4 Accounting and forecasting policy parameters for departmental external financial reporting

4.1  Explanatory note

To make the statements and forecasts of different departments comparable, and to ensure that the consolidated financial statements and forecasts of the Government reporting entity are prepared on a consistent basis, a department needs to report on a basis not materially different from the bases upon which other departments report. This is substantially achieved through all departments and the Government itself preparing their financial statements and forecasts within the same policy parameters.

The principles which must be used by departments when developing their accounting policies are outlined in Section 2 of the Treasury Instructions ("Principles for the development of accounting policies for external financial reporting").

This section of the Treasury Instructions focuses on the provision of information on the parameters within which departmental accounting policies must be developed, with particular reference, where appropriate, to:

• areas not yet specifically covered by generally accepted accounting practice;
• limiting choices in generally accepted accounting practice where this is necessary for consistency in the financial statements of the Government; and
• clarifying accounting treatments where generally accepted accounting practice and other legislative requirements may be in conflict.

4.2  Particular accounting policies: General

4.2.1  Statement of Responsibility

A department's financial report may be issued only when the Statement of Responsibility is signed by the department's Chief Executive and Chief Financial Officer.

4.2.2  Combination of sub-entities

Departments of the Crown must combine the results and financial position of all sub-entities.  The sub-entities to be combined in a department's financial statements are those that fall within the extended meaning of a department provided by section 33 of the Act, which defines a department as including "any activities, other than activities performed by a natural person or separate legal entity, that are funded by way of appropriation administered by the department and any bodies or statutory offices, other than natural persons or separate legal entities, that are funded by way of appropriation administered by the department.”

For all sub-entities that are not joint ventures (as defined by NZ IAS 31) the purchase method, as described in NZ IFRS 3 Business Combinations, and the consolidation procedures outlined in NZ IAS 27 Consolidated and Separate Financial Statements must be used in preparing the department's financial statements. This method of preparing consolidated financial statements is sometimes referred to as a line-by-line consolidation.

Sub-entities that are joint ventures shall be accounted for in accordance with NZ IAS 31 Interests in Joint Ventures as follows.

• Jointly-controlled operations: The department shall recognise the assets it controls, the liabilities and expenses that it incurs, and its share of the jointly-controlled operations' income.
• Jointly-controlled assets: The department shall recognise 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: The department shall recognise its share in a jointly-controlled entity using the equity method.

In the preparation of financial statements, all intra-departmental transfers and transactions must be eliminated. Accordingly, each sub-entity must identify and record transactions with other parts of the department. If it is not possible to eliminate absolutely all such transactions, all material intra-departmental transactions must be eliminated.

4.2.3  Goods and Services Tax

Goods and Services Tax (GST) is an indirect tax on goods and services.

GST is collected at various stages of production and distribution by registered persons in respect of their taxable activities.

The following financial statements and the equivalent forecast statements must be prepared on a net of GST basis (i.e. on a GST exclusive basis):

• Statement of Financial Position (except for receivables and payables and any assets where GST input tax is irrecoverable);
• Statement of Financial Performance (for non-departmental revenues and expenses GST is included as a separate line item within the statement);
• Statement of Cash Flows;
• Statement of Service Performance;
• Statement of Commitments; and
• Statement of Contingent Liabilities.

As appropriations are on a GST exclusive basis, the Statement of Unappropriated Expenditure must also be prepared exclusive of GST.

For non-departmental expenses and capital expenditure, the item shall be recorded net of GST where money is being paid:

• on GST applicable products and services; and
• to a GST registered person.

In other words, if the recipient of the payment is required to account for GST on the amount received, the expense shall be recorded net of GST.

Care must be taken when deducting input tax to ensure that it is not related to making GST-exempt supplies. Exempt supplies include financial services, residential rent, supplies of fine metal, interest charges and supplies of donated goods and services. If a purchase is connected with an exempt supply, any full amount should be recognised as part of the related asset or, where the expenditure relates to an expense item, expensed.