Balance Sheet as at 30 June 1998

Reserve Bank of Australia

Liabilities 1997 1998

$’000 $’000

Capital 40 000 40 000

Reserves:
Reserve Bank Reserve Fund (Notes 1(f), 3) 2 281 380 2 829 277
Reserve for Contingencies and
General Purposes (Notes 1(f), 3) 3 322 946 3 322 946
Unrealised Profits Reserve (Notes 1(f), 3, 16) 662 430 2 349 036
Asset revaluation reserves (Notes 1(f), 3, 16) 1 728 285 1 287 246

Capital and reserves 8 035 041 9 828 505

Australian notes on issue (Note 1(h)) 20 063 976 21 650 623

Deposits by:
Banks:
Non-callable deposits 4 361 441 4 681 696
Exchange settlement accounts 9 235 175 5 019 291
Government and government instrumentalities:
Commonwealth 5 164 193 755 632
State 317 676 364 918
Foreign governments, foreign institutions
and international organisations 83 213 68 477
Other depositors 120 013 182 668

Other liabilities:
Profit distribution payable to
Commonwealth of Australia 1 700 000 2 725 983
Provisions (Notes 1(g), 4) 77 004 77 944
Other (Note 5) 1 767 359 1 953 837
Total 50 925 091 47 309 574

72
Balance Sheet as at 30 June 1998
Reserve Bank of Australia

Assets 1997 1998

$’000 $’000

Gold and foreign exchange (Note 1(b)):

Gold 1 757 281 1 236 577
Foreign exchange (Note 15) 21 590 124 24 197 457

Domestic government securities (Notes 1(c), 15) 25 406 665 21 012 026

Loans, advances and bills discounted 107 049 95 441

Bank premises and other durable assets

(Notes 1(e), 6) 268 211 273 793

Clearing items (remittances in transit,

cheques and bills of other banks) (Note 7) 1 591 013 284 446

Australian notes and coin 79 040 85 041

Other assets (Note 8) 125 708 124 793

Total 50 925 091 47 309 574

IJ Macfarlane
Chairman, Reserve Bank Board
6 August 1998

73
Profit and Loss Appropriation Statement for year ended 30 June 1998
Reserve Bank of Australia

1997 1998
$’000 $’000

Net Profit* (Note 2) 2 729 677 4 402 977

Net transfers to Unrealised Profits Reserve (Note 3) (662 430) (1 686 606)

Transfer from Asset Revaluation Reserves (Note 3) 1 637 490 557 509
Earnings available for distribution 3 704 737 3 273 880

Reserve Bank Reserve Fund (Note 3) 1 637 490 547 897

Reserve for Contingencies and

General Purposes (Note 3) 367 247 –

Commonwealth of Australia 1 700 000 2 725 983

Total 3 704 737 3 273 880

* The published Profit and Loss Appropriation Account for year ended 30 June 1997
showed Net Profit (after deducting amounts provided for contingencies and general
purposes) as $3 337.5 million. The 1997 Net Profit has been restated to show the effect
of the change in accounting policy on investments; this has resulted in a decrease in the
1997 profit of $607.8 million but has not changed Earnings available for distribution.
Refer to Note 16 for full details.

IJ Macfarlane
Chairman, Reserve Bank Board
6 August 1998

74
Notes To and Forming Part of the Financial Statements
30 June 1998 Reserve Bank of Australia

Note 1 Summary of accounting policies

The financial statements have been prepared in accordance with the Reserve Bank Act and
are based on the form prescribed by the Reserve Bank Regulations. The Bank is now subject
to the Commonwealth Authorities and Companies Act 1997 which came into effect on
1 January 1998. The Bank has prepared its 1997/98 financial statements under the Reserve
Bank Act and the Reserve Bank Regulations as they were immediately before 1 January
1998; this is in accordance with the transitional arrangements under Regulation 27 of the
Audit (Transitional and Miscellaneous) Regulations 1997.
The statements are a general purpose financial report prepared in accordance with
Australian Accounting Standards. Unless otherwise stated, the accounting policies and
practices followed in these statements are consistent with those followed in the previous
year.
All amounts are expressed in Australian dollars unless another currency is indicated.
Current market values are used for the Bank’s major assets, including domestic and foreign
marketable securities, gold and foreign currency, as well as for premises and shares in
international financial institutions. In other cases, an historical cost basis of accounting is
used. Revenue and expenses are brought to account on an accrual basis.
The Bank has changed its accounting policy on the recognition of gains on gold and foreign
exchange, domestic investments and premises. From 1 July 1997 all gains on foreign
exchange and domestic investments are recognised immediately in the profit and loss
account; any unrealised gains are transferred to the Unrealised Profits Reserve and are not
available for distribution to the Commonwealth of Australia until they are actually realised.
Realised profits on gold and premises are no longer recognised in the profit and loss account,
but are now treated as transfers from the relevant asset revaluation reserve. Comparatives
have been restated to take account of the effect of this change in accounting policy. Further
detail on the change in accounting policy and its effect is contained in Note 16.
The Bank does not fall within the definition of a financial institution under AAS 32 Specific
Disclosures by Financial Institutions.
(a) Note Printing Australia The operations of Note Printing Australia (NPA) are
conducted as a separate business enterprise. Up to and including 30 June 1998, NPA was
not a separate legal entity; its assets, liabilities and profit and loss account are included in
the Bank’s financial statements, after elimination of transactions internal to NPA and the
Bank. On 1 July 1998 Note Printing Australia Limited was formed as a wholly owned
subsidiary of the Bank.

75
Note 1 (continued)

(b) Gold and foreign exchange

Gold holdings and gold loans

Gold holdings (including gold on loan to other institutions) are valued at the Australian
dollar equivalent of the 3pm fix in the London gold market on the last business day of
June. The Bank loans gold to financial institutions participating in the gold market. All
gold loans are secured to 110% of their market value by Australian dollar denominated
collateral security. Loans are usually for periods between 3 and 12 months, with very few
extending beyond 12 months. Interest on gold loans is accounted for on a standard
accrual basis.

Foreign exchange
Foreign exchange holdings are invested mainly in securities (issued by the governments
of the United States, Japan and Germany) and bank deposits (with major OECD foreign
commercial banks and central banks). The Bank engages in foreign currency swaps and
interest rate futures.
Assets and liabilities denominated in foreign currency, other than those subject to swap
contracts, are converted to Australian dollar equivalents at exchange rates ruling on the last
business day of June. Realised and unrealised gains or losses on foreign currency are
immediately taken to profit and loss; this is a change in accounting policy – refer to Note 16.

Foreign government securities

Foreign government securities comprise coupon and discount securities and repurchase
agreements. Coupon securities have biannual or annual interest payments depending on
the currency and type of security. Interest earned on discount securities is the difference
between the actual purchase cost and the face value of the security. The face value is
received at maturity. Interest earned on securities is accrued over the term of the
security.
Marketable securities, other than those contracted for sale under repurchase agreements,
are reported at market values on the last business day of June; realised and unrealised
gains and losses arising from changes in market valuations during the year are taken to
the profit and loss account. Earnings on foreign currency investments are converted to
Australian dollars using the exchange rate of the date they are received.

Foreign currency swaps

The Bank uses foreign currency swaps to assist daily domestic liquidity management or to
smooth the impact of other foreign currency transactions on Official Reserve Assets. A
currency swap is the simultaneous purchase and sale of one currency against another
currency for different maturities. The cash flows are the same as when borrowing one
currency for a set period, and lending another currency for the same period. The pricing
of the swap must therefore reflect the interest rates applicable to these money market
transactions. Interest rates are implicit in the swap contract but interest itself is not paid
or received.
Foreign exchange holdings contracted for sale beyond 30 June 1998 (including those
under swap contracts) have been valued at contract exchange rates.

76
Note 1 (continued)

Interest rate futures

The Bank uses interest rate futures contracts on overseas exchanges to hedge its portfolio
of foreign securities. An interest rate futures contract is a contract to buy or sell a specific
amount of securities for a specific price on a specific future date.
Both interest rate futures and foreign currency swaps are off balance sheet items. The
Bank did not trade in any other derivative instruments during 1997/98.
(c) Domestic government securities The Bank holds Commonwealth Government
Bonds, Treasury Notes, Capital Indexed Bonds, and Treasury Adjustable Bonds. It also
holds Australian dollar denominated securities issued by the central borrowing
authorities of State and Territory Governments where these are acquired under
repurchase agreements. Realised and unrealised gains or losses on domestic government
securities are immediately taken to profit and loss; this is a change in accounting policy –
refer to Note 16.
Commonwealth Government Bonds are coupon securities; the interest is payable biannually
at the coupon rate. Commonwealth Treasury Notes are discount securities; the interest
earned is the difference between the purchase price and the face value on redemption.
Capital Indexed Bonds are coupon securities with the nominal value of the security
indexed in line with movements in the consumer price index each quarter until maturity;
interest is paid quarterly. Treasury Adjustable Bonds are securities with a coupon rate
periodically reset by reference to movements in the Australian Bank Bill Swap Reference
Rate; interest is payable each quarter.
Securities are valued at market prices on the last business day of June except when
contracted for sale under repurchase agreements.
(d) Repurchase agreements In the course of its financial market operations, the Bank
engages in repurchase agreements involving foreign and domestic marketable securities.
Securities sold but contracted for purchase under repurchase agreements are reported on
the balance sheet within the relevant investment portfolio and are valued at market
prices; the counterpart obligation to repurchase is included in “Other liabilities”. The
difference between the sale and repurchase price is recognised in the profit and loss
account as an offset to interest income over the term of the agreement.
Securities held but contracted for sale under repurchase agreements are reported within
the relevant investment portfolio at contract amount. The difference between the
purchase and sale price is recognised as interest income over the term of the agreement.
(e) Bank premises and other durable assets A formal valuation of the Bank’s
premises is conducted on a triennial basis. The most recent valuation was at 30 June
1998, when Australian premises were valued by officers of the Australian Valuation
Office and overseas premises were valued by local independent valuers. The valuations
have been incorporated in the accounts.
Valuations are updated annually for developments in the property markets where the
Bank’s assets are held. Annual depreciation is based on market values and assessments of
useful remaining life.

77
Note 1 (continued)

Other durable assets are recorded at cost less depreciation, which is calculated at rates
appropriate to the estimated useful life of the relevant assets. Depreciation rates are
reviewed annually, and adjusted where necessary to reflect the most recent assessments
of the useful life of assets.
In the opinion of the Board, values of durable assets in the financial statements do not
exceed recoverable values.
Details of annual net expenditure, revaluation adjustments and depreciation of these
assets are included in Note 6.
(f) Reserves Reserves are maintained to cover the broad range of risks to which the
Bank is exposed. The Reserve Bank Reserve Fund is a general reserve which provides for
potential losses arising from fraud, support of the financial system and other non-insured
losses. The Treasurer determines each year, after consultation with the Board, the
amount to be credited to the Reserve Fund.
The Reserve for Contingencies and General Purposes provides cover against risks relating
to events which are contingent and non-foreseeable. The major risks in the category arise
from movements in market values of the Bank’s holding of domestic and foreign
securities. Amounts set aside for this Reserve are determined by the Treasurer after
consultation with the Board.
Asset revaluation reserves reflect the impact of changes in the market values of a number
of the Bank’s assets (gold, premises, and shares in international financial institutions).
Due to the change in accounting policy for foreign exchange and domestic government
securities, unrealised gains on these assets are now recognised in the profit and loss
account - refer Note 16. Until such gains are realised, they are not available for
distribution to the Commonwealth of Australia; in the interim the amounts are retained
in the new Unrealised Profits Reserve.
(g) Provisions The Bank maintains provisions for accrued annual leave, calculated on
salaries prevailing at balance date and including associated payroll tax. The Bank also
maintains provisions for long service leave and post-employment benefits, in the form of
health insurance and housing assistance, and associated fringe benefits tax; these
provisions are made on a present value basis in accordance with AAS 30. In addition, the
Bank makes provision for future workers’ compensation claims in respect of incidents
which have occurred before balance date, based on an independent actuarial assessment.
(h) Australian notes on issue The Bank assesses regularly the value of notes still
outstanding at least five years after the note issue ceased which are judged to have been
destroyed and therefore unavailable for presentation. No amount was written off
Australian notes on issue in 1997/98 or 1996/97.

78
 1997 1998
$’000 $’000

Note 2 Net Profits

Revenues
Income from overseas investments (Note 1(b)) 796 962 1 043 284
Gains on overseas investments 65 374 104 497
Income from domestic
government securities (Note 1(c)) 1 615 713 1 059 168
Gains on domestic government securities 394 293 63 811
Gains on foreign currency (Note 1(b)) 555 041 2 467 515
Interest on loans, advances, etc. 4 343 19 776
Net interest from overnight settlements systems 3 319 8 841
Reimbursement by Commonwealth for loan management
and registry expenses 2 698 2 290
Banking services fees received from Commonwealth 14 871 27 509
Income from rental of Bank premises
(incl. cleaning/maintenance fees) 5 721 6 660
Commission on gold loans 35 125 21 277
Sales of numismatic and other note products 17 049 25 030
Earnings on shares in Bank for
International Settlements (Note 8) 2 067 2 541
Gain on sale of durable assets – 1 125
Maintenance of Value payment from
International Monetary Fund 19 147 –
Other 17 148 25 226
Total Revenues 3 548 871 4 878 550

Less: Expenses
Interest on deposit liabilities 628 310 248 025
Staff costs 119 354 101 866
Special redundancy/retirement payments (Note 10) 12 912 29 684
Depreciation of Bank premises (Note 6) 7 091 7 145
Depreciation of durable assets (Note 6) 6 864 6 547
Premises 10 467 11 764
Equipment 11 281 13 150
Stores and stationery 1 280 1 048
Materials used in note production 9 469 16 577
Travel 1 706 2 245
Consultants’ fees (Note 12) 1 672 2 129
Telecommunications 1 320 1 808
Reference materials 1 881 2 012
Maintenance of Value payment to
International Monetary Fund – 14 628
Other 5 587 16 945
Total Expenses 819 194 475 573
Net Profit 2 729 677 4 402 977

79
 1997 1998
$’000 $’000

Note 3 Reserves
Changes in the Bank’s various Reserves are shown below.

Reserve Bank Reserve Fund (Note 1(f))

Opening balance 643 890 2 281 380

Appropriation from profits in terms of section 30

of the Reserve Bank Act 1 637 490 547 897
As at 30 June 2 281 380 2 829 277

Reserve for Contingencies and General Purposes

(Note 1(f))

Opening balance 2 955 699 3 322 946

Appropriation from profits in terms of section 30

of the Reserve Bank Act 367 247 –
As at 30 June 3 322 946 3 322 946

Unrealised Profits Reserve (Notes 1(f), 16)

Opening Balance – 662 430

Net transfers from Profit and Loss Appropriation 662 430 1 686 606
As at 30 June 662 430 2 349 036

Asset Revaluation Reserves (Notes 1(f), 16)

Gold

Opening balance 3 472 670 1 588 663

Net revaluation adjustments (246 517) 88 766

Transfers to Profit and Loss Appropriation

– realised (gains)/losses (1 637 490) (547 897)
As at 30 June 1 588 663 1 129 532

80
 1997 1998
$’000 $’000

Note 3 (continued)

Shares in international financial institutions (Note 8)

Opening balance 75 510 68 198

Net revaluation adjustments (7 312) 9 117

As at 30 June 68 198 77 315

Bank premises (Notes 1(e), 6)

Opening balance 57 953 71 424

Net revaluation adjustments 13 471 18 587

Transfers to Profit and Loss Appropriation

– realised (gains)/losses – (9 612)
As at 30 June 71 424 80 399

Total Asset Revaluation Reserves

Opening balance 3 606 133 1 728 285

Net revaluation adjustments (240 358) 116 470

Transfers to Profit and Loss Appropriation
– realised (gains)/losses (1 637 490) (557 509)
As at 30 June 1 728 285 1 287 246

81
 1997 1998
$’000 $’000

Note 4 Other liabilities – provisions (Note 1(g))

Salaries and wages accrued 2 513 1 667
Provision for accrued annual leave 8 073 7 282
Provision for long service leave 23 908 21 667
Provision for post-employment benefits 42 140 46 628
Provision for workers’ compensation 370 700
As at 30 June 77 004 77 944

Note 5 Other liabilities – other

Amounts outstanding under repurchase agreements
(contract price) (Note 1(d)) 1 521 497 1 887 117
Remittances in transit 173 113 5 051
Interest accrued on deposits 56 012 27 848
Other 16 737 33 821
As at 30 June 1 767 359 1 953 837

Note 6 Bank premises and other durable assets

(Note 1(e))
Premises
Opening balance 232 669 238 920
Net expenditure in year (129) 198
Disposals – (6 856)
232 540 232 262
Depreciation prior to revaluation (7 091) (7 145)
Book valuation prior to revaluation 225 449 225 117
Net revaluation adjustments (Note 3) 13 471 18 587
As at 30 June 238 920 243 704

The triennial revaluation of Bank premises occurred at 30 June 1998.

Other durable assets

Opening balance 95 350 97 838
Additions less disposals 2 488 5 176
97 838 103 014
Accumulated depreciation (68 547) (72 925)
As at 30 June 29 291 30 089

82
 1997 1998
$’000 $’000

Note 7 Clearing items

This includes net amounts of $284 million owed to the Bank for overnight clearances of
financial transactions through the clearing houses, Austraclear and Reserve Bank
Information and Transfer System (RITS). (An amount of $1 591 million was owed to the
Bank at 30 June 1997.)

Note 8 Other assets

Shareholding in Bank for International Settlements 70 532 79 649
Gold coin 14 976 16 117
Other 40 200 29 027
As at 30 June 125 708 124 793

Note 9 Contingent liabilities and other items not included in the balance sheet
Contingencies
The Bank has a contingent liability, amounting to $67.6 million at 30 June 1998
($62.8 million at 30 June 1997), in respect of the uncalled portion of its shares held in
the Bank for International Settlements.
In the course of providing banking services to its customers, the Bank provides performance
guarantees to third parties in relation to customer activities. Such exposure is not material
and has not given rise to losses in the past.

Other items
The Reserve Bank is a respondent on appeal from a judgement given in the Bank’s favour
by the Federal Court. The Bank is a defendant in two common law matters. The Bank is
an appellant in a case regarding a payroll tax assessment and is a respondent and third
party before the Administrative Appeals Tribunal in two matters concerning workers’
compensation. All cases in which the Bank is defendant or respondent are being
defended, and none is judged likely to have a materially adverse effect on the activities,
financial condition or operating results of the Bank.
In keeping with Commonwealth Government policy, the Bank carries its own insurance
risks except where administrative costs are estimated to be excessive. Experience with
self insurance claims is as follows:

Number of Claims on Bank

1997 1998

0 – $10 000 64 32
$10 001 – $20 000 1 –
$20 001 – $30 000 – 3
$40 001 – $50 000 1 –

83
Note 10 Special redundancy/retirement payments
The Bank’s expenses in 1997/98 include $29.7 million paid or payable to, or on behalf of,
staff who accepted special redundancy/retirement offers. Corresponding payments in
1996/97 totalled $12.9 million. Staff leaving the Bank in 1997/98 under these arrangements
numbered 249 (195 in 1996/97).

Note 11 Cost of executives

The number of executives whose remuneration “packages”, measured in terms of costs to
the Bank, fell within the following bands was:

Remuneration band Number Number

1997 1998

$100 000 – $109 999 1 1

$120 000 – $129 999 6 2
$130 000 – $139 999 5 7
$140 000 – $149 999 4 3
$150 000 – $159 999 2 4
$160 000 – $169 999 1
$170 000 – $179 999 1 2
$180 000 – $189 999 6 2
$190 000 – $199 999 3 4
$200 000 – $209 999 1
$220 000 – $229 999 2 2
$230 000 – $239 999 1 3
$240 000 – $249 999 1 2
$250 000 – $259 999 1
$260 000 – $269 999 1
$280 000 – $289 999 1
$290 000 – $299 999 1
$330 000 – $339 999 1
$340 000 – $349 999 2
$380 000 – $389 999 1
$400 000 – $409 999 1*
$430 000 – $439 999 1

* Less than full year at relevant salary level.

Total remuneration received or due and receivable by these executives amounted to $7.021
million ($7.435 million in 1996/97). Remuneration includes cash salary, the Bank’s
contribution to superannuation, housing assistance, motor vehicles and health insurance
and the fringe benefits tax paid or payable on these benefits.

84
Note 12 Remuneration of auditor
Fees paid or payable to the statutory auditor (Auditor-General of the Commonwealth of
Australia) for audit services to the Bank totalled $307 000 in 1997/98 ($295 000 in
1996/97). They are included in “Consultants’ fees” in Note 2, which also covers legal fees
and payments made to specialists for “review and advice” services.

Note 13 Related party and other disclosures

The Remuneration Tribunal determines the remuneration appropriate to the Bank’s non-
executive Board members. In 1997/98, payments totalled $174 782 ($181 804 in 1996/97).
In addition, $40 853 was paid for the services of members of the Board of Note Printing
Australia, who are not employees of the Bank ($39 523 in 1996/97).
Payments made by the Bank to a prescribed superannuation fund in connection with the
retirement of members of the Board totalled $61 702 in 1997/98 ($367 011 in 1996/97) and
are included in staff costs in Note 2. They represent payments made in respect of executive
members of the Board on the same bases as for other employees, and for non-executive
members in terms of the Superannuation Guarantee Charge.
The Bank is not empowered to lend to non-executive members of the Board. Loans to the
Governor and Deputy Governors are permitted only in terms of section 71 of the Reserve
Bank Act; at 30 June 1998, there are three such loans (aggregating to $378 260 (three loans
aggregating to $433 340 at 30 June 1997)) which have been made for homes in which the
officers reside, and are on the same terms and conditions as for other officers of the Bank.
There were no other related-party transactions with Board members; transactions with
director-related entities which occurred in the normal course of the Bank’s operations were
conducted on terms no more favourable than similar transactions with other employees or
customers.

Superannuation funds
Two superannuation funds are operated pursuant to the Reserve Bank Act: the Reserve
Bank of Australia Officers’ Superannuation Fund (OSF) and the Reserve Bank of Australia
UK Pension Scheme. A small part of the assets of the OSF are held by the Bank as nominee
for the trustees of the OSF; such assets are not included in these statements. Payment of
the funds’ current and future benefits is funded by member and Bank contributions and the
funds’ existing asset bases. The Bank’s contributions to the OSF in accordance with the
Reserve Bank (Officers’ Superannuation) Rules, and to the UK Pension Scheme in
accordance with the UK Trust Deed, are included in staff costs in Note 2. Administration
and other operational costs (eg salaries, overheads, legal costs and valuation fees) incurred
by the Bank for superannuation arrangements are also included in Note 2. There were no
other related-party transactions between the Bank and the funds during 1997/98.
At 30 June 1998, the OSF had a surplus of assets over accrued benefits of $158 million
($160 million at 30 June 1997). The UK Pension Scheme had a surplus equivalent to $6.7
million ($3.0 million at 30 June 1997). During 1997/98, the Bank made superannuation
contributions of $3.3 million ($5.4 million in 1996/97).

85
Note 13 (continued)

Details of the Funds as at 30 June 1998 are as follows:

1997 1998
$’000 $’000

Reserve Bank Officers’ Superannuation Fund

Accrued benefits 446 361 410 606
Net market value of assets 606 729 568 889
Surplus 160 368 158 283
Vested benefits 448 079 414 171

Reserve Bank of Australia UK Pension Scheme

Accrued benefits 15 560 18 392
Net market value of assets 18 588 25 153
Surplus 3 028 6 761
Vested benefits 16 615 20 921

Total Superannuation Funds

Accrued benefits 461 921 428 998
Net market value of assets 625 317 594 042
Surplus 163 396 165 044
Vested benefits 464 694 435 092

Accrued benefits refer to the present value of future benefits payable to current fund
members, taking into account assumed future salary increases. Vested benefits are the
benefits payable if all current members were to terminate their fund membership at
balance date.

Note 14 Segment reporting

The Bank operates as a central bank, predominantly in one geographical area.

86
Note 15 – Financial instruments
Australian Accounting Standard AAS 33 Presentation & Disclosure of Financial
Instruments applies to reporting periods from 31 December 1997 and is applicable to the
Bank for the first time in the 1997/98 Financial Statements. The standard requires
disclosure of information relating to both recognised and unrecognised financial
instruments; their significance and performance; accounting policy terms and conditions;
net fair values; and risk information.
A financial instrument is defined as any contract that gives rise to both a financial asset of
one entity and a financial liability or equity instrument of another entity. The identifiable
financial instruments for the Bank are its domestic government securities, its foreign
government securities, bank deposits, interest rate futures, foreign currency swap contracts,
gold loans, notes on issue and deposit liabilities.
Net fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction, and is usually
determined by the quoted market price net of transaction costs. All of the Bank’s recognised
financial instruments are carried at current market value which approximates net fair value.
Financial risk of financial instruments embodies price risk (currency risk and interest rate
risk); credit risk; liquidity risk; and cash flow risk. AAS 33 requires disclosure on interest
rate risk and credit risk.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to
changes in market interest rates. The following table shows the Bank’s balance sheet
restated in compliance with AAS 33.

87
Note 15 (continued)

Interest rate risk

As at 30 June 1998

Balance Floating Repricing Period Not Weighted

Sheet Interest $ million Bearing Average
Total Rate 0 to 3 3 to 12 1 to 5 Over Interest Rate
$ million $ million months months years 5 years $ million %

Assets
Gold
Gold loans 1 145 – 587 372 186 – – 1.8
Gold holdings 92 – – – – – 92 n/a
1 237

Foreign Exchange
Securities sold under
repurchase agreements 1 405 – 161 – 228 1 016 – 5.2
Securities purchased under
repurchase agreements 9 969 – 9 969 – – – – 4.7
Deposits and other securities 12 656 – 4 323 2 225 3 524 2 317 267 4.3
Accrued interest
foreign exchange 167 – – – – – 167 n/a
24 197

Domestic Government
Securities
Securities sold under
repurchase agreements 445 – – – 164 281 – 5.4
Securities purchased under
repurchase agreements 9 094 – 9 094 – – – – 5.0
Other securities 11 296 – 4 076 4 047 1 772 1 401 – 5.0
Accrued interest domestic
government securities 177 – – – – – 177 n/a
21 012

Loans advances and

bills discounted 96 78 – – – – 18 3.4
Bank premises and
other durable assets 274 – – – – – 274 n/a
Clearing items 284 – – – – – 284 n/a
Australian notes and coin 85 – – – – – 85 n/a
Other assets 125 – – – – – 125 n/a
Total Assets 47 310 78 28 210 6 644 5 874 5 015 1 489 4.6

88
Note 15 (continued)

Interest rate risk (continued)

As at 30 June 1998

Balance Floating Repricing Period Not Weighted

Sheet Interest $ million Bearing Average
Total Rate 0 to 3 3 to 12 1 to 5 Over Interest Rate
$ million $ million months months years 5 years $ million %

Liabilities
Australian notes on issue 21 651 – – – – – 21 651 n/a
Deposits 11 073 11 073 – – – – – 2.7
Profit distribution 2 726 – – – – – 2 726 n/a
Provisions 78 – – – – – 78 n/a
Other 1 953 – 1 887 – – – 66 4.3
Total Liabilities 37 481 11 073 1 887 – – – 24 521 1.0

Capital and Reserves 9 829 – – – – – – n/a

Total
Balance Sheet 47 310

Off Balance Sheet Items

Interest Rate Futures* (1 864) – (877) – – (987) – n/a

Other liabilities includes amounts outstanding under Sale Repurchase Agreements.

All recognised financial instruments are shown at net fair value.
Off balance sheet items are shown at nominal market value (difference from net fair value is negligible).
All financial instruments are shown at their repricing period. Repricing period is equivalent to maturity
period except for some holdings of domestic government securities (which appear in the 0 to 3 months
category):
Approximately $1.7 billion has a maturity period of 1 to 5 years
Approximately $90 million has a maturity period of over 5 years.

* Interest rate futures reflect short positions in interest rate contracts traded in foreign futures
exchanges to manage interest rate risk on Official Reserve Assets.
Credit risk
Credit risk in relation to a financial instrument is the risk that a third party (customer, bank or other
counterparty) will not meet its obligations (or be permitted to meet them) in accordance with agreed terms.
The Bank’s maximum exposure to credit risk in relation to each class of recognised financial assets, other
than derivatives (off balance sheet items) is the carrying amount of those assets as indicated in the
balance sheet. The Bank’s exposures are all to highly rated counterparties and its credit risk is very low.
As part of an IMF support package during 1997/98 the Bank undertook a series of foreign currency
swaps with the Bank of Thailand. The Bank provided United States dollars, receiving Thai Baht in
exchange. The amount outstanding on the swaps at 30 June 1998 was the equivalent of 1.2 billion
Australian dollars, on which the Bank is earning a yield of 5.33%. The swaps represent 2.5% of the
Bank’s total assets as at 30 June 1998.

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Note 15 (continued)

The Bank’s maximum credit risk exposure in relation to off balance sheet items is:
Foreign exchange swaps As at 30 June 1998 the Bank was under contract to purchase $6.5 billion of
foreign currency and sell $14.2 billion of foreign currency. As of that date there was an unrealised net
gain of $79.8 million on these swap positions. The credit risk exposure of these contracts is the cost of
re-establishing the contract in the market in the event of the failure of the counterparty to fulfil their
obligations.
Interest rate futures As at 30 June 1998 about 9% of the Bank’s foreign currency reserves (excluding
gold) were hedged through interest rate futures contracts. The amount of credit risk on these contracts
is approximately $9.3 million. As at 30 June 1998 there was an unrealised gain on those contracts of
$1.4 million.
Concentration of credit risk
The Bank operates to minimise its credit risk exposure through comprehensive risk management policy
guidelines. The following table indicates the concentration of credit risk in the Bank’s investment
portfolio. See Notes 1(b), 1(c) and 1(d).

Credit Risk Table

Security type Risk rating Risk rating % of

of security of total asset
issuer* counterparties* portfolio

Domestic government securities

Holdings of Commonwealth Government Securities AAA n/a 24.2
Securities sold under repurchase agreements AAA AAA 0.2
AAA AA 0.5
AAA other 0.3
Securities held under repurchase agreements AAA AAA 3.6
AAA AA 10.0
AAA other 2.7
AA AAA 0.1
AA AA 2.1
AA other 0.7
other other 0.2
Foreign investments
Holdings of securities AAA n/a 18.1
Securities sold under repurchase agreements AAA AA 2.6
AAA other 0.5
Securities held under repurchase agreements AAA AA 13.4
AAA other 9.5
Deposits n/a AAA 0.6
n/a AA 4.2
n/a other 2.5
Gold loans n/a AAA 0.3
n/a AA 0.7
n/a other 1.4
Other 1.6
100
* Standard & Poor’s ratings

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Note 16 Change in accounting policy – investments
During 1997/98 the Bank conducted a detailed accounting review of the makeup,
conditions and turnover associated with the domestic government securities portfolio; the
results of this review were:
• the portfolio is now more actively managed;
• there are no explicit restrictions on the Bank taking profit when the opportunity exists,
provided this is within the overall broader monetary policy framework of the Bank;
• there is regular movement and turnover in the portfolio;
• the securities are marketable securities.
Based on the results of this review the Bank has determined that the domestic government
securities portfolio ought to be treated as current assets. From 1 July 1997, the Bank has
therefore commenced accounting for all gains, both realised and unrealised, through the
Profit and Loss Account. This change also results in domestic government securities being
accounted for on a consistent basis with foreign exchange investments, and thus lends
clarity and transparency to the financial statements.
Up to and including 1996/97 unrealised gains/losses on investments (gold and foreign
exchange and domestic government securities) were passed to/from revaluation reserves
provided market price was greater than cost. The accounting policies included treating
domestic government securities as non-current assets. That part of the Investments
Revaluation Reserve and/or Foreign Currency Revaluation Reserve relating to investments
and/or currencies disposed of in the course of the financial year was transferred to the Profit
and Loss Account for inclusion in the calculation of net operating earnings. This treatment
allowed all realised gains to be distributed in terms of the Reserve Bank Act.
With recent changes to the Reserve Bank Act, the Bank is now required to retain unrealised
gains until they are actually realised, and this had made possible the recognition of gains
during the year in the profit and loss account. As of 1 July 1997, the Bank made the
following changes to its accounting policy for investments:
• Foreign exchange investments are now accounted for in terms of AAS 20 – all gains and
losses are recognised in the profit and loss account when they arise;
• Gold investments are now accounted for in terms of AAS 10 – the Bank will continue to
use an asset revaluation reserve to recognise unrealised gains, and transfer any realised
gains to the Profit and Loss Appropriation Account;
• Domestic investments – all gains and losses are recognised in the profit and loss account
when they arise.
The following table shows the effect of the change in accounting policy on the 1997
published figures.

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 $’000 $’000

Asset Revaluation Reserves

As published at 30 June 1997 2 390 715
Transfer to Profit and Loss Account of unrealised
gains due to change in accounting policy
Foreign currency (428 194)
Foreign investments (22 764)
Domestic investments (211 472) (662 430)
Restated as at 30 June 1997 1 728 285

Net Profit
As published at 30 June 1997 (before transfer to
Reserve for Contingencies and General Purposes) 3 704 737
Add transfer of unrealised gains from Asset
Revaluation Reserves due to change in accounting
policy
Foreign currency 428 194
Foreign investments 22 764
Domestic investments 211 472 662 430
Less transfer to Profit and Loss Appropriation of
realised profits on gold sales, due to change in
accounting policy (1 637 490)
Restated as at 30 June 1997 2 729 677

Profit and Loss Appropriation Account

Restated Net Profit at 30 June 1997 2 729 677
Transfer to Unrealised Profits Reserve due to change
in accounting policy (662 430)
Transfer from Profit and Loss Account of realised
profit on gold sales due to change in accounting
policy 1 637 490
Available for distribution at 30 June 1997 (unchanged) 3 704 737

Net Profits appropriated as follows:

Reserve for Contingencies and General Purposes
(amount unchanged, but previously disclosed at end
of Note 2) 367 247
Reserve Bank Reserve Fund (unchanged) 1 637 490
Commonwealth of Australia (unchanged) 1 700 000
Total 3 704 737

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Note 17 Cash flow statement

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

Statement of Cash Flows for the financial year ended 30 June 1998

1997 1998
Inflow/(outflow) Inflow/(outflow)
$’000 $’000

Cash flow from operating activities

Interest received on investments 2 164 899 2 449 953
Interest received on loans, advances, etc.
and on net overnight settlements systems 7 527 29 262
Loan management reimbursement 2 698 2 290
Banking service fees received
from Commonwealth 13 763 16 038
Rents received 5 721 6 660
Net payments for and proceeds from
sale of investments (14 037 063) 4 435 389
Interest paid on deposit liabilities (592 125) (276 189)
Staff costs (including redundancy) (120 103) (130 609)
IMF Maintenance of Value adjustment 61 998 20 004
Premises, equipment and stores (22 851) (26 138)
Other 38 006 35 543
Net cash provided by operating activities (12 477 530) 6 562 203

Cash flows from investment activities

Net expenditure on premises and
durable assets (9 996) (687)
Net cash used in investing activities (9 996) (687)

Cash flows from financing activities

Profit payment to Commonwealth (2 135 807) (1 700 000)
Net movement in clearing items 89 –
Net movement in deposit liabilities 11 962 727 (8 209 029)
Net movement in Special Reserve
– IMF SDRs (15 470) –
Net movement in loans and advances (8 619) 11 533
Net movement in notes on issue 882 044 1 586 647
Proceeds from gold sales 1 822 749 608 327
Other 198 392 (159 560)
Net cash provided by financing activities 12 706 105 (7 862 082)
Net increase/(decrease) in cash 218 579 (1 300 566)
Cash at beginning of financial year 1 451 474 1 670 053
Cash at end of financial year 1 670 053 369 487

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Note 17 (continued)

Reconciliation of Cash 1997 1998

$’000 $’000

Cash 79 040 85 041

Overnight settlements system 1 591 013 284 446
1 670 053 369 487

Reconciliation of net cash provided by

operating activities to Net Profit 1997 1998
$’000 $’000

Net Profit 2 729 677 4 402 977

Increase in interest payable 36 185 (28 164)
Increase in interest receivable (135) 645
Gain on sale of foreign currency (126 847) (830 263)
Gain on sale of investments (225 431) (118 953)
Unrealised gains on investments (662 430) (1 686 606)
Increase in income accrued on investments (247 776) 347 502
Depreciation of Bank premises 7 091 7 145
Depreciation of durable assets 6 864 6 547
IMF Maintenance of Value adjustment
(including accrual to end June) 42 851 34 632
Net payments for and proceeds from sale
of domestic and foreign investments (14 037 063) 4 435 389
Other (516) (8 648)
Net cash provided by operating activities (12 477 530) 6 562 203

IJ Macfarlane
Chairman, Reserve Bank Board
6 August 1998

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