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Treasury Instructions 2009

3   Accounting policies for external financial reporting by the Government of New Zealand

3.1  Introduction

This section of the Treasury Instructions details the accounting policies for use in the external financial statements of the Government of New Zealand.

3.2  Reporting entity

The consolidated financial statements for the Government reporting entity (financial statements of the Government of New Zealand) as defined in the Act must be prepared in accordance with the requirements of the Act.

Government reporting entity, as defined in section 2(1) of the Act, means:

  • the Sovereign in right of New Zealand; and
  • the legislative, executive, and judicial branches of the Government of New Zealand.

The description “Consolidated financial statements for the Government reporting entity ” and the description “Financial statements of the Government ” have the same meaning and can be used interchangeably.

3.2.1 Public benefit entity

For the purposes of financial reporting the Government of New Zealand is a public benefit entity.

3.3  General accounting policies

The Financial Statements of the Government of New Zealand must comply with generally accepted accounting practice.

The measurement base to be applied is historic cost modified by the revaluation of certain assets and liabilities.

Financial statements are to be prepared on an accrual basis.

The financial statements are to be presented in New Zealand dollars rounded to the nearest million.

3.4 Judgements and estimations

The preparation of financial statements in conformity with NZ IFRSs requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Where material, information on the major assumptions used in preparing the financial statements must be provided in the relevant accounting policy or the relevant note.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year must be discussed in the notes.

3.5 Specific accounting policies

3.5.1 Reporting and forecast period

The reporting and forecast period for the financial statements of the Government of New Zealand is the financial year from 1 July to 30 June.

Where necessary the financial information for State-owned enterprises and Crown entities that have a balance date other than 30 June will be adjusted for any transactions or events that have occurred since their most recent balance date and that are significant for the Government's financial statements.

3.5.2 Basis of combination

Ministers of the Crown, departments, Offices of Parliament, the Reserve Bank of New Zealand, the New Zealand Superannuation Fund, State-owned enterprises (including Air New Zealand Limited), Crown entities (excluding Tertiary education institutions) and organisations listed in Schedule 4 of the Public Finance Act 1989 are combined using the purchase method of combination.

Corresponding assets, liabilities, income and expenses, are added together line by line. Transactions and balances between these sub-entities must be eliminated on combination in accordance with the eliminations framework available from the Treasury website at www.treasury.govt.nz.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Government reporting entity.

Where a subsidiary has a balance date other than 30 June, and their information is not reported to 30 June, the information reported to their most recent balance date is adjusted for any transactions that have occurred since then that are significant for the Government's financial statements.

Tertiary education institutions are equity accounted, which recognises these entities’ net assets, including asset revaluation movements and surpluses and deficits.

The basis of combination for joint ventures depends on the form of the joint venture.

  • Jointly controlled operations: The Government reporting entity recognises the assets it controls, the liabilities and expenses that it incurs, and its share of the jointly controlled operations’ income.
  • Jointly controlled assets: The Government reporting entity recognises its share of the jointly controlled assets, its share of any liabilities and expenses incurred jointly, any other liabilities and expenses it has incurred in respect of the jointly controlled asset, and income from the sale or use of its share of the output of the jointly controlled asset.
  • Jointly controlled entities: Jointly controlled entities are equity accounted, whereby the Government reporting entity initially recognises its share of interest in these entities's net assets at cost and subsequently adjusts the cost for changes in net assets. The Government reporting entitys’ share of the jointly controlled entity's surpluses and deficits are recognised in the Statement of Financial Performance.

Business combinations that occurred prior to the transition to NZ IFRS are not restated retrospectively.

3.5.3 Income

3.5.3.1 Taxation revenue levied through the Crown's sovereign power

The Crown provides many services and benefits that do not give rise to revenue. Further, payment of tax does not of itself entitle a taxpayer to an equivalent value of services or benefits, since there is no relationship between paying tax and receiving Crown services and transfers. Such revenue is received through the exercise of the Crown in Parliament's sovereign power.

Where possible, taxation revenue must be recognised at the time the debt to the Crown arises.

Revenue type Revenue recognition point
Source deductions When an individual earns income that is subject to PAYE
Resident withholding tax When an individual is paid interest or dividends subject to deduction at source
Fringe benefit tax (FBT) When benefits are provided that give rise to FBT
Provisional tax When taxable income is earned
Terminal tax Assessment filed date
Goods and services tax (GST) When the liability to the Crown is incurred
Customs and excise duty When goods become subject to duty
Road user charges and motor vehicle fees When payment of the fee or charge is made
Stamp, cheque and credit card duties Assessment filed date
Exhaustible resources levy When the resource is extracted
Other indirect taxes When the debt to the Crown arises
Levies (eg, ACC levies) When the obligation to pay the levy to the Crown is incurred

3.5.3.2 Revenue earned through operations

Revenue from operations includes revenue that has been earned by the Crown in exchange for the provision of outputs (products or services) to third parties.

Revenue from the supply of goods and services to third parties must be measured at the fair value of consideration received. Revenue from the supply of goods must be recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from the supply of services must be recognised at balance date on a straight line basis over the specified period for the services unless an alternative method better represents the stage of completion of the transaction.

3.5.3.3 Interest income

Interest income must be accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. The method applies this rate to the principal outstanding to determine interest income each period.

3.5.3.4 Dividend income

Dividend income from investments must be recognised when the Government's rights as a shareholder to receive payment have been established.

3.5.3.5 Rental income

Rental income must be recognised in the Statement of Financial Performance on a straight-line basis over the term of the lease. Lease incentives granted must be recognised evenly over the term of the lease as a reduction in total rental income.

3.5.3.6 Donated or subsidised assets

Where a physical asset is acquired for nil or nominal consideration, the fair value of the asset received must be recognised as income in the Statement of Financial Performance.

3.5.4 Expenses

3.5.4.1 General

Expenses must be recognised in the period to which they relate.

3.5.4.2 Welfare benefits and entitlements

Welfare benefits and entitlements, including New Zealand Superannuation, must be recognised in the period when an application for a benefit has been received and the eligibility criteria met.

3.5.4.3 Grants and subsidies

Where grants and subsidies are discretionary until payment, the expense must be recognised when the payment is made. Otherwise, the expense must be recognised when the specified criteria have been fulfilled and notice has been given to the Crown.

3.5.4.4 Interest expense

Interest expense must be accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash payments through the expected life of the financial liability to that liability's net carrying amount. The method applies this rate to the principal outstanding to determine interest expense each period.

3.5.5 Foreign-currency

Transactions in foreign currencies must be initially translated at the foreign exchange rate at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies must be recognised in the Statement of Financial Performance, except when deferred in equity when hedge accounting is applied.

Non-monetary assets and liabilities measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value must be translated into New Zealand dollars at the exchange rate applicable at the fair value date. The associated foreign exchange gains or losses follow the fair value gains or losses to either the Statement of Financial Performance or directly to equity.

The exchange rate to be used in the translation of assets and liabilities denominated in foreign currencies is provided each month on the CFISnet home page.

Foreign exchange gains and losses arising from translating monetary items that form part of the net investment in a foreign operation must be reported in a translation reserve in equity.

3.5.6 Financial Instruments

Financial assets and financial liabilities must be designated into the categories in NZ IAS 39 Financial Instruments: Recognition and Measurement with reference to the business 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. Although they do not arise out of a contract, receivables from taxes, levies and fines (and any penalties associated with these activities) as well as social benefit receivables are for ease of presentation purposes included as a financial instrument.  These non-contract receivables, collectively referred to as sovereign receivables, are designated separately from other financial assets.

Financial assets and liabilities must be recognised and measured in accordance with NZ IAS 39.

3.5.6.1 Financial assets

Financial assets held for trading and financial assets designated at fair value through profit or loss must be 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 profit and loss if acquired principally for the purpose of selling in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either significant 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. 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 non-derivatives that are either designated in this category or not classified in any of the other categories. Available-for-sale financial assets must be initially recorded at fair value plus transaction costs. They must be subsequently recorded at fair value with any resultant fair value gains or losses recognised directly in equity except 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 (e.g. equity instruments) the fair value movements recognised in equity include any related foreign exchange component. At derecognition the cumulative fair value gain or loss previously recognised directly in equity is recognised in the Statement of Financial Performance.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables must be recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest revenue policy). Loans and receivables issued with a duration 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.

Sovereign receivables are initially assessed at nominal amount or face value; that is, the receivable reflects the amount of tax owed, levy, fine charged, or social benefit debt payable .  These receivables are subsequently adjusted for penalties and interest as they are charged, and tested for impairment.  Interest and penalties charged on tax receivables is presented as tax revenue in the Statement of Financial Performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.

Fair values of quoted investments are based on current bid 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. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

3.5.6.2 Financial liabilities

Financial liabilities held for trading and financial liabilities designated at fair value through profit or loss must be 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 profit and loss if acquired principally for the purpose of selling 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 must be recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate method. Financial liabilities entered into with a duration 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, is recognised at face value. Currency issued represents a liability in favour of the holder.

3.5.6.3 Derivatives

Derivative financial instruments must be recognised both initially and subsequently at fair value. They are reported as either assets or liabilities depending on whether the derivative is in a net gain or net loss position respectively. Recognition of the movements in the value of derivatives depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged (see Hedging section below).

Derivatives that are not designated as for hedge accounting are classified as held-for-trading financial instruments with fair value gains or losses recognised in the Statement of Financial Performance. Such derivatives may be entered into for risk management purposes, although not formally designated for hedge accounting, or for tactical trading. The underlying intent of the derivative influences where gains and losses are reported in the Statement of Financial Performance.

3.5.6.4 Hedging

Individual entities consolidated within the Government reporting entity apply hedge accounting after considering the costs and benefits of adopting hedge accounting, including whether an economic hedge exists and the effectiveness of that hedge, whether the hedge accounting qualifications could be met, and the extent it would improve the relevance of reported results.

Transactions between entities within the Government reporting entity do not qualify for hedge accounting in the financial statements of the Government (although they may qualify for hedge accounting in the separate financial statements of the individual entities). Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, the effects of the hedge relationship are automatically reflected in the Statement of Financial Performance so hedge accounting is not necessary.

(a) Cash flow hedge

Where a derivative qualifies as a hedge of variability in asset or liability cash flows (cash flow hedge), the effective part of any gain or loss on the derivative may be recognised in equity and the ineffective part must be recognised in the Statement of Financial Performance. Where the hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability (e.g. where the hedge relates to purchase of an asset in a foreign currency), the amount recognised directly in equity may be included in the initial cost of the asset or liability. Otherwise, gains or losses recognised in equity transfer to the Statement of Financial Performance in the same periods as when the hedged item affects the Statement of Financial Performance (e.g. when the forecast sale occurs). Both effective and ineffective parts of the hedge are recognised in the same area of the Statement of Financial Performance as the hedged item.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Statement of Financial Performance. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred to the Statement of Financial Performance.

(b) Fair value hedge

Where a derivative qualifies as a hedge of the exposure to changes in fair value of an asset or liability (fair value hedge) any gain or loss on the derivative is recognised in the Statement of Financial Performance together with any changes in the fair value of the hedged asset or liability.

The carrying amount of the hedged item is adjusted by the fair value gain or loss on the hedged item in respect of the risk being hedged. Both effective and ineffective parts of the hedge must be recognised in the same area of the Statement of Financial Performance as the hedged item.

3.5.7 Inventories

Inventories must be accounted for in accordance with the relevant financial reporting standard (refer NZ IAS 2 Inventories and NZ IAS 41 Agriculture).

Inventories are recorded at the lower of cost (calculated using weighted average method) and net realisable value. Inventories held for distribution for public benefit purposes are recorded at the lower of cost and current replacement cost. Where inventories are acquired at no cost, or for nominal consideration, the cost shall be the current replacement cost at the date of acquisition.

Inventories include unissued currency and harvested agricultural produce (e.g. logs, wool).

The cost of harvested agricultural produce is measured at fair value less estimated point-of-sale costs at the point of harvest.

3.5.8 Property, plant and equipment

Items of property, plant and equipment must initially be recorded at cost. Cost may include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Where an asset is acquired for nil or nominal consideration the asset will be recognised initially at fair value, where fair value can be reliably determined, with the fair value of the asset received, less costs incurred to acquire the asset, also recognised as income in the Statement of Financial Performance.

Revaluations are carried out for a number of classes of property, plant and equipment to reflect the service potential or economic benefit obtained through control of the asset. Revaluation is based on the fair value of the asset, with changes reported by class of asset.

Subsequent to initial recognition, classes of property, plant and equipment must be accounted for as set out below.

Class of PPE Accounting policy
Land & Buildings Land and buildings are recorded at fair value less impairment losses and, for buildings, less depreciation accumulated since the assets were last revalued.
Valuations undertaken in accordance with standards issued by the New Zealand Property Institute are used where available.
Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998, may be used if they have been confirmed as appropriate by an independent valuer.
When revaluing buildings, there must be componentisation to the level required to ensure adequate representation of the material components of the buildings. At a minimum, this requires componentisation to three levels: structure, building services and fit-out.
Specialist Military Equipment Specialist military equipment is recorded at fair value (which is determined using depreciated replacement cost) less depreciation and impairment losses accumulated since the assets were last revalued.
Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the bases of these valuations are confirmed as appropriate by an independent valuer.
State Highways State highways are recorded at fair value (which is determined using depreciated replacement cost) less depreciation and impairment losses accumulated since the assets were last revalued. Land associated with the state highways is valued using an opportunity cost based on adjacent use, as an approximation to fair value.
Rail Network The Rail Network is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.  Land associated with the state highways is valued using an opportunity cost based on adjacent use, as an approximation for fair value.
Aircraft Aircraft (excluding Specialised Military Equipment) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Electricity Distribution Electricity distribution network assets are recorded at cost, less accumulated depreciation and accumulated impairment losses.
Electricity Generation Electricity generation assets are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Other PPE – at cost Other property, plant and equipment, which include motor vehicles and office equipment, are recorded at cost less accumulated depreciation and accumulated impairment losses.
Specified cultural and heritage assets Specified cultural and heritage assets comprise national parks, conservation areas and related recreational facilities, as well as National Archives holdings and the collections of the National Library, Parliamentary Library and Te Papa. Such physical assets are recorded at fair value less subsequent impairment losses and, for non-land assets, less subsequent accumulated depreciation. Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, when they do not generate cash flows and where no market exists to provide a valuation.

Classes of property, plant and equipment that are revalued, must be revalued at least every five years or whenever the carrying amount differs materially to fair value.

Items of property must be revalued to fair value for the highest and best use of the item on the basis of the market value of the item, or on the basis of market based evidence, such as discounted cash flow calculations. If no market based evidence of fair value exists, fair value must be estimated using an optimised depreciated replacement cost approach. Where an item of property is recorded at its optimised depreciated replacement cost, optimised depreciated replacement cost must be based on the estimated present cost of constructing the existing item of property by the most appropriate method of construction, less allowances for physical deterioration and optimisation for obsolescence and relevant surplus capacity. Where an item of property is recorded at its optimised depreciated replacement cost, borrowing costs must be expensed.

Unrealised gains and losses arising from changes in the value of property, plant and equipment are recognised as at balance date. To the extent that a gain reverses a loss previously charged to the Statement of Financial Performance for the asset class, the gain is credited to the Statement of Financial Performance. Otherwise, gains are credited to an asset revaluation reserve for that class of asset. To the extent that there is a balance in the asset revaluation reserve for the asset class any loss is debited to the reserve. Otherwise, losses are reported in the Statement of Financial Performance.

Accumulated depreciation at revaluation date may be either restated proportionately or eliminated against the gross carrying amount so that the carrying amount after revaluation equals the revalued amount. The elimination approach must be applied unless Treasury has been otherwise informed.

Realised gains and losses arising from disposal of property, plant and equipment are recognised in the Statement of Financial Performance in the period in which the transaction occurs. Any balance attributable to the disposed asset in the asset revaluation reserve is transferred to retained earnings.

For each property, plant and equipment asset project, borrowing costs incurred during the period required to complete and prepare the asset for its intended use are expensed.

The carrying amounts of plant, property and equipment must be reviewed at least annually to determine if there is any indication of impairment. Where an asset's recoverable amount is less than its carrying amount, it will be reported at its recoverable amount and an impairment loss will be recognised. Losses resulting from impairment are reported in the Statement of Financial Performance, unless the asset is carried at a revalued amount in which case any impairment loss is treated as a revaluation decrease.

Depreciation must be charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of property, plant and equipment, less any estimated residual value, over its estimated useful life.

Typically, the estimated useful lives of different classes of property, plant and equipment are as follows:

Class of PPE Estimated useful lives
Freehold buildings 25 to 60 years
Specialist military equipment 5 to 25 years
State highways:
Pavement (surfacing) 7 years
Pavement (other) 36 years
Bridges 90 to 100 years
Rail Network:  
Track and ballast 40 years
Tunnels and bridges 80 years

Overhead traction and signalling

20 years

Aircraft (ex specialist military equipment) 10 to 20 years
Electricity distribution network 2 to 80 years
Electricity generation assets 25 to 55 years
Other plant and equipment 3 to 25 years

3.5.9 Biological assets

Biological assets (e.g. trees, sheep) managed for harvesting into agricultural produce (e.g. logs, wool) or for transforming into additional biological assets must be measured at fair value less estimated point-of-sale costs, with any realised and unrealised gains or losses reported in the Statement of Financial Performance. Where fair value cannot be reliably determined, the asset is recorded at cost less accumulated depreciation and accumulated impairment losses. For commercial forests, fair value takes into account age, quality of timber and the forest management plan.

Biological assets not managed for harvesting into agricultural produce, or being transformed into additional biological assets are reported as property, plant and equipment in accordance with the policies for property, plant and equipment.

3.5.10 Intangible assets

Intangible assets must be initially recorded at cost. The cost of intangible assets acquired in a business combination is their fair values at date of acquisition. Where an intangible asset is acquired for nil or nominal consideration it must still be initially carried at cost, which by definition is nil/nominal. The treatment outlined in NZ IAS 38 Intangible Assets (paragraph 44) exemption is for recipients of government grants and is not applicable for the financial statements of the Government. NZ IAS 38 also does not contemplate the situation of assets being internally generated through legislation or regulation. Entities with intangible assets generated through legislation or regulation should consult with Treasury

The cost of an internally generated intangible asset represents expenditure incurred in the development phase of the asset only. The development phase occurs after the following can be demonstrated: technical feasibility; ability to complete the asset; intention and ability to sell or use; and development expenditure can be reliably measured. Research is “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding ”. Expenditure incurred on the research phase of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred.

Intangible assets with finite lives are subsequently recorded at cost less any amortisation and impairment losses. Amortisation is charged to the Statement of Financial Performance on a straight-line basis over the useful life of the asset. Typically, the estimated useful lives of computer software is 3 to 5 years.

Assets with indefinite useful lives are not amortised, but are tested at least annually for impairment.

Where there is an active market for an intangible asset, the asset is recorded at a revalued amount, being fair value less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are done for each intangible asset, not for a class of asset.

Realised gains and losses arising from disposal of intangible assets are recognised in the Statement of Financial Performance in the period in which the transaction occurs. Unrealised gains and losses arising from changes in the value of intangible assets are recognised as at balance date.

  • To the extent that a gain reverses a loss previously charged to the Statement of Financial Performance, the gain is credited to the Statement of Financial Performance. Otherwise, gains are credited to an asset revaluation reserve for that asset.
  • To the extent that there is a balance in the asset revaluation reserve for the intangible asset a revaluation loss is debited to the reserve. Otherwise, losses are reported in the Statement of Financial Performance.

Intangible assets with finite lives must be reviewed at least annually to determine if there is any indication of impairment. An intangible asset with an indefinite life must be tested for impairment annually. Where an intangible asset's recoverable amount is less than its carrying amount, it will be reported at its recoverable amount and an impairment loss will be recognised. Losses resulting from impairment are reported in the Statement of Financial Performance, unless the asset is carried at a revalued amount in which case the impairment loss is treated as a revaluation decrease.

Goodwill acquired in a business combination must be recognised as an asset at cost and tested for impairment at least annually. Any impairment of goodwill is recognised as an expense. Impairment losses on goodwill are not reversed. For the purpose of impairment testing, goodwill must be allocated to cash generating units. Unless otherwise stated, the cash generating unit is synonymous with the entity acquired (i.e. Air New Zealand).

3.5.11 Non-current assets held for sale and discontinued operations

Non-current assets or disposal groups are separately classified where their carrying amount will be recovered through a sale transaction rather than continuing use; that is, where such assets are available for immediate sale and where sale is highly probable. Non-current assets or disposal groups must be recorded at the lower of their carrying amount and fair value less costs to sell.

3.5.12 Investment Property

Investment property is property held primarily to earn rentals or for capital appreciation or both. It does not include property held primarily for strategic purposes or to provide a social service (e.g. affordable housing) even though such property may earn rentals or appreciate in value – such property is reported as property, plant and equipment. Nor does investment property include property interests held under operating leases.

Investment properties must be measured at fair value. Gains or losses arising from fair value changes are included in the Statement of Financial Performance. Valuations are undertaken in accordance with standards issued by the New Zealand Property Institute.

The cost model is permitted only where the fair value cannot be reliably determined. Entities with investment property that cannot be reliably determined must provide Treasury with details of such investment properties.

3.5.13 Employee benefits

Employee benefits must be accounted for in accordance with NZ IAS 19 Employee Benefits.

3.5.13.1 Pension liabilities

Obligations for contributions to defined contribution retirement plans are recognised in the Statement of Financial Performance as they fall due. Obligations for defined benefit retirement plans are recorded at the latest actuarial value of the Crown liability. All movements in the liability, including actuarial gains and losses, are recognised in full in the Statement of Financial Performance in the period in which they occur.

3.5.13.2 Other employee entitlements

Employee entitlements to salaries and wages, annual leave, long service leave, retiring leave and other similar benefits are recognised in the Statement of Financial Performance when they accrue to employees. Employee entitlements to be settled within 12 months are reported at the amount expected to be paid. The liability for long-term employee entitlements is reported as the present value of the estimated future cash outflows.

In 2009 the Treasury issued two excel models (spreadsheets) to calculate long service leave and retiring leave liabilities that comply with NZ IAS 19. These models can be downloaded from Treasury Circular 2009/06. Entities that used the 1998 long service leave model, or have adapted another model based on Treasury Circular 1998/15, must switch to these new models for the financial year ending 30 June 2009 and beyond. However, an entity may continue to engage an independent actuary, or use their in-house valuation models approved by an independent actuary, rather than switch to the new in-house Treasury models.

3.5.13.3 Termination benefits

Termination benefits are recognised in the Statement of Financial Performance only when there is a demonstrable commitment to either terminate employment prior to normal retirement date or to provide such benefits as a result of an offer to encourage voluntary redundancy. Termination benefits settled within 12 months are reported at the amount expected to be paid, otherwise they are reported as the present value of the estimated future cash outflows.

3.5.14 Insurance contracts

The future cost of ACC claims liabilities must be revalued annually based on the latest actuarial information. Movements of the liability are reflected in the Statement of Financial Performance. Financial assets backing the liability are designated at fair value through profit and loss.

3.5.15 Leases

Finance leases and operating leases must be accounted for in accordance with NZ IAS 17 Leases.

Finance leases transfer to the Crown as lessee substantially all the risks and rewards incident on the ownership of a leased asset. Initial recognition of a finance lease results in an asset and liability being recognised at amounts equal to the lower of the fair value of the leased property or the present value of the minimum lease payments. The capitalised values are amortised over the period in which the Crown expects to receive benefits from their use.

Economically speaking, finance leases are a form of borrowing that, depending on an entity's borrowing powers, may require prior ministerial approval. See Treasury Instruction 6.3.5.1 which sets out issues to consider and information to provide when seeking approval for finance leases.

Operating leases, where the lessor substantially retains the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter. Lease incentives received are recognised evenly over the term of the lease as a reduction in rental expense.

3.5.16 Other liabilities and provisions

Other liabilities and provisions must be recorded at the best estimate of the expenditure required to settle the obligation. Liabilities and provisions to be settled beyond 12 months are recorded at their present value.

3.5.17 Contingent assets and contingent liabilities

Contingent assets and contingent liabilities must be accounted for in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Contingent liabilities and contingent assets are recorded in the Statement of Contingent Liabilities and Contingent Assets at the point at which the contingency is evident. Contingent liabilities are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised.

3.5.18 Commitments

Commitments are future expenses and liabilities to be incurred on contracts that have been entered into at balance date.

Information on non-cancellable commitments must be disclosed in the Statement of Commitments.

Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising the option to cancel must be included in the Statement of Commitments at the value of that penalty or exit cost (i.e. the minimum future payments).

Commitments must be classified as:

  • Capital commitments: aggregate amount of capital expenditure contracted for but not recognised as paid or provided for at period end. NZ IAS 16 Property, Plant and Equipment (paragraph 74(c)) requires the disclosure of contractual commitments for the acquisition of property, plant and equipment.
  • Non-cancellable operating leases with a lease term of more than one year (as required by NZ IAS 17 Leases). These must be classified into liabilities due under the lease in the following periods:
    • not later than one year;
    • later than one year and not later than five years; and
    • later than five years.
  • Other non-cancellable commitments: these may include consulting contracts, cleaning contracts and ship charters. These must be classified into commitments due in the following periods:
    • not later than one year;
    • later than one year and not later than five years; and
    • later than five years.

Interest commitments on debts and commitments relating to employment contracts must not be included in the Statement of Commitments.

3.5.19 Comparatives

When presentation or classification of items in the financial statements is amended or accounting policies are changed voluntarily, comparative figures must be restated to ensure consistency with the current period unless it is impracticable to do so.

3.5.20 Institutional analysis

The Government reporting entity is not required to provide segment reporting as it is a public benefit entity. Nevertheless, information is presented for material institutional components and major economic activities within or undertaken by the Government Reporting Entity. The three major institutional components of the Crown are:

  • Core Crown:  This group, which includes Ministers, government departments, offices of Parliament and the Reserve Bank of New Zealand most closely represents the budget sector and provides information that is useful for fiscal analysis purposes.
  • State-owned enterprises including entities governed by the State –owned Enterprises Act, and for the purposes of these statements also includes Air New Zealand, represents entities that undertake commercial activity.
  • Crown entities:  This group includes entities governed by the Crown Entities Act 2004.  These entities have separate legal form and specified government frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy.

Functional analysis is also provided of a number of financial statements items.  This functional analysis is drawn from the Classification of the Functions of Government produced by the International Monetary Fund.

3.5.21  Related parties

The Government comprises a large number of commonly controlled entities. These entities, and their key management personnel, transact among themselves and with the Government reporting entity on a regular basis, for example, for the purchase of postage stamps or the registration of vehicles. The Public Finance Act 1989 requires separate reporting by these individual entities and these entities will report transactions with the Crown and other related parties as appropriate in these individual financial statements.

With the exception of key management personnel, no other parties control the Government, are controlled by the Government without being consolidated, or are under common control of another entity with the government. Tertiary education institutions, joint ventures and the Government Superannuation Fund are however considered related parties due to government influence and transactions between the government reporting entity and these entities are separately disclosed where material.

Key management personnel, defined as Ministers of the Crown that are in Cabinet, are also considered to be related parties.

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