What makes monetary authorities unique with respect to financial reporting?
Monetary authorities, and more specifically central banks, have functional objectives that are difficult to report in an appropriate manner under existing financial reporting frameworks, designed for commercial entities. Central banks measure success by policy outcomes rather than profit, though the efficient use of resources is important. Also, central banks have specific assets and liabilities on their balance sheet that are not held by commercial entities, or which central banks use differently from other entities. For example, currency in circulation, accounting for International Monetary Fund (IMF) membership, and monetary gold are specific items where standard reporting frameworks lack appropriate guidance. Financial assets and liabilities are commonly held for policy purposes rather than for income generation.
The focus of accounting frameworks on annual profit and shareholder wealth makes it difficult for central banks to use financial statements to effectively report their use of resources to achieve the functional objectives mandated in their laws.
Research by the World Gold Council shows that these issues are common to both International Financial Reporting Standards (IFRS) and national accounting frameworks, both widely adopted by central banks. Only the European System of Central Banks (ESCB), the national banks of the eurozone , has developed specific accounting guidelines for central banks.
What is “monetary gold”? How does monetary gold differ from the physical gold that corporate entities, such as a jeweller or a manufacturer for example, might hold?
IFRS considers gold as a commodity. This is appropriate for miners, jewellers and manufacturers, but not for central banks that hold gold as a financial asset within their foreign exchange reserves portfolio. Around 100 central banks hold gold in their foreign reserves portfolios. This gold, provided it meets a specific definition provided by the IMF, is called “monetary gold”. Collectively, monetary authorities are the world’s largest holders of monetary gold and they manage it as part of their foreign reserves portfolio. Consequently, they are looking for an accounting framework that enables them to report the management of their monetary gold holdings using the same method as they do the rest of their reserves portfolios.
What are the objectives of the “Guidance for Monetary Authorities on the recommended practice in accounting for monetary gold”?
As monetary gold is held for similar reasons among all central banks, it seems appropriate for there to be a single method for the accounting and reporting of this asset by central banks. However, an earlier World Gold Council study surveyed 70 central banks holding monetary gold and identified seven different general approaches for accounting for the gold. This makes comparability difficult, while weakening the central banks’ accountability framework.
Secondly, any accounting basis should reflect the functional objectives for holding monetary gold, which is a form of financial asset that is an integral element of their foreign reserves portfolio, rather than as a commodity.
The adoption of a common reporting framework for monetary gold will make it easier for external auditors to accept this divergence from reporting standards without issuing a qualification to the annual audit report.
Finally, the Guidance seeks to enhance the quality of disclosures relating to monetary gold holdings. The original research on monetary gold holdings encountered an uneven level of disclosure regarding monetary gold holdings. This limited the scope for users of the financial statements to understand the rationale for, and details of, central bank gold holdings.
Given that IFRS is already the default accounting standard for many central banks, why is this Guidance necessary?
While many monetary authorities broadly apply IFRS, or national standards based on IFRS, the World Gold Council continues to receive specific queries from central banks regarding the best accounting practices for monetary gold, an asset which currently receives numerous different accounting treatments from monetary authorities. This is because the IFRS reference to gold is inappropriate for central banks. IFRS is designed for commercial entities, and is thus not a perfect fit for central banks. Likewise, International Public Sector Accounting Standards (IPSAS) – the public sector equivalent of IFRS – lacks appropriate guidance of the specific issues confronting central banks. The IPSAS Board published a consultation paper on these issues, that included monetary gold, in 2016, but they have yet to issue any particular standards on this topic.
The ESCB issued their own accounting rules on monetary gold as part of their broader accounting guidelines, since it is an important item in the balance sheets of member central banks and one where a system wide approach was required. These guidelines only apply to the Eurosystem central banks. Hence, those central banks who do not adopt the ESCB’s guidance still face a challenge in finding an appropriate accounting framework to report their holdings of monetary gold in a manner consistent with their functional objectives.
Why can’t all monetary authorities simply follow the ESCB’s accounting guidelines?
The ESCB accounting guidelines are a set of guidelines developed by the European Central Bank and the national central banks of the eurozone to address central bank specific accounting issues necessary for a harmonised approach across the system. The accounting guidelines address a number of issues specific to the eurozone central banks, such as concepts of monetary income from single currency policy related activities. This means they are not easily adopted by other central banks. The World Gold Council’s Guidance is consistent with the principles of the ESCB’s accounting guidelines, though its disclosure requirements are based on those found in IFRS.
What authority does the World Gold Council have to issue accounting-related standards?
The World Gold Council helps create standards across the gold industry in order to improve the integrity, consistency, relevancy and accessibility of the global gold market. Having said that, the World Gold Council is not an international accounting standard-setter.
The Wold Gold Council has received numerous queries from central banks across the globe, seeking guidance with respect to monetary gold accounting – some central banks have even noted that their current accounting policies significantly limit their ability, or willingness, to hold gold as it can lead to the distribution of unrealised gains – a situation which central banks try crucially to avoid. As such, the World Gold Council feels it is necessary to help provide leadership on this important issue.
How do monetary authorities adopt the Guidance within the broader reporting frameworks?
The Guidance is narrowly defined. It is not intended as a substitute for any reporting framework, only to address issues, such as monetary gold, that lack appropriate coverage. As such, it specifically addresses issues of integration with the central bank’s general reporting framework. Accounting frameworks allow divergence from the framework in those specific conditions where the standards prevent a true and fair view. IAS 8 within IFRS is an example of such an allowance and the Guidance specifies the disclosures required to explain the rationale and impact of the departure from the general framework.
Is adoption of this Guidance mandatory? What are the benefits for central banks that adopt the Guidance?
Adoption of the Guidance is at the sole discretion of the monetary authority. As it is guidance, not an accounting standard, there is no element of compulsion.
However, the benefit is that for those monetary authorities whose accounting framework lacks specific standards regarding monetary gold, the adoption of a common treatment for monetary gold provides stronger grounds for auditor acceptance of the treatment for this specific item. The adoption of a common framework for monetary gold will enhance financial statement comparability and accountability.
What has the response been thus far?
Besides distributing the draft Guidance on the internet for comment, the World Gold Council presented the draft at central banking forums in Europe, Asia and Latin America. At these forums it received widespread endorsement along with constructive review comments. It is encouraging that several central banks have seen the value of a common framework, with some currently evaluating plans to adopt the Guidance. Additionally, in drafting the Guidance, the World Gold Council took note of existing central bank practices and 13 monetary authorities already follow the principles outlined in the final Guidance.