Entities included in the consolidated financial statements of the Government reporting entity

The Government of New Zealand has three branches: the legislative, executive and judicial branches. The executive branch includes around 40 departments and Ministries. In order to ensure that the activities of all three branches are appropriately reported the concept of the Government reporting entity was developed. The Government reporting entity, as defined in the Act, consists of these three branches and the Sovereign in right of New Zealand (section 2(1)). The Government reporting entity concept is similar to the parent entity in a private sector context.

The financial statements of the Government report on the whole-of-government – they are sometimes referred to as group accounts. The Act (section 27(3)) requires that the annual consolidated financial statements for the Government reporting entity must include the Government reporting entity’s interests in:

• all Crown entities named or described in the Crown Entities Act 2004. These include:
  • statutory entities which are further classified as Crown agents, autonomous Crown entities and independent Crown entities (around 80)
  • Crown entity companies (currently 12)
  • Crown entity subsidiaries
  • school boards of trustees (over 2,500), and
  • tertiary education institutions (around 30)
• all organisations named or described in Schedule 4 (a range of small or unusual entities that do not have Crown entity status but which nevertheless are required to comply with various sections of the Crown Entities Act 2004) (around 50)
• all State enterprises named in the first Schedule of the State-Owned Enterprises Act (around 18)
• all Offices of Parliament (currently three)
• the Reserve Bank of New Zealand, and
• any other entity whose financial statements must be consolidated into the financial statements of the Government reporting entity to comply with GAAP (for example, where the Government holds a controlling interest in a company).

Local authorities are not included in the financial statements of the Government because they are not controlled by the Government. A list of entities included in the financial statements of the Government is available in the financial statements. The statements can be accessed from Treasury’s web site at www.treasury.govt.nz/financialstatements/. A diagram illustrating the entities within the state sector is available on the State Services Commission’s website at www.ssc.govt.nz/display/document.asp?docid=4423.

The financial statements of the Government must present information on the Government’s interests in a large number of entities. The financial statements could present information on these interests by disclosing the Government’s net investment in such entities (measured at cost or fair value). Although disclosure of the net investment is useful, it does not provide readers with any indication of the revenues and expenses, assets and liabilities or cash flows of the entities concerned. Information on each individual entity is provided by way of their separate financial statements, but it is difficult for users to assimilate this information and use it to assess the overall financial operations and financial position of the Government. This is the role of consolidated financial statements.

The Act therefore requires that the Government prepare consolidated financial statements (section 27(1)). In accordance with financial reporting standards, the concept of control is used to determine which investments are consolidated.[8]

The consolidated financial statements of the Government reporting entity are created by combining the financial statements of all the entities described above on a line-by-line basis. For example, the assets and liabilities of all controlled entities are treated as assets and liabilities of the Government. Transactions between the entities within the consolidated group are eliminated to ensure they are not double counted.

Comparison of projected performance and actual results

The financial statements of the Government are used by the Government to demonstrate its accountability for its actual financial performance against forecasts. The Act requires that the Government produce both forecast financial statements (Part 2) and monthly and annual financial statements (Part 3).

The Act’s requirements in relation to forecast financial statements are discussed in Chapter 3.

The monthly statements provide timely information for external users to monitor the Government’s progress in relation to forecasts throughout the year.

In common with appropriations and financial forecasts, the financial statements are prepared using the accrual basis of accounting and in accordance with generally accepted accounting practice (GAAP). As discussed in Chapter 1, consistent application of accounting policies enhances the comparability of information.

User needs

The financial statements of the Government are intended to meet the needs of a range of external users. Such reports are commonly referred to as general purpose financial reports.

Although each group of users will have specific needs, users of the financial statements of the Government are frequently interested in the state of the Government’s overall financial health (referred to as financial condition) and whether this financial condition has improved or deteriorated. The financial statements of the Government can provide information on aspects of financial condition including:

• sustainability, or a government’s ability to meet existing operational commitments and the creditor requirements brought on by past borrowing, without abrupt or large increases in debt or taxes
• flexibility, or the degree to which a government can increase its financial resources to respond to rising commitments, by either expanding its revenues or increasing its debt burden, and
• vulnerability, or the degree to which the government becomes dependent, and therefore vulnerable, to sources of funding outside its control or influence (CICA, 1997).

The financial statements provide users with the basis for analysing the Government’s financial condition, at a point in time, against these criteria. However, the Government’s financial statements do not provide information on the effectiveness of government spending and revenue decisions as this requires separate evaluation of the impact of these decisions.