Note 32:  Contingent Liabilities and Contingent Assets

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability was realised it would reduce the operating balance and net worth and increase gross sovereign-issued debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to gross sovereign-issued debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the amount of any award against the Crown.

Guarantees and Indemnities

Guarantees and indemnities are disclosed in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In addition, guarantees given under Section 65ZD of the Public Finance Act 1989 are disclosed in accordance with Section 26Q(3)(b)(i)(B) of the same Act.

Air New Zealand - Letters of credit and performance bonds

The letters of credit are primarily given in relation to passenger charges, and airport landing charges. The performance bonds are primarily given in respect to Engineering contracts.

$49 million at 30 June 2010 (2009: $37 million)

Cook Islands - Asian Development Bank (ADB) loans 

Before 1992, the New Zealand Government guaranteed the Cook Islands' borrowing from the ADB. These guarantees have first call on New Zealand's Official Development Assistance.

$14 million at 30 June 2010 (2009: $16 million)

Indemnification of receivers and managers - Terralink Limited

The Crown has issued a Deed of Receivership indemnity to the appointed receivers of Terralink Limited against claims arising from the conduct of the receivership.

$10 million at 30 June 2010 (2009: $10 million)

Ministry of Transport - funding guarantee 

The Minister of Finance has issued a guarantee of $10 million to the Transport Accident Investigation Commission. The guarantee allows the Commission to assure payment to suppliers of specialist salvage equipment in the event of the Commission initiating an urgent investigation of any future significant transport accident.

$10 million at 30 June 2010 (2009: $10 million)

Legal Proceedings and Disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

Accident Compensation Corporation

A contingent liability exists resulting from two conflicting District Court decisions regarding entitlement to weekly compensation. In order to obtain certainty the Corporation has been granted leave to appeal the most recent decision to the High Court.

$45 million at 30 June 2010 (2009: nil)

Tax in dispute 

Tax in dispute represents the outstanding debt of those tax assessments raised, against which an objection has been lodged and legal action is proceeding. When a taxpayer disagrees with an assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court.

The 2009 contingent liability included disputes with a number of financial institutions regarding the tax treatment of certain structured finance transactions. These disputes have now been resolved.

$295 million at 30 June 2010 (2009: $1,661 million)

Kapiti West Link Road

A recent High Court decision in favour of the New Zealand Transport Agency is being appealed. The appeal relates to having the land held for the Kapiti West Link Road released for sale.

$14 million at 30 June 2010 (2009: $25 million)

Health - legal claims

Claims against the Crown exist in respect of alleged negligence for issues regarding treatment and care.

$25 million at 30 June 2010 (2009: $15 million)

Other Quantifiable Contingent Liabilities

Kyoto protocol

The Government has a contingent liability relating to 84.0 million forestry credits. During the first commitment period, the Ministry of Agriculture and Forestry estimate that 89.1 million tonnes of credits will be generated by carbon removals via forests (2009: 92.3 million tonnes). Of this amount, 5.1 million tonnes has been allocated to foresters through the ETS as at 30 June 2010. To the extent that these forests are harvested (in subsequent commitment periods) and a future international agreement is negotiated, there will be an associated liability generated that will need to be repaid. As the forestry credits have been incorporated when calculating the current position for the first commitment period, the associated obligation of the Crown in respect of future commitment periods has been reported as a separate contingent liability.

$1,590 million at 30 June 2010 (2009: $1,995 million)

International finance organisations 

The Crown has lodged promissory notes with the International Monetary Fund. Payment of the notes depends upon the operation of the rules of the organisation.

$1,529 million at 30 June 2010 (2009: $1,762 million)

New Zealand Export Credit Office - export guarantees

The New Zealand Export Credit Office (NZECO) provides a range of guarantee products to assist New Zealand exporters. These NZECO guarantees are recorded by the Crown as contingent liabilities.

$133 million at 30 June 2010 (2009: $155 million)

Air New Zealand Partnership

The Air New Zealand Group has a partnership agreement with Christchurch Engineering Centre in which it holds 49 per cent interest. By the nature of the agreement joint and several liability exists between the two parties.

$70 million at 30 June 2010 (2009: $68 million)

Inland Revenue - Unclaimed monies

Under the Unclaimed Monies Act 1971, companies (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.

$50 million at 30 June 2010 (2009: $46 million)

Crown Health Financing Agency

The agency is subject to potential legal claims plus associated legal fees in respect of the actions of the former Area Health Boards. The agency is defending those claims that have resulted in litigation and will defend any of the others that result in litigation. The agency does not accept liability for the claims.

$26 million at 30 June 2010 (2009: $28 million)

Reserve Bank - demonetised currency

The Crown has a contingent liability for the face value of the demonetised currency issued which have yet to be repatriated.

$23 million at 30 June 2010 (2009: $23 million)

State highway extension

The SH20 - 1 Manukau Extension Contractor has presented a claim to the New Zealand Transport Agency for time delays and disruption. Discussions are on-going to achieve a mutually agreeable outcome between parties.

$41 million at 30 June 2010 (2009: nil)

Unquantifiable Contingent Liabilities

Accounting standard NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that contingent liabilities be disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Disclosure of remote contingent liabilities is only required if knowledge of the transaction or event is necessary to achieve the objectives of general purpose financial reporting. This part of the Statement provides details of those contingent liabilities of the Crown which cannot be quantified (remote contingent liabilities are excluded).