Fundamental Principles of Central Bank Financial Reporting: A Preliminary Study in SEACEN Economies

The central bank’s objective is to achieve monetary stability. In achieving its objectives, central banks conduct monetary transactions with different objectives than commercial entities. The central bank may hold a large number of financial instruments, both in domestic currency and foreign currencies. While the financial instruments possessed by the central bank may have similar features as those owned by commercial entities, they are intended for policy implementation instead of for profit creation.The financial statements of the central bank should be interpreted as a whole in relation to the achievement of central bank objectives. Thus, central bank financial statements are not meant for decision-making on investments by stakeholders. The difference in financial reporting purposes may raise the question as to whether the accounting standards for commercial entities, such as IFRS, is suitable for central banks. This paper shows in general, the choice of central bank financial reporting framework is defined by the function, ownership or accountability of central bank. The central bank is a unique not-for-profit entity; therefore, profits are not a measure of central bank performance. As a tool of accountability, financial statements of a central bank should be reliable and understandable. Despite limitations of the IFRS, many central banks have opted to use the IFRS because of the absence of central bank-specialized accounting standards. Some institutions have employed either national accounting standards, central bank-specific standards, or some combination thereof. This study was conducted to shed light on central bank accounting practices and focuses on SEACEN central banks and their roles, financial reporting practices and the users' perspective on the central bank financial statements. In terms of financial reporting, consistent with previous research, the study found that there are variations in financial reporting framework used by central banks in the SEACEN economies. 42% of central banks have establish their own accounting standards while the other 42% adopt the IFRS fully. In between, 16 % adopt the IFRS or national IFRS with modifications. The study suggests that there is a different emphasis on the importance of each component of financial statements. It is noted that several central banks, even one which applies the IFRS, opt not to present the statement of cash flows. In the case of a central bank using an accounting framework that significantly departs from the IFRS or modified-IFRS standard, there are some main key departures, which includes the effect of changes of foreign exchanges, subsequent measurement of financial assets, and measurement of FX Swap for monetary operations. The study also found that there are different views of users whether the bottom line of the central bank's financial statements is important. Nevertheless, they agree that accounting standards should be applied able to support the stability of income.