Archived - Exchange Fund Account Annual Report 2001: 2

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Financial Statements -  December 31, 2001

Management Responsibility for the Financial Statements 

Responsibility for the financial statements of the Exchange Fund Account (the Account) and all other information presented in this Annual Report rests with the Department of Finance. The operation of the Account is governed by the provisions of Part II of the Currency Act. The Account is administered by the Bank of Canada as fiscal agent.

The financial statements were prepared in accordance with the stated accounting policies set out in Note 2 to the financial statements which conform to those used by the Government of Canada. These policies were applied on a basis consistent with that of the preceding year.

The Department of Finance establishes policies for the Account's transactions and investments, and related accounting activities. It also ensures that the Account's activities comply with the statutory authority of the Currency Act.

The Bank of Canada effects transactions for the Account and maintains records, as required to provide reasonable assurance regarding the reliability of the financial statements. The Bank reports to the Department of Finance on the financial position of the Account and on the results of its operations.

The Auditor General of Canada conducts an independent audit of the financial statements of the Account and reports the results of her audit to the Minister of Finance.

The Annual Report of the Account is tabled in Parliament along with the financial statements, which are part of the Public Accounts of Canada and are referred to the Standing Committee on Public Accounts for their review.

_________________
David A. Dodge 
Governor
Bank of Canada 

___________________
Kevin G. Lynch
Deputy Minister
Department of Finance

_________________
S. Vokey
Chief Accountant
Bank of Canada

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Auditor's Report 

To the Minister of Finance

I have audited the balance sheet of the Exchange Fund Account as at December 31, 2001 and the statement of revenue for the year then ended. These financial statements are the responsibility of the Account's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In my opinion, these financial statements present fairly, in all material respects, the financial position of the Account as at December 31, 2001 and its revenues and its cash flows for the year then ended in accordance with the accounting policies set out in Note 2 to the financial statements, which conform to the accounting policies of the Government of Canada.

Further, in my opinion, the transactions of the Account that have come to my notice during my audit of the financial statements have, in all significant respects, been in accordance with Part II of the Currency Act.

John Wiersema, CA
Assistant Auditor General
for the Auditor General of Canada

Ottawa, Canada
March 15, 2002

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Exchange Fund Account 

Balance Sheet 
As at December 31, 2001

	2001		2000
	(in millions of dollars)
	US	Canadian	US	Canadian
Assets
Denominated in US dollars
Cash and short-term deposits	$ 4,073	$ 6,487	$ 4,2401	$ 6,358
Marketable securities (Notes 4 and 5)	15,134	24,105	16,089	24,126
	19,207	30,592	20,329	30,484
Denominated in other foreign currencies
Cash and short-term deposits (Note 6)	108	172	146	219
Marketable securities (Notes 4 and 6)	10,541	16,790	7,176	10,747
	10,649	16,962	7,313	10,966
Denominated in Special Drawing Rights
Special Drawing Rights (Note 7)	616	982	579	868
Gold and gold loans (Note 8)	47	75	54	81
	663	1,057	633	949
Official international reserve assets	$ 30,519	$ 48,611	$ 28,275	$ 42,399
Due to the Consolidated Revenue Fund
Advances (Note 9)		$ 46,353		$ 39,870
Net revenue for the year		2,258		2,529
		$ 48,611		$ 42,399

Approved:

___________________
David A. Dodge 
Governor
Bank of Canada 

___________________
Kevin G. Lynch
Deputy Minister
Department of Finance

___________________
S. Vokey
Chief Accountant
Bank of Canada

(The accompanying notes are an integral part of these financial statements.)

Exchange Fund Account 

Statement of Revenue 
for the year ended December 31, 2001

	2001	2000
	(in millions of Canadian dollars)
Revenue from investments
Marketable securities	$ 2,318	$ 2,292
Cash and short-term deposits	303	407
Special Drawing Rights	32	36
Gold	7	6
	2,660	2,741
Other revenue (loss)
Gain on sales of gold	50	198
Net foreign exchange losses	(452)	(410)
	(402)	(212)
Net revenue for the yeardue to  the Consolidated Revenue Fund	$ 2,258	$ 2,529

(The accompanying notes are an integral part of these financial statements.)

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Notes to Financial Statements 
December 31, 2001

1. Authority and Objective 

The Exchange Fund Account (the Account) is governed by Part II of the Currency Act. The Account is in the name of the Minister of Finance and is administered by the Bank of Canada as fiscal agent. The Financial Administration Act does not apply to the Account.

The legislative mandate of the Account is to aid in the control and protection of the external value of the Canadian dollar, and the Minister of Finance acquires or sells for the Account those assets which are deemed appropriate for this purpose in accordance with the Currency Act. The Account is empowered to invest in instruments approved by the Minister of Finance in accordance with the Act.

The objectives of the Exchange Fund Account are to provide general liquidity for the government and to promote ordely conditions in the foreign exchange market for the Canadian dollar. In September 1998, the Department of Finance and the Bank of Canada decided to move away from intervening in the foreign exchange market in a predictable or automatic fashion (selling foreign exchange / buying Canadian dollars when there was upward pressure on the value of the Canadian dollar). Instead, the current policy is for the Bank of Canada to intervene on a discretionary basis.

Revenue for the year is payable to the Consolidated Revenue Fund of the Government of Canada within three months after the end of the year in accordance with the Currency Act.

2. Significant Accounting Policies 

Significant accounting policies of the Account are set out below. As required by the Currency Act, they conform to the stated accounting policies used by the Government of Canada to prepare its financial statements. As all material changes in cash flows are evident from the financial statements, a separate statement of cash flows has not been prepared.

a) Valuation of assets

The estimated fair market value of cash and short-term deposits, which are recorded at cost and generally held to maturity, is deemed to be equal to their book value.

Marketable securities are adjusted for unamortized premiums or discounts, where applicable, and are reported at the lower of their amortized costs including accrued interest and year-end market values. Purchases and sales of securities are recorded at the settlement dates.

Marketable securities, short-term deposits and Special Drawing Rights (SDR) include accrued interest. The SDR is a unit of account issued by the International Monetary Fund (IMF), and its value is determined in terms of a basket of four major currencies.

Gold and gold loans include accrued interest. Gold and gold loans are carried in the Account at a value of 35 SDR per fine ounce, which approximates cost and conforms to the value used in the Public Accounts of Canada.

b) Revenue from investments

Revenue from investments is recorded on an accrual basis and includes interest earned, amortization of premiums and discounts, gains or losses on sales of securities, and revenues from securities lending activities. Write downs of securities to their year-end market values (if applicable) are recorded as a charge to investment revenue in the year in which they occur.

c) Gold

Gold sales and net gains on gold sales are recorded at settlement dates. Interest revenue from gold loans is recorded on an accrual basis and is included in revenue. Premiums received on the sales of call options on gold are recorded in revenue.

d) Translation of foreign currencies and SDRs

Assets and liabilities denominated in foreign currencies and SDRs are translated into Canadian and US dollar equivalents at year-end market exchange rates, which were as follows:

	Canadian dollars
	2001	2000
US dollar	1.5928	1.4995
Euro	1.4182	1.4086
Japanese yen	0.01211	0.01307
Special Drawing Rights	1.99995	1.95371

Foreign exchange gains or losses result from the translation of assets and advances denominated in foreign currencies and SDRs, as well as transactions throughout the year. Unrealized foreign exchange gains or losses on short-term currency swap arrangements with the Bank of Canada and on currency hedges are recorded in revenue as Net foreign exchange gains (losses). See also Note 10.

Investment revenue in foreign currencies and SDRs is translated into Canadian dollars at the foreign exchange rates prevailing on the date the revenue is earned.

e) Services received without charge

The Account receives without charge administrative, custodial and fiscal agency services from the Bank of Canada. Costs related to these services are not recognized in the financial statements.

f) Interest-free advances

The Account receives interest-free advances from the Consolidated Revenue Fund. Interest cost related to these advances is not recognized in the financial statements.

3. Official Government Operations 

Official government operations involve purchases and sales of Canadian dollars against foreign currencies. These are undertaken to promote orderly conditions in the market for the Canadian dollar, or to meet net government requirements for foreign exchange. During 2000 and 2001, no transactions were aimed at moderating movements in the value of the Canadian dollar.

The majority, but not all, of Canada's official international reserves reside inside the Exchange Fund Account. The EFA accounts for approximatly 91% of Canada's official reserves.

4. Risk Management and Financial Instruments 

The role of the EFA as principal repository of Canada's official international reserves determines the nature of its assets and of its operations, as well as its use of financial instruments.

To ensure that the EFA asset portfolio is prudently diversified with respect to credit risk, the investment guidelines specify limits on holdings by class of issuer (sovereign, agency, supranational or commercial financial institution) and type of instrument, while there are further limits on exposure to any one issuer or counter-party.

With respect to investment guidelines prescribed by the Minister of Finance, the EFA may hold debt issued in the designated currencies by highly rated sovereign governments, their agencies and by supranational organizations. Eligible issues must have an AA-rating or better from two of five designated rating agencies (S&P, Moody's, Fitch IBCA, Dominion Bond Rating Service and Canadian Bond Rating Service) one of which must be either Moody's or S&P. The EFA may also make deposits and execute other transactions with commercial financial institutions meeting the same rating criteria, with the term to maturity of commercial deposits limited to three months or less.

Interest rate and foreign currency risks are minimized by matching the duration structure and the currency of the EFA's assets and the related foreign currency borrowings of the government of Canada.

Term Structure of Foreign Currency Investments

		Par Value
	Under 6 months	6 to 12 months	1 to 5 years	Over 5 years	Total Par Value	Unamortized Premium/ Discount and Accrued Interest	Amortized Cost
	(in millions of US dollars)
US Dollar Holdings
Government securities	$3,201	$50	-	-	$3,251	$(18)	$3,233
Yield to Maturity	2.86%	6.32%
Other securities	2,330	578	6,912	1,848	11,668	233	11,901
Yield to Maturity	2.54%	4.71%	5.91%	6.31%
Total US Dollar Holdings	5,531	628	6,912	1,848	14,919	215	15,134
Other Foreign Currencies
Euro Holdings
Other securities	-	214	2,761	6,512	9,487	289	9,776
Yield to Maturity		4.56%	4.53%	4.89%
Yen Holdings
Government securities	-	-	380	380	760	5	765
Yield to Maturity			0.57%	1.91%
Total Other Foreign Currencies	-	214	3,141	6,892	10,247	294	10,541
Total Assets:	$5,531	$842	$10,053	$8,740	$25,166	$509	$25,675

5. Marketable Securities Denominated in US Dollars 

	2001			2000
	(in millions of dollars)
Securities	Par value	Amortized cost		Par value	Amortized cost
	US	US	Canadian	US	US	Canadian
US Government	$ 3,251	$ 3,232	$ 5,148	$ 3,022	$ 3,046	$ 4,567
US Federal Agencies	7,772	7,746	12,337	4,655	4,611	6,915
Sovereign paper and International Institutions	3,896	3,894	6,203	8,244	8,146	12,214
Accrued interest	-	262	417	-	286	430
	$ 14,919	$ 15,134	$ 24,105	$ 15,921	$ 16,089	$ 24,126
Estimated market value at year-end		$ 15,570	$ 24,799		$ 16,319	$ 24,471

Estimated market values are based on quoted market prices.

Loans of securities are effected on behalf of the Account by agents who guarantee the loans and obtain collateral of equal or greater value from their approved counter-parties in these transactions. At year-end, a portion of the Account's holdings of US Government securities consisting of US $ 2,500 million (par value) in Treasury Notes (US $ 2,825 million in 2000) is being used in securities lending operations with financial institutions.

6. Assets Denominated in Other Foreign Currencies 

Cash and Short-term Deposits

	2001		2000
	(in millions of dollars)
	US	Canadian	US	Canadian
Euro	$ 46	$ 73	$ 76	$ 114
Japanese yen	62	99	70	105
	$ 108	$ 172	$ 146	$ 219

 

Marketable Securities

	2001			2000
	(in millions of dollars)
	Par Value	Amortized cost		Par value	Amortized cost
	US	US	Canadian	US	US	Canadian
Euro	$ 9,487	$ 9,776	$ 15,571	$ 6,598	$ 6,729	$ 10,091
Japanese yen	760	765	1,219	436	438	656
$10,247	$ 10,541	$ 16,790	$ 7,034	$7,167	$ 10,747
Estimated market value at year-end:		$10,618	$ 16,913		$ 7,174	$ 10,757

Estimated market values are based on quoted market prices.

7. Special Drawing Rights (SDR) 

	2001		2000
	(in millions of dollars)
	US	Canadian	US	Canadian
Held at year-end	$ 614	$ 978	$ 574	$ 861
Accrued interest	2	4	5	7
	$ 616	$ 982	$ 579	$ 868

8. Gold and Gold Loans 

During the year, the Account sold 132,119 fine ounces of gold (621,745 fine ounces in 2000).

	2001		2000
	(in millions of dollars)
	US	Canadian	US	Canadian
Held at year-end
Gold loans	$ 41	$ 66	$ 49	$ 74
Gold	5	8	5	7
Accrued interest on gold loans	1	1	-	-
	$ 47	$ 75	$ 54	$ 81

The year-end carrying values and market values (based on London fixings) of gold and gold loans, excluding accrued interest, are:

		2001		2000
		Price per fine ounce	Total value in millions	Price per fine ounce	Total value in millions
Carrying value	- US	$ 43.95	$ 47	$ 45.60	$ 54
	- Canadian	70.00	75	68.38	81
Market value	- US	276.50	291	272.65	323
	- Canadian	440.41	463	408.84	484

9. Due to the Consolidated Revenue Fund (CRF) - Advances 

The Account is funded by advances from the CRF. Advances were limited to C$ 50 billion outstanding as of December 31 of each calendar year by Order in Council dated March 2, 2000. On April 26, 2001, an Order in Council was issued to increase the limit to C$ 60 billion. At year-end, advances from (deposits with) the CRF consisted of:

	2001	2000
	(in millions of Canadian dollars)
US dollars	$ 38,027	$ 41,242
Canadian dollars	(6,924)	(10,798)
Euro	15,162	9,860
Japanese yen	1,308	758
Special Drawing Rights	(1,220)	(1,192)
	$ 46,353	$ 39,870

The proceeds of Canada's borrowings in foreign currencies and allocations of SDR by the IMF have been advanced from the CRF to the Account. Subsequent repayments of foreign currency debt are made using the assets of the Account and result in reductions in the level of foreign currency advances. Interest payable by Canada on borrowings in foreign currencies and charges on SDR allocations to Canada are charged directly to the CRF.

Canadian dollar advances are required by the Account for the settlement of its purchases of foreign currencies. Sales of foreign currencies result in receipts of Canadian dollars that are remitted to the CRF, causing reductions in the level of outstanding Canadian dollar advances. Cumulative net sales of foreign currencies can result in overall net deposits of Canadian dollars by the Account with the CRF.

10. Commitments 

a) Currency swaps

The Account may enter into short-term currency swap arrangements with the Bank of Canada. The objective of these swaps is to assist the Bank in its cash management operations. The Account sells US dollars for Canadian dollars, with simultaneous agreements to repurchase these US dollars from the Bank on future dates at the same exchange rates in effect at the time the swaps were entered into. The maximum term of the swaps is equivalent to the term of the underlying securities; however, they are generally reversed earlier based on operational requirements of the Bank.

These swaps result in receipts of Canadian dollars by the Account, which are remitted to the Consolidated Revenue Fund. These transactions are reversed when the swaps are unwound.

At year-end, the Account had no commitment to repurchase US dollars under swap arrangements with the Bank of Canada (US $ 1,004 million in 2000. The Canadian dollar equivalent at the year-end exchange rate was $1,506 million).

b) Gold options and forward contracts

The Minister of Finance has authorized the sale of call options, as well as forward sales, on part of the Account's gold holdings.

Under gold options, the Account receives a premium against commitments to sell gold at predetermined prices. No gold is sold unless the holders of the options exercise their rights by the expiry dates. At year-end, the Account had commitments to sell 120,000 fine ounces of gold (no options outstanding in 2000).

Under forward contracts, the Account is committed to sell gold at predetermined prices on future dates. At year-end, the Account had outstanding commitments to sell 95,000 fine ounces of gold (20,000 fine ounces of gold in 2000) for a total value of US$ 27 million (US$ 6 million in 2000). The value dates of these contracts are February 21^st, February 22^nd, April 12^th and April 30^th, 2002.

c) Foreign currency contracts

The following table presents the fair value of foreign currency contracts with contractual amounts outstanding at December 31:

	2001		2000
	(in millions of Canadian dollars)
	Contractual value	Fair value	Contractual value	Fair value
Forward Sales	$ 2,321	$ (14)	$2 262	$ 33
Forward Purchases	$ 2,339	$ 14	$2,298	$(34)

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