Professional services initiative: World Gold Council

Managing the nuanced tensions that exist between the central bank community, global accounting standards and the world’s largest auditing companies is an unenviable job that few entities would voluntarily take on. Faced with a very specific challenge, however, the World Gold Council has successfully stepped into these uncharted waters during the past year.

In February 2018, the WGC published guidance for monetary authorities on the recommended practice in accounting for monetary gold. This fairly brief technical document may not sound like the most ground-breaking of initiatives, and it has yet to be widely adopted, but it does represent an important step forward in solving a very difficult conundrum that has faced central banks.

The nub of the issue is that under International Financial Reporting Standards, gold is treated as a commodity, which makes sense for miners, manufacturers and jewellers that use it as such. However, central banks hold ‘monetary gold’ as a financial asset in their foreign reserves portfolios, and accounting for it as a commodity under IFRS presents problems.

“Many central banks face a serious issue when they account for monetary gold because when the price of gold rises, they have to submit the unrealised gains to their government Treasury departments, but if the price of gold falls, the central government doesn’t remit back the funds. For many reserve managers, it has been seen as a lose-lose investment for this reason,” says Natalie Dempster, managing director of central banks and public policy at the WGC.

Based in London, with operations in the US, India, China and Singapore, the WGC acts as the leading market development organisation for the gold industry. Although its members represent 24 of the world’s largest gold mining companies, it also advocates on behalf of other entities that use the gold market, which is how it came to work on central bank accounting practices.

When the WGC first became aware of this issue a few years ago, it was told by one Latin American central bank that gold was no longer an attractive asset because the accounting challenge outweighed its intrinsic value. The WGC commissioned accounting expert and International Monetary Fund veteran Kenneth Sullivan to investigate further.

While IFRS would demand that gold be accounted for ‘at cost’, and most central banks follow IFRS, many of them account for monetary gold at ‘fair value’. Sullivan reviewed the practices of 70 central banks that hold monetary gold, and found seven different ways of accounting for it, including historical cost and six different versions, of fair value. One central bank had had three auditors over the past decade and had been advised to change its accounting practices four times.

“We heard overwhelmingly from central banks that they felt there was a lack of clear guidance,” says Dempster. “Many of them follow IFRS, which is appropriate for commercial entities, but is not suitable for central banks in specific areas. Clearly, gold is a unique asset that poses unique accounting challenges.”

Having conducted its analysis and uncovered the variation that exists in accounting practices, the next step for Sullivan and the WGC was to seek consensus on an appropriate accounting treatment for monetary gold, with the objective of moving towards a common framework.

The guidance that was issued in February 2018 is not intended to be a replacement for IFRS, and it includes instructions for integration with a general purpose accounting framework. It recognises the preference for fair-value accounting for gold, but with a stipulation that gains and losses should go through ‘other comprehensive income’ (OTI), rather than profit and loss (P&L).

“By reporting the unrealised gains and losses from monetary gold as fair value through OTI, central banks can transparently show it on the balance sheet as an asset that they hold without impacting the bottom line as it would if it went through P&L,” explains Dempster.

Nearly a year on from the publication of the guidance, it has now been adopted by one central bank, and three more are in the process of reviewing it and seeking board approval. That might seem a somewhat modest start, but in the relatively slow-moving world of central banks and accounting practices, it is not uncommon for such processes to take time.

Monetary gold has never been defined in international accounting standards, but we cannot simply make our own policy … This guidance will make it easier for us to achieve a level of standardisation in accounting

Accounting and finance head of a central bank

The WGC recognises that the guidance is likely to be of most relevance to the smaller emerging market (EM) central banks that are highly reliant on international standards and guidance. There has also been rising interest in holding gold reserves in EMs, with more than 20 countries increasing their gold reserves during the past two years, Dempster tells Central Banking.

“We are mainly focused on the smaller EM central banks because they are the ones that have the most need for guidance, particularly if there is tension with the ministry of finance,” she explains. “We are pleased to have kick-started some dialogue on the issue, and hope to see the guidance adopted more widely in the coming years.”

Drawing up accounting guidance is not the WGC’s core competence, of course, and it had to tread a delicate balance, helping central banks solve the problem they faced without stepping on the toes of accounting standards boards and auditors. The International Accounting Standards Board has been supportive of the guidance, but the WGC appears to have had a tougher job winning over auditors.

“One of our biggest challenges has been the decidedly mixed level of support from external audit firms. As they are generally large global entities that focus predominantly on the large corporations, they may lack the full understanding of the unique practices and needs of central banks,” says Dempster.

While it would welcome greater support from auditors, the WGC has continued to work at a grassroots level with central banks over the past year, making sure it has had a presence at the key accounting conferences where the issue has been discussed. Central banks have been grateful for the council’s commitment to resolving this delicate accounting challenge.

“Monetary gold has never been defined in international accounting standards, but we cannot simply make our own policy – our reporting has to be comparable with other central banks. This guidance will make it easier for us to achieve a level of standardisation in accounting,” says the head of accounting and finance at one central bank.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle