Refining central bank gold practices
by Kenneth Sullivan and Robin Darbyshire
Central banks hold large quantities of gold, mostly monetary gold, as part of their foreign reserves, but in other forms as well, such as antiques. Such holdings of public resources require monetary authorities to account appropriately for their gold and related transactions, relating to their accountability to stakeholders.
Since central banks hold monetary gold principally for functional rather than profit-maximising purposes, issues can surface when trying to reflect gold on balance sheets and income statements. In the absence of any ‘standard setting’ body for central banks’ accounting methods, most adopt International Financial Reporting Standards or national accounting standards, often with specific variations for central banks.
The problem with gold arises because IFRS define gold as a commodity, not a financial asset. Although this is appropriate for gold held by the commercial entities for which IFRS are intended, it is not so for central banks. For monetary authorities, gold is a financial instrument, similar to holdings of reserve currencies. To address this problem central banks have adopted a wide array of practices consistent with their own laws and accounting preferences.
Developing a common best practice
A 2016 World Gold Council paper surveyed the various gold accounting processes adopted by central banks and distilled these into seven fundamental approaches. Convergence on a common method to accounting for monetary gold would strengthen accountability, comparability and transparency of central bank reporting while facilitating external auditor agreement on divergence from IFRS or national frameworks.
The WGC has issued a draft guidance note on common best practice on accounting for gold and is holding meetings with central banks. The key issues in gold accounting are whether to hold it on the balance sheet at cost or at market value, and if held at market value how to treat the resulting unrealised revaluation gains and losses to ensure they do not form part of distributable profit.
Consistent with the International Monetary Fund’s balance of payments manual, there is a general preference to report monetary gold in the balance sheet at market (or fair) value rather than cost. Of the 69 central banks covered in the WGC survey, 60 reported gold at fair value. While there is general convergence on recognising gold at fair value, there is none on the appropriate treatment of unrealised revaluations.
Refining reporting frameworks
The WGC accounting guidelines seek to follow IFRS principles as closely as possible, not just on accounting but, more importantly, on disclosure requirements. The guidance recommends that central banks report monetary gold in the balance sheet at market value denominated in their domestic currency, combining the gold price and the dollar exchange rate into a single price. Revaluation gains and losses do not pass through profit and loss, but pass to a separate unrealised revaluation reserve in the balance sheet through ‘other comprehensive income’.
Under this approach unrealised revaluation gains and losses will not form part of distributable profit until disposal of the gold. The disclosure of revaluation movements in ‘other comprehensive income’ is consistent with the need to use this statement to report net movements in balance sheet value. The guidance recommends that revaluation losses should offset balances in the relevant reserve until the reserve is zero, after which the bank offsets revaluation losses against realised profit.
The WGC paper discusses, too, how to price gold. It recommends that the fair value should reflect adjustments for the form and location of the gold, as the standard prices quoted in markets are for gold in a specific form held in a gold market location. The analysis covers the accounting for non-monetary gold and some specific gold transactions such as swaps as well.
The effort to provide a common guidance for monetary gold is an example of a broader discussion of issues central banks have with adopting IFRS which is likely to grow as they seek to refine their reporting frameworks.
Kenneth Sullivan is a Consultant for the World Gold Council. He is former Chief Manager of Accounting and Corporate Services at the Reserve Bank of New Zealand. Robin Darbyshire is an independent consultant and former Financial Accountant at the Bank of England. Back