In the Riksbank's reporting of its financial results, the return from the bonds is divided into two parts. One part is a periodisation of current interest income that spreads the return that the Riksbank receives, if the bonds are held to maturity, evenly over the entire term. The other part of the return is changes in the market value of the bonds that are allowed to affect the reported result during the period in question. The second part can be managed in different ways with different accounting principles.

With an accounting principle that fully market values all assets, the total change in value over one year would be included in the profit and loss for the year in the annual accounts. A year of favourable value development for the central bank's assets would mean a financial profit, while a year when the value declines would lead to a financial loss. Since the Riksbank has assets that tend to vary widely in value, such as long-term bonds and assets priced in foreign currency, such an accounting principle would result in a reported result that varies considerably from year to year.

Another type of accounting principle completely ignores changes in the market value of assets and instead is completely based on periodised interest income and the purchase value of the bonds.^[10] Examples of central banks using this type of accounting are the Federal Reserve and the Bank of England. Market values and any unrealised changes in value are often reported separately, but they do not affect the official accounts. With this type of accounting principle, the reported result gives very little information about what the result would be if the assets were to be sold before they mature. This means a much more even development of the financial results over time, apart from the effects of any sales before the bonds have matured.

The Riksbank uses accounting principles that follow the guidelines of the European System of Central Banks (ESCB).^[11] The ESCB's accounting guidelines also provide for the possibility to book monetary policy assets at the so-called "accrued acquisition value", which means that the holding is not market-valued. However, the Riksbank has chosen not to use this possibility. These guidelines can be regarded as a combination of the two accounting principles described above. They are based on a market valuation of assets but where the variation in asset prices does not have a full impact on reported earnings. If the market value of an asset is less than the purchase value (adjusted for the periodised interest income) in an annual account, the value difference is recognized as a loss on net income for the year and the purchase value is written down to the prevailing market value.^[12] It is in practice as if the Riksbank were to sell off the asset and thereby realize the loss, and immediately thereafter buy back the same asset at the prevailing market price. However, if the market value of an asset exceeds the adjusted acquisition value, the reported profit for the year is not affected. The assets are still market valued on the balance sheet, but a corresponding item is recorded on the liabilities side in the form of a so-called revaluation account (see Fact Box). There is thus an asymmetry in how changes in the market value affect the Riksbank's financial results.

Source: The Riksbank

Declining market value has rapid impact on the Riksbank’s reported result

During 2022, bond yields have risen rapidly and the market value of the Riksbank's Swedish bonds has fallen. During the first four months of the year, the Riksbank has made an unrealised loss of SEK 38 billion, with a loss in value of SEK 64 billion resulting from interest rate-related price effects (SEK 43 billion on the monetary policy bond holdings and SEK 21 billion on bonds in the foreign exchange reserve) however, there the loss is offset by SEK 16 billion and SEK 9 billion respectively from positive exchange rate and gold value effects. See both the change in market values and the level of the revaluation accounts in Table 1. If interest rates and thus asset prices were to remain at these levels for the rest of the year, the year's reported result would thus be adversely affected, as unrealised value losses (negative revaluation accounts) lead to write-downs. A possible such development is presented as a scenario in section 2.2 below.

A write-down can be equated to the Riksbank selling and immediately buying back the asset in question at the prevailing market price. An unrealised loss is thus entered into the profit and loss account, as if we had actually sold and realised the loss. However, the write-down also means that the original purchase value of the asset is changed to the current market value, as if we had bought back the asset in question at the current market price. This means, on the other hand, that the expected and periodised interest income for the asset in the future will be higher than before, since it reflects the higher market rate. The Riksbank's interest income during the remaining term of the bonds is therefore, in accounting terms, higher and has a positive effect on future reported results (all else being equal).^[15] For bonds with given cash flows held until maturity, the total return is also given. A write-down, due to higher market interest rates and lower value of the bond, only results in a redistribution of the return over the remaining time to maturity. The negative impact on earnings resulting from the write-down is entirely matched by the higher remaining interest income from the bond, which means that the return on holding the bond to maturity is unchanged and is solely dependent on the acquisition cost (purchase rate). This can then counteract a higher current interest expenditure that arises from the fact that the policy rate is also higher.

With the accounting principle chosen by the Riksbank, rising market interest rates and falling bond prices lead to a relatively large loss during the financial year in which the change occurs. The result then develops more normally, although the Riksbank's policy rate and interest costs for deposits rise. We can therefore expect that some of the initial and major losses may be partially offset by profits in subsequent years.

If one were to use the accounting principle that ignores market valuation and entirely lean on periodising future interest income, the final aggregated result would be the same as with the accounting principle chosen by the Riksbank. However, the effects of higher interest rates will be distributed differently over the period. Instead of taking full account of the reported results for a single year, the result is negatively affected by unchanged interest income but higher accrued interest expenses, due to the higher policy rate, during all remaining years of the holding's maturity (if the bonds are held to maturity). As mentioned above, some other central banks use this principle.