HONG KONG MONETARY AUTHORITY Annual Report 1996
NOTES ON THE ACCOUNTS*
Certificates of Indebtedness which are denominated in Hong Kong dollars but are issued and redeemed in US dollars at the linked exchange rate of US$1=HK$7.80 are stated in the accounts at their Hong Kong dollar face value. At the Balance Sheet date the difference between their Hong Kong dollar face value and the market value of the US dollars required for their redemption is included in other assets.
Foreign currency income and expenditure are translated into Hong Kong dollars at the daily prevailing exchange rates.
(c) Off-balance sheet financial instruments
Forward foreign currency contracts are valued at prevailing market rates on the last business day of the year. Exchange gains and losses arising from these contracts are included in the Income and Expenditure Account. Prior to 1996, outstanding forward foreign exchange contracts were valued at the prevailing spot exchange rates as at the balance sheet date. An upgrading of computer systems in 1996 has facilitated the valuation of outstanding forward foreign exchange contracts at replacement cost i.e. the forward exchange rates at the balance sheet date relevant to the remaining life of the contracts. This change in accounting estimates which was included in the Income and Expenditure Account for the year, resulted in a reduction of $265 million in the surplus reported for 1996.
Interest rate swap contracts and futures contracts are marked to market on the last business day of the year with the resultant revaluation gains and losses being included in the Income and Expenditure Account. Interest income and expenses arising from the interest rate swap contracts and gains and losses on the sale and maturity of futures contracts are included in the Income and Expenditure Account.
(d) Fixed assets
Fixed assets, including furniture, fixtures and equipment, motor vehicles, personal computers and capitalised systems development costs, are stated at cost less accumulated depreciation and are depreciated on a straight line basis over their respective estimated useful lives of 3 to 5 years. Fixed assets costing less than $10,000 are not capitalised but are charged to the Income and Expenditure Account.
(e) Investments in subsidiary and associated companies
Investments in subsidiary and associated companies are accounted for at cost. The financial statements of the subsidiary company are not consolidated with those of the Exchange Fund because its activities are so dissimilar that consolidated financial statements would be misleading. Financial information relating to the subsidiary and associated companies is summarised at note 10.