Note 33:  Impact of Adoption of NZ IFRS

The aim of this section is to explain how the transition from previous GAAP to NZ IFRS has affected the reported financial position and financial performance of the Government of New Zealand.

The Government is reporting in compliance with NZ IFRS for periods beginning on and after 1 July 2007. Previous reporting has been on the basis of approved accounting standards applicable in New Zealand at the time. The following pages describe the impact of the adoption of NZ IFRS by providing reconciliations between the previous GAAP and the comparative information shown in these financial statements for:

• net worth as at 1 July 2006 and as at 30 June 2007, and
• the operating balance for the year ended 30 June 2007.

In addition to changes in measurement and recognition rules, NZ IFRS has resulted in a number of changes to the format of the financial statements. The major reclassifications are:

• depreciation and amortisation previously classified under operating expenses now separately disclosed
• share investments previously classified under marketable securities now separately disclosed
• some properties held by Land Information New Zealand (LINZ) have been reclassified from assets for sale to property, plant and equipment and as a result have been fair valued
• settlement deposits with the Reserve Bank previously classified under borrowings - sovereign guaranteed now separately disclosed
• separation of borrowings between sovereign guaranteed and non-sovereign guaranteed no longer in the statement of financial position (transferred to the statement of borrowings)
• payables and provisions previously classified as one category now split
• some interest, dividend income, and interest expense are now classified as gains and losses on financial instruments
• sales of goods and services are now classified as other revenue and vice versa, and
• social assistance in relation to ACC payments is now classified under insurance expenses.

Notes to the NZ IFRS Transition

a) On 1 July 2006 the accounting policy regarding the valuation basis of the rail network changed to depreciated replacement cost. Previously this asset was reported at historical cost. In addition, the Crown’s investment in Massey University increased on 1 July 2006 by $277 million in relation to asset revaluations.

b) The reporting of the Government Superannuation Fund (GSF) has changed due to applying a specific standard for employee benefits, including pension schemes, under NZ IFRS. The main changes to the financial statements were:

• a reduction in the net liability of GSF due to valuing the liability on the basis that the Government meets its obligation on a pay-as-needed basis, rather than the amount to be invested today to fully fund future contributions under pre adoption of NZ IFRS. This latter approach assumes the Fund would invest in assets that would generate revenue on which there would be an additional obligation to pay tax, and
• a netting of GSF plan assets against the pension liability (nil impact on net worth).

c) The reporting of the ACC liability has changed owing to new requirements under NZ IFRS. The main changes to the financial statements were:

• the ACC liability has increased due to adding an additional risk premium and liability adequacy test on the unearned levy liability to meet estimated future claims. The actuarially calculated liability under pre adoption of NZ IFRS represented a mid-point estimate - that is, equal chance of actual payouts being greater than or less than the estimate. To that extent, it represented the most likely outcome. Introducing an additional risk premium and liability adequacy test under NZ IFRS does not change the relative risk of ACC's activities; rather it simply changes how this risk is reported, and
• changes to the presentation of the unearned levy liability (nil impact on net worth).

d) Under NZ IFRS all derivative contracts must be recognised in the statement of financial position at fair value.

e) Receivables from taxes and fines have been written down to reflect the time value of money and collection costs.

f) The reduction in the National Provident Fund (NPF) liability is due to the tax effect of valuing the liability on the basis of determining present value of payments to this scheme under current arrangements, rather than the current approach which determines what payment would be required today to settle all future obligations.

g) Under NZ IFRS goodwill is not amortised over a specified period. Instead, an annual impairment test is conducted.

h) The Crown’s investment in Christchurch and Invercargill airports was deemed significant influence under NZ IFRS increasing the investment at 1 July 2006 and 30 June 2007 by $73 million and $172 million respectively.