6   Operating instructions applying to departments as defined in the Public Finance Act 1989

6.1 Financial responsibility of Chief Executives

Section 34 of the Act makes departmental Chief Executives responsible for the financial management and financial performance of their departments.

Chief Executives are responsible for operating their own accounting and management systems and establishing day to day procedures to support those systems.

Specific responsibilities, which must be addressed by Chief Executives, include:

• financial reporting requirements;
• the system of internal control;
• responsibility for non-statutory bodies;
• banking, receipt and payment systems;
• accounting systems;
• control over asset acquisition, utilisation and disposal;
• purchasing, contracting and tendering procedures;
• risk management;
• travel policies and procedures;
• personnel policies and procedures; and
• foreign exchange exposure management.

A number of publications have been developed to assist departmental Chief Executives with the development and maintenance of appropriate accounting policies and systems. Departments may obtain these publications from their Vote Analysts.

The Chief Executive’s responsibilities must be carried out within the parameters of legislation and Government policy. The requirements of the Act, the State Sector Act 1988, Treasury Instructions, Minister of Finance Instructions and any other legislation or regulations governing the operations of the department must be complied with. These requirements may result in departments having responsibilities to parties other than the Crown. Government policy, as set out in Cabinet decisions, Ministerial direction, or agreements between the Chief Executive and the Responsible Minister may also impact on the manner in which the Chief Executive meets his or her responsibilities. Financial delegations from Cabinet to the Responsible Minister and the Chief Executive are a specific example of Cabinet decisions that impact upon financial management within a department.

In addition to responsibilities associated with the financial management of the department, the Chief Executive may be responsible for incurring expenditure, collecting revenue, or managing assets and liabilities on behalf of the Crown, or for managing trust money on behalf of the Treasury (which manages it for the Crown).

6.2 Reporting obligations

6.2.1 Annual financial statements of departments

6.2.1.1 Reporting requirements

Section 45B of the Act sets out the requirements for preparation of the annual financial statements of departments. They must be prepared in accordance with generally accepted accounting practice as defined by section 2 of the Act; and include:

• any other information or explanations needed to fairly reflect the department’s financial operations and financial position;
• the forecast financial statements prepared at the start of the financial year for comparison with the actual financial statements;
• a statement of actual expenses and capital expenditure incurred against each appropriation administered by the department and each class of outputs included in each output expense appropriation; and
• a statement of unappropriated expenses and capital expenditures incurred in relation to the activities of, or appropriations administered by the department together with an explanation of the reasons for the unappropriated expenses and capital expenditure.

6.2.1.2 Non-departmental activity

A number of departments administer non-departmental activities on behalf of the Crown. Although departments are not directly accountable for the financial performance of non-departmental activities, the department is responsible for the effective and efficient administration of these activities. The provision of information on the financial extent of these activities will provide context for, and supporting information regarding, departmental outputs, and is necessary to reflect the financial operations of the department for the year and its financial position at the end of the year.

Departments therefore must disclose non-departmental activities in the form of schedules. If applicable and appropriate, departments must have up to six separate sets of schedules for assets, liabilities, income, expenses, contingencies and commitments (if not fully disclosed in the statement reporting expenditure or expenses or liabilities incurred against appropriations). Departments must also provide a statement regarding the accounting policies used in preparing the schedules, to the effect that measurement and recognition rules consistent with generally accepted accounting practice are applied in the preparation of the schedules. The schedules are to be audited.

6.2.2 Provision of reports to Ministers

Chief Executives must provide regular financial and performance information to their Responsible Minister (the Minister responsible for the department), and to Ministers responsible for Votes administered by their department. These reports must, if requested, be made available to the Treasury.

Although the format and timing of this information is at the discretion of Ministers and departments, Cabinet has directed that five principles should be adhered to when preparing this information. These principles are:

• No surprises: Ministers should expect to be adequately warned in advance of any issue of significance, for example, if there is any risk that appropriations may be breached.
• Linked to other reporting: Performance information should be linked to Ministerial priorities, and should therefore link to any communications from Ministers that express those priorities. Such information should also be consistent with measures of performance included in the information supporting the Estimates of Appropriations, Statement of Intent and Annual Report.
• Materiality: The level of detail should be appropriate. The issue of materiality should consider both the dollar value of financial information and whether the information is significant for other reasons.
• Forward Looking: A common criticism of reporting is that information is historic and often simply describes what has already occurred. Reporting should also make projections of future situations and compare these with what was planned. Where variances indicate that remedial action is required, departments should clearly identify areas in which ministers are required to make decisions. Decisions contained within a report should be distinguished from information provided purely for the minister’s information.
• Exceptions Basis: Exceptions reporting focuses on areas where performance has departed or is anticipated to depart from agreed performance expectations.

6.2.3 Provision of reports to the Treasury

The Treasury is responsible for reporting aggregate financial information to the Minister of Finance. The Secretary to the Treasury requires assurance that there is an adequate system of internal control in place in departments, and that the departmental information used in this reporting can be relied upon.

In addition, the role of the Treasury in preparing forecasts and actual financial statements means that the Treasury also requires timely information in specified formats. Chief Executives must supply timely and accurate information to the Treasury for the following purposes:

• Preparation and compilation of the Budget and the Estimates of Appropriations, Information supporting the Estimates of Appropriations, supplements, and adjustments to these;
• Budget and appropriation monitoring;
• Monitoring and control of Crown revenue, expenditure, assets and liabilities (refer also to Treasury Instructions, section 6.4 “Crown revenue, expenditure, liabilities and assets”);
• Forecasting and monitoring of banking activity (refer also to Treasury Instructions, section 6.5 “Banking”);
• Monitoring and control of trust money (refer also to Treasury Instructions, section 6.6 "Trust money");
• Monitoring and control of contingent liabilities (refer also to Treasury Instructions, section 6.7 "Contingent liabilities"); Preparation of the financial statements of the Government of New Zealand; and
• Explanation of material variances to forecast.
  

Such information must be provided by way of reports in the form, and within the time frame, from time to time specified by the Treasury. These requirements are set out in Treasury Circulars.

6.2.4 Compliance with accounting and forecasting policies

All reports supplied to the Treasury must be prepared in accordance with the relevant accounting and forecasting policies issued by the Treasury. In the case of departmental activity they are the “Accounting and forecasting policy parameters for external financial reporting by departments” (section 4 of the Treasury Instructions). In the case of Crown activity managed by the department, reports are to be prepared in accordance with the “Crown accounting policies for external financial reporting” (section 3 of the Treasury Instructions).

6.2.5 Provision of other information

Section 79 of the Act provides the legal authority for the Treasury to request information from departments (except an intelligence and security department unless the Secretary and the Chief Executive of that department agree) in relation to the financial management, financial performance, or banking activities of a department, or in relation to the management or control of any Crown asset or liability.

Chief Executives must supply such information or access as the Treasury may from time to time require for the purpose of examining the accuracy of information provided to the Treasury or the integrity of the financial management system operating in a department.

6.3 Departmental revenue, expenditure, assets and liabilities

6.3.1 Managing departmental expenditure

A key principle of the appropriation process is that expenses and/or capital expenditure may not be incurred without prior legislative approval. In addition to such statutory authority, all expenses and/or capital expenditure may be incurred only in accordance with the most recent Cabinet Office Circular on delegations for expenditure. The Imprest Supply and supplementary estimates processes are designed to allow some flexibility for government and departments to alter resource allocations while still maintaining prior parliamentary legislative approval and scrutiny.

Under these processes, no expenses or capital expenditure additional to, or in excess of, appropriation may be incurred without prior Cabinet approval. Any such approval is:

• for an appropriation for expenses or capital expenditure;
• to include these appropriations in the next set of Estimates; and
• to meet such expenses or capital expenditure from Imprest Supply.

An alternative mechanism, that of transferring an amount appropriated in a Vote for a specified class of outputs in that Vote to another class of outputs in that Vote, is permitted under section 26A of the Act. This transfer can be either during or after the financial year, provided that it is the only transfer to that class of outputs for the year, that the amount transferred does not increase the class of outputs by more than 5%, and that the total amount appropriated is not altered. An Order in Council is required to effect such a transfer.

6.3.2 Expenditure requiring Minister of Finance approval

Both emergency expenditure and unappropriated expenditure require the approval of the Minister of Finance prior to the expenditure being incurred. The Treasury must prepare a report to the Minister for each case of emergency or unappropriated expenditure; therefore details of any such expenditure must be supplied by the department concerned to the Treasury.

Emergency Expenditure : Section 25 of the Act provides authority for the Minister of Finance to approve the incurring of expenses or capital expenditure necessary in the event of a defined emergency. Early notification by a department to the Treasury will help ensure rapid approval is obtained from the Minister in the event of any such emergency.

The Government’s policy on civil defence expenditure is contained in the National Civil Defence Plan, published by the Ministry of Civil Defence and Emergency Management.

The Government’s policy on search and rescue expenditure is contained in the National Search and Rescue Manual published by the Ministry of Transport.

Expenditure in excess of an existing appropriation : Section 26B of the Act provides authority for the Minister of Finance to approve the incurring of expenses or capital expenditure in the last three months of the financial year, in excess of appropriation by Parliament, up to the greater of $10,000 or 2% of the total amount appropriated for costs for that Vote for that financial year.

6.3.3 Foreign exchange exposure management

Section 65F of the Act provides that it is not lawful for a department of the Crown or the Crown itself to enter into a derivative transaction except as provided in any Act. Section 2 of the Act provides a derivative transaction includes a foreign exchange transaction. Section 65G of the Act provides the Minister of Finance may enter into a foreign exchange transaction if it appears to the Minister to be necessary or expedient in the public interest to do so. A department’s foreign exchange exposure management is conducted in accordance with its Departmental Foreign Exchange Exposure Management Policy, and operates on the basis of delegation from the Minister of Finance through the Treasury. The guidelines for the Management of Departmental Foreign-exchange Exposure (first issued 1990, updated 2003) assist departments in preparation of their Foreign-Exchange Policy Document. If a department’s Foreign Exchange Exposure Management Policy is within the guidelines, it must be agreed between the Chief Executive of the department and the Secretary to the Treasury. If a department’s Foreign Exchange Exposure Management Policy is not within the guidelines it must be agreed between the Responsible Minister and the Minister of Finance.

6.3.4 Departmental insurance and risk management

Departments must carry out some form of systematic risk management process covering:

• identification of the risks faced, or likely to be faced;
• quantification of the type and size of the risk (including consideration of prior losses and probability of loss);
• determination of a risk appetite (i.e., the amount of risk the department is prepared to accept); and
• deciding how the risks are to be managed or controlled, including whether to purchase insurance cover.

Each department is likely to approach this task differently to others, and will arrive at different conclusions based on their business profiles and risk exposures. Regardless of the process chosen, the critical element is that accountability for managing risk is established within the department, and that procedures are in place to maintain it as a high priority throughout agency operations.

The full range of options for the treatment of risks should be canvassed before decisions are made. The options available can be defined as:

• Tolerate – an assessment of the costs to manage or mitigate a risk may outweigh the benefits to be gained, so a decision is made to accept the risk as it stands.
• Treat – internal systems or processes are put in place that reduce the risk to suitable levels (i.e. installing sprinkler systems).
• Transfer – an external party takes on the risk, most commonly by way of commercial insurance.
• Terminate – the activity being undertaken or contemplated is stopped due to the risks being too high.

Departments are not obliged to insure against all their risks. Rather, they are required to systematically assess all risk management options available to them, of which insurance is only one. Decisions on the management of risks are likely to be made according to the probability and size of any loss, and the department’s ability to absorb any potential loss. This is especially the case for decisions on self-insurance, where the department needs to be certain that it has the operational and financial ability to absorb any loss.

In the rare circumstance that a significant identified risk cannot be managed by a department (including by way of self insurance or commercial insurance), this is to be quantified and reported to the responsible Minister and the Minister of Finance. This is likely to arise in situations where the insurance market is unwilling to take on the risk (for example, war time insurance of military assets), and where mitigation efforts are not deemed to be cost-effective or appropriate.

Options such as self-insurance by the department should be explored and costed before raising the issue with Ministers. This will include consideration of whether the department has the operational and financial capability to handle any loss, and the impact this would have upon producing outputs and achieving outcomes.

It is important that insurance and risk management arrangements are regularly reviewed. This ensures that relevant factors from the changing business environment are taken into account, and that best practice improvements are being implemented or adapted.

The Crown owns other assets which are not recorded in departmental balance sheets (for example, Parliament buildings). The general policy for these Crown assets is self-insurance. Departments managing Crown assets (particularly assets with substantial and special value) should continue to review the risks faced by those assets and advise the responsible Minister(s) as to the most effective courses of action. In the case of buildings, for example, this may include increasing strengthening or mitigation strategies within buildings against catastrophic events such as earthquake or fire.

6.3.5 Prohibition on investing, borrowing or lending

Departments must not invest surplus cash balances unless it is under a delegation from the Treasury. Investing includes the purchase of shares or equity in another organisation.

Under section 65I of the Act, investing of public money in bank deposits with a bank approved by the Minister for the purpose, public securities, and other securities approved by the Minister for the purpose, may be undertaken by the Treasury.

Under section 65K the Crown must not lend money to any party except as expressly authorised by any Act or if lending the money is necessary for the Crown to meet a legal obligation or to perform a function properly. For the purposes of this Instruction, lending does not include loans made to employees as part of their remuneration agreements, or the provision of credit for the supply of goods and services for periods of less than 90 days.

Under section 46 departments of the Crown must not borrow money unless authorised by any Act nor must any person lend money to departments of the Crown. The term “borrow money ” includes entering into hire purchase or agreements that are of the same or a substantially similar nature, financing leases or arrangements that are of the same or a substantially similar nature, obtaining goods and services (including fixed assets) on credit for periods greater than 90 days and accepting debt on assignment from other persons (i.e. recording the indebtedness of another entity in the accounts of the department and paying those debts as if they were the debts of the department). Under section 47 the Minister of Finance may borrow money on behalf of the Crown if it appears to the Minister to be necessary or expedient in the public interest to do so.

6.3.5.1 Obtaining authority to enter into finance leases

A finance lease is a form of borrowing and the general prohibitions on borrowing also apply to finance leases.

Departments must obtain approval before entering into any finance lease.

Departments may seek approval for entering into finance leases by either:

• seeking specific approval from the Minister of Finance for a specific lease. In this case the Minister signs the lease and the department administers it on the Minister’s behalf. This approach is most useful for one off arrangements that are less likely to be renewed; or
• seeking a pre-determined level of borrowing ability as an agent in accordance with requirements outlined in section 50 and section 53 (if relevant) of the Act. Departments must provide a paper to the Treasury seeking delegated authority to enter into finance leases. This approach is most useful where the number, quantum and timing of leases may change regularly (for example, IT leases). In order to deal with such changes the use of pre-determined levels within which the department has flexibility to alter leasing arrangements are likely to be appropriate. Any borrowing limit must be consistent with the limits in CO(99)7 in relation to purchase, development or leasing of fixed assets.

When seeking delegated authority to enter into finance leases departments must provide a paper setting out the following information:

• the parties to the lease and their legal jurisdiction;
• the nature of the request (one off lease approval or delegated limit to enter finance leases up to a certain nominal value);
• what the finance leases will be for (eg, IT equipment);
• the expected costs and benefits of using finance leases as opposed to operating leases or outright purchase, including the discount rate used; and
• relevant information on contingent liabilities/assets (eg, indemnities/options).

Where information on the following factors is relevant it should also be included:

• taxation implications for all counter-parties to the lease;
• evaluation of counter-party credit risk, such as what happens if one party defaults on contractual obligations;
• the extent of foreign exchange rate exposure, if any, and who will manage this; and
• details of the arbitration authority if any.

The Treasury, in advising the Minister of Finance will consider factors such as:

• costs from the Crown’s point of view, not just the departments (albeit departments are required to manage all cash flows associated with potential finance leases from existing baselines);
• the potential increased costs in comparison with other sources of finance, the duration of the arrangement, cost of exiting the arrangement and whether the advantage leveraged by a department is at the expense of other areas of the Crown (for example if a favourable finance rate was levered off the New Zealand tax base); and
• the increased risks from the negative impact on other areas of fiscal or financial policy (for example implications of any cross default clauses or overall gross debt targets of the Crown).

The Department’s request to the Treasury will form the basis of a joint Treasury and Department Report to be sent to the Minister of Finance advising of the request for delegations, and Treasury’s recommendations in relation to it. A delegation will be attached for the Minister to formally sign and will then be returned to the Department.

6.3.6 Memorandum accounts

Memorandum accounts are notional accounts which record the accumulated balance of surpluses and deficits incurred in the provision of certain outputs on a full cost-recovery basis. They are not formal assets or liabilities of the Crown.

In general, full-cost recovery (including the capital charge) applies where departments supply services to third parties in the absence of competition or under a statutory monopoly. Departments should ensure that fees and charges do not differ so far from cost that demand for the service is substantially affected.

Except where prior approval for alternative arrangements has been obtained from Treasury, departments must use memorandum accounts to record the accumulated balance of surpluses and deficits incurred in the provision of third-party fully cost-recovered outputs.

Memorandum accounts are to be used where:

• the outputs are provided by the department (including any boards, authorities or other organisations that, for appropriation and reporting purposes, legally form part of the department);
• third parties are to be charged for services provided on that basis; and
• refunding surpluses or levying for shortfalls through a contractual arrangement is costly or impractical.

Memorandum accounts are not to be used where:

• revenue is legitimately earned at market rates; or
• revenue is received in advance as defined under generally accepted accounting practice.
• revenue results from internal charging within a department;
• outputs where Government policy is explicitly to recover at less than full cost of the outputs; or

The use of memorandum accounts does not affect the responsibilities of chief executives to manage expenses consistently with appropriations.

The structure and opening balance of each memorandum account is to be approved by the Minister of Finance and the relevant Vote Minister and Responsible Minister (if different).

Judgement is required in deciding whether it is acceptable to aggregate separate fees or different fee paying groups into a single memorandum account. Departments should consider the interests of fee-payers, compliance costs and the materiality of the amounts.

The memorandum account commences with an opening balance and is adjusted each year by the end-of-year surplus or deficit in relation to the fees covered by the memorandum account.

Where the accumulated positive balance of a memorandum account is greater than the year’s deficit, the Minister of Finance, Vote Minister and Responsible Minister may jointly approve such capital contributions, subject to the economic effects of reductions in the accumulated balances being minimal (CAB (00) M 42/11 refers). Requests for capital contributions in these situations should be accompanied by the following information:

• the amount sought;
• the current balance of the memorandum account;
• an explanation of the cause of the deficit; and
• an assessment of the need to adjust fee levels.

Where the accumulated balance of a memorandum account is negative or less than the deficit incurred, normal capital contributions apply (CO (00) 12 refers).

Memorandum accounts must be presented in the information supporting the Estimates of Appropriations and annual reports. This disclosure should include a summary of movements in each memorandum account showing revenues and expenses separately, opening and closing accumulated balances and comparative information.

6.4 Crown revenue, expenditure, assets and liabilities

6.4.1 Definition of Crown

In this section of the Treasury Instructions the term “Crown ” is used where revenue, expenditure, assets or liabilities are being managed by a department of the Crown otherwise than for departmental purposes. Such items are also referred to as “non-departmental”.

Examples of “Crown revenue ” and “Crown expenditure ” are taxation revenue and benefit payments. Such revenue and expenditure can be distinguished from departmental revenue or expenditure that relate to, or result from, the supply of outputs by the department.

Similarly, “Crown assets ” are those assets that the department manages for the Crown, rather than those assets used by a department for its own purposes. Crown liabilities are those liabilities that a department manages for the Crown, rather than liabilities incurred by the department as part of its normal operating activities. Crown assets and liabilities are not reported in the statement of financial position of the department.

6.4.2 Authority to operate Crown bank accounts

Under section 65R of the Act, the Treasury is responsible for the opening, maintenance and operation of all Crown Bank Accounts.

Where it is appropriate, the Treasury will establish Crown Bank Accounts for use by departments. Departments will be issued with a Notice of Delegation Regarding Crown Bank Accounts to operate these accounts, in accordance with section 65S of the Act (refer also to section 6.5 of the Treasury Instructions, “Banking”).

6.4.3 Collection of Crown revenue

Departments collecting revenue for the Crown must:

• bank all such revenue into a Crown Bank Account approved by the Treasury for that purpose;
• operate that Crown Bank Account in accordance with the terms of these Instructions, and any Notice of Delegation Regarding Crown Bank Accounts issued by the Treasury;
• maintain a management, accounting and information system which will:
  • o recognise Crown revenue when it is earned,
  • o account for all Crown debtors, and
  • o account for all receipts relating to Crown revenue;
• operate an adequate system of internal control in respect of such debtors and revenue;
• ensure adequate procedures are adopted for the collection of these debts;
• provide forecasts to the Treasury of Crown revenue and the consequential cash flows; and
• provide such other information in relation to Crown revenue as the Treasury may from time to time require.

If a remittance is received, which does not constitute full payment, and there are elements of both departmental and Crown revenue, then the money is to be applied to discharge the debt to the Crown first. Where such a remittance includes trust money and cannot be separated from departmental or Crown money, then the ranking of distribution should be approved by the Treasury.

6.4.4 Disbursement of Crown expenditure

Departments making payments for the Crown (including refunds of Crown revenue) must:

• make such payments from a Crown Bank Account approved by the Treasury for that purpose;
• only make such payments directly to the recipient (i.e. not to an agent for subsequent payment to the recipient) unless agreed by the Treasury;
• operate that Crown Bank Account in accordance with the terms of section 6.5 of the Treasury Instructions (“Banking”), any Notice of Delegation Regarding Crown Bank Accounts issued by the Treasury and the most recent Cabinet Office Circular on delegations for expenditure;
• maintain a management, accounting and information system which will:
  • recognise the expenditure when it is incurred;
  • account for all Crown creditors, and
  • account for all payments made on behalf of the Crown;
• operate an adequate system of internal control in respect of such creditors and payments;
• provide forecasts to the Treasury of the Crown expenditure and the consequent cash flows; and
• provide such other information in relation to Crown expenditure as the Treasury may from time to time require.

6.4.5 Management of Crown assets

6.4.5.1 General requirements

Departments managing assets for the Crown must:

• maintain a management, accounting and information system which will account for all Crown assets managed by the department;
• value, or arrange for valuations of, Crown assets in accordance with the "Crown accounting policies for external financial reporting" (section 3 of the Treasury Instructions);
• apply appropriate asset management standards;
  
• provide the Treasury with such information as it may from time to time require.

6.4.5.2 Delegation of authority to write off Crown assets

Departments may seek delegated authority to write off Crown assets when the following conditions are met:

• a documented set of policies and procedures (including appropriate approvals) is in place to ensure that a Crown asset will only be written off when all avenues of recovery have been exhausted or the expected costs of recovery outweigh the expected return from pursuing the debt or realising the asset. The expected return is to take into account the probability of a successful collection or sale and the amount involved;
• a half-yearly system of reporting on any write-offs to joint Ministers has been instituted. The report should include the nature of the assets, amounts involved, recovery actions taken, and cost-benefit analyses on pursuing the debts further;
• a follow-up action plan is established to survey any developments of debts written off, and resume recovery actions if new information suggests that collection is feasible; and
• joint Ministers are satisfied, on the recommendations of officials, with the procedures in place and support the delegations request.

The levels of delegation should be proposed by departments and agreed by joint Ministers on a case-by-case basis, taking into account the nature of the assets, the department’s operations and the recommendations of the department and Treasury.

6.4.6 Management of Crown liabilities

Departments managing liabilities for the Crown must:

• maintain a management, accounting and information system which will account for all Crown liabilities managed by the department;
• value Crown liabilities in accordance with the “Crown accounting policies for external financial reporting” (Section 3 of the Treasury Instructions);
• operate an adequate system of internal control; and
• provide the Treasury with such information as it may from time to time require.

6.4.7 Provision of information to Treasury

The Treasury is responsible for the preparation of the “Government reporting entity’s ” Financial Statements under section 27 of the Act. Section 2(1) of the Act defines “Government reporting entity ” to mean the Sovereign in right of New Zealand and the legislative, executive and judicial branches of the Government of New Zealand. It therefore requires regular information from departments regarding Crown revenue, expenditure, assets, liabilities and cash flows. This may include information each month calculated on a cash basis and both cash and accrual information for half and full year external reporting. Section 79 of the Act gives Treasury the statutory base to request other information from departments.

6.5 Banking

6.5.1 Introduction

This section of the Treasury Instructions relates to banking arrangements in respect of public money held in departmental and Crown bank accounts (both domestic and foreign currency). Refer to section 6.6 of the Treasury Instructions (“Trust money”) for banking arrangements in relation to trust money.

Proper accounting systems must be set up and maintained to ensure that public money is properly accounted for and internal controls maintained.

6.5.2 Bank accounts

The Crown has contracted with Westpac Banking Corporation to provide the Crown’s domestic banking operations. All New Zealand dollar accounts must be set up at the Government Branch of Westpac Banking Corporation unless an exemption has been granted. For Crown bank accounts an exemption is granted by the Minister under section 65R(2) of the Act. For departmental bank accounts the Treasury or the Minister, under section 65S(1) of the Act, grants an exemption.

Foreign currency bank accounts and non-Westpac New Zealand dollar bank accounts may be opened under the terms of a Direction for Foreign Currency Departmental Bank Accounts and a Notice of Delegation Regarding Crown Bank Accounts issued by the Treasury. With respect to Crown bank accounts, foreign currency accounts may be opened in accordance with the Notice of Delegation Regarding Crown Bank Accounts issued by the Treasury.

Departmental bank accounts are primarily the responsibility of departments. All Crown bank accounts are the responsibility of the Treasury (see the Treasury Instructions, section 6.4.2 “Authority to operate Crown bank accounts”). Crown and departmental bank accounts operate under the authority of the sections in Part II of the Act.

All payments (whether by cheque, tape, electronic funds transfer etc) out of a bank account are to be authorised by two account signatories, unless the Treasury approves a specific exemption. Appointment of account signatories (who may be specified officers or classes of officers), and changes thereto, are managed by the department under a direction by the Treasury.

Cheques drawn on a departmental bank account or a Crown bank account must have the name of the department printed on them.

Section 65U(4) provides that where money has been paid into a Crown or departmental bank account in error, or in excess of the amount required for the purpose for which it was paid, it may be paid out of that bank account to the person entitled to the payment. This section could be applied to refund payments, where the refund arises due to overpayment. Note that such refunds are not expenses and therefore do not require an appropriation; they should be accounted as reductions in revenue.

6.5.3 Departmental bank accounts

Treasury’s prior approval must be obtained before opening or closing Departmental bank accounts (including sub-accounts). In the case of foreign currency departmental bank accounts the Treasury will issue Directions for Foreign Currency Departmental Bank Accounts, pursuant to section 65T of the Act, governing the terms and conditions under which such accounts must operate.

A positive balance must be maintained in New Zealand dollar departmental bank accounts at all times. Sub-accounts may go into overdraft provided the net position remains positive. Foreign currency bank accounts must not be overdrawn. Trust bank accounts must be managed under section 6.6 of the Treasury Instructions (“Trust money”).

Departmental receipts and payments are paid into, and out of, departmental bank accounts. When establishing the account structure consideration should be given to cash forecasting requirements, cost of maintenance, size and nature of business, volume of transactions and organisation structure. The bank account structure must be agreed with the Treasury.

The combined balance of departmental bank accounts operated by a department must never be overdrawn. Any cash balances held in New Zealand dollar departmental bank accounts at the Government branch of Westpac must be invested by the Treasury overnight. Departments may receive, on a periodic basis, payment from the Treasury for overnight cash balances held in departmental bank accounts.

Each foreign currency bank account must not be overdrawn at any time. Departments that earn interest on foreign currency departmental bank accounts must comply with the Direction for Foreign Currency Departmental Bank Accounts issued to it.

6.5.4 New Zealand dollar Crown bank accounts

Section 65U of the Act requires all receipts of public money to be paid into a Crown bank account or a departmental bank account. Departmental revenue is earned whenever a direct exchange relationship with a department occurs (i.e. when a department provides a good, service, right or money, for which it receives some form of payment or a right to payment). Departments also act for the Crown in respect of non-departmental activities and may therefore collect receipts for the Crown in respect of non-departmental revenue. Examples of such receipts are taxes, fines, duties, levies, royalties and infringement fees. Departments must deposit all receipts from Crown activities into a “Crown receipts bank account ”.

Although the responsibility to operate Crown bank accounts rests with the Treasury, some Crown bank accounts will be able to be operated by departments. The authority to operate Crown bank accounts results from the issuing of a formal Notice of Delegation Regarding Crown Bank Accounts by the Treasury in accordance with section 65S of the Act and section 41 of the State Sector Act 1988. Departments must at all times comply with the terms of any such Notice.

Separate bank accounts will be established for depositing Crown receipts and making payments on behalf of the Crown. This separation ensures the integrity of the Controller function and Parliamentary supply, as amounts received will not be able to be directly used for payments, but will instead be remitted to the New Zealand Debt Management Office.

A positive balance must be maintained in each Crown bank account (or sub-account) operated by a department at all times unless the Notice of Delegation Regarding Crown Bank Accounts permits otherwise.

Departments must not undertake transfers between Crown accounts. If a transfer is necessary then the department must notify the Treasury of the need for the transfer, and the Treasury will arrange the transfer.

Crown bank accounts must be reconciled at least monthly.

At the end of the financial year any money remaining in a Crown bank account managed by a department must be returned to the main Crown bank account managed by the New Zealand Debt Management Office. Sufficient funds must remain in the Crown bank account to cover any unpresented cheques or other known withdrawals relating to the financial year just completed. Sufficient funds must also remain in the Crown bank account to enable the payment of any outstanding obligations that are to be met from that account.

6.5.5 Foreign currency Crown bank accounts

Foreign currency Crown bank accounts may only be opened pursuant to a Notice of Delegation Regarding Crown Bank Accounts and at banks listed in the department’s policy document on the Management of Foreign Currency Transaction Exposure.

6.5.6 Foreign currency holdings in departmental and Crown bank accounts

Departments must hold no more foreign currency than is required for normal business operations. Approval to open a foreign currency Departmental or Crown bank account should not be sought unless such an account is essential to the efficient conduct of that business.

6.5.7 Power of Minister or the Treasury in relation to Crown or departmental bank accounts

All directions issued by the Treasury or the Minister of Finance regarding:

• the terms and conditions under which a bank account may be operated;
• the provision of information; and
• directions regarding public money including transfers from a departmental bank account

must be adhered to promptly.

Each department has full responsibility for the operation of its Departmental bank account, subject to direction from the Minister or the Treasury under section 65S of the Act. The powers conferred by sections 65S(3) and 65T(2) of the Act will be used only in special circumstances.

6.5.8 Cash payment schedule

Departments must negotiate a cash payment schedule with the Treasury prior to the commencement of each financial year. Cash is requested to be paid into either Crown payment bank accounts controlled by the department (non-departmental operations on behalf of the Crown) or into departmental bank accounts. A separate cash payment schedule is required in respect of each Crown payment bank account operated by the department. Only one cash payment profile is required for departmental bank accounts.

Departments, as part of their budgeting process, must estimate the cashflows of the department's operations and any Crown activity managed by the department. This figure is then used to determine the total cash requirement for the year. This cash requirement is broken down into disbursements to be made at regular intervals (usually fortnightly) by the Crown. The cash payment schedule is arrived at through departmental negotiation with the Treasury Vote Analyst and is entered into the Crown’s Financial Information System (CFISnet) via the cash module. Cash is disbursed in New Zealand dollars.

Any subsequent changes to the cash payment schedules must also be agreed with the Vote Analyst. Notice of any changes (i.e. a new cash payment schedule signed by both the department and the Vote Analyst) is required at least two full working days prior to the payment date.

Departments are responsible for transferring funds required for the normal course of business to departmental and Crown foreign currency bank accounts, subject to an agreed Departmental Foreign Exchange Exposure Management Policy and Notice of Delegation Regarding Crown Bank Accounts or Direction for Foreign Currency Departmental Bank Accounts.

Departments are required to reconcile cash requests back to appropriations to ensure that cash requests do not exceed authorised levels. Any reconciling items should be explained in the cash reconciliation within the CFISnet cash module.

6.5.9 Investment of public money

Departments are not permitted to invest cash balances. To minimise the cost of managing the core government’s cash flows it is essential to manage centrally not only the Government’s cash disbursements (and the funding thereof) but also its investment activity. Investing in this context is investing by departments with entities other than the Crown (i.e. other than the “core” Crown). Section 65I of the Act confers investment powers upon the Treasury. These powers may not be delegated to departments. However, the Treasury may allow departments to open foreign currency interest bearing departmental or Crown bank accounts.

6.6 Trust money

6.6.1 Legislative provisions

Trust money is defined by section 66 of the Act as:

• Money that is deposited with the Crown pending the completion of a transaction or dispute and which may become repayable to the depositor or payable to the Crown or any other person.
• All money that is paid into Court for possible repayment to the payee or a third party, by virtue of any Act, rule or authority whatsoever.
• All money that is paid to the Crown in trust for any purpose.
• Money that belongs to or is due to any person and is collected by the Crown pursuant to any agreement between the Crown and that person.
• Unclaimed money that is due to or belongs to any person and is deposited with the Crown.

Trust money exists only where there is a trustee/beneficiary relationship. Money set aside by the Crown or department for a particular purpose will normally not be trust money as there is no directly identifiable beneficiary who has deposited the money with the Crown.

Trust money held by the Crown is to be managed separately from public money.

Any money held by a department which is not trust money is public money.

Under the Act, the Treasury has the responsibility to manage and invest trust money. The Treasury may appoint agents (including departments) to act on its behalf. Written Notices of Appointment to Manage and Invest Trust Money are issued in these cases.

Section 68 of the Act establishes the constraints on the investment of trust money.

6.6.2 Notice of appointment

A written Notice of Appointment to Manage and Invest Trust Money, in accordance with sections 66(4) and 67(3) of the Act, specifying the terms of the delegation to administer trust money, will be issued by Treasury to departments acting as trust money agents. Only those departments holding such a Notice are authorised to manage and invest trust money and operate trust bank accounts.

Departments must not establish or create trusts. Departmental monies may be deposited into a trust bank account only if the following conditions have been met:

• the department is purchasing services from the trust; or
• the department is not the sole beneficiary.

6.6.3 Accounting for trust money

Where a department is acting for the Crown as manager of trust money, the department must manage and account for trust money separately from public money. Trust money must be banked into a separate bank account for each trust.

In accounting for trust money, departments are responsible for maintaining documentary evidence of contributions, distributions, revenue and expenses for each beneficiary.

6.6.4 Internal control and trust money

Under the Notice of Appointment to Manage and Invest Trust Money, the Chief Executive of a department must ensure that the appropriate internal control systems are in place in respect of trust money managed by the department.

Internal controls in respect of trust money include the following:

• keeping detailed records of all outstanding money held in trust;
• controlling receipting procedures and ensuring proper authorisation of payments;
• monthly balancing of the trust bank account and investments to the department’s accounting records;
• adequate security and control over the blank cheque forms; and
• adequate security over receipt books.

6.6.5 Reporting of trust money

Departments must provide reports to the Treasury, in the form specified, detailing receipts, payments and balances of trust money managed by the department. These reports must be made at year end for inclusion in the financial statements of the Government of New Zealand, and at such other times as the Treasury may from time to time request.

6.6.6 Records of trust money

The department is responsible for maintaining records of the deposit. The records must include the current (and any preceding) Notices of Appointment to Manage and Invest Trust Money and show the following in respect of each category of trust money specified in the Schedule to the Notice of Appointment:

• documentation supporting existence of trust relationship (i.e. contracts, letters of agreement/appointment, legislation, trust deed, etc);
• name of depositor(s);
• name of beneficiary(ies);
• date of deposit;
• bank where deposit is held;
• amount of the deposit;
• interest terms;
• treatment of interest payments;
• maturity date;
• date deposit is to be refunded;
• date and amount of interest refund(s); and
• date and authority releasing the deposit from the trust account.

6.6.7 Trust bank accounts

Departments appointed to manage trust money must operate a separate bank account for each trust. The Notice of Appointment to Manage and Invest Trust Money will contain authority to establish the bank account(s). These accounts will be separate from departmental bank accounts or Crown bank accounts.

Trust money must be banked into a trust bank account(s), and may be invested only in accordance with the Notice of Appointment. Payments may not be made from trust bank accounts until the money representing the payment has been credited to the account. Trust bank accounts must not be overdrawn.

Unclaimed trust money is deemed to be public money and must be credited to a Crown bank account. Full details of the payment of unclaimed trust money to a Crown bank account must be provided to the Treasury. Section 70(1) of the Act details the circumstances giving rise to unclaimed trust money. Subsequent claims on unclaimed trust money paid into a Crown bank account must be treated in accordance with section 70(2) of the Act.

6.6.8 Investment of trust money

A department which is delegated authority to invest trust money may invest only in accordance with the Notice of Appointment to Manage and Invest Trust Money. Where practicable, any interest earned on trust money must be either added to the original sum and accounted for by apportionment to each beneficiary, or distributed to each beneficiary. The Treasury must be consulted and concur with the method of treating interest when a department does not consider it practicable to treat interest as detailed above.

6.6.9 Taxation

Departments must ensure that they are aware of relevant taxation legislation to the extent that it affects trusts. The Inland Revenue Department should be consulted, or legal advice sought, as necessary.

6.6.10 Definition of terms

Contribution: Amount that has been contributed to the trust by donors during the reporting period and which has been banked to the Trust bank account.

Distribution: Sum paid to beneficiaries of the trust during the reporting period.

Expenses: These are only the direct costs paid by the trust in achieving its aims. This may include cash paid for taxation, administrative and accounting fees, salaries and wages of trust employees, purchase of goods and services and the purchase of items of property, plant and equipment.

Revenue: The amount of interest or other income received by the trust on Trust investments, assets, and current balances.

6.7 Contingent liabilities

6.7.1 Introduction

When determining the accounting disclosures for contingent liabilities, the NZ IAS 37 definition is the relevant definition.

6.7.2 Contingent liability types

The major types of contingent liabilities that may arise in respect of non-departmental activities include guarantees, indemnities and warranties, performance bonds, legal disputes, uncalled capital on shares and other securities.

Departments should be aware that guarantees, indemnities and warranties might be couched in language that hides their nature. This would particularly apply where formal contracts do not exist. A guarantee may be given without the term “guarantee” ever being used. Similarly, the use of the term “guarantee” may not necessarily mean that a contingent liability arises (i.e. Guaranteed Retirement Income).

6.7.3 Register of contingent liabilities

Each Government Department must maintain a Register of Contingent Liabilities in which all contingent liabilities given on behalf of the Crown by, or in respect of, the department are to be recorded. The register must disclose the nature of the contingent liability and provide such details as the date that it was incurred, the authority under which it was given, its term, and the amount if it is able to be quantified.

The Chief Executive must determine the responsibility for the management of the Register of Contingent Liabilities. It is recommended that the Register be operated by the senior Office Solicitor or where this does not exist, by the senior Corporate Services Manager. These personnel have the greatest knowledge of the contracts entered into by the Department and of any instances where the Department has bound the Crown to future possible expenditure.\

6.7.4 Certification by Minister

At 31 December and 30 June, the details of current guarantees from each departmental register must be provided to the Responsible Minister of the Department for certification that they are unaware of any additional contingent liabilities that have been omitted. For Offices of Parliament the certification will be provided by the Chief Executive.

6.7.5 Power to give guarantees

Subject to delegations or regulations, all guarantees and indemnities are required to be given or approved by the Minister of Finance. Under section 65ZD of the Act, the power to give guarantees and indemnities has been conferred upon the Minister of Finance. Under section 65ZE a department may give a guarantee or indemnity that is of a type specified in regulations, if it is necessary or expedient in the public interest to do so. The Public Finance (Departmental Guarantees and Indemnities) Regulations 2007 provide for the types of guarantees or indemnities that a department may given under s65ZE. See also Treasury Circular 2007/11.

Costs incurred under indemnities that are authorised by regulations or given under delegated authority are to be met out of departments' baselines and are to be advised to the Secretary to the Treasury.

Where a contingent liability exceeding $10,000,000 is incurred under section 65ZD or 65ZE, a statement that the contingent liability has been incurred, containing such details relating to that guarantee or indemnity as the Minister considers appropriate, must be published in the Gazette and tabled in Parliament as soon as practicable.

Under section 63 of the Act the Minister of Finance may issue securities, in the manner and form he thinks fit, for any money borrowed by the Crown.