The Treasury

Global Navigation

Personal tools

Note 26: Financial Instruments

The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as the Treasury, Reserve Bank, New Zealand Superannuation Fund, Inland Revenue and ACC. The financial management objectives of each of these portfolios are influenced by the purpose and associated governance framework for which the portfolio is held. The purposes of a portfolio may cover:

  • Funding purposes. Primarily financial assets and liabilities are held to finance the Government's borrowing requirements and provide funds to Government entities. Examples include Government bonds and Treasury bills. Financing activity exposes the Government to financial risks from interest rates and global demand for New Zealand Government bonds.
  • Social policy purposes. Primarily held to achieve social policy objectives. A large portion of the financial instruments for social policy purposes relates to student loans to support tertiary education policy. The associated risk for the Student Loan portfolio is that borrowers will default on their obligation.
  • Investment purposes. Primarily held for the purpose of generating returns to assist in funding long-term obligations. The main investment portfolios are managed by ACC and the NZ Superannuation Fund. Associated risks include performance of the New Zealand and global markets.
  • Central bank purposes. Primarily held for the Reserve Bank's foreign reserve management and market operations. The main financial risks to which the Reserve Bank is exposed includes foreign exchange risks, liquidity risks and financial stability risks.
  • Commercial purposes. Primarily held by entities that operate on a commercial basis, who will hold financial instruments arising from their normal business activity. The main examples are State owned enterprises (including the mixed ownership model companies). Associated risks include interest rates risks, foreign exchange risks and price risks.

These purposes are not mutually exclusive, with portfolios typically established for, or arising from, a public policy objective, such as pre-funding future superannuation expenses, but in doing so are managed to maximise economic returns consistent with the policy objective.

Reporting to Ministers on these portfolios is done on a portfolio-by-portfolio basis. Detailed risk management policy disclosure of Government reporting entities can be found in an individual entity's Annual Report.

The institutional frameworks and policy objectives of these portfolios are reviewed periodically. Otherwise, reporting on the consolidated financial management and performance of these portfolios is done in the context of the interim and annual Financial Statements of the Government, the forecasts reported in the Half-Year and Budget Economic and Fiscal Updates, and a more in-depth analysis of the Crown's assets in regular Investment Statements.

This note provides the following details of the Crown's financial instruments:

  • Non-derivative financial instrument policies (pages 103 to 104)
  • Classification of financial assets and financial liabilities (pages 105 to 106)
  • Fair value measurement (pages 106 to 107)
  • Derivative disclosures (pages 108 to 109)
  • Risk management (pages 110 to 113), and
  • Sensitivity analysis (pages 113 to 114).

Non-derivative financial assets

Financial assets are designated into the following categories: loans and receivables at amortised cost, financial assets available-for-sale, financial assets held-for-trading and financial assets designated as fair value through the operating balance. This designation is made by reference to the purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation. 

The maximum loss due to default on any financial asset is the carrying value reported in the statement of financial position.

Major financial asset type Designation
Trade and other receivables All designated as loans and receivables at amortised cost
Student loans All designated as loans and receivables at amortised cost
Kiwibank mortgages All designated as loans and receivables at amortised cost
Other advances Generally designated as loans and receivables at amortised cost
IMF financial assets All designated as loans and receivables at amortised cost
Share investments Generally designated as fair value through the operating balance
Marketable securities Generally designated as fair value through the operating balance
Long-term deposits Generally designated as loans and receivables at amortised cost

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest method (refer interest revenue policy).  Loans and receivables issued with durations of less than 12 months are recognised at their nominal value, unless the effect of discounting is material.  Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired.  Interest, impairment losses and foreign exchange gains and losses are recognised in the statement of financial performance.

Financial assets held-for-trading and financial assets designated at fair value through the operating balance are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance. A financial asset is designated at fair value through the operating balance if acquired principally for the purpose of trading in the short term.  It may also be designated into this category if the accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related liabilities or is part of a group of financial assets that is managed and evaluated on a fair value basis, such as with the NZ Superannuation Fund.  Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance.  Transaction costs are expensed as they are incurred.

Available-for-sale financial assets are initially recorded at fair value plus transaction costs.  They are subsequently recorded at fair value with any resultant fair value gains or losses recognised in the statement of comprehensive revenue and expense, with some exceptions.  Those exceptions are for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (such as debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset.  These latter items are recognised in the statement of financial performance.  For non-monetary available-for-sale financial assets (eg, some unlisted equity instruments) the fair value movements recognised in the statement of comprehensive revenue and expense include any related foreign exchange component.  At derecognition, the cumulative fair value gain or loss previously recognised in the statement of comprehensive revenue and expense, is recognised in the statement of financial performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with an original maturity of no more than three months.

Fair values of quoted investments are based on market prices.  Regular way purchases and sales of all financial assets are accounted for at trade date.  If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques, as set out in the notes to the financial statements.  At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Non-derivative financial liabilities

Financial liabilities are designated into the following categories: amortised cost, financial liabilities held-for-trading and financial liabilities designated as fair value through the operating balance. This designation is made by reference to the purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation.

Major financial liability type Designation
Accounts payable All designated at amortised cost
Government stock Generally designated at amortised cost
Treasury bills Generally designated at amortised cost
Government retail stock All designated at amortised cost
Settlement deposits with Reserve Bank All designated at amortised cost
Issued currency Not designated: Recognised at face value

Financial liabilities held-for-trading and financial liabilities designated at fair value through the operating balance are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance.  A financial liability is designated at fair value through the operating balance if acquired principally for the purpose of trading in the short term.  It may also be designated into this category if the accounting treatment results in more relevant information because it either eliminates or significantly reduces an accounting mismatch with related assets or is part of a group of financial liabilities that is managed and evaluated on a fair value basis.  Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance.  Transaction costs are expensed as they are incurred.

Other financial liabilities are recognised initially at fair value less transaction costs and are subsequently measured at amortised cost using the effective interest method.  Financial liabilities entered into with durations of less than 12 months are recognised at their nominal value.  Amortisation and, in the case of monetary items, foreign exchange gains and losses, are recognised in the statement of financial performance as is any gain or loss when the liability is derecognised.

Currency issued for circulation, including demonetised currency after 1 July 2004, is recognised at face value.  Currency issued represents a liability in favour of the holder.

Page top