decision-making needs of users and are reliable in that they:

  • faithfully represent the results and financial position of the central bank;

  • reflect the economic substance of events and transactions;

  • are neutral (that is, free from bias);

  • are prudent; and

  • are complete in all material respects.

Specific issues to consider in disclosing accounting policies include:

  • Financial instruments. Financial instruments comprise a significant proportion of a central bank’s economic resources and account for a significant amount of the overall financial performance. Financial instruments can be subject to various measurement practices (such as historic cost or market value) or may not even be recorded within the financial statements (i.e., they are off balance sheet). Consideration should be given to including detailed disclosure in the accounting policies of the way in which these financial instruments are accounted for, including the measurement base used and how they are recognized in the financial statements. The detailed disclosure is important to understanding how profit is measured and any implications that measurement may have for dividend calculation purposes. In addition, disclosure may provide an appropriate example for commercial bank disclosure because information on financial instrument recognition and measurement is an integral part to understanding the profitability and health of commercial banks.

  • Changes in accounting policies. Accounting policies should also include an explanation on whether or not there have been changes made in any specific accounting policies. Where changes have been made, the reason should be disclosed, and the impact on the current and prior periods should be explained.

  • Disclosure of supplementary information. The accounting policies are an appropriate location for disclosing other nonfinancial information required by IFRS, including the entity’s name, legal status, the reporting group, whether the financial statements comply with IFRS, and whether the fundamental accounting assumptions such as accrual accounting and going concern have been applied.

F. Balance Sheet

The balance sheet reflects the economic resources under the control of the central bank and the legal and economic obligations of the central bank. This provides information on the financial structure, liquidity and solvency of the central bank.

The application of IAS 1 and IAS 30 to central bank balance sheets raises several issues including disclosure:

  • of current and long-term categories of assets and liabilities versus disclosure in broad order of liquidity;

  • in the face of the balance sheet or notes to accounts; and

  • of equity and reserves.

Current/noncurrent versus order of liquidity

IAS 1 requires an entity to determine, based on the nature of its operations, whether or not to present current and noncurrent assets and current and noncurrent liabilities as separate classifications on the face of the balance sheet. When an entity chooses not to make this classification, assets and liabilities should be presented broadly in order of their liquidity. However, IAS 30 suggests banks should present a balance sheet that groups assets and liabilities by nature and lists them in an order that reflects their relative liquidity.

Central banks usually have significant levels of financial assets and liabilities. Hence, the presentation will be most appropriately made in broad order of liquidity, since many assets and liabilities will be able to be realized or settled in the near future.

Face of balance sheet versus notes to the accounts

Both IAS 1 and IAS 30 detail several items that should be considered for disclosure on the face of the balance sheet. In determining the appropriate presentation on the face of the balance sheet, consideration should be given to how the presentation could best reflect the underlying business operations of the central bank. The objective would be for a user of the financial statements to be able to understand the significant economic resources and obligations of the central bank by reviewing the balance sheet.

For example, the RBNZ applies a distinction between local and foreign currency assets and liabilities. This reflects that the RBNZ holds foreign currency assets primarily for the purpose of managing New Zealand’s foreign reserves. Local currency assets and liabilities arise from monetary policy implementation, banking operations, and provision of circulating currency. Within the local and foreign currency splits, assets and liabilities are presented in broad order of liquidity, and any specific items required to be disclosed by accounting standards are included either on the face of the balance sheet or in the notes to the accounts.

In addition, the RBNZ approach has been to identify a common set of balance sheet asset and liability definitions that are adopted throughout the notes to the accounts. Specifically, this allows disclosure relating to balance sheet risks (such as credit risk, interest rate risk and foreign currency risk) to be presented by a common set of balance sheet classifications. The conceptual rationale is that the same elements of the balance sheet can be considered in light of the different risks that arise. This allows users who seek information on specific risks, such as the RBNZ exposure to credit risk, to relate the balance sheet amounts to credit risk arising on those amounts.

Note also that the RBNZ has deliberately attempted to increase the transparency of balance sheet presentation through disclosure of summarized explanation of major balance sheet changes and references to the notes to the accounts for further information.

Equity and reserves

IAS 1 details several disclosures required in the balance sheet with respect to share capital. These disclosures may not be applicable to central bank circumstances given that central banks are not always funded through share capital.

Disclosure of reserve information is very important in central bank circumstances to allow users to understand the reasons why reserves are maintained. This disclosure should be accompanied by a description of the nature and purpose of each reserve class.

G. Income Statement

The income statement provides information concerning the performance of the central bank and, in particular, its profitability. This information can assist understanding how economic resources have been increased and consumed by the central bank. In addition, central banks may charge for the provision of certain services (such as banking services to the public sector and government). Profit information allows users to understand the extent to which the profit generated from these activities is excessive or comparable to the profits generated by commercial suppliers of similar services.

However, the disclosure of central bank profit is usually an inappropriate measure of central bank performance. This is relevant where central bank profit arises largely from the consequences of implementing monetary policy and from the monopoly issue of circulating currency. The profit generated in these circumstances will arise usually as a consequence of the monetary policy actions of the central bank. The central bank may influence interest rates in order to achieve inflation objectives, and the profit the central bank earns as a consequence of the monetary policy actions is secondary to achieving the inflation objectives. A better measure of performance in these circumstances is information that explains the inflation objectives and the success of the central bank in meeting the inflation objectives. The more important financial information is the operating costs the central bank has incurred in achieving these inflation objectives.

The disclosure of cost information is usually a better indicator of financial performance because it demonstrates whether the central bank has been efficient in achieving its policy objectives. For example, has central bank spending been appropriate given the policy objectives? Disclosure of cost information allows users to review the central bank stewardship of public resources. This disclosure of cost information can be used to demonstrate that the central bank has been efficient and responsible in using public resources. This can enhance the central bank’s credibility and reduce the potential for political interference. Hence, the disclosure of central bank cost information can contribute to obtaining and preserving greater central bank independence.

Consideration can be given to complementing the traditional income statement with a statement that discloses financial performance by reference to the material business operations of the central bank. This approach can refer to the “outputs” or goods and services that the central bank produces and may satisfy the functional presentation requirements suggested by IAS 1, but is not a specific requirement of IAS 1 or IAS 30. The RBNZ presents two income statements, one in the traditional fashion and one by reference to the outputs of the RBNZ. These statements include performance relative to budget and explain any significant budget variances to enhance transparency.

IAS 1 and IAS 30 prescribe certain information to be included on the face of the income statement or in the notes to the accounts. The IAS 30 classifications are more appropriate to central bank circumstances, since the IAS 1 approach is the more traditional approach designed for businesses that make and sell physical goods. The IAS 1 approach uses a “gross profit” concept where information is provided on income generated by sales of goods less the cost of purchasing or making those goods. The net of this income and cost is the “gross profit” of the entity that is available to meet operating costs before profit is calculated.

However, the application of the IAS 30 approach should be tailored to the specific circumstances of the central bank. The IAS 30 approach primarily facilitates analysis of profitability from a commercial bank perspective. In particular, the approach has been designed to allow analysis of commercial banks’ interest rate margin (i.e., the margin earned through the lending and borrowing money in the banking process), trading activities, and fee income. These profit categories are usually not as relevant to central bank circumstances given the nonprofit objectives of central banks.

H. Changes in Equity and Reserves

This statement explains the changes in the central bank’s equity and reserves, including distributions to stakeholders, increases of equity (by way of retained earnings or contributions by stakeholders), and changes in various reserves.

I. Explanatory Notes to the Accounts

The financial statements also contain notes, supplementary schedules, and other information that is relevant to the needs of users. This will include information concerning future risks to the maintenance of the resources of the central bank, potential obligations and resources not recognized in the financial statements of the central bank, and the reasons why these potential obligations are not recognized.

Information that is not included on the face of the balance sheet or income statement should be included in the notes to the accounts. Each item on the face of the balance sheet should be cross-referenced to any related information in the notes.

IAS 30 contains specific disclosures to be included in the notes to the accounts. The specific disclosures include:

  • Contingencies and commitments (IAS 30, para. 26). This is to report any obligations not recognized in the financial statements and provides information concerning off balance sheet transactions, potential obligations that may affect liquidity and solvency, and potential losses that are not recognized. The information is extremely important because it allows users to understand any potential obligations of the central bank that are not currently recognized in the financial statements. These potential obligations may affect future central bank finances and disclosure should be sufficiently comprehensive and detailed to allow financial statement users to assess the probability and impact of any potential obligations. For example, a central bank may have provided guarantees for third-party lending that could have a material impact on the central bank in the event of third-party default. Even if the probability of the guarantee being exercised was low, the financial statements should describe the nature and amount of the guarantee and the circumstances governing its exercise. This provides the central bank with some defense in the event that the guarantee was exercised, which substantially reduced a future dividend payment to government.

  • Maturity analysis of assets and liabilities (IAS 30, para. 30). This information allows users to assess the ability of the entity to meet obligations as they fall due and understand the overall liquidity of the entity.

  • Concentrations of assets and liabilities (IAS 30, para. 40). Disclosure of significant concentrations by geography and industry assists users to assess the degree of exposure the entity has to any one sector. This is important to understand the risks the organization may face if a particular region/country or industry experiences financial difficulties.

  • Significant net foreign currency exposures (IAS 30 para. 40). There is a requirement to disclose significant net foreign currency exposures to provide information regarding the degree of foreign currency risk the entity faces. A significant net foreign currency concentration exposes an entity to the risk arising from changes in foreign currency rates. Central banks may have significant net foreign currency exposures arising from the management of foreign reserves.

  • Losses on loans and advances (IAS 30, para. 43). This allows users to assess the effectiveness of the entity in managing and providing for loan losses and in recovering outstanding loans to customers.

  • General banking risks (IAS 30, para. 50). This information provides users with an understanding of items such as general provisions for loan losses.

  • Assets pledged as security (IAS 30, para. 53). Banks will often pledge assets as collateral for borrowing money. A common example is repurchase agreements, where money is advanced to external parties after an entity passes legal title of the assets (usually marketable securities) to the counterparty. The purpose of this disclosure is to allow readers to determine the value of assets available to creditors and the ability of the entity to dispose of assets to meet liquidity requirements.

IV. IAS 32 Financial Instruments: Disclosure and Presentation—Case Study of the Reserve Bank of New Zealand9

A. Introduction

This section discusses issues for central banks in applying IAS 32—Financial Instruments: Disclosure and Presentation (IAS 32).10 In addition, the section considers the broader issue of appropriate financial instrument risk disclosures for central banks, including:

  • the importance of financial instrument risk disclosures, including an overview of key risks associated with financial instruments;

  • qualitative disclosures, including disclosure of risk management policies and the nature and extent of activities;

  • quantitative risk disclosures, including interest rate risk, foreign currency risk, credit risk, liquidity risk, and fair values; and

  • offsetting financial assets and liabilities in balance sheet presentation.

The RBNZ’s 2002–2003 financial statements, included as Appendix II, are used as a case study for various disclosures. However, it should be noted that:

  • The RBNZ’s financial statements are prepared in accordance with the requirements of New Zealand accounting standards. New Zealand accounting standards and disclosures reflect requirements considered appropriate to the New Zealand legal and economic situation and are not necessarily the same as the requirements of IAS.

    • In addition, the RBNZ’s financial statements contain disclosure requirements required under International Financial Reporting Standards. However, the financial statements have not been prepared in accordance with the measurement and recognition requirements of IFRS. Therefore, the disclosures, which are specific to those measurement and recognition requirements, have not been made.

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B. Importance of Financial Instrument Risk Disclosures

During the early to mid-1990s, there was increasing recognition of the need for organizations to provide comprehensive information on the nature and extent of their exposure to financial risks. This was in part due to the dynamic nature of financial markets and the growing use and development of more complex financial instruments such as derivative financial instruments. An entity can substantially change its financial risks very quickly by entering into financial transactions including derivative instruments. For example, derivatives may be used to modify a particular financial risk, to reduce or even eliminate exposure to it. Alternatively, derivatives may be used as speculative tools to multiply the effects of changes in interest rates, foreign currency rates, or security prices.11

In addition, there was an increase in the demand for information on financial risks and risk management systems because of financial market crises (such as the collapse of Barings Bank and the Asian financial crisis). A number of these financial market crises arose from the combination of poor risk management and complex financial instruments, combined with low or ineffective levels of disclosure. This raised the need for published information on the nature and extent of financial risk that an organization faced and the way in which these risks were managed and mitigated.

As previously discussed, relevant, reliable, and timely financial information is of crucial importance to the efficient operation of modern capital markets.12 Information uncertainties can increase the cost of capital to an entity. Accounting standard setters have sought to reduce information uncertainties arising from involvement in financial instruments by developing specific standards (including IAS 32) that detail disclosure requirements for financial instruments. The importance of disclosure concerning financial instruments is reinforced by other international organizations. For example, a 1999 survey of trading and derivative disclosures published by the Basel Committee and International Organization of Securities Commissions (IOSCO). These two groups considered transparency of banks’ and securities firms’ activities and risks to be a key element of an effectively supervised financial system as follows:

Transparency, based on meaningful public disclosure, plays an important role in reinforcing the efforts of supervisors in encouraging sound risk management practices and fostering financial market stability.13

This report suggested that financial institutions should:

  • Provide financial statement users with a clear picture of their trading and derivatives activities. They should disclose meaningful summary information, both qualitative and quantitative, on the scope and nature of their trading and derivatives activities and illustrate how these activities contribute to their earnings profile. They should also disclose information on the major risks associated with their trading and derivatives activities and their performance in managing these risks.

  • Disclose information produced by their internal risk measurement and management systems on their risk exposures and their actual performance in managing these exposures. Linking public disclosure to internal risk management processes helps ensure that disclosure keeps pace with innovations in risk measurement and management techniques.

While these recommendations are for derivative instrument disclosures, they are equally relevant to disclosures concerning financial instruments in general.

The importance of disclosures concerning financial instruments is reflected in the requirements of IAS 32. The objective of IAS 32 is to enhance financial statement users’ understanding of the significance of financial instruments to an entity’s financial position, performance, and cash flows. IAS 32 requires the disclosure of information about the factors that affect the timing and certainty of an entity’s future cash flows relating to financial instruments and the accounting policies applied to those instruments.

In particular, IAS 32 requires disclosure of information about the nature and extent of an entity’s use of financial instruments, the business purpose they serve, the risks associated with them, and management policies for controlling those risks. This assists users to understand the risks associated with financial instruments, including market risk, credit risk, and liquidity risk. Each of these risk types is defined below:

  • Market risk. IAS 32 identifies three types of market risk, as follows:

    • Currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates.

    • Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates.

    • Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market.

  • Credit risk. The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

  • Liquidity risk. The risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

  • Cash flow interest rate risk. The risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

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Financial statement users can generally obtain the information they require on the risks arising from involvement in financial instruments through two types of disclosure:

Narrative or qualitative disclosures. These explain the risks the entity is exposed to; how the entity evaluates these risks; how the entity uses financial instruments to manage financial risks and major policies adopted to limit and control risk. This information will

  • Quantitative disclosures. This information is used for evaluating the extent to which the entity is exposed to market risk, credit risk, liquidity risk, or cash flow interest rate risk.

Central banks will typically hold significant volumes of financial instruments as part of their operations. Hence, central banks can face significant financial risks in their own operations. The risks typically include: foreign currency risk from the management of foreign reserves; interest rate risk on foreign and local currency assets and liabilities; liquidity risk associated with the management of foreign reserves; and credit risk on local and foreign currency assets. In addition, central banks face risk associated with general operations (operational risk) and the risk of damage to the central bank’s credibility and reputation (reputation risk).

Users of central bank financial statements will be concerned with the extent to which the central bank is using financial instruments in appropriate circumstances and that the central bank is appropriately managing the risks that arise from involvement in financial instruments. Disclosures that demonstrate the central bank is appropriately managing financial risks are important because the central bank is managing public resources. The central bank can use these disclosures to demonstrate that appropriate care and responsibility are being taken to manage these public resources.

Transparent qualitative and quantitative disclosure can demonstrate that the central bank is aware of the risks associated with financial instruments and that these risks are being appropriately managed. Even if the central bank deliberately chooses not to manage specific risks arising from involvement in financial instruments, the disclosure of this information may enhance the credibility of the central bank. For example, a central bank could explain the reasons why exposure to foreign currency risk is not managed in order to avoid external criticism in the event the central bank incurs large unrealized foreign currency gains or losses.

In addition, many central banks have a responsibility for supervision of commercial banks within their countries including the regulation of commercial bank disclosures. This provides central banks with an opportunity to promote best practice in disclosure and transparency concerning financial instruments in areas they have in common with commercial banks.

Similarly, the RBNZ is responsible for the supervision of commercial banks in New Zealand. The New Zealand approach to supervision is based on public disclosures of information. The failure of traditional supervisory approaches to prevent substantial bank failures and the risk of moral hazard have caused the RBNZ to adopt a public disclosure regime for commercial banks. As a result, commercial banks have, in some situations, looked to the RBNZ practices to gain illustrations of best-practice disclosure. Therefore, the RBNZ has committed to preparing its financial statements according to best-practice accounting and disclosure requirements as applicable to a central bank. In pursuing this objective, the RBNZ attempts to set an example, where appropriate, for commercial banks to follow.

C. Narrative and Qualitative Disclosures

Qualitative disclosures provide management with an opportunity to explain the risk management objectives of the central bank, and how these objectives fit into the overall central bank objectives. This can include information on the nature and extent of involvement in financial instruments, risk management policies in general, specific risk management policies for each of the major risk categories (i.e., the policies used for managing interest rate risk, credit risk, foreign currency risk and liquidity risk), and the accounting policies for financial instruments.

Nature and extent of activities

IAS 32 requires disclosure of information about the nature and extent of financial instruments, including significant terms and conditions that may affect the amount, timing, and certainty of future cash flows. Information on the nature and extent of financial instruments allows the financial statement users to understand the central bank’s business reasons for using financial instruments. For example, the central bank may explain that financial instruments are used for specific policy purposes such as the implementation of monetary policy. Alternatively, the central bank may use derivative financial instruments, such as forward foreign exchange contacts, as a tool to reduce exposure to foreign currency risk. Disclosure of this type of information can assist financial statement users to understand the reasons why the central bank uses financial instruments and, provide a better understanding of the overall risk-taking philosophy of the central bank.

The approach taken by the RBNZ is to present this information as the first note to the financial statements. The disclosures provide specific information concerning the following:

  • The RBNZ’s foreign currency activities (note 1(a)) provide an overview of financial instruments arising from the RBNZ’s management of New Zealand’s foreign reserve portfolio, the funding for these financial instruments and the management of these financial instruments including the risk-taking philosophy used in foreign reserves management.

  • Significant events that affected on the RBNZ’s involvement in different types of foreign currency financial instruments (note 1(b)).

  • An overview of the RBNZ’s involvement in derivative instruments (note 1(c)).

  • An overview of the involvement in a securities lending program (note 1(d)) including the amount lent out under the program at balance date.14

  • An outline of the legislative provision that permits the minister of finance to direct the RBNZ to intervene in the foreign exchange market (note 1(e)) and the extent of such directed intervention.

  • Disclosure of legal restrictions on assets (note 1(f)). The purpose of this disclosure is to allow readers to determine whether any assets that are recorded in the balance sheet have legal restrictions against them. For example, a central bank may have assets that have been pledged as security in repurchase transactions.15 This disclosure is also required by IAS 30 (para. 60).

  • Discussion of the RBNZ’s involvement in financial instruments arising from local activities including monetary policy implementation (note 1(f)).

Risk management policies

IAS 32 requires an entity to describe its financial risk management objectives and policies including its policy for hedging each main type of forecast transaction for which hedge accounting is used. This discussion may include information on the principal internal control procedures in place such as the existence of a centralized risk management committee, a summary of any involvement in new financial instruments, the risks associated with new financial instruments, and a description of any hedging policies. For example, a central bank may have specifically authorized procedures and policies governing the use of financial instruments. Summary disclosure of this information can be used to demonstrate that appropriate risk management processes and controls exist for each of the major financial risks that the central bank is exposed to. This disclosure demonstrates that the central bank has an appropriate risk management structure. This information is important in central bank circumstances because the central bank is managing public resources and can demonstrate that appropriate systems are in place to minimize financial risks. It is suggested that central banks specifically discuss the following:

Risks and management controls. This includes an overview of the key aspects of the organizational structure used in the risk management and control process. The discussion may explain the existence of a centralized risk management committee and whether separate divisions of the central bank are responsible for measuring and monitoring central bank financial risk. The disclosure can include a description of each major risk the central bank is exposed to, how these risks arise, and the methods used to manage and measure the risks.

The RBNZ provides an overview of its risk management structure in note 16. Notes 18 to 23 then discuss the background to how the risks arise for operational risk, credit risk, interest rate risk, foreign currency risk, and liquidity risk. The techniques used to manage each of these risks are specifically considered, including the major internal control processes.

Credit risk is the risk of loss arising from counterparty default. Qualitative credit risk disclosures can summarize the central bank policies for identifying, measuring, and managing credit risk. The discussion might address the structure of the credit/loan review function (i.e., how does the central bank assess the creditworthiness of their counterparties), internal controls, risk limits, and limit monitoring. Risk limits and limit monitoring refer to the risk management process of limiting the total assets held with any single counterparty. The process of limiting the total assets held with a single counterparty is effective only if it is supported by regular reporting of actual exposures compared to limits.

The qualitative credit risk disclosures should also discuss any mechanisms used to reduce credit exposure, including the use of collateral and any netting agreements. Central banks may require collateral before they are prepared to provide funding in situations such as the implementation of domestic monetary policy implementation.

The RBNZ credit risk management approach is outlined in note 18(a). This provides an overview of the credit risk management framework and limit framework. The analysis is extended to include a discussion of the collateral that is accepted by the RBNZ in the operation of New Zealand’s real time gross settlement system.

Interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. This reflects that changes in the level of interest rates will change the present value of financial instruments. Where financial instruments are accounted for on the basis of market values, changes in value will be recognized in the income statement of the central bank. Disclosure can summarize the policies used for measuring and managing interest rate risk and how the central bank reviews its effectiveness in managing interest rate risk. This allows the financial statement users to know that the central bank is aware of exposure to interest rate risk and that appropriate steps have been taken to manage exposure to changes in interest rates.

The RBNZ discloses the policies used for measuring and managing interest rate risk in notes 19 and 21. This risk arises from the RBNZ’s management of foreign reserves. The disclosure includes an overview of the “Value at Risk” (VaR) model that is used to manage the RBNZ’s exposure to interest rate risk and foreign currency risk. VaR is a statistical model that estimates the potential daily loss from movements in interest rates and foreign currencies in normal market conditions. The metric is calculated by statistically modeling historical interest rate movements and using these movements to predict exposure to future losses within a specific probability range. These types of VaR model are often used by commercial banks to manage commercial bank interest rate and foreign currency risk.

The RBNZ disclosure includes the VaR model parameters and major model assumptions. This information is provided to facilitate an understanding of the effectiveness of the RBNZ model in managing interest rate risk.

In addition, information is provided on the existence and level of stop-loss limits used to limit losses that may arise from departures from the risk neutral position.

Foreign currency risk is the risk of loss arising from changes in the level of foreign currency rates. The narrative disclosure for foreign currency risk can explain the extent to which the central bank has exposure to foreign currency risk and whether any methods are used to manage and monitor foreign currency risk.

The RBNZ qualitative disclosure on foreign currency risk in note 20 explains how the RBNZ is only exposed to foreign currency risk arising from trading positions undertaken by specialist staff. Foreign currency risk is managed by way of VaR limits and stop-loss limits for the combined market risk, as explained in note 21. The hedging practice in respect of foreign currency exposure arising from domestic operations is described.

Liquidity risk is the risk that an entity will encounter difficulties in raising funds to meet obligations as they fall due. Liquidity risk may result from an inability to sell an asset quickly at close to its fair value. Disclosure can include how liquidity risk arises and practices undertaken to manage liquidity risk.

The RBNZ management of liquidity risk of foreign currency assets is explained in note 22. This includes the use of liquid asset ratios and limits on the minimum and maximum proportion of reserves that may be held in any one currency and the monitoring of these limits. Further information is provided on additional credit arrangements including credit lines. Given the nature of the New Zealand central bank operations, the RBNZ is not subject to local currency liquidity risk.

Accounting policies

For each class of financial asset and liability, IAS 32 requires disclosure of the accounting policies. This includes valuation methods adopted, the criteria used for recognizing gains and losses in the income statement, and whether regular way purchases and sales of financial assets are accounted for at trade date or settlement date.

Disclosures about accounting policies assist users to understand any important distinctions that exist in the accounting treatment of various types of financial instruments. IAS permit a variety of methods to account for financial instruments.16 The accounting policies used for financial instruments will impact on how gains and losses are recognized in the income statement. For example, a mark-to-market method of accounting, held for trading assets, will immediately recognize any changes in the market value of financial assets and liabilities in the income statement. Conversely, historic cost accounting will recognize only interest paid and received on financial instruments in the income statement. Where financial instruments are marked to market, the disclosure should explain the basis used for calculating market values, such as use of external market prices or internal valuation models. Because the accounting practices for derivatives are not always consistent across countries or between institutions, it is particularly important that the central bank describe the accounting treatment of derivative instruments.

IAS 32 requires detailed disclosure of the methods used to determine fair values of financial instruments. Where fair value is the basis for measurement and recognition, this information can be included as part of the accounting policies. The disclosure requirements for determining fair values include the methods and significant assumptions, whether fair values are determined directly, by reference to published market prices, or estimated using a valuation technique.

The RBNZ provides detailed accounting policies for all significant categories of financial instruments. This detail includes information on the balance sheet presentation, income recognition, valuation basis, and the methods used to determine the value of financial instruments measured and recognized at fair value. Expanded information on accounting policies for financial instruments is seen as an opportunity to promote transparency of disclosures of accounting policies for commercial banks. Accounting policies for financial instruments will have a significant impact on the presentation and measurement of assets and liabilities and commercial bank profitability.

Fair value disclosures

Fair value information provides a neutral basis for assessing management stewardship by indicating the effects of its decisions to buy, sell, or hold financial assets and to incur, maintain or discharge financial liabilities. Fair value information permits comparisons of financial instruments that have the same economic characteristics regardless of why they are held or acquired. The qualitative disclosures of fair values will discuss the methods and significant assumptions used to determine the fair value of financial instruments, including whether fair values are determined directly, by reference to published market prices, or estimated using a valuation technique. In the case of instrument categories for which there are no external market prices, the discussion should highlight the methods and assumptions used to estimate market value.

A specific fair value issue unique to central bank circumstances is the method used to assess the fair value of currency in circulation. This is typically calculated as the face value of currency issued.

The RBNZ discusses the methods used to calculate the fair value disclosures for each class of financial instrument in the accounting policies where the accounting measurement basis is fair value and in note 14 for the other financial instruments. This includes discussion of relevant valuation methods and reasons why book value is considered to approximate fair value for certain instruments.

Other risks

Legal, operational, and reputation risk pose significant concerns to central banks, but accurate measurement of these risks is often difficult. However, central banks can help financial statement users understand these risks by providing information on the nature of the risks and describing how they relate to the central bank’s activities.

The RBNZ discusses operational risk in note 17. The discussion includes an overview of the main techniques used to manage operational risk. However, there is limited discussion of the other risk types including the management of reputation risk.

D. Quantitative Disclosures for Financial Instruments

Quantitative information provides users with an understanding of the degree of risk exposure within each major risk category. IAS 32 requires certain quantitative information for interest rate risk, credit risk, and fair values. IAS 30 requires quantitative information for liquidity risk and foreign currency risk. This section provides an overview of the quantitative disclosures for the requirements of IAS 30 and IAS 32, excluding liquidity risk. The requirements for liquidity risk disclosures have been outlined in an earlier section.17

Interest rate risk

IAS 32 requires disclosure of information concerning the entity’s exposure to interest rate risk for each class of financial asset and financial liability. This allows financial statement users to understand the economic impact for the entity owing to changes in interest rates.

IAS 32 expects the disclosure to include information on the maturity or interest rate repricing dates for various financial instruments and information on effective interest rates. Interest rate repricing dates are the dates at which the interest rate on variable financial assets or liabilities will change. The basic idea is that the present value of financial assets and liabilities will change when there is a change in interest rates. An increase in the level of interest rates will result in a decrease in the present value of financial assets and liabilities, and vice versa. The magnitude of this change will generally depend on the remaining time to maturity of the financial instrument. All things being equal, financial instruments with longer terms to maturity will be subject to greater present value changes because of a change in interest rates. This logic evolves from the “time value of money” concept that underpins modern financial markets.

For banks, the IAS 32 disclosure is typically by way of an interest rate repricing table. Assets and liabilities are grouped into various periods based on the maturity or interest rate repricing period. Interest rate risk increases if there is a mismatch between the repricing of financial assets and liabilities. A mismatch arises where the maturity or repricing dates for financial assets and liabilities are different. Where a mismatch exists, the present value of the assets and liabilities will change by different amounts when interest rates change.

For example, consider an asset with a remaining maturity of five years and a liability with a maturity of one year. If interest rates change, the value of the asset will change by a different amount to the value of the liability. The existence of this situation could be highlighted in the following table:

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A repricing schedule increases the understanding of interest rate risk because it compares the maturity or repricing of assets and liabilities over future periods. This allows users to identify any significant “gaps” in the repricing of financial assets and liabilities. Hence, the financial statement user may obtain an understanding of how much the entity would gain or lose because of a change in interest rates.

The RBNZ provides a comprehensive interest rate repricing schedule, using the asset and liability categories presented on the face of the balance sheet (note 19). This has been extended to provide repricing gap information by currency to further enhance understanding of potential exposure to interest rate risk within specific currencies.

The balance sheet asset and liability categories have also been used to present the quantitative risk disclosures for credit risk and foreign currency risk. The approach of using the balance sheet asset and liability categories is intended to provide users with a comprehensive presentation of the RBNZ’s assets and liabilities and the risk profile for each category of assets and liabilities. This approach allows the financial statement user to understand the reasons why the central bank holds different assets and liabilities and the extent of the risk associated with each category of asset and liability.

As discussed in the section on qualitative disclosures, information can be provided on the exposure to interest rate risk as measured by VaR. VaR models predict the loss that would arise on financial assets because of changes in the level of interest rates or foreign currencies. Note 21 provides the RBNZ VaR measures. This information includes the year-end VaR position, internal limits, peak exposure, average exposure, and the lowest exposure. The peak exposure is the maximum VaR position that has arisen during the financial year. Information on the peak, average, and low exposure allows users to understand the extent to which risk limits have been utilized during the period.

Credit risk

The main credit risk disclosures required by IAS 32 include the amount that best represents the maximum credit risk exposure and any significant concentrations of credit risk. The disclosures of significant concentrations of credit risk are similar to the requirements of IAS 30 (para. 40) to disclose significant concentrations of assets and liabilities by geography, customer, industry, or other concentration. From a credit risk perspective, this information assists users to assess the degree of credit exposure a central bank may have to any specific sector. This is important to understand the risks the central bank may face if a particular region/country or industry experiences financial difficulties and was subsequently unable to meet debt obligations. In addition, these disclosures can be used to demonstrate the overall credit quality of the central bank asset portfolio.

The RBNZ example is provided in note 18 (b) which provides credit exposure by industry and geography. Additional quantitative credit exposure information is provided as follows:

  • Credit exposure by credit rating (note 18 (c)). This analysis of financial assets by the credit rating of the issuers allows users to assess the overall credit quality of the RBNZ’s financial assets.

  • Credit exposure by counterparty (note 18 (d)). This includes the number of end-of-year and peak credit exposure to individual counterparties in excess of 10 percent of the RBNZ’s equity. This allows users to assess credit exposure to individual counterparties and obtain an understanding of any large credit exposures. This is more important in a commercial banking environment where users can understand the impact that a default of a single large counterparty would have on the commercial bank’s equity.

Foreign currency risk

IAS 32 does not specifically require disclosure on information concerning foreign currency risk. IAS 30 has a requirement to disclose the amount of significant net foreign currency exposures to provide information regarding the degree of foreign currency risk the entity faces. A significant net foreign currency concentration exposes an entity to the risk arising from changes in foreign currency rates.

The RBNZ provides this information in note 20, including the amount of foreign currency held in each class of foreign currency financial asset and liability.

Fair values

Where assets and liabilities are not reported at fair value on the face of the balance sheet, IAS 32 requires disclosure of their fair value in the notes to the accounts. Where fair values are determined by a valuation technique not supported by observable market prices or rates and changing any valuation assumption would result in a significantly different fair value, disclosure is required including the effect on the fair value of a range of reasonably possible alternative assumptions. For example, this may arise in circumstances where a central bank has a significant holding of financial assets that are not actively traded or where the central bank is essentially the only active price maker. In this circumstance, the range of fair values possible under the different assumptions is required.

The RBNZ fair values are presented in note 14.

Concentrations of funding

IAS 30 requires disclosure of any significant concentrations of liabilities. This provides an indication of the potential risks inherent in a bank’s funding.

The RBNZ discloses this information in note 15.

E. Collateral

An entity’s policies for and extent to which financial assets are pledged or received as collateral can provide important information on the extent to which financial assets may be encumbered or available for other purposes.

IAS 32 requires disclosure of the amount of financial assets pledged as collateral for liabilities or contingent liabilities and any material terms and conditions relating to assets pledged as collateral. Where an entity has accepted collateral that it is permitted to sell or repledge, it shall disclose the fair value of the collateral accepted, sold, and any material terms and conditions associated with its use of this collateral.

Central banks that have pledged financial assets as collateral do not have those assets available for other purposes. For example, in the situation where funds were needed for foreign exchange intervention, any assets pledged as collateral under repurchase transactions would not be available to fund intervention.

The RBNZ provides information on the collateral pledged and received under interest rate swaps, repurchase and reverse repurchase agreements in note 1(f).

F. Offsetting Financial Assets and Liabilities

Readers generally expect financial assets and liabilities to be presented on a gross basis in the balance sheet. This means that assets and liabilities should not be netted against each other for reporting purposes. This approach ensures that the balance sheet presents all the obligations and resources of the entity—netting obligations may understate actual assets and liabilities and misrepresent the underlying economic position.

However, offsetting assets and liabilities is permitted under IAS 32 when the entity has a legally enforceable right to set off the recognized amounts and the entity intends to settle the obligations on a net basis. A legal right of set-off will usually arise under either:

  • contract law—where parties to the agreement explicitly acknowledge a right to set off.

  • common law—through the traditional acceptance of a right of set off and the practice of doing so.

To be recognized in the balance sheet, a legal right of set-off should be enforceable in a liquidation or bankruptcy.

The RBNZ typically follows the strict practice of not setting off assets and liabilities in the balance sheet.

G. Other IAS 32 Disclosure Requirements

IAS 32 has several other disclosure requirements. The RBNZ is not currently affected by the events or activities that give rise to disclosure under these requirements. Therefore, the RBNZ financial statements do not provide examples of these other IAS 32 disclosures. These disclosures arise from the following:

  • Debt/equity classification of financial instruments (IAS 32 paragraphs 15, 26, 28, 33, 35). IAS 32 sets out the classification and disclosure of financial instruments as financial liabilities, financial assets or equity instruments. This includes guidance on how to separately classify and disclose financial instruments in these categories and the treatment of payments arising from the instruments as dividends or interest.

  • Derecognition (IAS 32 para. 94 (a)). Disclosure is required where financial assets have been derecognized when the entity has transferred all or part of a financial asset.

  • Compound financial instruments with multiple embedded derivatives (IAS 32 para. 94(d)). If an entity has issued an instrument that contains both a liability and an equity component and the instrument has embedded derivative features whose values are interdependent, IAS 32 requires disclosure of these features.

  • Disclosure from the application of IAS 39 Financial Instruments: Recognition and Measurement. The disclosure requirements that were previously included in IAS 39 are now part of IAS 32. These disclosure requirements include:

  • IAS 32 para. 58. Information on hedge accounting under IAS 39 including a description of the hedge, the financial instruments designated as hedging instruments, and the nature of risks being hedged.

    • IAS 32 para. 59. Gains or losses on hedging instruments recognized in equity including the amounts recognized in equity for the period and amounts removed from equity.

    • IAS 32 para. 94(e) and 94(f). Information on the carrying amounts of financial assets and liabilities that were designated as held for trading and as financial assets a financial liability at fair value through profit or loss.

    • IAS 32 para. 94(g). The reasons for any reclassification of financial assets as one measured at cost rather than fair value.

    • IAS 32 para. 94(h). Material items of income, expense, and gains and losses resulting from financial assets and financial liabilities, whether included in profit or loss or as a separate component of equity.

    • Impairment (IAS 32 para. 94(i)). The nature and amount of any impairment loss recognized in profit or loss for a financial asset shall be disclosed.

    • Defaults and breaches (IAS 32 para. 94(j)). Information with respect to any defaults of principal or interest, and any other breach during the period of the loan.

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H. Summary

This section has discussed issues for central banks in applying IAS 32. Central banks have an important role in disclosures of financial instruments, since central banks will typically hold significant volumes of financial instruments as part of their operations. Hence, users of central bank financial statements will be concerned with the extent to which the central bank is using financial instruments in appropriate circumstances and that the central banks are appropriately managing the risks that arise from involvement in financial instruments.

Transparent qualitative and quantitative disclosure can demonstrate that the central bank is aware of the risks associated with financial instruments and that these risks are being appropriately managed.

In addition, many central banks have a responsibility for supervision of commercial banks within their countries, including the regulation of commercial bank disclosures. This provides central banks with an opportunity to promote best practice in disclosure concerning financial instruments.

V. IAS 7—Cash Flow Statements18

A. Introduction

This section outlines some of the issues to be considered in the preparation of the statement of cash flows. IAS 7: Cash Flow Statements (IAS 7) requires the presentation of the cash flow statement as an integral part of an entity’s financial statements. Some of the issues that can arise for a central bank include:

  • the purpose of the cash flow statement;

  • how cash should be defined;

  • defining investing and financing cash flows;

  • presentation of gross or net cash flows; and

  • the direct or indirect method of presenting operating activities.

B. Purpose of the Cash Flow Statement

The purpose of the cash flow statement is to help users of financial statements assess an entity’s ability to generate cash flows and the needs of the entity to utilize those cash flows. The cash flow statement is based on the concept that the purpose of a business is to make a profit, realize it in cash, and do this repeatedly. The entity’s cash flows are required to be classified according to the activity that gave rise to them.

  • Operating activities. The principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

  • Investing activities. The acquisition and disposal of long-term assets and other investments not included in cash equivalents.

  • Financing activities. Activities that result in changes in the size and composition of the equity capital and borrowings of the entity.

These classifications can be thought of as an entity raises money (financing activities), invests this money in long-term assets (investing activities), and obtains income and expenses from those assets (operating activities). The cash flow statement shows how the entity generates cash flows and presents information on changes in the entity’s investing and financing structure.

Owing to the definition of cash, a statement of cash flows does not always represent the actual liquidity of a central bank. Moreover, a central bank will often be responsible for issuing circulating currency and managing the liquidity of the domestic banking system. Some commentators consider that these factors reduce the information value of the cash flow statement in the central bank’s circumstances. For example, the Reserve Bank of Australia expresses presentation concerns in the opening introduction to their statement of cash flows:

The following cash flow statement appears as a matter of record to meet the requirements of AAS28; in the RBA’s view, it does not shed any additional light on the RBA’s financial results. For the purpose of this statement, cash includes the notes and coin held at the Reserve Bank and overnight settlement system account balances with other banks.19

The Reserve Bank of New Zealand (RBNZ) experienced similar concerns that resulted in a substantial review of the RBNZ’s cash flow statement to improve the presentation and to ensure the cash flow statement provided an improved indicator of the RBNZ’s liquidity.

In central bank circumstances, the RBNZ view is that the statement of cash flows and related notes to the accounts can be used to provide information on the:

  • Extent to which operating income was generated in cash and the extent to which reported profits are available to distribute as dividends.

  • Cash impact of the major changes in the RBNZ’s balance sheet structure during the financial year by presenting the net cash changes in the major balance sheet categories. This approach is intended to assist the financial statement users understand how cash has been generated and applied to change the RBNZ’s balance sheet structure during the financial year.

  • The liquidity of the RBNZ. This information was only possible following a revision in the RBNZ’s definition of “cash.”

The cash flow statement is likely to be most important in supporting the distribution of central bank profits. Central banks are often confronted with having large unrealized gains that should not be distributed as part of the central bank dividend. The distribution of unrealized gains may have monetary policy implications because the central bank may not hold the liquidity to fund the distribution to the government’s budget. This would result in a monetary emission to the government.

A properly constructed central bank cash flow statement will clearly present cash flows from operating activities, which demonstrates the extent to which the central bank’s current year profit has been converted into cash. This presentation will provide a mechanism to support any decisions not to distribute unrealized profits, as it will illustrate the central bank’s cash position, and where profits have yet been realized as cash. Equally, if the central bank does distribute unrealized gains, these unrealized gains will need to be funded by selling assets (investing activities), issuing currency or borrowing from third parties (financing activities). The cash flow statement will clearly demonstrate how a central bank has funded any distribution of profits.

C. Definition of Cash

Cash is generally defined to include cash on hand, demand deposits, and highly liquid investments that are readily convertible cash and which are subject to an insignificant risk of changes in value. However, due to the high liquidity of most central bank assets, a wide definition of cash could lead to a high proportion of the central bank’s assets being considered cash.

This would mean that the disclosure of cash flows in the investing (how cash has been applied) and financing (how cash has been generated) sections would be contained entirely in the opening and closing cash positions. While this may be a better indicator of a central bank’s liquidity it does reduces the ability of the cash flow statement to accurately provide information on how cash is generated and applied.

The RBNZ approach has been to consider cash as those financial instruments that are highly liquid and are used in the day-to-day cash management of the central bank. This definition has included the highly liquid foreign reserve assets of the RBNZ and local currency financial assets that arise from the RBNZ’s management of the New Zealand Government bank account held with the RBNZ.

The definition of cash ensures that the RBNZ’s cash balances provide an indicator of the actual liquidity of the RBNZ. Previously, the RBNZ defined cash in a way that resulted in a negative cash balance being reported. This approach was not considered to provide a fair presentation of the actual liquidity of the RBNZ.

D. Defining Investing and Financing Cash Flows

IAS 7 suggest presentations of cash flows according to the definitions of operating activities, investing activities, and financing activities. In a central bank, these definitions could be applied as follows:

  • Operating activities. This category includes the main cash revenue and expense flows such as paying and receiving of interest, fee income, and operating expenses. Remaining activities that have not been classified as investing or financing are usually included as operating activities.

  • Investing activities. These comprise investments from monetary policy and foreign reserves operations, any other investment of circulating currency, and the sale and purchase of fixed assets.

  • Financing activities. This includes issue and repayment of circulating currency, loans used to fund long-term borrowings (such as the funding for holdings of foreign reserves or funding from the IMF), and disbursement of the annual dividend.

The effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash at the beginning and the end of the period. This amount is presented separately and includes the differences, if any, had those cash flows been reported at end-of-period exchange rates.

E. Presentation of Gross or Net Cash Flows

Cash flow statements are generally expected to present gross flows of cash. However, cash flows may be reported net when they are on behalf of customers and reflect the activities of customers rather than those of the entity. In addition, cash receipts and payments may be reported net for items in which the turnover is quick, the amounts are large, and the maturities are short.

It is generally accepted that net cash flows are appropriate when the cash movements arise through external factors such as a client depositing funds with a retail financial institution. However, gross cash flows may be more useful to provide a scale of the risks facing the entity either in terms of cash handling (i.e., the business has handled this volume of cash) or in trading activities (i.e., the volume with which a portfolio is bought and sold).

F. Direct and Indirect Methods of Preparation

IAS 7 suggests that entities should report cash flows from operating activities using either the direct or the indirect method. Under the direct method, major classes of gross cash receipts and gross cash payments are disclosed, while the indirect method presents the net profit or loss and adjustments for the effects of noncash transactions including balance date accruals and unrealized gains and losses.

Entities are encouraged to use the direct method because this may provide information useful in estimating future cash flows since it adds new information unavailable from the balance sheet and income statement. In addition, the direct method is considered to best reflect the gross inflows and outflows of cash from operating activities.

G. Summary

A cash flow statement can provide useful information on central bank activities that is not available in other sections of the financial statements. The cash flow statement can be used to assist the financial statement users in understanding how cash has been generated and applied to change the central bank’s balance sheet structure during the financial year and provide an indication of the liquidity of the central bank. Moreover, the cash flow statement provides a basis for understanding the extent to which the central bank profit has been generated in cash and how distributions to government are funded.

APPENDIX I

Summary of IAS Disclosure Requirements20

A. Introduction

This section provides a summary of the detailed IAS disclosure requirements for:

  • IAS 1—Presentation of Financial Statements (IAS 1);

  • IAS 2—Inventories (IAS 2);

  • IAS 7—Cash Flow Statements (IAS 7);

  • IAS 8—Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8);

  • IAS 10—Events after Balance Date (IAS 10);

  • IAS 16—Property, Plant and Equipment (IAS 16);

  • IAS 17—Leases (IAS 17);

  • IAS 18—Revenue (IAS 18);

  • IAS 21—The Effects of Changes in Foreign Exchange Rates (IAS 21);

  • IAS 24—Related Party Disclosures (IAS 24);

  • IAS 30—Disclosures in the Financial Statements of Banks and Similar Financial Institutions (IAS 30);

  • IAS 32—Financial Instruments: Disclosure and Presentation (IAS 32);

  • IAS 37—Provisions, Contingent Liabilities and Contingent Assets (IAS 37); and

  • IAS 39—Financial Instruments: Recognition and Measurement (IAS 39)—effective 1 January 2001.

This section has been designed to assist in the preparation of central bank financial statements in accordance with the requirements of these standards and sets out the disclosure requirements of each standard that is effective for periods beginning on or after January 1, 2005. The section has been set out in the form of a “check-list” to facilitate the review of central bank financial statements against the disclosures required by these IFRS.

The RBNZ’s 2002–03 financial statements are used as a case study for various disclosures. However, it should be noted that:

  • The RBNZ’s financial statements are prepared in accordance with the requirements of New Zealand accounting standards. New Zealand accounting standards and disclosures reflect requirements considered appropriate to the New Zealand legal and economic situation and are not necessarily the same as the requirements of IAS.

  • In addition, the RBNZ’s financial statements contain disclosure requirements required under IFRS. However, the financial statements have not been prepared in accordance with the measurement and recognition requirements of IFRS. Therefore, the disclosures, which are specific to those measurement and recognition requirements, have not been made.

The disclosure examples are referenced as follows:

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B. Contents of Financial Statements
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C. Accounting Policies
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D. Balance Sheet
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E. Income Statement
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F. Statement of Changes in Equity
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G. Cash Flow Statement
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H. Notes to the Accounts (Excluding Accounting Policies)
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APPENDIX II

Reserve Bank of New Zealand—Financial Statements 2002–2003

This appensdix contains pages 49-100 of the Reserve Bank of New Zealand 2003 Annual Report. http://www.rbnz.govt.nz/about/Whatwedo/0094054.html

CONTENTS OF THE FINANCIAL STATEMENTS

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APPENDIX III

IAS 39 Financial Instruments: Recognition and Measurement (Effective January1, 2005)21

A. Introduction

IAS 39 establishes standards for recognizing and measuring information about an entity’s financial assets and financial liabilities. IAS 39 provides clear rules on the circumstances where amortized cost or fair value accounting for financial instruments may be applied. IAS 39 and IAS 32 are the two main standards pertaining to financial instruments. IAS 39 has no disclosure requirements, and it is beyond the scope of this appendix to consider and resolve all the issues involved in applying IAS 39 to central bank circumstances. Therefore, the appendix provides an outline of some of the key requirements of IAS 39 and outlines issues to consider in its application to central banks.

B. Recognition

A financial asset or a financial liability is recognized by an entity on its balance sheet when the entity becomes a party to a contract. The following are some examples:

  • the entity has a legal right to receive, or a legal obligation to pay, cash; or

  • goods and services have been delivered or rendered; or

  • a commitment has been made to purchase or sell a financial asset on a future date at a specified price by a regular way purchase or sale.

Categories of financial assets

IAS 39 identifies four categories of financial assets. These are:

  1. Financial assets at fair value through profit or loss. This includes:

    • Financial assets classified as held for trading assets, which are generally assets, acquired to generate a profit from short-term fluctuations in price. Derivatives are classified as held for trading unless they are designated an effective hedging instrument.

    • Financial assets that are designated by the entity as fair value through profit or loss.

  2. Held-to-maturity investments are non-derivative financial assets with fixed payments and fixed maturity that the entity intends and is able to hold to maturity.

  3. Loans and receivables are nonderivative financial assets with fixed payments that are not quoted in an active market.

  4. Available-for-sale assets are non-derivative financial assets that are designated as available-for-sale or are not classified within the three other categories.

  5. Dummy List

When classifying assets for valuation under IAS 39, central banks need to make decisions reflecting the nature of the asset, the reason for holding it, the nature of any liability it is offsetting, the need to trade the asset against the intention to hold it to maturity, and the profit distribution framework for the bank. IAS 39 limits the scope to transfer assets between categories, since the definitions have been tightened and the available alternative treatments reduced. The presumption now is for a move to fair value accounting with limited exemptions. Fair value captures changes in the value of financial assets in the period they occur, potentially creating greater volatility in the measurement of a bank’s income. Consequently, management of the income statement will require more careful attention to the central bank’s balance sheet.

Trade date versus settlement date

A “regular way” purchase or sale of financial assets should be recognized in the accounting records using trade date accounting or settlement date accounting. The method used is applied consistently for all purchases and sales of financial assets that belong to the same category as outlined above. For this purpose, assets that are held for trading form a separate category from assets designated at fair value through profit and loss.

The trade date is the date an entity commits to purchase or sell an asset. It is the date the entity recognizes the asset to be received and the liability to pay in the future and derecognizes an asset that is sold and recognizes the receivable from the buyer. When the entity uses trade date accounting for financial assets measured at fair value, it will account for any change in the fair value of the assets during the period between the trade date and the settlement date.

The settlement date is the date that the asset is delivered to or by an entity.

C. Measurement
Initial measurement of financial assets and financial liabilities

A financial asset or financial liability is recognized initially by an entity at cost, which is the fair value given for the asset or the fair value received in the case of a liability.

The cost is determined by the transaction price and for financial assets and liabilities, other than those at fair value through profit or loss, includes any transaction costs for fees and commissions paid to agents, brokers, and dealers.

Subsequent measurement of financial assets

After initial recognition, financial assets should be measured at their fair values except for the following categories:

  • loans and receivables;

  • held-to-maturity investments; and

  • investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured.

The published price quotations in an active market are the best evidence of fair value. However, if the market for a financial instrument is not active, an entity establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where a valuation technique is commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the entity will use that technique.

Financial liabilities

Financial liabilities designated as fair value through profit or loss shall be measured at their fair value. All others are valued at amortized cost.

Gains and losses

Fair value through profit or loss. A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be included in profit or loss.

Available-for-sale financial assets. A gain or loss on an available-for-sale financial asset shall be recognized directly in equity, through the statement of changes in equity, except for impairment losses and foreign exchange gains and losses, which one included in profit and loss.

Financial assets and financial liabilities carried at amortized cost. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or financial liability is derecognized or impaired when there is objective evidence that an impairment loss has been incurred. Impairment losses are measured as the difference between the asset’s carrying amount and the present value of expected future cash flows discounted at the financial asset’s original effective interest rate. To recognize the loss, the carrying value of the asset should be reduced to the estimated recoverable amount either directly or through the use of an allowance account. The amount of the loss should be recognized in profit or loss.

The following table summarizes the accounting treatment for measuring financial assets and financial liabilities.

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D. Managing Income
Selecting appropriate asset classifications

One option to reduce income volatility is to classify assets, where appropriate, as being held to maturity. This removes the need to record them at fair value (though fair value disclosure is still required in the notes to the accounts). This will reduce the size of unrealized revaluation gains reported through profit and loss and the related volatility. While the held-to-maturity facility is designed to satisfy the needs of specific types of financial institutions who hold assets to meet specific future liabilities, there is some rationale for central banks to adopt this position for that portion of their portfolio that backs the currency in circulation liability. As a zero-rated liability, the currency in circulation liability has no offsetting valuation movements when interest rates change.

To comply with the held-to-maturity requirements central banks will need to be careful to ensure the criteria of the category it complies with. This may require the division of like securities into separate portfolios to enable differing valuations to be applied to the same security type that may be held for differing purposes. However, it should be noted that IAS 39 prohibits an entity classifying any assets as held to maturity if is sells or transfers more than an insignificant amount of held-to-maturity investments before maturity during the current financial year or during the two preceding financial years.23

An alternative option to minimize the impact of fair value on income is by using the available-for-sale (AFS) classification. The gains and losses on AFS financial assets will not be recognized through profit and loss (with the exception of any foreign currency gains and losses which will be recognized in income under IAS 21).

Impact of classifications on income and reserves

The decision to classify an asset as AFS with unrealized revaluation gains and losses recognized directly in equity raises interesting questions of managing central bank income and the effect of unrealized losses on the central bank’s equity. Taking the revaluations to reserves will reduce the volatility of reported profit. In times of falling interest rates, this will result in a growth of reserves and an effective understatement of economic income. The effect will be to reduce the pool of dividends payable to the government.

Conversely, in a situation of rising interest rates the opposite result will occur. The reserves will accumulate debit balances, eroding capital, while the reported profit will be effectively overstated. The profit for distribution to the government will not be reduced by the amount of the revaluation losses. The result, if the AFS quantity is significant, could be a situation where the government is receiving large profit disbursements from the central bank while it is showing a notional negative capital position. As entities are unable to switch between alternate treatments as circumstances change, central banks will need to think through the issues very carefully regarding what assets they classify as available-for-sale.

Traditionally accounting standards have avoided the maintenance of debit balances within equity accounts. Prudence and the capital maintenance concept required that debit balances should be accounted for through the income statement so to ensure that reductions of capital were resolved before any distributions of dividends occurred. This was reflected in the expectation that where revaluation accounts are maintained they may only exist if they have a credit balance. In the event that the credit balance is written down, any further revaluation losses were to be taken into the income statement.

Impairment of financial assets

IAS 39 requires recognition of impairment losses on financial assets at amortized cost through profit and loss. A financial asset is impaired if its carrying amount exceeds its estimated recoverable amount. The recoverable amount must be estimated if objective evidence exists that suggests an asset is impaired. The excess of carrying amount over the estimated recoverable amount is an impairment loss and is included in profit and loss. The standard discusses the need to recognize impairment of asset values on an individual basis for significant items or on a group basis for minor or residual items. Impairment of financial assets is recognized either through direct write-downs to expenses or indirectly through provisions. Either way the requirement is to report the changes in value arising from impairment through profit and loss. Besides the direct impact that this will have on income recognition, there is now an increased duty to ensure that the loan portfolio is properly managed, valued, and losses provided for. Compliance with IFRS now requires the ability to demonstrate that this management of the loan portfolio is happening.

This strengthened requirement for reporting impairment of loans will assist bank supervisors to develop an appropriate provisioning regime among commercial banks that should be complying with IFRS as a minimum.

This will pose some problems for a number of central banks because of their holdings of nonperforming government debt. A strict adherence to international standards requires the continued accrual of interest on this debt until it is deemed nonperforming. Once it is deemed nonperforming it is possible to stop accruing interest on it but the need then exists to make provisions for its impairment. The problem with a central bank writing off government debt is that it is equivalent to publicly acknowledging government insolvency. While this is politically inexpedient, the alternatives are limited if one wishes to remain in compliance with IFRS. There are obvious incentives here to ensure that governments maintain the integrity of their financial obligations.

The main impact of IAS 39 on profit and loss lies in the move to a wider application of fair value valuation methodology and the consequential requirement to report the majority of these valuation changes through profit and loss. Consequently, central banks will need to pay close attention to the income effects of these changes. Financial assets at fair value through profit and loss must be valued at fair value and the valuation changes taken to income. Holding large portfolios of tradable securities could result in potentially large valuation impacts in profit and loss, especially where no offsetting liabilities exist. This will be problematic if the central bank is unable to exclude unrealized revaluation gains from distribution as dividends. Even if it is able to remove these unrealized gains from distribution, they could introduce volatility to reported income that could result in criticisms of the quality of central bank management. This is particularly so given that central banks are among the architects of the very movements in interest rates that cause the changes in values of the securities. The standard removes the discretion to hold securities for trading but value them at cost or lower of cost and market. The challenge for central banks is to ensure that their balance sheet is appropriately classified so that unnecessary volatility is avoided and the volatility that does occur can be explained.

E. Other IAS 39 Requirements

IAS 39 includes several other measurement and recognition requirements including embedded derivatives and hedge accounting. These are briefly outlined in this section.

Embedded derivatives

IAS 39 contains additional special rules for financial instruments that contain an embedded derivative. This is a derivative contract that is embedded in another contract – the host contract. Examples include convertible debt and prepayment options in mortgages. This requirement is designed to ensure that the recognition of derivatives cannot be avoided by including (embedding) a derivative in a another contract or financial instrument that is accounted for on a different basis to the derivative.

An embedded derivative is required to be separated from its host contract and accounted for separately when its economic characteristics and risks are not closely related to the economic characteristics and risks of the host contract. However, an embedded derivative that is included in a financial asset or liability that is measured at fair value with changes recognized in profit and loss does not have to be separated and measured because the changes in value will be included in the changes of the combined instrument and reported through profit and loss.

Hedge accounting

A significant part of IAS 39 is devoted to detailed rules in relation to the application of hedge accounting. In the absence of applying the hedge accounting rules, all derivative financial instruments must be reported at fair value with the gains and losses recognized directly through profit and loss.

Hedge accounting means designating a hedging instrument, normally a derivative, as an offset to changes in the fair value or cash flows of a hedged item. Nonderivative financial instruments may be used as hedging instruments only in respect of foreign exchange risk. A hedged item can be a recognized asset or liability, an unrecognized firm commitment, a highly probable forecast transaction or a net investment in a foreign operation. Hedge accounting attempts to match the offsetting effects of the hedged items and hedging instrument and recognize them through profit and loss at the same time.

IAS 39 outlines the criteria under which hedge accounting may be applied. The hedge accounting criteria are only permitted when:

  • The hedging relationship is formally designated and documented including identification of the hedging instrument, hedged item, the nature of the risk being hedged, and how the entity will assess the effectiveness of the hedge.

  • The hedge is expected to be highly effective and the effectiveness of the hedge can be reliably measured and tested.

The measurement rules under hedge accounting depend on whether the hedge is considered a fair value hedge or a cash flow hedge, and IAS 39 requires differing treatment depending hedge characteristics.

F. Summary

IAS 39 creates a number of challenges for central banks. These include the classification of financial assets and the application of the complex hedge accounting rules. Central banks will need to carefully plan the application of IAS 39 in conjunction with consideration of the impact on reported equity and distributions of central bank profits. This may require both education of politicians and users of central bank financial statements as to the impact of IAS 39 as well as the development of a robust dividend distribution policy to ensure that central bank capital is not endangered through the distribution of unrealized profits.

APPENDIX IV

IAS 21—The Effect of Changes in Foreign Exchange Rates24

A. Introduction

This standard, while significant in determining how central banks record and value foreign currency transactions within their accounts, has relatively limited effect on the disclosure requirements for a central bank. For central banks, the usual manager of a nation’s foreign exchange reserves, IAS 21 is an important standard. This appendix will summarize the significant accounting treatments prescribed by this standard for central banks and discuss the treatment of foreign exchange revaluation gains and losses before closing, with a summary of the disclosure requirements required under this standard.

B. Required Treatment under IAS 21

All foreign exchange transactions undertaken by the central bank should be recorded at the exchange rate prevailing at the time of the transaction.

Subsequent revaluations of the transactions at the end of the period depend on whether the foreign currency item is classified as a monetary or nonmonetary item.

Monetary items, defined as “money held and assets and liabilities to be received or paid in fixed or determinable amounts of money,”25 are to be revalued at balance sheet dates using the exchange rates prevailing on that date. Nonmonetary items, which are everything else, are not revalued and are reported at the exchange rate prevailing at the time of the transaction.

C. Treatment of Revaluation Gains and Losses

IAS 21 requires all gains and losses on monetary items, both realized and unrealized, to be reported through profit and loss.26 Because of its special role in managing a country’s foreign reserves, a central bank often carries significant open foreign exchange positions that can result in large movements of unrealized revaluation gains and losses. Ideally, the central bank should be able to recognize these revaluation movements in profit and loss but exclude them from considerations of taxable income or for distribution to the government as dividends. This is achieved by allocating them to an unrealized revaluation reserve before arriving at distributable earnings.

Unrealized losses reported through profit and loss could be offset against unrealized revaluation reserves. In the situation where the losses continue once the revaluation reserve has reached a zero balance, the continued accumulation of losses in this reserve will create debit balances that will have the effect of eroding the capital of the bank. This raises a second issue of concern.

Any charge from operations that has the effect of reducing the capital of the bank should be included and disclosed through profit and loss. This is very important because it allows the bank to offset losses against gains before it makes any distributions to the government’s budget. The result is that the bank first applies its net income to maintain its capital value before deciding any distributions.

The automatic accumulation of losses in a revaluation reserve means that the financial statements may not disclose them to bank management, and they may not gain attention until they have seriously eroded the bank’s statutory capital and other reserves. This practice will accelerate the erosion of the bank’s capital because, at the same time that the debit balance is accumulating in the revaluation reserve, the bank is undertaking distributions of income to the government’s budget. This is the same concern as expressed when discussing AFS assets under IAS 39.

A common feature in transition economies is the accumulation of large foreign-currency-denominated liabilities as the nation borrows to stabilize its balance of payments situation. Pressures to devalue the currency usually accompany this. The combination of these two situations produces revaluation losses. To reduce the impact of this on the central bank’s capital they need to be reported through profit and loss rather than assigned to a revaluation reserve.

The provisions of IAS 39 and IAS 21 are different. IAS 39 allows the accumulation of unrealized revaluation gains and losses in reserves for AFS assets without being reported through profit and loss, while IAS 21 requires all revaluation movements to be reported through profit and loss. Best practice remains the adoption of fair value and recognition through profit and loss at the time of revaluation.

D. Disclosure Requirements under IAS 21

The relevant disclosure requirements for central banks relating to holdings of foreign exchange reserves are the:

  • amount of exchange differences included in the profit or loss for the period; and

  • net exchange differences classified as equity as a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.

A significant disclosure requirement for a central bank that is not found in IAS 21 is the requirement in IAS 30 that a “bank should also disclose the amount of significant net foreign currency exposures.”27

Given that central banks usually carry significant levels of foreign currency assets and liabilities, the disclosure requirements of IFRS are inadequate in specifying the full level of disclosures that a reader of a central bank’s financial statements would find relevant. Readers would be interested in information about currency composition, the types of assets and liabilities, and the nature and management of foreign currency risk faced by the central bank. An example of an additional disclosure could be a note reconciling the net foreign currency position reported in the balance sheet with that reported to the IMF in the statement of net international reserves or through the Special Data Dissemination Standard (SDDS). Such a disclosure is found in the notes to the accounts of the National Bank of Ukraine’s financial statements. Other examples of foreign currency holding disclosures can be found in the RBNZ 2003 financial statements included in Appendix II of this publication, in the balance sheet and notes 1, 16, 18, 19, 20, 21, 22, 31, and 37.

There are further disclosure requirements for any entity that holds investments in foreign entities but these are not covered in this appendix because they are a minor issue for only a few central banks.

APPENDIX V

Differences between the Accounting and Reporting Principles in the Eurosystem and the International Financial Reporting Standards (IFRS)28

A. Introduction

The European System of Central Banks (ESCB) is represented by the European Central Bank (ECB) in Frankfurt, Germany, and the 25 National Central Banks (NCBs) participating in the European Union. The Eurosystem consists of the ECB and the 12 NCBs which have adopted the single currency area. For analytical and operational purposes, the ECB must produce a consolidated balance sheet which is an aggregation of the balance sheets of the ECB and the NCBs participating in the Eurosystem. Furthermore, the ECB publishes a consolidated weekly financial statement every Tuesday (after quarter end on Wednesday) reporting the data of the previous Friday.

The statute of the ECB/ESCB requires the Governing Council of the ECB to establish a set of standard rules covering the accounting and reporting of operations undertaken by the central banks participating in the Eurosystem. This ECB Guideline, covering the accounting and reporting regimes, is a legally binding instrument in the European Union. The principles apply to the Eurosystem and therefore are not binding on NCB’s national reports and financial accounts. However, in order to achieve consistency and comparability it is recommended that NCBs should, to the extent possible, adopt these rules, which almost all of the participating NCBs have done since the beginning of the Eurosystem either by legal obligation or on a voluntary basis.

B. General Remarks

The ECB Guideline was originally drawn up for a first-time application from 1999 onwards by an ECB committee representing accounting experts from the central banks of the European Union and the ECB. The European Accounting Directives, the IAS, and Generally Accepted Accounting Principles formed the basis for the considerations. The Guideline intended to establish accounting standards that meet both the specific needs of central bank accounting and the financial reporting requirements of the Eurosystem.

As the economic and financial environment is continually evolving, the ESCB has committed itself to monitor the development of accounting and reporting standards and will review the harmonized provisions in light of changing international standards or other operational needs. Thus the latest revision of the ECB Guideline approved on December 5, 2002, has been effective from January 1, 2003.

The ESCB accounting and reporting principles have a very high degree of compliance with IFRS principles. Those limited areas where the ECB Guideline does not fully follow IFRS are in areas where it was considered that IFRS did not meet specific central bank accounting and reporting requirements. The ECB Guideline focuses on core central bank activities. Therefore, in interpreting this Guideline account shall be taken, amongst other things, of the accounting principles harmonized by EU community law and generally accepted international accounting standards.

The following chapter describes the areas where the ESCB accounting and reporting principles deviate from IFRS. There is no discussion when policies and accounting techniques comply with IFRS or when specific standards of the IFRS framework are not relevant for core central bank activities.

C. References
Accruals—Amortization for Securities

Reference Guideline ECB: Article 11, paragraphs 2 and 3

The ESCB gives detailed definitions about the method of calculation, date of calculation and recording in the accounts. The amortization for securities purchased below or above the nominal value is calculated by use of either the straight line or implicit rate of return method, depending on the type and remaining duration of the securities.

Reference IFRS: IAS 36, paragraph 5; IAS 38, paragraph 7, and IAS 39, paragraph 10

IFRS specifies only terms in accordance with amortization and the basic meanings.

Recognition of Income and Treatment of Unrealized Gains and Losses at Balance Sheet Date

Reference Guideline ECB: Article 11, article 12

These articles specify a separate treatment for gold, each different currency and each different class of security.

Realized gains and realized losses shall be taken to the profit & loss account.

Unrealized gains from price or currency revaluation are posted directly to a revaluation account shown as a liability in the balance sheet. These entries are therefore not recognized as income.

Unrealized losses are recorded to the profit and loss account at year-end when exchange rates and market prices fall below average acquisition cost. Unrealized losses transferred to the profit and loss account are not reversed in following years against new unrealized gains. Unrealized losses in one currency or in a security may not be netted against unrealized gains in another currency or security.

The rationale for this asymmetric treatment is based on the consideration that central banks should not record unrealized gains in the profit and loss account, as they are not seen as distributable until they are realized. Paying dividends by central banks increases liquidity in the financial sector by enlarging the monetary base. Therefore, it is considered inappropriate to distribute unrealized gains as they are not based on a reliable and sustainable increase in the asset side of the central bank’s balance sheet. Underpinning the rationale for this approach is the fact that the central banks of the eurosystem hold substantial risky and generally static portfolios of foreign currency and gold, which are held primarily for monetary policy purposes rather than for trading. Consequently, the IFRS philosophy of recognizing changes in the wealth of an entity in its income statement could lead to significant volatility in central bank profits.

Reference IFRS: Framework, paragraphs 74 to 77 (income), 78 to 80 (expense), 81 (Capital Maintenance Adjustment), 102 to 110 Concepts of Capital and Capital Maintenance

Unrealized gains: follows concept of capital maintenance:

Under this concept, a gain is earned only if the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning of the period (Framework 92 and 94a).

Unrealized losses: Recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (Framework 94).

IAS 21, paragraphs13–16 requires all exchange rate revaluation gains and losses to be reported through profit and loss.

IAS 39 provides a range of valuation options depending on the reason for holding the financial instrument.

Accounting Rules for Off-Balance-Sheet Instruments

Reference Guideline ECB: Article 13 (general rules), article 14 (forward exchange transactions), article 15 (foreign exchange swaps), article 16 (interest futures), article 17 (interest rate swaps), article 18 (forward rate agreements), and article 19 (forward rate transactions in securities).

For all these transactions the ESCB has specified rules how to record the instruments, how to recognize revaluation differences and the treatment of income. All the rules follow the general accounting principles of the ESCB (e.g., revaluation at market values, treatment of realized and unrealized gains and losses, and accruals principle).

Reference IFRS: IAS 39

The IFRS are more prescriptive than ESCB standards. IAS 39 requires that all financial assets and liabilities, including derivatives are recorded in the balance sheet. For financial instruments presented at fair value, the treatment of revaluation differences depends on the purpose of holding.

Hedge Accounting

Reference Guideline ECB: Article 12, paragraph 3 d (relating to FX and gold)

For gold and currencies, a macro hedge concept is applied as all assets and liabilities, and contingent claims and contingent liabilities, are aggregated for each currency when calculating net acquisition cost and resulting realized and unrealized effects.

No hedge accounting is allowed for securities or other financial instruments.

Reference IFRS: IAS 39

IFRS is far more specific than the ECB-Guideline as it allows a greater range of hedging of instruments. It applies strict definition of hedges, hedge effectiveness and requires all hedges to be accounted for at fair value. Hedging in general is dealt within IAS 39 paragraph 121 to 152 while the recognition of gains and losses resulting from hedge relations is covered in paragraph 153 to 164.

Trade Date versus Settlement Date Accounting

Reference Guideline ECB: Article 5, Annex III

The ESCB standards presently allow both trade date or settlement date approaches, provided that financial reporting for the purposes of consolidation is performed adjusted to a settlement basis where relevant. As from 1 January 2007, all NCBs will have to change their accounting systems to trade date recording (economic approach), with the exception of securities transactions. Annex III describes the economic approach in detail.

Reference IFRS: IAS 39

IAS 39, paragraphs 30–34, discusses this issue but accepts recording a transaction on the trade date or settlement date basis.

Reporting Obligations–Format of Balance Sheet and Profit and Loss Account

Reference Guideline ECB: Annex I list the types of financial statements in the Eurosystem, both internal and published. Annex IV relates to the composition of the balance sheet and determines the content of balance sheet items and valuation principles. The formats are laid down as follows:

  • Annex V: Consolidated weekly financial statement of the Eurosystem: format to be used for publication after quarter end

  • Annex VI: Consolidated weekly financial statement of the Eurosystem: format to be used for publication during the quarter

  • Annex VII: Consolidated annual balance sheet of the Eurosystem

  • Annex VIII: Annual balance sheet of a central bank

  • Annex IX: Published profit and loss account of a central bank

Reference IFRS: IAS 30

  • Weekly financial statements are not specified in IFRS. (The Eurosystem publishes them due to a specific requirement of its statute.)

  • Annual balance sheet and annual consolidated balance sheet have a completely different format in comparison to the ESCB rules

  • The ESCB-format of the profit and loss account is similar to IAS 30

The format of the Eurosystem’s weekly financial statement and the annual balance sheet was created to provide the user with a clear picture of the Eurosystem-related ECB monetary policy decisions. The format is structured according to the monetary policy instruments established by the Eurosystem as well as to identify the principal asset and liability groups denominated in gold, foreign currency or in euro. Presentation incorporates a split between assets and liabilities that are held against residents or non-residents of the euro area.

Reporting Obligations—Other Financial Reporting Formats

  • Statement of changes in equity

  • Cash flow statement

These reports are not required under the ESCB rules though they are required under the annual financial statements according to the IFRS framework (IAS1). The ESCB is of the opinion that these two reports do not give any significant or useful additional information to the other existing financial and statistical information provided within the Eurosystem.

Disclosure Notes to the Annual Accounts

Reference Guideline ECB: none

No ESCB regulation exists covering the content of notes to the annual accounts. This means that the NCBs have to follow their own legal requirements that are based on the EC directives.

Most IFRS contain detailed instructions on what information needs to be disclosed either as accounting policies or within the notes to the annual accounts.

This is a significant, but not irreconcilable, area of divergence between ESCB and IFRS reporting requirements. The tendency within the Eurosystem has been to move voluntarily towards greater transparency, in line with international standards, but without being prescriptive. Harmonized disclosure has been agreed for certain components of the balance sheets of the individual Eurosystem central banks where there are links with the balance sheets of other Eurosystem members.

Impairment

Reference Guideline ECB: no specific regulation

In the absence of any detailed regulation, the basic accounting assumptions which are stated in Article 3 of the ECB Guideline may provide some guidance in this respect. Otherwise, NCBs follow national guidelines.

Reference IFRS: IAS 36 and 39

IFRS separated the impairment of financial (IAS 39) and non-financial (IAS 36) assets. Detailed procedures are laid down to ensure that assets are carried at no more than their recoverable amount.

Provision for General Banking Risk

Reference Guideline ECB: Annex IV

Under the ESCB standards, a creation of provisions for exchange and price risk is not excluded (although national arrangements may restrict or prohibit their creation). Although no specific regulation is contained in the ECB Guideline, Annex IV determines how such a provision—if built by a NCB taking into consideration its individual national legal regime— has to be presented in the balance sheet.

Reference IFRS: IAS 30, IAS 37

Under IFRS, a provision for general banking risk is not allowed according to IAS 30 Paragraph 50 to 52 and various paragraphs in IAS 37. Under IAS 39, impairment is an incurred loss basis, which prevents the accumulation of ex ante provisions.

This divergence between IFRS and the ESCB rules may be of relevance regarding risk management. Under the ESCB regime, it will be easier for a central bank to create adequate financial buffers in the case that risks are not sufficiently covered by capital and reserves or revaluation gains recorded in the balance sheet. On the other hand, IFRS focuses more on the relevance of the profit and loss figures.

Events after the Balance Sheet Date

Reference Guideline ECB: Article 3

Reference IFRS: IAS 10

IFRS is far more detailed than the ECB Guideline, which nevertheless follows in principle the same logic as IAS 10.

Recognition of Banknotes and Coins (legal tender)

Reference Guideline ECB: Article 10, Annex IV

Under Article 10, the Guideline gives detailed rules for the calculation of the banknote in circulation item in the balance sheet. Annex IV specifies the presentation of banknotes and coins in the balance sheet. The accounting policies are referring to those banknotes and coins that are legal tender in the member states of the European Monetary Union.

Reference IFRS: no specific regulation

Covered under definition of liabilities in Framework.

Sources:
  • ESCB: Guideline of the European Central Bank of 5 December, 2002 on the Legal Framework for Accounting and Financial Reporting in the European System of Central Banks (ECB/2002/10) as published in the Official Journal of the European Union (L 058 on March 3, 2003).

  • IFRS/IAS: International Financial Reporting Standards/IAS 2004.

1

This Working Paper is based on papers—presented to a central bank accounting workshop held at the Joint Vienna Institute (JVI), Vienna, in April 2000—by Janet Cosier (Bank of Canada), Freidrich Karrer (Austrian National Bank), Richard Perry (Reserve Bank of New Zealand), Arne B. Petersen (IMF), and Kenneth Sullivan (IMF).

2

Available on the IMF external web page, along with the supporting document at www.imf.org/external/np/mae/mft/index.htm.

3

IFRS replaced International Accounting Standards (IAS) as the international accounting framework. IFRS subsume the remaining individual IAS that have not been reviewed and reissued as IFRS.

4

Richard Perry (formerly Reserve Bank of New Zealand) performed the update.

5

Prepared by Arne B. Petersen and Kenneth Sullivan.

6

Prepared by Richard Perry.

7

Section V, “International Accounting Standard 7—Statement of Cash Flows.”

8

See Appendix I, “Summary of International Accounting Standard Disclosure Requirements—IAS 1, IAS 7, IAS 21, IAS 30, IAS 32, and IAS 39.”

9

Prepared by Richard Perry.

10

This includes disclosures previously specified in IAS 39.

11

It is noted that central banks do not typically enter into derivative instruments primarily for speculative purposes. Central bank objectives tend to be more policy-oriented rather than profit-oriented, and derivative instruments are generally used to assist in the risk management of financial assets and liabilities held for policy purposes.

12

See Section III, “Applying IAS 1 and IAS 30 to Central Bank Reporting.”

13

See “Recommendations for public disclosure of trading and derivatives activities of banks and securities firms,” consultative paper issued jointly by the Basel Committee on Banking Supervision and Technical Committee of IOSCO, February 1999, www.iosco.org.

14

Under the securities lending program, the RBNZ contracts an external agent to lend out a portion of the RBNZ’s foreign currency securities. The agent will lend these securities to financial market counterparties in order to generate income. This lending arrangement is completed in accordance with predefined terms and conditions designed to minimize the risks of the arrangements. The external agent and the RBNZ share the income earned through this program.

15

Under a repurchase transaction, the central bank may borrow cash and pledge financial securities as security to the borrowing arrangement. The typical accounting treatment results in the financial securities that have been pledged as security continuing to be recorded as assets in the central bank’s balance sheet.

16

This is further discussed in Appendix III concerning IAS 39: Recognition and Measurement of Financial Instruments.

17

See Section III, “Applying IAS 1 and IAS 30 to Central Bank Reporting.”

18

Prepared by Richard Perry.

19

See note 19 of the Reserve Bank of Australia’s 2003 Financial Statements, www.rba.gov.au

20

Prepared by Richard Perry.

21

Prepared by Janet Cosier and Kenneth Sullivan.

22

Fair value is calculated by published quotations in an active market or using a valuation technique where there is no active market.

23

The are limited circumstances where a sale does not trigger this outcome outlined under IAS 39.

24

Prepared by Kenneth Sullivan.

25

IAS 21, para. 8. Note that this does not include monetary gold.

26

IAS 21, para. 28.

27

IAS 30, para. 40.

28

Prepared by Mr. Friedrich Karrer.

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Transparency in Central Bank Financial Statement Disclosures
Author:
Mr. Kenneth Sullivan