Accounting for Monetary Gold

Monetary authorities, and more specifically central banks, have functional objectives that make existing financial reporting frameworks, designed for commercial entities, difficult to apply when central banks report their performance. Central banks, who are generally long term holders of monetary gold measure success by policy outcomes rather than annual profit, though demonstrating the efficient use of resources is important. Also, central banks hold 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 pose challenges for central banks to use these commercial entity based financial reporting frameworks 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.

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 consistent with how they manage their reserves portfolios.  

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 – has published amendments to IPSAS 41 financial Instruments that reflect the IFRS approach to gold but provide monetary authorities some discretion in accounting for monetary gold. 

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. 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. 

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 and so provides guidance in those situations where its clients find the gold accounting standards inappropriate for their reporting needs. 

The World 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, but does not claim to be a standard setter. 

The Guidance is narrowly defined. It is not intended as a substitute for any reporting framework, only to address issues concerning monetary gold, where central banks find current standards inappropriate. As such, it specifically addresses issues of integration with the central bank’s general reporting framework. IAS 8— Accounting Policies, Changes in Accounting Estimates and Errors provide the basis for any divergence from IFRS in those specific conditions where the standards prevent presentation of a true and fair view. The World Gold Council Guidance specifies the disclosures required to explain the rationale and impact of the departure from the general framework.  

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 appropriate 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.

Besides distributing the Guidance on the internet the World Gold Council presents the guidance at central banking forums in Europe, Asia and Latin America. At these forums it receives 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. As at 2021 the World Gold Council notes that14 monetary authorities follow the principles outlined in the Guidance.