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Notes to the Financial Statements for the year ended 31 March 1999

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1.            Accounting Policies

(a)          The financial statements are prepared on a cash basis with all transactions being accounted for on settlement.  Purchases and sales of securities and currencies include purchases of foreign currencies with sterling but they also include inter alia:

• purchases of foreign currency with another foreign currency;
  
  
• placing (purchasing) foreign currency deposits with foreign currency and the maturity of foreign currency deposits for foreign currency;
  
  
• purchases of securities denominated in foreign currency with foreign currency and the sale of such securities for foreign currency.

(b)         Transactions in foreign currency, gold and IMF Special Drawing Rights are translated at the market price or exchange rate ruling at the date of the transactions.

(c)         Stocks of gold held at the year end are valued at 75 per cent of the final London fixing price as at 31 March 1999, the balance sheet date.  This policy has resulted in gold balances at 31 March 1999 being valued at ,129.985 per troy oz.

Foreign currency, and IMF SDRs deposits are translated into sterling at the year end using market exchange rates ruling on the last working day in March.

(d)         Investments are not revalued at the balance sheet date, but are carried at their average historic cost unless determined to have suffered a permanent loss of value in which case they are written off.   No write-offs occurred during 1998-99.   Holdings of foreign currencies are primarily invested in securities.

2.               Transfers of sterling between the EEA and the National Loans Fund

The sterling balance in the EEA is held in cash at the Paymaster General.  When the sterling balance falls it can always be increased by a fresh issue of capital from the NLF under the terms of section 7 of the National Loans Act 1968.  This in turn creates a liability on the EEA to the NLF.  No interest is charged on these liabilities. Conversely, when foreign currency is sold for sterling with the result that the sterling balance is in excess of the EEA’s requirement, the Treasury can decide that some reduction should be made by a transfer from the EEA to the NLF.  This reduces any outstanding liability of the EEA to the NLF.  If there is no outstanding liability the sterling transfer is a >capital repayment'.   During 1998-99 there was a capital repayment to the NLF of £1,880 million (see Note 3 below) and hence there was no liability at the year end.  

Sterling transfers during the year were as follows:

3.               Retained Surplus

4.               Unrealised valuation gains (losses) during the year

Unrealised valuation gains and losses result from movements in sterling against the associated foreign currencies in which the bulk of the EEA’s assets and liabilities are denominated. Such gains and losses result from movements in exchange rates between the date of the original transaction and the balance sheet date.

5.              Uncompleted contracts

At 31 March 1999 there were outstanding commitments valued at ,752m for sale of holdings, resulting from forward sales and unsettled spot transactions.

6.        Exchange cover scheme

The EEA reserves have been partly financed through the Exchange Cover Scheme (ECS).  Under the ECS Local Authorities and Public corporations borrowed in foreign currency and sold the foreign currency to the EEA for sterling.  The EEA is committed to sell back to the Local Authorities the foreign currency that they require to repay their borrowing at the same rate of exchange as when the initial borrowing took place.

For this "exchange cover" the EEA receives as premium all or a greater part of the difference between the rate of interest charged on the foreign currency borrowing and the rate which would have been charged on normal borrowing from the NLF by the body concerned.  Until 1987, borrowers received a percentage of the interest rate difference as a benefit.  If the foreign currency was borrowed at a floating rate of interest, and the rate at any time exceeds the appropriate NLF rate, the EEA pays the difference to the borrower.  No foreign currency borrowing has received exchange cover since 1987 and none is planned.

7.          Administration Costs

The following table sets out the administrative costs of EEA management. The figure given below is the actual amount attributed for the Bank of England's management charges for 1998-99. This differs from the cash payments made in the year, as shown in the Account of Receipts and Payments, which include payments of £2 million in respect of management costs for 1999-2000.

* Total EEA assets at 31 March 1999 as shown in the EEA annual statement of account.

8.         SDRs

The EEA has a liability to pay the IMF for those SDRs which were allocated to the United Kingdom when the United Kingdom became a participant in the Special Drawing Rights Agreement.  Payment would be required at current exchange rates if the United Kingdom withdrew from participation or if the Agreement were wound up.  This liability was valued at £1,612 million at 31 March 1999.

On 7 May 1999, HM Treasury announced a restructuring of the United Kingdom’s official reserves involving a programme of gold auctions.   Over the medium term the Treasury has stated that it is planning to reduce its gold holdings to around 300 tonnes.  in the financial year 1999-2000, the Bank of England sold approximately 125 tonnes on behalf of HM Treasury in a programme of five auctions of 25 tonnes.  On 3 March 2000 HM Treasury announced the sale of a further 150 tonnes of gold during the financial year 2000-01 in a programme of six auctions of 25 tonnes each.   Detailed plans for sales in later years will be announced nearer the time.