Note 27: Provisions

The provision for employee entitlements represents annual leave, accrued long service leave and retiring leave, and sick leave entitlements accrued by employees. Probability assumptions about continued future service affecting entitlements accrued as at reporting date have been made using previous employment data. For entitlements that vest over a period exceeding one year discount rates rising from 2% next year to 6% in later years.

The Emissions Trading Scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The ETS creates a limited number of tradable units (the NZ Unit) which the Government can allocate freely. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrendered to the Crown by emitters. Emitters can also use international Kyoto units to settle their emission obligation, which might occur where obligations exceed the number of allocated NZ Units. These units are recognised as part of the Net Kyoto Position (refer to note 22). For further information on international Kyoto Units surrendered, refer to the Ministry for the Environment's Annual Report for the year ended 30 June 2012 and website www.climatechange.govt.nz. In the ETS transition period to the end of 2012, emitters can also use the NZ$25 price option to settle their emission obligation.

Until the end of 2012, the Government's net position regarding its climate change obligations will be determined by the net Kyoto position and the provisions for ETS credits. After 2012, the net position will depend on any future international climate change commitments.

The carbon price used to calculate the ETS provision is based on the estimated current carbon price of €3.62 The carbon price in New Zealand dollars equates to $NZ5.73 (2011: $NZ20.28), using the 30 June 2012 exchange rate of €0.6319 =$NZ1 (30 June 2011: €0.5734 = $NZ1, and a carbon price of €11.63 per unit).

The carbon price for the ETS provision has been determined by the Ministry for the Environment based on international market transactions and spot prices that have occurred in the secondary certified emission reduction (sCER) markets as published by Point Carbon. Currently, the secondary CER market has been determined to be the most relevant market for determining the carbon price of NZ Units in the calculation of the provision for ETS credits. As the market for NZ Units develops the basis for determining this carbon price will be reviewed.

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF) (refer to note 32 for details of the guarantee). Included in the provision is the NPF's DBP Annuitants Scheme unfunded liability position of $1,076 million (2011: $981 million), represented by a gross estimated pension obligation of $1,115million (2011: $1,020 million) with net investment assets valued at $39 million (2011: $39 million).

Estimated insurance proceeds are included in other revenue (note 5). Melville Jessup Weaver has prepared an independent actuarial valuation of both the estimated cost of purchasing the red zone properties and the estimated insurance proceeds from those properties as at 30 June 2012. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine these valuations.