Annual Report of the Treasury for the Year Ended 30 June 2014

1. Financial and physical capital – resources such as infrastructure, housing and saved wealth
2. Natural capital – resources such as a stable climate, quality water and biodiversity
3. Social capital – institutions and conventions that make our society work, and
4. Human capital – people's health, education and skills.

1. Economic
   We are the lead advisor for Ministers on economic performance, concentrating on policy areas that have a significant impact on economic performance. This includes advice on measures to improve the quality of regulation, removing barriers to growth and enhancing productivity.
2. Financial management and advice
   We manage the financial affairs of the Crown and provide advice on fiscal strategy, policy and performance. As the Government's chief accountant we also work to support awareness, professionalism and skills development in financial management across the State sector.
3. State sector leadership
   With the Department of the Prime Minister and Cabinet (DPMC) and the State Services Commission (SSC), we collectively lead the State sector with the aim of delivering outstanding results for New Zealanders. We assist the Government to develop its overall strategy for the State services, provide advice on how to improve the system and manage significant issues.
4. Performance management and advice
   We advise on the performance of departments and other entities the Crown owns. This includes working with them to improve performance as required. Our focus is delivering better services for less.
5. Commercial policy advice and operations
   We provide commercial policy advice (for example, advice on financial markets and government-owned assets) and provide financial operational services through the Treasury's Debt Management Office (NZDMO) and New Zealand Export Credit Office (NZECO).

Our Business Environment

New Zealand maintained its ranking of third out of 185 countries in the World Bank's Ease of Doing Business 2014 rankings. New Zealand was ranked within the top quarter for all the components of this index, including a top ranking for "starting a business" and "protecting investors" and second for "registering property".

New Zealand was eighth in 2013 on the OECD Product Market Regulation Barriers to Entrepreneurship indicator, compared to 26th in 2008. New Zealand's score for the regulation of airlines, telecommunications, postal services and the accounting and legal professions improved.

New Zealand has:

• the most comprehensive (least distorting) Goods and Services Tax (GST) or VAT in the OECD
• among the lowest tax burdens on labour income in the OECD
• amongst the easiest tax systems in the OECD to comply with, and
• a relatively high share of taxes collected from capital income compared with other OECD countries.
• New Zealand improved its ranking from 47th to 27th place out of 148 countries in the 2013/14 World Economic Forum Global Competitiveness report's perceived infrastructure quality component.

Our International Competitiveness

Exports as a % of GDP (real) have been between 31.3% and 33.9% over the past 10 years, most recently around 33.4%.

GDP per hour worked increased by 0.9% per year in New Zealand between 2001 and 2013, compared to an OECD-wide increase of 1.1% per year over the period.

In 2013, New Zealand's business investment as a percentage of GDP (real) was 15.5% compared to an average of 12.7% for the OECD countries (excluding New Zealand) with available data.

The World Economic Forum ranked New Zealand as the 18th most competitive economy in 2013/14, an increase from 23rd place in 2012/13.

Enhanced Human Capital and Labour Supply

Reducing long-term welfare dependence

The Government's target is to reduce the number of people continuously receiving these working-age benefits, which will become the new Jobseeker Support, for more than 12 months by 30%, from 78,000 in April 2012 to 55,000 by 2017.  As at March 2014 the number had dropped from 75,366 in March 2013 to 68,932.

Boosting skills and employment

The Government's targets are:

• 85% of 18-year-olds will have achieved NCEA Level 2 or an equivalent qualification in 2017. In 2013, the latest data available, this was at 78.6%, an increase of 1.4 percentage points from 2012, and
• 55% of 25–34-year-olds will have a qualification at Level 4 or above in 2017.  In 2013, the latest data available, this was at 53.85%, an increase of 1.25 percentage points from 2012.

A Stable Macroeconomic Environment

Economic variability

The standard deviation of New Zealand's annual real GDP growth (a measure of economic variability) was around 1.8 percentage points in the 10 years to 2013 (9th out of 34 OECD economies), compared to 2.1 (13th out of 28) and 2.6 (22nd out of 34) in the 1980s and 1990s respectively. This shows an improvement in New Zealand's relative ranking, with GDP variability now in the lowest third of OECD countries.

Macroeconomic vulnerability

The Treasury forecasts in the Budget 2014 Economic and Fiscal Update (BEFU) show the current-account deficit increasing from current levels, such that the net international liability position also begins to increase again. The net international liability position has fallen as a share of GDP since March 2009 partly owing to re-insurance inflows associated with the Canterbury earthquakes, although remains at a high level by international standards.

Fiscal Position Returning to a Sustainable Footing

The Pre-election Update forecasts show the operating balance (before gains and losses) (OBEGAL) returning to surplus in 2014/15 and net core Crown debt peaking in 2014/15 and then declining (see graph below). Core Crown expenses are forecast to reduce to 30% of GDP in 2016/17.

Net core Crown debt

Source:  The Treasury

In addition, projections included in the Pre-election Update show net core Crown debt falling to below 20% of GDP by 2020/21.

Assessments of New Zealand

Institutions and governance

• Second on public institutions in the World Economic Forum, Global Competitiveness Report 2013.
• Fifth in respect of governance in the Bertelsmann Stiftung Sustainable Governance Indicators.
• In the top 5% of countries on all six of the dimensions of governance in the WGI.

Integrity

• First equal (with Denmark) in the Transparency International Corruption Perceptions Index (2013).
• In the 99th percentile on control of corruption in the WGI.
• Third in respect of the absence of corruption.

Transparency rankings

• Second on open government in the World Justice Project Rule of Law Index (following Norway).
• First in the 2012 Open Budget Index; indicating that our Government provides the public with extensive information on the National Government's budget and financial activities.
• Fourth in "transparency of government policy-making" in the World Economic Forum Global Competitiveness Report.
• Fourth in the Global Open Data Barometer 2013 which takes into account readiness, implementation and impact of government open data initiatives.

Government's Better Public Services Results

The State sector needs to have a clear focus on achieving outstanding results for New Zealanders, given the limited resources available. Currently, the State sector is focused on achieving a set of clearly defined Better Public Services Results. The Treasury works alongside other agencies to support the achievement of these goals.

In 2012, the Government announced 10 results in challenging areas that were to be achieved by 2017. The Better Public Services Results are designed to help Ministers drive better outcomes for New Zealanders and to drive progress on issues that require State services leaders to work across agency boundaries and in partnership with communities, non-government organisations (NGOs) and the private sector. The programme is on track to achieve eight of the 11 headline targets, with progress publicly reported every six months. On-track results include reducing crime (the overall rate is down 16% since 2011) and reoffending (down 12.2% since 2011); reductions in long-term welfare dependence; an increase in infant immunisation rates; and an increase in the proportion of 18-year-olds with NCEA Level 2.

More detail is available at: http://www.ssc.govt.nz/better-public-services

Kiwis Count

Kiwis Count is a comprehensive survey that measures New Zealanders' satisfaction with 42 frequently used public services. It is an improvement and learning tool for those providing public services. Especially in a time of fiscal constraint, improvement in service quality scores speaks of agencies working hard to improve service and customer satisfaction.

The overall Service Quality Score (SQS) from 2012 to March 2014 has been relatively stable at 72. This is four points higher than when first measured in 2007.

Kiwis Count is based on the Canadian Citizens First survey. When this approach was first adopted, a key advantage was that service comparisons could eventually be made. The Kiwis Count SQS increased four points from 2007 to 2012 whereas over much the same period (2005 to 2012) the Canadian SQS improved by one point.

Kiwis Count also separately measures New Zealanders' trust in public services, based on their perceptions and experience. Although both measures have increased over time, trust in public services based on experience is consistently higher than trust based on perception. In March 2014, trust based on experience was 77% (compared to 67% in 2007) and trust based on perception was 44% (compared to 29% in 2007). More details are available at: http://www.ssc.govt.nz/kiwis-count

The 2014 stakeholder survey indicated that:

• 16% more stakeholders agreed the Treasury took a lead role in State sector performance improvement
• 16% more agreed that the Treasury modelled the behaviour it expects of other public service agencies, and
• 10% more felt that the Treasury clearly communicated what is needed to improve State sector performance.

Administration and Support Corporate Services Performance 

The emergency management functions transferred into DPMC in April 2014 which increased the CASS running cost budget from $10.5 million in 2013/14 to $11.9 million for 2014/15. Once the additional DPMC support is excluded, the running cost budget is equivalent to 2013/14 as CASS continues to realise service efficiencies whilst absorbing remuneration and inflationary cost pressures.

CASS has endeavoured to comply with the pre-determined metrics during a period of ongoing legacy consolidation and the introduction of new services and processes.  Stakeholder satisfaction validates that pre-determined levels are being met and further refinement of our Service Level Agreements (SLAs) and associated KPIs will be a focus as part of continuous improvement in the upcoming year. 

Benchmarking Administrative and Support Services measurement

Overall, the cost of Treasury administrative and support services increased in nominal terms by $365,000 between 2011/12 and 2012/13 (the latest data available at the time of publishing).  The Treasury performed better than its peer group in Finance, ICT and Procurement, with the cost of HR recruitment being the only outlier.

The percentage of administrative and support services cost to total running costs has reduced from 11.76% to 9.89% by end of 2012/13.  This places the Treasury in the top three of its cohort.[7]

In 2012/13, the latest data available, the Treasury performed above the median for its cohort in Finance and Legal functions, but was below the cohort median for Human Resources and Procurement.  This measure is expected to improve in the 2013/14 results.

Risk Management#

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The Treasury's risk management practice is based on an approach modelled on the Joint Australian/New Zealand International Risk Management Standard (ISO 31000:2009). The Treasury's ability to manage in an uncertain and changeable operating environment and to achieve our outcomes is enhanced by the quality of our risk management.[8]

Our enterprise risk management approach ensures there is systematic and regular assessment and monitoring of key strategic and operational risks facing the Treasury. Our senior leaders regularly identify and assess the Treasury's core organisational risks and ensure that we take appropriate actions to manage them. Our overall set of risks is overseen by executive management and a Risk and Audit Committee (RAC)(a committee of the Treasury Board), which comprises three experienced external members to provide independent perspectives.

Consistent with good practice, we reviewed and modified our risk management approach during 2013/14. This is being tested and will be rolled out across the organisation during 2014/15.

Our internal audit function complements the risk management approach by providing assurance to the Board and senior management that key risks are being managed appropriately and that internal controls are operating effectively. The areas of focus are selected using a risk-based approach. During 2013/14, audits were conducted in the following areas: aspects of performance reporting; the adequacy of the application control environment for Treasury models (for example, the Treasury's forecasting model); and NZECO.

Statement of Responsibility#

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Pursuant to section 45C of the Public Finance Act 1989, the Secretary to the Treasury is responsible for the preparation of the Department's financial statements and statement of service performance and for the judgements made in them. Under this section the Secretary is also responsible for having in place a system of internal control procedures that provides reasonable assurance as to the integrity and reliability of the Treasury's financial reporting.

In the opinion of the Secretary to the Treasury:

• the Department's financial statements and statement of service performance fairly reflect its financial position and operations for the financial year ended 30 June 2014
• the supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2014 and revenues and expenses managed by the Treasury on behalf of the Crown for the year ended on that date, and
• the forecast financial statements fairly reflect the forecast financial position and operations of the Department for the financial year to which they relate, based on information and decisions as at 29 April 2014.

Gabriel Makhlouf
Secretary to the Treasury

Fergus Welsh
Chief Financial Officer
(countersigned)

Statement of Service Performance#

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Our Service Performance#

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This section describes the 11 groups of outputs that the Treasury was funded to deliver in 2013/14 and assesses our delivery against the performance measures set out in the Information Supporting the Estimates 2013.

Collectively these output expenses support the achievement of the outcomes set out on pages 9 to 22 of this Annual Report.

For each output expense, summary information has been provided on the nature of the work it covered, along with examples of significant work completed during the year and an assessment of how we have performed against the performance measures that were published in the Information Supporting the Estimates 2013.

We have also included forecast performance information for the 2014/15 year. We have not provided performance information where measures are being introduced for the first time for 2014/15 and were not applicable to 2013/14.

Where a current year measure has, or is being, expired and replaced with a replacement we have labelled them accordingly and provided performance information against them for the year in which they apply.

The diagram on pages 6 and 7 of this report illustrates the relationship between our output expenses, our intermediate outcomes and outcomes.

Policy Advice – Finance#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to enable and facilitate ministerial decision-making that achieves for New Zealand improved economic performance, a high performing State sector and a stable and sustainable macroeconomic environment.

Scope of Appropriation

This appropriation is limited to the provision of advice (including second opinion advice and contributions to policy advice led by other agencies) to support decision-making by Ministers on government policy matters relating to Finance.

Significant Work Completed

During 2013/14, the Treasury provided advice on:

Social policy

• Social housing reform, including securing Cabinet approval to set up the Social Housing Establishment Unit to lead work on commercial options, fiscal implications, policy issues and implications for HNZC of making HNZC assets and capital investment contestable. We worked closely with MSD to develop a work programme for social housing purchasing which includes reform of financial assistance and a contestable trial. We also supported the smooth and successful transfer of functions, including the administration of Income Related Rents, from HNZC to MSD in April 2014.
• The affordability and supply of housing, including delivering the first report of three planned into availability and timeliness of infrastructure for freeing up land for housing. We developed a framework to think about the incentives on councils and are embedding this into other parts of our work. We continued to support MBIE in implementing/developing other parts of the formal work programme and associated advice. We also supported a successful project post-Budget with DPMC and MBIE stocktaking progress and assessing policy options, and had input into RBNZ's amendments to Loan Value Ratio (LVR) policy.
• The implementation of the investment approach for welfare policy, with the aim of reducing the level of long-term welfare dependency. The formal components are now largely in place; we have base information for future monitoring of Work and Income's performance and have been working with MSD on the 2014/15 targets and on the proposed focus of 2014/15 investments. The Multi-category Appropriation is now in place and operational.
• The financial sustainability of the Justice sector and the options to manage both and short- and long-term cost pressures whilst delivering better services. The Treasury has worked with the Justice sector to advise Ministers on the delivery options for the Justice and Emergency Services Precinct in Christchurch.
• The health system and its performance, including working on health papers associated with Affording Our Future and the Treasury's 2013 Statement on the Long-term Fiscal Position.
• A government policy direction for ACC funding policy in collaboration with ACC and MBIE.
• Improving education system outcomes; for example, by working closely with MOE on advice to establish a new professional body for the teaching profession and Investing in Educational Success. We also focused on the effectiveness of education system expenditure and resource management, including undertaking a joint review of institutional arrangements for the management of school property, and working with TEC to improve the quality of capital business cases for Canterbury Tertiary Education Institutions. The business case for expansion of the trade facilities at the Christchurch Polytechnic and Institute of Technology has been completed and construction is underway.

Christchurch development

• Implementing whole-of-government procurement arrangements forChristchurch based on joint advice from Canterbury Earthquake Recovery Authority (CERA), MBIE and the Treasury. The Treasury also provided advice, jointly with other agencies, on a delivery vehicle for central city capital projects in Christchurch, the implementation of the Cost Sharing Agreement and the finances of the Christchurch City Council. We have also supported CERA and other agencies in the development of business cases for major capital projects in Christchurch.

Resource management

• Cross-agency work on resource management including building the evidence base and developing policy options on freshwater, which led to a National Policy Statement underpinned by a National Objectives Framework.
• Proposed Resource Management Act 1991 reforms, including sections 6 and 7 and a tool for greater direction from central Government. The decision to transition to a domestic only ETS from 2015, which will yield significant savings.
• The options for reforming resource management through the Resource Management Bill 2012 and Resource Management Reform Act 2013. This included clarifying the national direction and tools; simplifying and reducing the requirements for resource consent, introducing a time limit for consents for medium-sized projects, considering Māori interests in resource management earlier in the planning process and streamlining the process for Auckland's first unitary plan.

Infrastructure

• The infrastructure evidence base, including the 10-year Capital Intentions Plan, which are important steps in laying down the foundations for achieving the country's infrastructure objectives. We had a strong focus on supporting and briefing on key government engagements with local government, specifically the Central Government/Local Government annual forum and the Central Government/Auckland annual forum. We also provided advice on transport policy issues including the Auckland Transport package.

Budgeting and financial management

• New Zealand's fiscal outlook and risks to support the fiscal decisions that were taken in Budget 2014 and the associated BPS and FSR. This included advice on Budget and fiscal strategy incorporating macroeconomic, growth, State sector and balance sheet perspectives.
• Capital allocation via the use of a Capital Investment Panel. The Panel assessed the relative attractiveness of capital proposals considered in Budget 2014 from an all-of-government perspective, identifying a portfolio of capital investments that appeared most likely to provide best value to Government over the near to medium term, taking account of their potential impact on living standards, and recognising the constraints of the Future Investment Fund.

Regulatory reform

• Provided advice on changes to the statutory disclosure regime for government-initiated legislation. The Legislation Amendment Bill was introduced into the House of Representatives in May and now awaits its first reading debate.

International relationships and external engagement

• Advancing regional economic integration and the Government's Business Growth Agendas through the TPP negotiations, and arrangements to allow the direct conversion of the New Zealand Dollar and Chinese Renminbi.

Our economy and fiscal position

• Domestic and international economic developments in Monthly Economic Indicator reports and other reports.
• The impact of fiscal policy settings on monetary policy and macroeconomic stability, and options for dealing with revenue surprises and long-term fiscal objectives to support fiscal decisions in Budget 2014.
• The risks to the Crown of the implicit guarantee of the financial sector and options to support the operation and implementation of the Open Bank Resolution, contributed to the Australian Financial Sector Inquiry and worked with Trans-Tasman Banking Council agencies to enhance crisis preparedness, and supported the preparation of the capital markets chapter of the Business Growth AgendaFuture Direction report.
• RBNZ's implementation of macro-prudential tools under the Memorandum of Understanding (MOU) established last year, with the aim of safeguarding the stability of our economy and financial markets.

During 2013/14, the Treasury also:

• engaged with the IMF on their Article IV report, and with rating agencies on their sovereign rating assessments so that New Zealand was accurately represented and New Zealand perspectives were considered, and
• supported the Minister of Finance's programme of international visits to advance New Zealand's interests abroad. These included meetings with G20, APEC, Asian Development Bank, IMF and the World Bank.

Expenditure is $3.006 million under the Supplementary Estimates budget.

The majority of the expenditure variance relates to additional funding approved late in the financial year for Social Housing work that was not used as priority areas were still being determined ($1.865 million).

Provision of Financial Operations Services and Operational Advice#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to improve economic performance and financial stewardship across the State sector, export and financial markets, through provision of relevant and timely operational support, services and advice.

Scope of Appropriation

This appropriation is limited to the provision of services that support the performance of the State sector, including fiscal reporting, forecasting and monitoring; provision of Export Credit; and the management, administration and monitoring of Crown Guarantee Schemes, Crown Lending, Crown Investments and Crown Bank Accounts.

Significant Work Completed

During the year, the Treasury:

Performance improvement and capability building

• Worked with SSC and DPMC on 13 full PIF reviews and eight follow-up PIF reviews. Led the upgrade to the regulatory lead question in the PIF Agency model; provided input into the remaining six upgrades; and participated in the reset and redesign of the PIF programme itself.
• Changes we are implementing to the State Sector Act 1988, the Public Finance Act 1989 and the Crown Entities Act 2004 which were contained in the State Sector and Public Finance Reform Bill. In particular, we redesigned the Estimates and reporting requirements, and produced guidance to support more meaningful reporting against strategic intentions. The changes also provide for greater flexibility in allocating resources through multi-category appropriations.
• Advanced the reform programme to deliver better public services. Advice included further strengthening of the mandate of specialist functional leadership within the public sector in information technology, procurement and property through whole-of-government directions applying to key Crown entities; and a comprehensive revision of Crown entities guidance for Ministers, entities and monitors.
• We continued our focus on building the capability of priority public sector organisations by delivering global good practice products, training courses, communities of practice and executive sessions on developing Better Business Cases (BBC), and arranged for the endorsement of 13 Better Business Case Experts. We worked with NZTA to adapt BBC across the entire National Land Transport Programme, with growing wider interest from across local government.
• Continued to improve performance metrics for the BASS exercise to enhance its utility for decision-makers. This included all agencies moving to report a more detailed breakdown of ICT expenditure, and enhanced effectiveness indicators via new capability maturity models for HR, Communications and Legal. Reported on BASS results for 2012/13 in March 2014.
• Worked with agencies on identifying opportunities to strengthen the efficiency and effectiveness of the finance function and drive improvement in the performance of government agencies.

Budgeting, fiscal reporting and forecasting

• Delivered the Budget 2014 consistent with the Government's fiscal strategy of returning to operating surplus in 2014/15 and funding all new capital requirements from the existing Crown balance sheet. This included advising the Government on operating and capital spending to enable Ministers to manage short- and longer-term spending pressures, reallocate government spending and reprioritise the balance sheet.
• Produced tax and economic forecasts of the outlook for the New Zealand economy to inform future fiscal policy advice and to inform the public about the basis of that advice, helping both government and business to make informed decisions about spending and investment.
• Produced unqualified audited Financial Statements of Government for 2012/13, including a high-level summary “fiscal overview” to serve as a useful roadmap for readers, and interim months financial statements of government.
• Successfully identified and managed the impact on government reporting entities transitioning to new Public Benefit Entity accounting standards, including assisting entities to manage upcoming changes to their financial reporting framework.
• Worked with agencies on the Optimise Finance Initiative, which focused on identifying opportunities to strengthen the efficiency and effectiveness of the finance function and help to drive improvement in the performance of government agencies.

New Zealand Export Credit Office

• Issued 59 new policies with a total exposure value of $86 million and supported exports of $306 million into 27 countries. While the number of total policies and exposure did not meet our forecast targets, in part it was owing to several examples of private insurers and banks stepping in to support the exporting firm, after NZECO's initial support helped increase their export turnover and profitability.
• Hosted a four-day conference of international export credit agencies, with 47 delegates from 22 countries. These enable NZECO to improve its information gathering particularly in emerging markets that New Zealand firms are exporting to.
• Delivered seminars on trade finance to exporters, banks and external agencies to improve awareness of how NZECO guarantees mitigate risk and improve competitive advantage. Reflecting the emphasis on external engagement, 54% of businesses supported by NZECO during the year were new clients.

New Zealand Debt Management Office

• Advanced $225 million to support the work of government entities. Advances were made to Auckland Council ($138 million) through eight loans to develop the Auckland rail network by purchasing Electric Multiple Units (EMU) and building an EMU depot. Other advances were made to District Health Boards (DHBs) ($62 million) and HNZC ($25 million).
• Managed risk on $449 million of interest-rate swaps transacted for HNZC.
• Collaborated with MBIE on the preparation of the scoping and requirements to be included in the Request For Proposals document for the all-of-government banking services tender, with particular focus on the Crown's transactional banking arrangements.

Guarantee schemes

• Resolved outstanding litigation acquired by the Crown from receivers as part of the transfer of residual assets from receiverships under the DGS.

Public Private Partnerships

• Published a substantially revised Standard Form for PPP Project Agreements. The revisions enable future projects to benefit from developments during the first two pathfinder PPP transactions, whilst ensuring that the Crown preserves the contractual positions negotiated.
• Worked closely with NZTA to achieve contractual and financial close for Transmission Gully, providing for the delivery of a strategic link for Wellington and introducing an innovative and value for money contracting model for the procurement of roading infrastructure.
• Worked with the Department of Corrections to gain Cabinet approval for the procurement of a new maximum security facility at Auckland Prison as a PPP and with MOE to gain Cabinet approval for the procurement of a new bundle of four schools as a PPP.

Managing the Crown's balance sheet

• The Treasury produced the Investment Statement as required under recent amendments to the Public Finance Act 1989. The Investment Statement assessed the state and composition of the Crown's major assets and liabilities. It also discussed the importance of balance sheet management and the principles of efficient and effective balance sheet management. While the Crown balance sheet is relatively well managed, there are opportunities to improve performance in some areas.

Project monitoring assurance

• Provided project monitoring assurance over 50 high-risk government projects and independent reports to Ministers on the status and risk of these projects.
• Completed 17 Gateway Reviews since December 2013 on high-risk government projects.

Expenditure is $2.108 million under the Supplementary Estimates budget. The majority of this variance ($1.218 million) relates to NZECO owing to variable demand-related costs. Revenue related to this activity is recognised as premiums in Non-departmental (page 88).

Permanent Legislative Authority Funding for New Zealand Debt Management Office#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to achieve the administration of the Crown's financing requirements so as to raise sufficient funds to finance the Crown's cash deficit while minimising the cost to the Crown of such borrowing.

Scope of Appropriation

During 2013/14 the Treasury's Debt and Related Financial Asset Management functions are funded through the three Permanent Legislative Authorities (PLAs) set out below.

• Administration of Crown Borrowing PLA – This appropriation is limited to expenses incurred in connection with administering borrowing by the Crown, as authorised by section 61(1) of the Public Finance Act 1989.
• Administration of Derivative Transactions PLA – This appropriation is limited to expenses incurred in connection with administering derivative transactions of the Crown, as authorised by section 65H(2) of the Public Finance Act 1989.
• Administration of Investment of Public Money PLA – This appropriation is limited to expenses incurred in connection with administering the investment of public money, as authorised by section 65J(1) of the Public Finance Act 1989.
• As of 1 July 2014 three PLAs are being merged into one appropriation: Administration of Crown Borrowing, Securities, Derivative Transactions and Investment PLA. The combined PLA is intended for the same purpose.

Significant Work Completed

During the year, the Treasury:

Borrowing programme

• Issued $8 billion of government bonds, achieving the targeted programme size. This compared to $14 billion in 2012/13.
• Introduced a 2030 maturity inflation indexed bond, with an initial issue via syndication raising $2.5 billion from the market. This transaction won the Kanga News 2013 New Zealand Domestic Bond Deal of the Year.
• Ran a buy-back programme which enabled investors to reduce holdings of the bond maturing in April 2015 by $2.1 billion, providing more liquidity for investment into longer term bonds.

Marketing efforts and interactions with international stakeholders and credit rating agencies

• Promoted government bonds, and New Zealand generally, in local and international markets. This included overseas investor missions to the UK and Europe and support of inbound investor visits. These developed and strengthened intermediary and investor relations.
• Accompanied the Minister of Finance on visits to Hong Kong, Singapore and the US to participate in investor and rating agency presentations, including updates on the New Zealand economy and the NZDMO issuance strategy.
• Participated in, and presented at, a number of investor and sovereign peers conferences and other fora.
• Engaged with the three rating agencies (Moody's, Standard & Poor's and Fitch) to assist them in their assessments of New Zealand's creditworthiness. This included briefing them on the developments in the New Zealand economy, organising meetings with relevant officials, commentators and Ministers.

Derivatives programme

• Successfully managed risks associated with the changing market value of the NZDMO asset portfolio within the average monthly Value at Risk (VaR) limit.
• Investigated the implications and options involved in responding to international regulation designed to move over-the-counter derivatives towards being centrally cleared.

Investment programme

• Managed a portfolio that at 30 June 2014 comprised marketable securities valued at $3.871 billion, deposits of $64 million and a cash balance of $3.414 billion. These assets were used to fund Crown operations, to provide short-term liquidity if required and to help repay debt maturities as they fall due.
• Assets were invested in a high credit quality portfolio, predominantly made up of AAA- and AA- rated securities.

Treasury services

• Provided Treasury services, and administered loans, to other parts of the Crown according to government policy. These services provide net cost savings to the Crown, through centralised borrowing and lending activities. This results in a lower debt servicing expense for the Crown than individual entities borrowing separately. Central treasury management saves on transaction costs and provides risk management benefits to the Crown.

Technology platform redevelopment

• Commenced a project to progressively replace the existing platform that manages the end-to-end transaction capture, settlement and reporting functions for NZDMO. The creation of the Business Information Hub will enable increased functionality, flexibility and resilience in key processes. The project with take several years to fully implement, with the operating infrastructure and revaluation curves module having been completed in the 2013/14 year.

Performance Measurement

Performance targets have been specified as a total for activity across all three PLA output classes, as it is more meaningful to aggregate the quantitative targets across these output classes.

With the implementation of the Public Finance Amendment Act 2013, from 1 July 2014 three previous PLAs, Administration of Crown Borrowing, Administration of Derivative Transactions and Administration of Investment of Public Monies, were combined into Administration of Crown Borrowing and Investment.

Expenditure across the three PLAs is $989,000 under the Supplementary Estimates budget. The costs of administering debt servicing and development of the Business Information Hub were lower than expected.

Administration of Guarantees and Indemnities given by the Crown Permanent Legislative Authority#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to achieve efficient and effective administration of the Crown's Guarantees and Indemnities, including the Wholesale and Retail Deposit Guarantee Schemes.

Scope of Appropriation

This appropriation is limited to expenses incurred in connection with administering of guarantees and indemnities given by the Crown, as authorised by section 65ZG of the Public Finance Act 1989.

Significant Work Completed

During 2013/14, the Treasury:

• resolved outstanding litigation acquired by the Crown from receivers as part of the transfer of residual assets from receiverships under the DGS, but
• did not undertake any other work in respect of this output, as there were no defaults of wholesale issuances under the Wholesale Funding Guarantee Facility (WFGF).

Expenditure is $96,000 under the Supplementary Estimates budget. Funding approved for potential legal costs in 2013/14 was not required.

Crown Company Monitoring Advice to the Minister for State-Owned Enterprises and Other Responsible Ministers#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to ensure appropriate financial and social returns, and long-term value is achieved from SOEs, Crown entity companies (CECs) and Crown entities monitored under this appropriation.

Scope of Appropriation

This appropriation is limited to the provision of ownership, performance monitoring and governance advice to the Minister for State-Owned Enterprises and other responsible Ministers in respect of the Ministers' shareholding responsibilities or as responsible Ministers for the New Zealand Lotteries Commission and Public Trust.

Significant Work Completed

During 2013/14, the Treasury:

• provided Quarterly Reports on the performance of SOEs, Crown entities and other monitored entities to ownership Ministers. To achieve this, we engaged with monitored agencies, provided advice on strategy and planning documentation and ensured compliance with statutory requirements for Statements of Intent (SOIs), Statements of Corporate Intent (SCIs) and Purchase Agreements of monitored entities
• provided advice to Ministers on the completion of strategic reviews for the New Zealand Post Group, Quotable Value, Landcorp Farming, KiwiRail and Public Trust
• commissioned independent valuation reports for a number of entities in the commercial portfolio and made these publicly available via: http://www.treasury.govt.nz/commercial/publications/information-releases/valuation-reports/
• continued and extended the tailored Crown director development programme to improve governance knowledge and capability
• provided advice and support on Solid Energy's financial situation
• assessed KiwiRail's bid for funding ahead of Budget 2014 and recommended a comprehensive review of the business be undertaken to assess the likely future funding requirements for the business ahead of Budget 2015, and
• facilitated the managed wind-down of Learning Media, following the decision to wind down this company on the basis that it was no longer commercially viable.

Expenditure is $352,000 under the Supplementary Estimates budget owing to staff vacancies and minor delays in strategic reviews.

Crown Company Monitoring Advice to the Minister of Science and Innovation and the Minister for Economic Development#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to ensure appropriate financial and social returns, and long-term value is achieved from Crown research institutes (CRIs) and Crown entities monitored under this appropriation.

Scope of Appropriation

This appropriation is limited to the provision of ownership, performance monitoring and governance advice to the Minister of Science and Innovation and other responsible Ministers in respect of the Ministers' shareholding responsibilities.

Significant Work Completed

During 2013/14, the Treasury:

• carried out a second opinion monitoring role in respect of the eight CRIs and reported on them in the Treasury's 2013 APR
• provided second opinion advice and guidance to MBIE on its monitoring of CRIs and Research and Education Advanced Network New Zealand (REANNZ)
• provided advice on New Zealand Venture Investment Fund Ltd (NZVIF) business planning and risks and opportunities, and
• assisted Ministers with board appointments for CRIs, NZVIF and REANNZ.

Expenditure is $35,000 under the Supplementary Estimates budget owing to staff vacancies and minor delays in strategic reviews.

Implementation of Mixed Ownership Model (Multi-year Appropriation)#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to achieve a deepening of capital markets, an enhancement of capital market disciplines and reduced pressure on the Crown to borrow for capital projects.

Scope of Appropriation

This appropriation is limited to expenses incurred in the following:

• Implementation of Mixed Ownership Model – This appropriation is limited to the policy, operational and transactional work to implement the MOM. Commenced on 15 December 2011 and expires on 30 June 2015.
• Direct Sale Costs for Implementing the Mixed Ownership Model – This appropriation is limited to the direct sales costs of implementing the MOM. Commenced on 15 December 2011 and expires on 30 June 2015.
• Loyalty Bonus Scheme Related to Initial Public Offers – This appropriation is limited to expenses incurred by allocating shares under a loyalty bonus scheme to eligible investors in initial public offers. Commenced on 1 March 2013 and expires on 30 June 2016.

Significant Work Completed

During 2013/14, the Treasury:

• completed the Meridian Initial Public Offer (IPO) on schedule and within budget. The IPO met the Government's objectives of widespread New Zealand ownership and raised $1.88 billion for the Crown's Future Investment Fund. Over 62,000 New Zealanders subscribed for shares in the company representing a New Zealand ownership level of 86.5%
• completed the sale of 20% of the shares in Air New Zealand, raising $370 million for the Crown's Future Investment Fund and reducing the Crown's ownership of the company to 53%. The shares were sold at no discount to the market price at close of business immediately before the transaction, and
• completed the Genesis IPO on schedule and within budget. The IPO met the Government's objectives of widespread New Zealand ownership and raised $730 million for the Crown's Future Investment Fund. Over 68,000 New Zealanders subscribed for shares in the company representing a New Zealand ownership level of 88%.

Expenditure is $2.291 million under the Supplementary Estimates budget. The Government Share Offer Programme has completed.

Provision of Financial Services to the New Zealand Local Government Funding Agency RDA (Revenue-dependent Appropriation)#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to deliver high-quality administrative services to the New Zealand Local Government Funding Agency (LGFA) to enable it to optimise the debt funding terms and conditions for participating local authorities.

Scope of Appropriation

This appropriation is limited to expenses incurred in connection with the provision of financial services on a commercial basis to the New Zealand LGFA.

Significant Work Completed

During 2013/14, the Treasury:

• provided services to LGFA, including bond tendering, processing on-lending to local councils, executing investment and derivative transactions, settling transactions and regular valuation, finance and risk reports
• managed the risk on $955 million of interest-rate swaps transacted for LGFA, and
• charged fees to cover the costs of providing these services, in accordance with the SLA.

Expenditure is $11,000 under the Supplementary Estimates budget owing to minor timing variations.

Shared Support Services#

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What is Intended to be Achieved with this Appropriation

This appropriation is intended to achieve quality, efficient support services for other agencies.

Scope of Appropriation

This appropriation is limited to provision of support services to other agencies.

Significant Work Completed

During 2013/14, the Treasury:

• delivered finance, human resources, information management and technology services to SSC and DPMC
• continued standardising and enhancing the Central Agencies' operating environment; in particular, upgrading the payroll system, undertaking a major refresh and consolidation of CASS IT infrastructure, implementing Finance workflow and implementing e-recruitment. These enhancements are intended to deliver greater network resilience and performance, improved security and reduced risks. In addition we have taken up support for the MCDEM as it was merged into DPMC, and
• achieved the objectives for the second year of operation; which entailed reducing risk, building resilience, expanding its services to include MCDEM and starting to develop the future vision for ICT and for CASS as a whole.

Expenditure is $2.224 million under the Supplementary Estimates budgetand this is also reflected in the lower Departmental Revenue charged for these services. MCDEM activities moved from DIA to DPMC from 1 April 2014, which increased related support services. The transition is continuing into 2014/15 resulting in under-expenditure in 2013/14.

Ministerial Servicing Performance 2013/14#

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The Treasury drafts responses to Parliamentary Questions for Written Answer (PQs), Ministerial Correspondence (MC) and Official Information Act requests (MOIAs) for consultation with, or approval by, the responsible Minister. We also respond to Official Information Act requests received by the Treasury (TOIAs).

The Treasury provides these services to the Minister of Finance, Associate Ministers of Finance and/or other Ministers on referral from the Minister of Finance or an Associate Minister of Finance; the Minister of Science and Innovation; and the Minister for State-Owned Enterprises.

The Treasury's workflow management system has recently been enhanced to provide improved reporting on Ministerial Servicing. Easier availability of data, together with increased managerial focus, is expected to improve the Ministerial Servicing statistics.

Agreed measures for Ministerial Servicing are set out on page 131.

The Quality of the Treasury's Policy Advice#

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The Treasury has a quality standard for policy advice that is applied to all appropriations. The Quality Standards for Policy Advice are published in full on pages 129 and 130 of this Annual Report.

Review of the Quality of the Treasury's Policy Advice 2013/14

As in previous years, a panel of experienced policy leaders within the Treasury was commissioned to review a sample of the Treasury's policy advice for the 2013/14 year. The intent of the review was to assess the quality of a sample of advice against the Treasury's Quality Standards for Policy Advice, identify examples of best practice and identify areas for potential improvement.

The panel was run jointly with SSC, which ensures an external perspective to the assessment of advice.

The panel looked at a representative sample of advice selected using a randomised methodology.

The review found that:

• the average grade for assessed reports was 7 out of 10; a slight decrease on last year's grade of 7.2. Given the small sample size we cannot determine whether this is of statistical significance, and
• 70% of reports were graded 7 out of 10 or higher; by contrast to 81% last year.

These results mean we have achieved our target of achieving at least an average of 70% and provide confidence that we are maintaining a satisfactory level of quality and the strengths and weaknesses identified remain consistent with previous annual reviews.

The strengths identified included: a clear logical structure to the papers, with good use of evidence and stakeholder engagement and clear options analysis. The language was plain and easy to understand with a strong focus on customer needs and interests.

The areas for improvement included a greater clarity of purpose in advice and providing succinct background information about the context in which the paper was written.

We are working through these findings with a view to determining any further actions we could take to lift the quality of our policy advice.

Financial Statements– Departmental#

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Statement of Comprehensive Income#

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for the year ended 30 June 2014

The Statement of Comprehensive Income details the revenue and expenses relating to all outputs (goods and services) produced by the Treasury during the financial year ended 30 June 2014. Total expenses equals total departmental output classes expenditure and appropriations in the Statement of Departmental Expenses and Capital Expenditure Against Appropriations on page 63.

Explanations of significant variances against budget are detailed in note 19.

Statement of Changes in Equity#

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for the year ended 30 June 2014

The Statement of Changes in Equity combines information about the net surplus with other aspects of the financial performance of the Treasury to give a measure of comprehensive income.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Financial Position#

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as at 30 June 2014

The Statement of Financial Position reports the total assets and liabilities of the Treasury as at 30 June 2014. Taxpayers' funds are represented by the difference between the assets and liabilities.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Cash Flows#

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for the year ended 30 June 2014

The Statement of Cash Flows summarises the cash movements in and out of the Treasury during the financial year. It takes no account of money owed to the Treasury or owing by the Treasury and therefore differs from the Statement of Comprehensive Income on page 60.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Departmental Expenses and Capital Expenditure Against Appropriations#

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for the year ended 30 June 2014

The Statement of Departmental Expenses and Capital Expenditure Against Appropriations details expenditure against appropriations. Total Departmental Output Classes Expenditure and Appropriations equals total expenses in the Statement of Comprehensive Income on page 60.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Commitments#

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Capital commitments

There are no capital commitments for this year (30 June 2013: Nil).

Non-cancellable operating lease commitments

The Treasury has non-cancellable operating leases on its principal premises at No 1 The Terrace, Wellington until 2017. These operating lease commitments have been recorded at their gross values in the Statement of Commitments.

Other non-cancellable commitments

The Treasury has entered into non-cancellable contracts for computer maintenance, cleaning services, consulting services and other contracts for services.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Contingent Liabilities and Contingent Assets#

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Unquantifiable contingent liabilities

The Department has the following unquantifiable contingent liabilities:

• Carpark licence (Pastoral House) – In relation to the one carpark leased by the Treasury at Pastoral House, the Crown indemnified AMP NZ Office Pastoral Ltd against certain damages or loss caused by our use of that carpark.
• Carpark licence (No 3 The Terrace) – In relation to the eight carparks leased by the Treasury at No 3 The Terrace, the Crown indemnified AMP NZ Office 1 The Terrace Ltd against certain damages or loss caused by our use of those carparks.
• Deed of Lease (No 1 The Terrace) – In relation to the lease by the Treasury of levels 5–14, the basement and the sub-basement of the building at No 1 The Terrace, the Crown indemnified AMP NZ Office 1 The Terrace Ltd against certain damages or loss in relation to our lease of the premises.
• Research in Motion Limited – In accordance with a delegation from the Minister of Finance dated 23 May 2005, the Treasury has granted an indemnity to Research in Motion Limited under a licence agreement for software used in conjunction with Blackberry mobile email devices, covering breach of the licence agreement, intellectual property rights, claims arising from incorrect use of the software, defamation type actions and breach of export restrictions.
• Reuters Services Contract – The Treasury has indemnified Reuters Group PLC and its subsidiaries against any losses arising from the Treasury’s use of certain Reuters services or arising from a breach of the Services Contract relating to the provision of financial information services. Further, the Treasury indemnified Lipper (a Reuters company) in respect of third party copyright and intellectual property rights.

Quantifiable contingent liabilities and assets

As at 30 June 2014, the Department had no quantifiable departmental contingent assets and liabilities (30 June 2013: Nil).

The accompanying accounting policies and notes form part of these financial statements.

Notes to the Departmental Financial Statements#

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for the year ended 30 June 2014

1  Statement of Accounting Policies

The Treasury is a government department as defined by section 2 of the Public Finance Act 1989.

In addition, the Treasury has reported separately on Crown activities and Trust monies which it administers.

The primary objective of the Treasury is to provide services to the public rather than making a financial return. Accordingly, the Treasury has designated itself as a Public Benefit Entity for the purposes of the External Reporting Board's Accounting Standards Framework.

The Financial Statements of the Treasury are for the year ended 30 June 2014. The unaudited Forecast Financial Statements are for the year ended 30 June 2015 which were prepared on 14 April 2014 (BEFU). These Financial Statements were authorised for issue by the Secretary to the Treasury on 30 September 2014.

Statement of compliance

The Financial Statements and Forecast Financial Statements of the Treasury have been prepared in accordance with the requirements of the Public Finance Act 1989, which includes the requirement to comply with New Zealand Generally Accepted Accounting Practices (NZ GAAP), and Treasury Instructions.

Basis of preparation

Measurement base

The Financial Statements have been prepared on an historical cost basis, modified by the revaluation of derivative financial instruments to fair value.

Functional and presentation currency

The Financial Statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars ($000). The functional currency of the Treasury is New Zealand dollars.

Changes in accounting policies

There have been no changes in accounting policies during the financial year.

Public Benefit Entities are required to report under the new Public Benefit Entity International Public Sector Accounting Standards (PBE IPSAS) from 1 July 2014. The new standards will affect disclosures. The changes have not been reflected in the current year.

Standards, amendments and interpretations issued that are not yet effective and have not been early adopted

Standards, amendments and interpretations issued but not yet effective that have not been early adopted, and which are relevant to the Treasury, are:

NZ IFRS 9 Financial Instruments will eventually replace NZ IAS 39 Financial Instruments: Recognition and Measurement. NZ IAS 39 is being replaced through the following three main phases: Phase 1 Classification and Measurement; Phase 2 Impairment Methodology; and Phase 3 Hedge Accounting. Phase 1 has been completed and has been published in the new financial instrument standard NZ IFRS 9. NZ IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in NZ IAS 39. The approach in NZ IFRS 9 is based on how an entity manages its financial assets (its business model) and the contractual cash flow characteristics of the financial assets. The financial liability requirements are the same as those of NZ IAS 39, except for when an entity elects to designate a financial liability at fair value through the surplus or deficit. The new standard is required to be adopted for the year ended 30 June 2016. However, as a new Accounting Standards Framework will apply before this date, there is no certainty when an equivalent standard to NZ IFRS 9 will be issued for public benefit entities.

The Minister of Commerce has approved a new Accounting Standards Framework (incorporating a Tier Strategy) developed by the External Reporting Board (XRB). Under this Accounting Standards Framework, the Treasury is classified as a Tier 1 reporting entity and it will be required to apply full Public Benefit Entity Accounting Standards (PAS). These standards have been developed by the XRB based on current International Public Sector Accounting Standards. The effective date for the new standards for public sector entities is for reporting periods beginning on or after 1 July 2014. This means the Treasury will transition to the new standards in preparing its 30 June 2015 Financial Statements.

Owing to the change in the Accounting Standards Framework for public benefit entities, it is expected that all new NZ IFRS and amendments to existing NZ IFRS will not be applicable to public benefit entities. Therefore, the XRB has effectively frozen the financial reporting requirements for public benefit entities up until the new Accounting Standard Framework is effective. Accordingly, no disclosure has been made about new or amended NZ IFRS that exclude public benefit entities from their scope.

Significant accounting policies

Revenue

Revenue is measured at the fair value of consideration received or receivable when the transaction occurs.

Revenue Crown

Revenue earned from the supply of outputs to the Crown is recognised as revenue when earned.

Revenue other

Cost recoveries

The Treasury fully recovers costs it incurs on behalf of other agencies by invoicing for the service provided. The recorded revenue is the gross amount of the sale.

Capital charge

The capital charge is recognised as an expense in the period to which the charge relates.

Operating leases

The Treasury leased office premises during the year ended 30 June 2014. Substantially all the risks and benefits of ownership were retained by the lessor, and therefore these leases were classified as operating leases. Operating lease costs are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the period of the lease.

Financial instruments

Financial assets and liabilities are initially measured at fair value plus transaction costs, unless they are carried at fair value through surplus or deficit, in which case the transaction costs are recognised in the surplus or deficit.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and bank accounts.

Debtors and other receivables

Short-term debtors and other receivables are recorded at their fair value, less any provision for impairment.

Impairment of a receivable is established when there is objective evidence that the Treasury will not be able to collect amounts due according to the original terms of the receivable.

Derivative financial instruments

The Treasury uses derivative financial instruments to hedge its exposure to foreign exchange movements. The Treasury does not hold or issue derivative financial instruments for trading purposes. The Treasury has not adopted hedge accounting.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at each balance date. Movements in the fair value of derivative financial instruments are recognised in the surplus or deficit.

The full fair value of a foreign exchange derivative is classified as current if the contract is due for settlement within 12 months of balance date. Otherwise, foreign exchange derivatives are classified as non-current.

Non-current assets held for sale

Non-current assets held for sale are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than continuing use. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

Any impairment losses for write-downs of non-current assets held for sale are recognised in the Statement of Comprehensive Income.

Any increases in fair value (less costs to sell) are recognised up to the level of any impairment losses that have previously been recognised.

Non-current assets held for sale (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale.

Property, plant and equipment

Property, plant and equipment comprises of leasehold improvements, computer hardware, furniture and fittings and office equipment.

Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses.

Individual assets, or groups of assets, are capitalised if their cost is greater than $5,000. Computer equipment with a cost greater than $1,000 is capitalised. The value of individual assets that is less than $5,000 and is part of a group of similar assets is capitalised.

Additions

The cost of an item of property, plant and equipment is recognised as an asset if it is probable that future economic benefits or service potential associated with the item will flow to the Department and if the cost of the item can be measured reliably.

Disposals

Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount of the asset. Gains and losses on disposal are included in the surplus or deficit.

Subsequent costs

Costs incurred subsequent to initial acquisition are capitalised only when it is probable that future economic benefits or service potential associated with the item will flow to the Department and the cost of the item can be measured reliably.

Depreciation

Depreciation of property, plant and equipment is provided on a straight-line basis at rates calculated to allocate the cost of an asset, less any estimated residual value, over its estimated useful life. The useful life and associated depreciation rates are as follows:

Leasehold improvements are depreciated over the unexpired period of the lease or the estimated remaining useful lives of the improvements, whichever is the shorter.

Intangible assets

Software acquisition and development

Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Costs that are directly associated with the development of software for internal use by the Treasury are recognised as an intangible asset. Direct costs include the software development, employee costs and an appropriate portion of the relevant overheads.

Staff training costs are recognised as an expense when incurred.

Costs associated with maintaining computer software are recognised as an expense when incurred.

Amortisation

The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its useful life. Amortisation begins when an asset is available for use and ceases at the date that an asset is de-recognised. The amortisation charge for each period is recognised in the surplus or deficit.

The useful lives and associated amortisation rates of major classes of intangible assets have been estimated as follows:

Impairment of property, plant and equipment and intangible assets

Intangible assets that have an indefinite useful life, or are not yet available for use, are tested for impairment annually.

Property, plant and equipment and intangible assets that have a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use.

Value in use is depreciated replacement cost for an asset where the future economic benefits or service potential of the asset are not primarily dependent on the asset's ability to generate net cash inflows and where the Treasury would, if deprived of the asset, replace its remaining future economic benefits or service potential.

If an asset's carrying amount exceeds its recoverable amount, the asset is impaired and the carrying amount is written down to the recoverable amount.

For assets not carried at a re-valued amount, the reversal of an impairment loss is recognised in the surplus or deficit.

Creditors and other payables

Creditors and other payables are measured at cost.

Employee entitlements

Short-term employee entitlements

Short-term employee entitlements expected to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay.

These include salaries and wages accrued up to balance date, annual leave earned but not yet taken at balance date, vested retiring and long service leave and entitlements expected to be settled in the next 12 months, and sick leave.

A liability for sick leave is recognised to the extent the absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that the Treasury anticipates it will be used by staff to cover those future absences.

The Treasury recognises a liability and an expense for performance pay where contractually obligated to pay it or where there is a past practice that has created a constructive obligation.

Long-term employee entitlements

Entitlements that are due to be settled beyond 12 months after the end of the reporting period in which the employee renders the related service, such as long service leave and retiring leave, are calculated on an actuarial basis.

The calculations are based on:

• likely future entitlements based on years of service, years to entitlement, the likelihood that staff will reach the point of entitlement and contractual-entitlements information, and
• the present value of the estimated future cash flows. (The discount rate is based on the weighted average of government bonds with terms to maturity similar to those of the relevant liabilities. The inflation factor is based on the expected long-term increase in remuneration for employees.)

Expected future payments are discounted using market yields on government bonds at balance date with terms to maturity that match, as closely as possible, the estimated future cash outflows for entitlements. The inflation factor is based on the expected long-term increase in remuneration for employees.

Superannuation schemes

Obligations for contributions to the State Sector Retirement Savings Scheme, KiwiSaver, Government Superannuation and individual retirement funds are accounted for as defined-contribution schemes and are recognised as expenses in the surplus or deficit as incurred.

Provisions

The Department recognises a provision for future expenditure of uncertain amounts or timing when there is a present obligation (either legal or constructive) as a result of a past event, when it is probable that an outflow of future economic benefits will be required to settle the obligation, and when a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision owing to the passage of time is recognised as a finance cost.

Equity

Equity is the Crown's investment in the Treasury and is measured as the difference between total assets and total liabilities. Equity is disaggregated and classified as taxpayers' funds and Memorandum Accounts.

Commitments

Expenses yet to be incurred on non-cancellable contracts that were entered into on or before balance date are disclosed as commitments to the extent that they are equally unperformed obligations.

Cancellable commitments that have penalty or exit costs explicit in the agreement, on exercising that option to cancel are included in the Statement of Commitments at the lower of the remaining contractual commitment and the value of that penalty or exit cost.

Goods and services tax

All items in the Financial Statements, including the Appropriation Statements, are GST exclusive - except for receivables and payables, which are on a GST-inclusive basis.

The net amount of GST recoverable from or payable to IRD is included as part of receivables or payables in the Statement of Financial Position.

The net GST paid to or received from IRD, including the GST relating to investing and financing activities, is classified as an operating cash flow in the Statement of Cash Flows.

Commitment and contingencies are disclosed exclusive of GST.

Income tax

Government departments are exempt from income tax as public authorities. Accordingly, no charge for income tax has been provided for.

Budget figures

The budget figures are those included in the Department's Budget Estimates for the year ended 30 June 2014, which are consistent with the financial information in the Main Estimates. In addition, the Financial Statements also present the updated budget information from the Supplementary Estimates.

Forecast figures

Basis of preparation

These Forecast Financial Statements have been prepared in accordance with New Zealand Public Benefit Entity (NZ PBE) International Public Sector Accounting Standards (IPSAS) and are unaudited. While a detailed impact assessment has yet to be completed, no significant impact is expected on transition from NZ IFRS to IPSAS.

These are the first set of prospective financial statements presented under NZ PBE IPSAS. They are compliant with PBE FRS – 42 Prospective Financial Statements and are consistent with Generally Accepted Accounting Practice. The purpose of the Forecast Financial Statements is to facilitate Parliament’s consideration of the appropriation for, and planned performance of, the Department. Use of this information for other purposes may not be appropriate. Readers are cautioned that actual results are likely to vary from the forecast information presented and that the variations may be material.

These financial forecasts are based on BEFU and have been prepared on the basis of assumptions as to future events that the Department reasonably expects to occur, associated with the actions it reasonably expects to take. They have been compiled on the basis of existing government policies and ministerial expectations at the date that the information was prepared.

The actual results will remain substantially the same as the previous year. Additional factors that could lead to material differences between the Forecast Financial Statements and the 2012/13 Actual Financial Statements include changes to the baseline budget through new initiatives, transfer of funding across financial years or technical adjustment.

Comment on PBE IPSAS accounting policies

Prospective financial statements have been prepared in accordance with the accounting policies expected to be used in the future for reporting historical general purpose financial statements. This is the first set of prospective financial statements prepared under PBE IPSAS accounting policies. While a detailed impact assessment has yet to be completed, no significant impact is expected on transition from NZ IFRS to IPSAS.

Authorisation statement

These Forecast Financial Statements were authorised for issue by the Secretary and Chief Executive of the Treasury on 14 April 2014. The Secretary and Chief Executive is responsible for the Forecast Financial Statements presented, including the appropriateness of the assumptions underlying the Forecast Financial Statements and all other required disclosure. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual financial results achieved for the period covered are likely to vary from the information presented, and the variations may be material.

Statement of cost allocation policies

The Department has determined the cost of outputs using the following cost allocation system:

• Direct costs are expenses incurred from activities in producing outputs. These costs are charged directly to the related output classes.
• Indirect costs are expenses incurred by Corporate Services and by the Office of the Chief Executive that cannot be identified with a specific output. Indirect costs are allocated to each output class based on cost drivers, related activity and usage information.

There have been no changes in the Treasury's general cost accounting policies since the date of the last audited Financial Statements.

Central Agency Shared Services (CASS) cost allocations

A cost allocation model relating to CASS-specific costs has been added from 7 March 2012 with the creation of the shared services model incorporating the Treasury, SSC and DPMC.

Changes in deliverables

The Gateway and Major Project Monitoring function was transferred from SSC to the Treasury on 2 December 2013.

Critical accounting estimates and assumptions

In preparing these Financial Statements, estimates and assumptions have been made concerning the future. These estimates and assumptions may differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are referred to below.

Retirement and long service leave

An analysis of the exposure in relation to estimates and uncertainties surrounding retirement and long service leave liabilities is disclosed in note 13.

2  Revenue - Crown

Revenue earned from the supply of outputs to the Crown is recognised as revenue when earned.

3    Other Revenue

 

4   Personnel Costs

5  Capital Charge

The Treasury pays a capital charge to the Crown based on taxpayers' funds at 30 June and 31 December each year. The capital charge rate for the 2014 year was 8% (2013: 8%).

6  Other Operating Expenses

 

7  Debtors and Other Receivables

The ageing profile of receivables at year-end is detailed below:

The carrying value of debtors and other receivables approximates their fair value.

8  Property, Plant and Equipment

The following categories of property, plant and equipment were used by the Treasury:

Additions for 2013/14 include $273,000 transferred from DIA with the transition of MCDEM.

9  Intangible Assets#

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The following categories of intangible assets were used by the Treasury:

 

Additions for 2013/14 include $2.047 million transferred from DIA with the transition of MCDEM.

There are no restrictions over the title of the Treasury's intangible assets. No intangible assets are pledged as security for liabilities.

Notes to the Departmental Financial Statements (continued)#

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10  Departmental Capital Expenditure#

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11  Creditors and Other Payables#

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12  Return of Surplus to Crown#

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The return of operating surplus to the Crown is required to be paid by 31 October each year. The Treasury had a surplus of $402,000 in the 2012/13 financial year and had obtained permission to retain it.

This has been appropriated this year, resulting in a corresponding offsetting loss in 2013/14, which was charged against taxpayers' funds at the end of the 2013/14 year.

13  Provision for Employee Entitlements#

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The present value of the retirement and long service leave obligations depends on a number of factors. Two key assumptions used in calculating this liability include the discount rate and the salary-inflation factor. Any changes in these assumptions will impact on the carrying amount of the liability.

In determining the appropriate discount rate, the Department adopts the central table of risk-free discount rates and CPI assumptions provided by the Treasury to all departments.

14  Reconciliation of Net Surplus to Net Cash Flows from Operating Activities#

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Notes to the Departmental Financial Statements (continued)#

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15  Related Party Transactions#

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All related party transactions have been entered into on an arms' length basis

The Treasury is a wholly-owned entity of the Crown. The Government significantly influences the roles of the Treasury as well as being its major source of revenue.

The Treasury has received funding from the Crown of $81.333 million to provide services to the public for the year ended 30 June 2014 (2013: $74.628 million).

In conducting its activities, the Treasury is required to pay various taxes and levies (such as GST, Fringe Benefit Tax [FBT], Pay-as-you-earn tax [PAYE] and ACC levies) to the Crown and entities related to the Crown. The payment of these taxes and levies (other than income tax) is based on the standard terms and conditions that apply to all tax and levy payers. The Treasury is exempt from paying income tax.

The Treasury also purchased and sold goods and services from entities controlled, significantly influenced or jointly controlled by the Crown. Purchases from these government-related entities for the year ended 30 June 2014 totalled $5.534 million (2013: $5.401 million). These purchases exclude capital charge and include air travel from Air New Zealand, ACC levies, legal advice from the Crown Law Office and service provided by other government departments primarily being Audit NZ, DPMC, Ministry of Foreign Affairs and Trade, SSC, DIA, MBIE and Statistics New Zealand.

 

Key management personnel of the Treasury at 30 June 2014 included the ELT (Chief Executive, one Deputy Chief Executive and five Deputy Secretaries) plus the Treasury Board fees. In early February 2014 the ELT structure was revised resulting in a smaller ELT with three roles being disestablished and two positions made redundant. The termination costs are included in the table.

The above key management personnel compensation excludes the remuneration and other benefits the Ministers of Finance, State-Owned Enterprises, Infrastructure and Science and Innovation receive. The Ministers' remuneration and other benefits are not received only for their role as a member of key management personnel of the Treasury. The Ministers' remuneration and other benefits are set by the Remuneration Authority under the Civil List Act 1979 and are paid under Permanent Legislative Authority, and not paid by the Treasury.

Related party transactions involving key management personnel (or their close family members)

There were no related party transactions involving key management personnel or their close family members. No provision has been required, nor any expense recognised, for impairment of receivables from related parties (2013: Nil).

16  Events After Balance Date#

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There were no events subsequent to balance date that required adjustment to the Financial Statements or disclosure (2013: Nil).

17  Financial Instruments#

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17A   Financial Instruments#

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The carrying amounts of financial assets and financial liabilities in each of the NZ IAS 39 categories are as follows:

17B   Financial Instrument Risks#

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The Treasury's activities expose it to a variety of financial instrument risks, including market risk, credit risk and liquidity risk. The Treasury has a series of policies to manage the risks associated with financial instruments and seeks to minimise exposure from financial instruments. These policies do not allow any transactions that are speculative in nature to be entered into.

Currency risk #

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Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Treasury has no material exposure to currency risk.

Interest rate risk#

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Interest rate risk is the risk that the fair value of a financial instrument will fluctuate, or the cash flows from a financial instrument will fluctuate, owing to changes in market interest rates.

The Treasury has no exposure to interest rate risk because it has no interest-bearing financial instruments.

Credit risk#

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Credit risk is the risk that a third party will default on its obligation to the Treasury, causing the Treasury to incur a loss.

In the normal course of its business, credit risk arises from debtors and deposits with banks.

The Treasury is only permitted to deposit funds with Westpac, a registered bank, and enter into foreign exchange forward contracts with NZDMO. These entities have high credit ratings. For its other financial instruments, the Treasury does not have significant concentrations of credit risk.

The Treasury's maximum credit exposure for each class of financial instrument is represented by the total carrying amount of cash and cash equivalents and net debtors (note 7). There is no collateral held as security against these financial instruments, including those instruments that are overdue or impaired.

Liquidity risk#

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Liquidity risk is the risk that the Treasury will encounter difficulty raising liquid funds to meet commitments as they fall due.

In meeting its liquidity requirements, the Treasury closely monitors its forecast cash requirements with expected cash drawdowns from NZDMO. The Treasury maintains a target level of available cash to meet liquidity requirements.

Contractual maturity analysis of financial liabilities, excluding derivatives#

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The table below analyses the Treasury's financial liabilities into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.

Notes to the Departmental Financial Statements (continued)#

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18  Capital Management#

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The Treasury's capital is its equity, which comprises taxpayers' funds and memorandum accounts. Equity is represented by net assets.

The Treasury manages its revenues, expenses, assets, liabilities and general financial dealings prudently. The Treasury's equity is largely managed as a by-product of managing income, expenses, assets, liabilities and compliance with the Government Budget processes, Treasury Instructions and the Public Finance Act 1989.

The objective of managing the Treasury's equity is to ensure that the Treasury effectively achieves its goals and objectives for which it has been established, while remaining a going concern.

19  Explanation of Major Variances#

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Statement of Comprehensive Income

The following major variations occurred between the 2013/14 Main Estimates budget and the Supplementary Estimates:

• The implementation of the government share offers work programme decreased costs in 2013/14 by $2.98 million reflecting a transfer of funding to the Non-departmental appropriations.
• Shared support services increased for DPMC owing to additional support for Emergency Management Services that transferred to DPMC from DIA from 1 April 2014. Revenue and expenditure increased by $2.8 million compared to 2012/13. Cost recoverable services to other agencies also increased revenue and expenditure budgets by $1.4 million.
• The Gateway and Major Project Monitoring functions transferred to the Treasury from SSC from 2 December 2013. This increased revenue and expenditure budgets by $1.5 million. New funding increased costs in 2013/14 for the Analytics and Insight programme by $2 million and $1.9 million for Social Housing.
• A range of approvals was given to transfer funding from 2012/13 ($3 million). This includes the retention of $400,000 surplus from prior year rent recoveries, $800,000 associated with shared service work programme, $500,000 for monitoring activity for ACC and HNZC and a number of smaller transfer amounts for a range of project work.

The following major budget variations occurred between the 2013/14 Actuals and the 2013/14 Supplementary Estimates budgets:

• Lower expenditure than forecast in the multi-year funding provided for the government share offers ($2.288 million).
• Shared Support Services expenditure and revenue were below budget by $2.2 million. Increased funding in 2013/14 reflected the transfer of Emergency Management Services to DPMC from 1 April 2014 which were not fully spent by 30 June 2014.
• Expenditure on NZDMO activities was lower than anticipated by $1 million owing to change in timing in development of the new business information system.
• Additional funding for social housing work was approved late in the financial year; $1.865 million of this funding remains unused, while priority areas were determined.
• NZECO expenditure was below budget by $1.2 million. This activity is cost recovered through non-departmental revenues.
• A number of other projects across the Treasury were delivered with a lower level of consultancy spend, including Analytics and Insights programme and performance improvement initiatives.

Statement of Financial Position

The following major variations occurred between the 2013/14 and the 2012/13 Actuals:

• Intangible assets increased as a result of Emergency Management functions transferring from DIA.

The following major budget variations occurred between the 2013/14 Actuals and the 2013/14 Supplementary Estimates budgets:

• Cash balances were higher and reflect additional draw-downs against the Crown debtor than budgeted.
• The increase in debtors and receivables reflects the increased support service charges provided for Emergency Management functions in DPMC and additional debtors associated with Gateway services.
• Capital expenditure programme was lower than anticipated for intangible assets for the Business Information Hub and on the IT development programme.

Supplementary Financial Schedules - Non-departmental#

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for the year ended 30 June 2014

Schedule of Expenses#

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for the year ended 30 June 2014

The Schedule of Expenses summarises expenses that the Department administers on behalf of the Crown. Details of non-departmental expenditure and appropriations are provided in the Explanatory Notes to Supplementary Statements and Schedules - Non-departmental on pages 97 to 105.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Expenditure and Appropriations#

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for the year ended 30 June 2014

The Schedule of Expenditure and Appropriations details expenditure and capital payments incurred against appropriations. The Department administers these appropriations on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Statement of Unappropriated Expenditure#

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for the year ended 30 June 2014

There was one item of unappropriated expenditure in Vote Finance in the year ended 30 June 2014.

The Rewarewa forest did not produce sufficient net proceeds to repay its portion of Taitokerau's total debt to the Crown resulting in a write-off of the loan of $261,000. This impairment was not expected in this fiscal year.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Revenue#

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for the year ended 30 June 2014

 

Comparatives have been restated to reflect current year's gain or loss in the correct statement.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Capital Receipts#

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for the year ended 30 June 2014

The Schedule of Capital Receipts details non-departmental capital receipts that the Department administers on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Assets#

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as at 30 June 2014

The Schedule of Assets summarises the assets that the Department administers on behalf of the Crown.

In addition, the Treasury monitors 18 SOEs and 20 Crown entities. The investment in these entities is consolidated in the Crown Financial Statementsonaline-by-line basis.The investment in these entities is not included in this schedule.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Liabilities#

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as at 30 June 2014

The Schedule of Liabilities summarises the liabilities that the Department administers on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Commitments#

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as at 30 June 2014

This schedule sets out the level of commitment made against out-year appropriations and funding baselines for non-departmental expenditure. The Department, on behalf of the Crown, has entered into non-cancellable contracts in relation to New Zealand House in London.

 

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Schedule of Contingent Liabilities#

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as at 30 June 2014

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital, legal disputes and claims. The contingent liabilities managed by the Treasury on behalf of the Crown are a mixture of operating and balance sheet risks and they vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised it would have a negative impact on the operating balance, net Crown debt and net worth. However, in the case of contingencies for uncalled capital, the negative impact would initially be restricted to net Crown debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount included is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

The majority of the quantified contingent liabilities shown above arise from the uncalled capital element of the Crown's investments in the Asian Development Bank and the World Bank, and promissory notes issued in favour of IMF.

Decrease in contingent liabilities is owing to exchange rate fluctuations and contributions made to IMF as part of IMF's response to the financial crisis.

Unquantifiable Contingent Liabilities#

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The Treasury also administers a number of contingent liabilities that cannot be quantified. These arise primarily from institutional guarantees and indemnities. Readers are referred to the Financial Statements of the Government for further details.

Contingent Assets#

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The Department, on behalf of the Crown, has no contingent assets (2013: Nil).

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Statement of Trust Monies#

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as at 30 June 2014

(a) Unclaimed Money

The Trust Account is established pursuant to section 67 of the Public Finance Act 1989, for the purposes of depositing money paid to the Crown under section 77 of the Trustee Act 1956.

The source of funds is principally estates of deceased persons where the beneficiaries cannot be traced. Funds are retained in the Trust Account for six years, and are then transferred to the Crown as unclaimed money.

Details of funds held in the Trust Account are gazetted annually.

(b) Mighty River Power Initial Public Offer Trust Account

In 2012/13 the Crown opened a Mighty River Power Initial Public Offer Trust Account to facilitate the partial sale of Mighty River Power. The source of funds relates to proceeds from the sale of shares and distributions relate to refunds paid to investors. The funds are transferred to the Crown upon completion of the IPO.

(c) Meridian Initial Public Offer Trust Account

During the year, the Crown opened a Meridian Initial Public Offer Trust Account to facilitate the partial sale of Meridian. The source of funds relates to proceeds from the sale of shares and distributions relate to refunds paid to investors. The funds are transferred to the Crown upon completion of the IPO.

(d) Genesis Initial Public Offer Trust Account

During the year, the Crown opened a Genesis Initial Public Offer Trust Account to facilitate the partial sale of Genesis Energy. The source of funds relates to proceeds from the sale of shares and distributions relate to refunds paid to investors. The funds are transferred to the Crown upon completion of the IPO.

(e) Treasury Trust Account

During the year, the Crown opened a Trust Account to facilitate transactions where there are monies due to persons and collected under any agreement with the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2014.

Statement of Accounting Policies#

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for the year ended 30 June 2014

Reporting Entity#

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These non-departmental schedules present financial information on public funds managed by the Treasury on behalf of the Crown.

The financial information reported in these schedules is consolidated into the Financial Statements of the Government, and therefore readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2014.

Basis of Preparation#

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The non-departmental schedules have been prepared in accordance with the accounting policies of the Financial Statements of the Government, Treasury Instructions and Treasury Circulars.

Measurement and recognition rules applied in the preparation of these non-departmental supplementary financial schedules are consistent with NZ GAAP and Crown accounting policies and are detailed in the Financial Statements of the Government. Recognition and measurement rules comply with NZ IFRS and other applicable financial reporting standards, as appropriate for public benefit entities.

Significant Accounting Policies#

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The accounting policies set out below have been applied consistently to all years presented in these financial statements.

There have been no changes in accounting policies during the year.

Public Benefit Entities new accounting standards framework - NZ PBE standards

The Government will transition to the new Public Benefit Entities suite of standards for the next year. The Treasury will issue new accounting policies based on the new standards. If there are adjustments on transition to the new suite of NZ PBE standards, the comparatives for 2013/14 will need to be restated. Changes are not anticipated.

Foreign exchange

Foreign exchange transactions are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. 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 are recognised in the schedule of non-departmental income or expenses.

Goods and services tax

All items in the financial statements, including appropriation schedules, are stated exclusive of GST. In accordance with Treasury Instructions, GST is returned on revenue received on behalf of the Crown, where applicable. However, an input tax deduction is not claimed on non-departmental expenditure. Instead, the amount of GST applicable to non-departmental expenditure is recognised as a separate expense and eliminated against GST revenue on consolidation of the Financial Statements of the Government.

Commitments

Future expenses and liabilities to be incurred on non-cancellable contracts that have been entered into at balance date are disclosed as commitments to the extent that they are equally unperformed obligations.

Explanatory Notes to Supplementary Statements and Schedules - Non-departmental#

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Explanatory notes provide details of significant expenditure and revenue variances between actual results in 2012/13 and 2013/14 and between 2013/14 actual results and 2013/14 Supplementary Estimates.

1 Capital Charge#

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Capital charge revenue increased by $19.935 million from 2012/13 year owing to the value of Taxpayer Funds on which the charge is based.

2 Crown Guarantee Schemes: The Retail Deposit Guarantee Scheme (DGS) and Crown Wholesale Funding Guarantee Facility (WFGF)#

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The Government provided two guarantee schemes in relation to financial institution deposits: DGS and WFGF.

2(a)  Retail Deposit Guarantee Scheme

The Government operated an opt-in Retail Deposit Guarantee Scheme for financial institution deposits from October 2008 to December 2011. The original scheme expired on 12 October 2010; the extended scheme expired on 31 December 2011.

Nine entities guaranteed under the scheme were placed into receivership. The Crown has met its obligations to depositors under the schemes with the exception of a small number of depositors whose deposits remain unclaimed. The rights of recovery from the receivers are recognised as assets.

As a consequence of payments made to depositors of failed finance companies under DGS, the Crown inherited the beneficial interest in the proceeds that could be recovered from the sale of the secured assets of the receiverships. The reported receivables represent the receivers’ best estimates of likely recoveries from the receiverships. However, the eventual return to the Crown is dependent upon the value that can be realised from these entities’ assets and the timing of receipts. A range of outcomes for eventual recoveries is possible.

2(b) Crown Asset Management Limited

CAML was established to manage recoveries from the remaining assets of receiverships which defaulted under the Retail Deposit Guarantee Scheme where the Crown was the sole creditor. In Budget 2012, $500 million was allocated for equity injections into CAML under a capital appropriation to acquire the DGS assets and property portfolio of SRESL which was mostly drawn down in 2011/12 with lower funding injections in 2012/13 of $54.8 million and in 2013/14 of $4 million. The remaining $6 million is not required.

2(c) Crown Wholesale Funding Guarantee Facility

In addition to DGS, the Government operated an opt-in WFGF from November 2008 to April 2010. As at 30 June 2014, eight guarantee certificates remained in place, and the remaining value of wholesale securities guaranteed was $2.478 billion. No provision is made for losses under this scheme as the probability of loss is considered remote.

3  Dividends#

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Total dividends from commercial entities received this year have decreased by $7.7 million from 2012/13 with increases in dividends for Meridian, Genesis and Air New Zealand offsetting a reduction in dividends to the Crown from Mighty River Power.

Dividends from Crown entities include $67.311 million paid by CAML (see note 2(b)).

Other dividends received are from the Crown's share in Christchurch, Dunedin and Hawkes Bay Airports which are $2.888 million higher than those received in 2012/13. This is mainly owing to a lower dividend last year for Christchurch International Airport.

4  Earthquake Commission Underwriting Fee#

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Each year since 1986 EQC has paid the Crown an “underwriting fee”. This fee represents a premium-like charge on EQC for the Crown's role as an insurer of last resort. For the current year the Crown received $10 million (2013: $10 million).

5  Unclaimed Money#

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Appropriation allows for unexpected claims on funds held in trust.

6  Goodwill#

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Goodwill administered on behalf of the Crown in relation to Air New Zealand of $258 million (2013: $258 million) has been tested for impairment under NZIAS 36 Impairment of Assets. As a result of the impairment testing, no impairment was identified.

7  Government Superannuation Fund Unfunded Liabilities#

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The Government operates a defined benefit superannuation plan for qualifying employees who are members of GSF. The members' entitlements are defined in the Government Superannuation Fund Act 1956. Members make regular payments to GSF and in return, on retirement, receive a defined level of income. GSF is closed to employees who were not members at 1 July 1992.

The GSF obligation has been calculated by the Government Actuary as at 30 June 2014. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from GSF in respect of past service to be estimated and then discounted back to the valuation date.

GSF unfunded liability as at 30 June 2014 was $10,887 million, a decrease of $1,022 million compared with 30 June 2013.

This is primarily attributed to an actuarial gain recognised in the year of $577 million (2013: $1,251 million gain) owing to the increase in short- and medium-term discount rates over the year, the strong investment returns achieved by the Fund and the Crown contributions made. Contributions made by the Crown against the liability during 2013/14 were $700 million (2013: $658 million) offset by revenue giving net expense of $613 million (2013: $610 million).

The improvement was offset owing to the current service costs and interest expenses (appropriated under Other Expenses Incurred by the Crown - GSF Unfunded Liability) of $250 million (2013: $276 million).

The Government expects to make a contribution of $727 million to GSF in the year ended 30 June 2015.

In addition to its obligations to past and present employees, because GSF is liable to income tax under section HJ 1 of the Income Tax Act 2004, the Crown will be required to make additional contributions equivalent to the tax on future investment income. Additional detailed note disclosures required under NZ IFRSs for this liability are included in the Financial Statements of the Government.

8  Government Superannuation Fund Authority - Crown's Share of Expenses#

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These are expenses of the Government Superannuation Fund Authority relating to the management and administration of GSF. The Crown's share for 2013/14 was $28.758 million, $3.991 million higher than that in 2012/13. The investment manager expenses are dependent upon the portfolio valuations. For some active investment managers, their performance, and accordingly their fees, exceeded the forecast. The fund portfolio grew faster during the year compared to prior year.

9  Government Superannuation Fund - Employers' Contribution#

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The employers' contribution to GSF has decreased from $42.089 million in 2012/13 to $39.669 million in 2013/14. This is because of reduced memberships and lower average employee salaries which attracted lower employer contributions.

10  International Financial Institutions (IFIs)#

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Contributions of $25.31 million were made to the IMF lending programme in 2013/14 compared to forecast of $212 million owing to a timing variation in the draw-down of funding by IFIs. Capital withdrawals of $20.264 million (2013: $5.082 million) were made by IMF representing a repayment of advances to IMF to support countries in financial difficulties. During the year, a net loss of $21.997 million on revaluation of IFIs' investment was recorded as a result of New Zealand dollar foreign exchange rate movement (2013: $1.349 million gain).

11  Invercargill Airport Limited#

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During the year, the Crown divested its 2.82% share investment in Invercargill Airport Limited to iwi making a gain of $5,600 as the investment had been impaired to nil value in last financial year.

12 Landcorp Protected Land Agreement#

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The Landcorp Protected Land Agreement has two appropriations: one for operating costs and one for capital expenditure in managing a total of 10 farms protected by the Crown.

Capital expenditure in managing the protected land since inception has totalled $7.213 million (2013: $5.591 million). Farming profits and forestry revenue net of tax was $557,000 (2013: $711,000).

During the year the Crown sold Opouahi Station for $7.617 million incurring a re-measurement loss against initial investment and capital improvements of $3.99 million. Operating and capital annual costs payable to Landcorp for Protected Land were below appropriation as recovery costs from 2012/13 droughts were lower.

13 Mighty River Power Initial Public Offer#

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On 14 May 2013 the Crown sold 48.9% of the shares in Mighty River Power receiving gross cash proceeds of $1,686.1 million.

New Zealand retail investors in the Mighty River Power share offer will receive one loyalty bonus share for every 25 shares they hold for two years from the allotment date, 14 May 2013, up to a maximum of 200 bonus shares. This loyalty scheme has been recognised in the Schedule of Expenses as an expense and in the Schedule of Liabilities as a corresponding liability reflecting the value of the maximum allocation of bonus shares. The total maximum cost of the loyalty bonus scheme to the Crown was estimated to be $24.676 million at the allotment date.

As at 30 June 2014, the loyalty bonus share scheme liability has been re-valued based on the number of loyalty bonus shares that retail investors were entitled to at that date, assuming they continued to hold their shares until May 2015 (although no estimate has been made for future sale of shares by investors) and Mighty River Power's share price as at that date (no estimate has been made for Mighty River Power's share price atthe time the loyalty bonus shares are transferred to investors). The liability was reduced partly because Mighty River Power’s share price as at 30 June 2014 was lower than the offer price, and the fact that a small number of investors had sold some of their shares and are no longer eligible for the loyalty bonus shares. In total, the liability reduced by $1.152 million (2013: $3.229 million). The gain offset the loss recognised on the valuation of the Genesis Energy loyalty bonus shares.

14 Air New Zealand Transaction#

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On 17 November 2013 the Crown sold around 20% of the shares on issue in Air New Zealand receiving gross cash proceeds of $365.2 million which resulted in a gain on sale of $206.9 million after direct costs of sales, as measured against the historical cost of Air New Zealand recorded in the Treasury Non-departmental assets.

15 Genesis Energy Initial Public Offer#

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In April 2014 the Crown sold 48.99% of the shares in Genesis Energy receiving gross cash proceeds of $733.5 million which resulted in a gain on sale of $395.2 million after selling expenses and allowance for loyalty bonus shares as measured against the historical cost of Genesis Energy recorded in the Treasury Non-departmental assets.

New Zealand retail investors in the Genesis Energy share offer will receive one loyalty bonus share for every 15 shares they hold for 12 months from the allotment date, 16 April 2014, up to a maximum of 2,000 loyalty bonus shares.

Loyalty bonus shares are allocated per every 15 shares purchased and held by the Crown for 12 months, capped at a maximum of 2,000 loyalty bonus shares per registered holder.

The total maximum cost of the loyalty bonus scheme to the Crown was estimated to be $21.606 million at the allotment date.

As at 30 June 2014, the loyalty bonus share scheme liability has been re-valued based on the number of loyalty bonus shares that retail investors were entitled to at that date, assuming they continued to hold their shares until May 2015 (although no estimate has been made for future sale of shares by investors) and Genesis Energy's share price as at that date (no estimate has been made for Genesis Energy's share price at the time loyalty bonus shares are transferred to investors). The liability was increased owing to an increase in the Genesis share price from the offer price, partially offset by the impact of the small number of investors who had sold some of their shares and were no longer eligible for the loyalty bonus shares. In total, the liability increased by $1.681 million. The loss is partially offset by the gain recognised on the valuation of Mighty River Power loyalty bonus shares.

16 Meridian Energy Initial Public Offer#

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In November 2013 the Crown sold a 48.982% share in Meridian Energy Limited receiving gross cash proceeds of $1.255 billion for the first instalment. The sale resulted in a gain on sale of $1,400 million after selling expenses as measured against the historical cost of Meridian Energy recorded in the Treasury Non-departmental assets. Further proceeds of $627.7 million will be received on 15 May 2015, when the final instalment is payable by investors.

Deferred proceeds from the final instalment are recognised progressively at a discounted rate from maturity.

17 Loyalty Bonus Shares#

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Costs associated with the GSO were under budget, but remaining funding will be retained for costs associated with the final instalment payment for Meridian Energy, and movements in the value of the loyalty bonus shares to be transferred to investors in Mighty River Power and Genesis Energy in May 2015 and April 2015 respectively.

18  National Provident Fund Defined Benefit Plan (DBP) (Annuitants) Scheme Provision#

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The Government has guaranteed superannuation schemes managed by NPF. As at 30 June 2014, NPF's DBP Scheme was in a net deficit position of $910 million (2013: $977 million), represented by a gross estimated pension obligation of $943 million (2013: $1,011 million) with net investment assets valued at $33 million (2013: $34 million). No additional provision was required during the year for other pension schemes managed by NPF, under the Government's guarantee described in section 60 of the National Provident Fund Restructuring Act 1990.

The decrease of $96 million in the Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2014 was primarily owing to:

• payments made against the liability by the Crown during the year of $73 million, and
• the actuarial gain recognised for the year of $22 million resulting from movements in the economic assumptions used in calculating the provision, and

offset by:

• the unwinding of the interest expense (appropriated under Other Expenses Incurred by the Crown – NPF Schemes – Liability under Crown Guarantee) of $27 million.

Additional detailed note disclosures are included in the Financial Statements of the Government for this liability.

19  National Provident Fund - Crown Liability for Scheme Deficiency#

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The Crown is liable for the deficiency in the accounts of NPF schemes established pursuant to section 38A (6) of the National Provident Fund Act 1950, authorised by section 72 of the National Provident Fund Restructuring Act 1990. There were no calls against this appropriation for 2013/14 to 31 March 2014 (2013: Nil) and a nil provision for the three months to 30 June 2014 (2013: Nil).

20  New Zealand Export Credit Office#

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The purpose of NZECO is to assist New Zealand companies to increase exports by providing government-guaranteed export credit insurance and financial guarantee products, which complement private sector offerings. This support may help exporters mitigate buyer repayment risks, secure increased export sales and access additional credit facilities from their banks.

Payment of guarantees and indemnities was higher than anticipated for NZECO, owing to claims and provisions at year-end. An outstanding provision recognised in 2011/12 is awaiting settlement at $29.705 million.

21  New Zealand House - London#

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Operational costs associated with New Zealand House (including depreciation) are included in Other Expenses Incurred by the Crown - New Zealand House, London. Costs are kept to a minimum, but appropriation allows for unexpected costs.

22   New Zealand Superannuation Fund#

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No contributions were made to NZSF in 2013/14 as a result of the Government's decision in May 2009 to suspend contributions until there are budget surpluses sufficient to fund contributions.

23  New Zealand Debt Management Office#

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23(a)  Interest from investments and other income

NZDMO's interest from investments decreased by $68.606 million owing to lower average funds available for investment during 2013/14.

23(b)  Other revenue - NZDMO derivatives

Other revenue - NZDMO comprises net gains on NZDMO derivatives (excluding fair value and foreign exchange gains/losses). Current year decrease of $67.247 million is attributable to both interest rate changes and transactional activity.

23(c)   Borrowing costs

Borrowing costs have decreased by $112.683 million mainly owing to lower interest expenses on market government bonds.

23(d)   Fair value losses incurred by NZDMO

Fair value losses incurred are lower in the current year by $76 million owing to a combination of funding situations incurred by NZDMO where the resulting financial instruments are accounted for on different bases.

23(e)   Change in initial recognition of financial assets - NZDMO

Changes in initial recognition of both drawn and undrawn loans under a $500 million loan facility to Auckland Council resulted in revenue of $16 million. Similarly, changes in initial recognition of undrawn loans under a $375 million lending commitment to NZTA resulted in expenses of $114 million.

24  Other Current Revenue#

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Other current revenue has increased by $51.07 million in 2013/14 which is owing to an unanticipated recovery of an asset that was part of the government guarantee scheme but had been fully written down.

25  Reserve Bank Surplus#

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Dividends received by the Crown from RBNZ increased from $160 million in 2012/13 to $175 million in 2013/14 owing to an increase in RBNZ's surplus. The principal reason for this increase is owing to additional interest income earned, foreign exchange gains and changes in the market value of financial instruments.

26  Southern Response Earthquake Services Limited#

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The Crown Support Deed (CSD) with SRESL has been revalued to its net present value in June 2014 to recognise the likely profile of cash draw downs over the 10-year life of the Deed including the balance that will be payable in 2021. This valuation is purely driven by SRESL's expected cash draw down profile and the associated unwinding of the discounting over the life of the agreement and was completed by Finity Consulting Pty Limited.

Variance is owing to delay in draw down of the loan and changes in discount rates.

27  Solid Energy New Zealand Limited#

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During 2013/14 an appropriation was established for $130 million to provide secured loan facilities to Solid Energy New Zealand Limited in the event the company required them. The company has not needed to draw down on these facilities to date. In addition, the Crown subscribed to $25 million of redeemable preference shares in Solid Energy New Zealand Limited which was immediately impaired recognising the position of the company. Subsequent to reporting date, the Crown signed a Deed of Indemnity and Bond Facility with Solid Energy. The Deed of Indemnity creates a liability provision for the Crown and an asset for Solid Energy, recognised on signing, of $103 million. Under this Deed the Crown will reimburse the costs of the rehabilitation expenses of Solid Energy, Pike River (2012) Ltd and Spring Creek Mining Company to the extent of $103 million in present value terms.

28  Taitokerau Forests Limited#

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Loans to Taitokerau Forests Limited of $1.2 million were advanced as per a loan agreement during 2013/14. Two of the 12 forests, namely Ngaiotonga and Rewarewa, have completed their harvesting. Unfortunately, the Rewarewa forest did not generate sufficient cash-flow to repay its debt, resulting in a loss of $261,000 including accrued interest which was written off.

No grants were provided in 2013/14 and draw downs against the loan were lower than budgeted owing to a variation in harvest timetable.

29 Learning Media#

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Costs associated with the liquidation of Learning Media are lower than appropriated with remaining funding being retained to cover any final costs.

New Zealand Debt Management Office#

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NZDMO is part of the New Zealand Treasury and is responsible for the efficient management of the Crown's debt and associated assets within an appropriate risk management framework. NZDMO's strategic objective is to maximise the long-term economic return on the Crown’s financial assets and debt in the context of the Government’s fiscal strategy, particularly its aversion to risk.

NZDMO's major responsibilities involve:

• financing the Crown’s borrowing requirement and managing a portfolio of assets and liabilities
• disbursing cash to departments
• advancing funds to government entities in accordance with government policy, and
• providing capital markets services and derivative transactions for departments and Crown entities.

NZDMO managed $18.36 billion of assets, $86.286 billion of liabilities, $365 million of revenue and $3.421 billion of expenses on behalf of the Crown for the year ended 30 June 2014. Further information on NZDMO's performance in managing the Crown's sovereign-issued debt and related financial assets is provided on page 40 and pages 45 to 48.

To facilitate a greater level of transparency regarding NZDMO operations, the following supplementary financial schedules report the activity of NZDMO as though it were a stand-alone entity. Cross-holdings or other financial positions between NZDMO and other government entities are not eliminated. The financial information reported in these schedules is consolidated into the Crown Financial Statements.

Schedule of Assets and Liabilities#

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as at 30 June 2014

Schedule of Revenues and Expenses#

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for the year ended 30 June 2014

Classes and Categories of Financial Instruments#

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NZDMO designates its financial assets and liabilities under the following NZ IFRS categories:

Derivatives#

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As at 30 June 2014, the value of derivatives was as follows:

Risks#

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Risk Management#

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NZDMO operates within a risk management framework that is approved by the Minister of Finance. The framework specifies NZDMO's policies for managing market risk, credit risk, liquidity risk, funding risk and operational risk.

The risk management framework is subject to continuous improvement as information technology and analytical techniques advance. NZDMO's risk management framework and practices are subject to regular audit review, and are also reviewed periodically by the Treasury's Risk and Audit Committee, by the Controller and Auditor-General and by external experts commissioned by NZDMO.

The risk management framework sets out the governance framework for NZDMO's operations, including the legislative provisions governing NZDMO's borrowing and investment activities. Internal operations are governed by an established risk culture, body of policies, ethical guidelines, defined responsibilities and formal delegations, segregated duties and reporting and performance management requirements.

Funding Risk#

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Funding risk refers to the inability to raise funds at an acceptable price and tenor.

NZDMO's funding policy is designed to spread refinancing risk over time, and to diversify funding sources by maintaining access to a range of funding markets. To manage interest-rate risk and lower the cost of the New Zealand-dollar portfolio, NZDMO maintains a mix of fixed-rate, inflation-indexed and floating-rate debt, and uses interest-rate swaps. To manage refinancing risk, NZDMO places a limit on the percentage of outstanding debt that has a maturity of less than one year at issuance. NZDMO also has a set of criteria to ensure liquidity is built up as a bond tranche approaches maturity.

Bonds are issued into benchmark lines to improve liquidity in the domestic bond market and, consequently, reduce the Crown's cost of borrowing. NZDMO limits the tranche size of each maturity of marketable bonds issued in New Zealand dollars. Benchmark size trades off between improving liquidity and managing refinancing risk, and it is reviewed regularly.

Liquidity Risk#

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Liquidity risk is defined as not being able to meet expected and unexpected cash flow needs. The objective of NZDMO's liquidity policy is to ensure that NZDMO can meet all cash obligations as they fall due. To manage liquidity risk in its foreign currency portfolios, liquid assets are required to be held in each currency to cover cash flow obligations over one-day, two-day and six-week intervals. For New Zealand-dollar liquidity risk, other liquidity policies apply, and NZDMO has established cash management arrangements with RBNZ to support effective management of overall Crown cash flows.

Liquidity Requirements#

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Credit Risk#

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Credit risk is defined as the risk of loss in portfolio value owing to the downgrade or default of an institution or security issuer.

NZDMO is exposed to credit loss when the issuer of a debt instrument defaults on interest or principal payments, or when a counterparty in a transaction such as a swap agreement defaults on an obligation. Credit-related loss in the value of the portfolio also occurs when the market value of a debt instrument falls owing to an increase in credit risk.

Financial instruments that subject NZDMO to credit risk include bank balances, advances, investments, interest-rate swaps, currency swaps, foreign exchange options and foreign exchange forward contracts.

NZDMO manages credit risk through the credit screening of counterparties, use of credit exposure limits and counterparty collateral obligations. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is monitored daily. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and foreign exchange counterparties.

NZDMO lending to government entities, and to entities to which NZDMO is exposed as a matter of government policy, is not managed under the credit policy.

The Crown has agreed to make available to the Auckland Council, a loan facility to enable the Council to develop the Auckland metro rail network. The loan facility amount is $500 million of which $192 million is undrawn as at 30 June 2014. The loans drawn are included in Advances to non-Crown above.

The Crown has also agreed to make available to LGFA a New Zealand-dollar revolving credit facility to meet exceptional and temporary liquidity shortfalls affecting LGFA. The 10-year facility (to February 2022) is for $400 million at June 2014 with the potential for this to be increased to a maximum $1,000 million by February 2015. As at 30 June 2014 the facility has not been utilised.

Concentration of Credit Exposure as at 30 June 2013#

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Operational Risk#

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Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Risk events include resource failures or constraints, control and security breaches or failures, transaction errors, compliance breaches, the breakdown of key relationships and disasters.

NZDMO's generic objectives in respect of operational risk are to:

• mitigate financial and reputational loss arising from operational failure by effectively managing operational risks where it is cost effective to do so, and
• establish a culture of continuous improvement of operational policies and practices.

Operational risks in NZDMO are managed in a number of ways. Controls include general Treasury policies, NZDMO-specific policies, reporting and performance management requirements, delegations and systems access restrictions. They are supported by close communications and regular management meetings that, in turn, reinforce a strong team ethic. Independent experts provide additional support in managing operational risk.

Market Risk#

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Market risk is defined as the impact of changes in interest rates or exchange rates on portfolio value.

The objective of NZDMO’s market risk management is to limit this risk within parameters that allow for the achievement of its other financial objectives, including earning a satisfactory rate of return on liquid assets and adding value in its foreign currency execution activities.

NZDMO has implemented an asset and liability matching (ALM) policy to manage risk within its portfolios. The policy aims to minimise the currency and interest-rate risks to NZDMO's revenues and balance sheet, by matching the characteristics of its assets to those of its liabilities, where practicable. The range of instruments used to minimise exposure to market risk includes debt instruments, financial assets, foreign exchange contracts, currency swaps, interest-rate swaps and futures contracts.

NZDMO is exposed to market risk when assets and liabilities are imperfectly matched. The risk is managed through the use of VaR limits and stop-loss limits.

The VaR limit is expressed over daily, monthly and annual time horizons at 95% confidence level and reflects the risk tolerance of the Government in respect of NZDMO's activities. NZDMO uses back-testing to evaluate the performance of the VaR model, and stress-testing is carried out to understand how extreme or unusual events would impact on the portfolio. Monthly, quarterly and annual stop-loss limits are in place to protect NZDMO from further losses once actual losses reach a certain point.

Because NZDMO's liabilities exceed its assets, it also incurs market risk associated with the net volume of outstanding government debt. Fluctuations in the net market value of New Zealand-dollar debt as a result of interest-rate movements are not actively managed, and unmatched debt is accounted for on an amortised cost basis.

Foreign Currency Risk Management#

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NZDMO's net foreign currency debt position is kept close to zero, as indicated in the schedules below.

Financial Instruments: Fair Value Hierarchy#

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NZDMO measures some financial instruments at fair value based on the designation or classification of the instruments into “Fair value through profit or loss” or “Available-for-sale” categories for financial instruments. The following table provides a fair value hierarchy, as required by NZ IFRS 7, that reflects the significance of the inputs used in making the fair value measurements. The hierarchy levels are Level 1 (quoted market prices), Level 2 (observable inputs) and Level 3 (unobservable inputs).

Independent Auditor's Report#

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To the Readers of the Treasury's Financial Statements, Non-Financial Performance Information and Schedules of Non-departmental Activities for the Year Ended 30 June 2014

The Auditor-General is the auditor of the Treasury (the Department). The Auditor-General has appointed me, Graeme Edwards, using the staff and resources of KPMG, to carry out the audit of the financial statements, non-financial performance information and the schedules of non-departmental activities of the Department on her behalf.

We have audited:

• the financial statements of the Department on pages 60 to 82, that comprise the statement of financial position, statement of commitments, statement of contingent liabilities and contingent assets as at 30 June 2014, the statement of comprehensive income, statement of changes in equity, statement of departmental expenses and capital expenditure against appropriations, statement of unappropriated expenditure and capital expenditure and statement of cash flows for the year ended on that date and the notes to the financial statements that include accounting policies and other explanatory information; and
• the non-financial performance information of the Department that comprises the statement of service performance on pages 34 to 57 and the report about outcomes on pages 9 to 22; and
• the schedules of non-departmental activities of the Department on pages 84 to 105 and 107 to 120 that comprise the schedule of assets, schedule of liabilities and revaluation reserves, schedule of commitments and schedule of contingent liabilities and contingent assets as at 30 June 2014, the schedule of expenses, schedule of expenditure and capital expenditure against appropriations, schedule of unappropriated expenditure and capital expenditure, schedule of income and statement of trust monies, for the year ended on that date and the notes to the schedules that include accounting policies and other explanatory information.

Opinion#

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In our opinion:

• the financial statements of the Department on pages 60 to 82:
  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect the Department's:
    • financial position as at 30 June 2014;
    • financial performance and cash flows for the year ended on that date;
    • expenses and capital expenditure incurred against each appropriation administered by the Department and each class of outputs included in each output expense appropriation for the year ended 30 June 2014; and
    • unappropriated expenses and capital expenditure for the year ended 30 June 2014; and
• the non-financial performance information of the Department on pages 34 to 57 and 9 to 22:
  • complies with generally accepted accounting practice in New Zealand; and
  • fairly reflects the Department's service performance and outcomes for the year ended 30 June 2014, including for each class of outputs:
    • its service performance compared with the forecasts in the statement of forecast service performance at the start of the financial year; and
    • its actual revenue and output expenses compared with the forecasts in the statement of forecast service performance at the start of the financial year.
• the schedules of non-departmental activities of the Department on pages 84 to 105 and 107 to 120 fairly reflect, in accordance with the Treasury Instructions:
  • the assets, liabilities, contingencies, commitments and trust monies as at 30 June 2014 managed by the Department on behalf of the Crown; and
  • the revenues, expenses, expenditure and capital expenditure against appropriations and unappropriated expenditure and capital expenditure for the year ended on that date managed by the Department on behalf of the Crown.

Our audit was completed on 30 September 2014. This is the date at which our opinion is expressed.

The basis of our opinion is explained below. In addition, we outline the responsibilities of Secretary to the Treasury and our responsibilities, and we explain our independence.

Basis of opinion#

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We carried out our audit in accordance with the Auditor-General's Auditing Standards, which incorporate the International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and carry out our audit to obtain reasonable assurance about whether the financial statements, the non-financial performance information and the schedules of non-departmental activities are free from material misstatement.

Material misstatements are differences or omissions of amounts and disclosures that, in our judgement, are likely to influence readers' overall understanding of the financial statements, the non-financial performance information and the schedules of non-departmental activities. If we had found material misstatements that were not corrected, we would have referred to them in our opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial statements, the non-financial performance information and the schedules of non-departmental activities. The procedures selected depend on our judgement, including our assessment of risks of material misstatement of the financial statements, the non-financial performance information and the schedules of non-departmental activities, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Department's preparation of the financial statements, the non-financial performance information and the schedules of non-departmental activities that fairly reflect the matters to which they relate. We consider internal control in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Department's internal control.

An audit also involves evaluating:

• the appropriateness of accounting policies used and whether they have been consistently applied;
• the reasonableness of the significant accounting estimates and judgements made by the Secretary to the Treasury;
• the appropriateness of the reported non-financial performance information within the Department’s framework for reporting performance;
• the adequacy of all disclosures in the financial statements, the non-financial performance information and the schedules of non-departmental activities; and
• the overall presentation of the financial statements, the non-financial performance information and the schedules of non-departmental activities.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements, the non-financial performance information and the schedules of non-departmental activities. Also we did not evaluate the security and controls over the electronic publication of the financial statements, the non-financial performance information and the schedules of non-departmental activities.

We have obtained all the information and explanations we have required and we believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion.

Responsibilities of the Secretary to the Treasury#

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The Secretary to the Treasury is responsible for preparing:

• financial statements and non-financial performance information that:
  • comply with generally accepted accounting practice in New Zealand;
  • fairly reflect the Department's financial position, financial performance, cash flows, expenses and capital expenditure incurred against each appropriation and its unappropriated expenses and capital expenditure; and
  • fairly reflect its service performance and outcomes; and
• schedules of non-departmental activities, in accordance with the Treasury Instructions, that fairly reflect those activities managed by the Department on behalf of the Crown.

The Secretary to the Treasury is also responsible for such internal control as is determined is necessary to enable the preparation of financial statements, and non-financial performance information and schedules of non-departmental activities that are free from material misstatement, whether due to fraud or error. The Secretary to the Treasury is also responsible for the publication of the financial statement, and non-financial performance information and schedules of non-departmental activities, whether in printed or electronic form.

The Secretary to the Treasury's responsibilities arise from the Public Finance Act 1989.

Responsibilities of the Auditor#

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We are responsible for expressing an independent opinion on the financial statements, the non-financial performance information and the schedules of non-departmental activities and reporting that opinion to you based on our audit. Our responsibility arises from section 15 of the Public Audit Act 2001 and the Public Finance Act 1989.

Independence#

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When carrying out the audit, we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the External Reporting Board.

In addition to the audit, we have carried out assignments in other areas of other advisory services, which are compatible with those independence requirements. Other than the audit and these assignments we have no relationship with or interests in the Department.

Graeme Edwards
KPMG
On behalf of the Auditor-General
Wellington, New Zealand

Executive Leadership Team#

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Gabriel Makhlouf - Secretary to the Treasury, Chief Executive#

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Gabriel (Gabs) Makhlouf is the Government's chief economic and financial advisor. He joined the Treasury in March 2010 following a career in the UK civil service, where his responsibilities ranged from policy development on domestic and international tax and welfare policy issues through to large-scale, customer-focused, operational delivery. Mr Makhlouf has chaired the world's main tax-ruling body - the Committee on Fiscal Affairs - at the OECD and was Principal Private Secretary to the UK Chancellor of the Exchequer, Gordon Brown. He has a BA (Honours) degree in Economics, an MSc in Industrial Relations and is an alumni of INSEAD's Advanced Management Programme.

Vicky Robertson - Deputy Chief Executive#

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Vicky Robertson was appointed Deputy Chief Executive in August 2012. She had previously been Deputy Secretary Growth and Public Services. Her role is to support the Chief Executive in driving the Treasury to achieve its vision, and as the Chief Operating Officer, has responsibility for the Treasury’s commercial, financial and corporate functions. During her 15-year Treasury career, Ms Robertson has worked in roles spanning a wide range of policy areas and has led corporate strategy and change. Ms Robertson has a law degree and played hockey at New Zealand Representative level as a member of the Black Sticks in 1991 and 1993/94.

Girol Karacaoglu - Chief Economist. Deputy Secretary, Macroeconomics, International and Economic Research#

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Girol Karacaoglu joined the Treasury on 1 March 2012, after being Chief Executive of The Co-operative Bank (formerly PSIS) for nine years. Dr Karacaoglu leads the Treasury's economic research, analysis and forecasting work, and is also responsible for the teams that work on achieving a stable and sustainable macroeconomic environment. Dr Karacaoglu has previously been General Manager at Westpac NZ, Chief Economist at the National Bank of New Zealand and lecturer in economics at Victoria University of Wellington. He has a PhD in Economics and an MBA, and is fluent in French and Turkish.

Fiona Ross - Deputy Secretary, Budget and Public Services#

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Fiona Ross re-joined the Treasury in 2011. She leads the Treasury's work to raise living standards by helping to ensure the Government's finances are well managed and overseeing advice on the performance of the public sector as a whole. Ms Ross has over 20 years' experience in the public service, including 10 years of experience on change and reform programmes in the UK public service. Ms Ross holds an Honours degree in Arts and a Master's degree in Public Policy, both from Victoria University of Wellington. She has been actively involved with a number of not-for-profit groups focused on the issues of sexual abuse and women's sport and fitness.

Catherine Atkins - Deputy Secretary, Growth and Public Services#

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Catherine Atkins has held a range of senior leadership positions since joining the Treasury in 1999, including Deputy Secretary of Strategy, Change and Performance. With a background in economics and international trade, her work has spanned policy areas ranging from market intervention, growth, competition policy and regulation to labour markets, welfare and State sector performance. She was also responsible for setting up the New Zealand Productivity Commission.

Bill Moran - Deputy Secretary, Strategy, Change and Performance#

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Bill Moran joined the Treasury in 1985. He has led work for the Treasury in macroeconomic and fiscal policy, tax strategy and State sector management. He is a strong advocate for ensuring the Treasury's work is informed by external views, and involving New Zealanders in the policy process. This has included leading a wide-ranging public engagement programme to review the tax system in 2009 and to test the assumptions and analysis for the Treasury's Long Term Fiscal Statement in 2013.

Mr Moran holds a Master's degree in Political Science from Victoria University of Wellington. He is a board member of New Zealand Football, Chair of the Organising Committee for the 2015 FIFA Under-20 Men's World Cup, to be held in New Zealand, a member of the FIFA Organising Committee for the 2018 Confederations Cup, to be held in Russia and was the Founding Chair of the Play It Strange Trust, a schools-based youth development initiative.

Brendon Doyle - Deputy Secretary, Financial Operations#

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Brendon Doyle joined the Treasury in March 2012 from Westpac in Australia, where he was Managing Director of its Global Capital Markets. He oversees the teams that borrow and make debt repayments for the Crown, and issue guarantees to support export businesses. His teams finance the gap between what the Government receives in taxes and fees and what it spends on providing public services. Mr Doyle has a Bachelor degree in Business Studies.

Note: Positions are as at date of publication.

External Advice on Governance and Performance#

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Treasury Board#

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The Treasury Board is an advisory board that supports the Secretary to the Treasury to meet the Treasury's strategic goals and ambitions. The Board does this by testing key strategic decisions, offering external expertise and perspectives and providing a strong advisory function.

The Board is not required by statute and is an innovation in the public sector. Its role and operating practice have evolved over time.

The Board's principal purpose is to hold the Chief Executive to account in an advisory capacity. The statutory responsibilities and accountabilities of the Chief Executive and the State Services Commissioner remain unchanged. The Board:

• tests high-level strategy set by the executive
• advises on strategy execution
• links the Treasury with external expertise, and
• provides an independent perspective on any area raised by the Chief Executive.

The Board aims to replicate the discipline provided by a private sector governance board as far as possible within the public sector management system, providing additional challenge, accountability and external expertise to the executive.

Non-executive Board Members#

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The Treasury Board is currently made up of seven non-executive members, the Chief Executive and Deputy Chief Executive. Current non-executive members of the Board are listed below:

Mr Paul Baines

Mr Paul Baines has a significant background in financial and strategic management. He sits on the boards of the New Zealand Institute of Economic Research, the Todd Corporation and is Chair of the Gillies McIndoe Research Institute. He is a former Chair of Barnardos and has served on the boards of Fletcher Building, the Reserve Bank of New Zealand and Telecom New Zealand.

Mr Whaimutu Dewes

Mr Whaimutu Dewes has a broad range of experience in private and public sector management and governance. He is currently the Chairman of Aotearoa Fisheries, Ngāti Porou Seafoods and Ngāti Porou Forestry and a director on the boards of Contact Energy, HNZC and Ngāti Porou Holding Company. He is of Ngāti Porou and Ngāti Rangitihi descent.

Professor Harlene Hayne

Professor Harlene Hayne is Vice-Chancellor of the University of Otago, where she has helped to lead the commercialisation of the university's intellectual property and built strong research links with the private sector. Her current Fellowships include the Royal Society of New Zealand and the American Psychological Society, and she has served on the Royal Society's Academy Council, the Marsden Fund Council and the New Zealand National Science Panel. She is Co-Chair of the Office of the Prime Minister's Science Advisory Committee Working Party on Reducing Social and Psychological Morbidity during Adolescence. Professor Hayne was made an Officer of the New Zealand Order of Merit in 2009 for her services to scientific and medical research.

Dr Susan Macken

Dr Susan Macken is an experienced company director and consultant. She is a director of the Bank of New Zealand, Fertility Associates and Tamaki Redevelopment Company. She is Chair of Crown research institute Environmental Science and Research. Previous directorships have included Southern Cross Healthcare, the NZ Racing Industry Board and the NZ Trade Development Board. She has worked for the World Bank as an economist.

Sir Ralph Norris

Sir Ralph Norris serves on the boards of Fonterra Co-operative Group, Fonterra Shareholder Fund, Fletcher Building and Origin Energy. He is a member of the Council of the University of Auckland and a Fellow of the New Zealand Institute of Management and the New Zealand Computer Society. His 40-year career in banking included roles as Chief Executive of the Commonwealth Bank of Australia and ASB Bank, and he is also the former Chief Executive of Air New Zealand. Sir Ralph was formerly Chairman of the New Zealand Bankers' Association, Australian Bankers' Association and the New Zealand Business Roundtable, and was previously a Director of the Business Council of Australia. Sir Ralph was made a Knight Companion of the New Zealand Order of Merit in 2009, and in 2013 was conferred by the University of NSW with an Honorary Doctorate in Business.

Dr Martin Parkinson PSM

Dr Martin Parkinson was appointed as Australia's Secretary to the Treasury in March 2011. As Secretary, he is a member of the Board of the Reserve Bank of Australia, Chair of the Advisory Board of the Australian Office of Financial Management and a member of the Council of Financial Regulators and the Prime Minister's Business Advisory Council. He holds a PhD from Princeton University, a MEc from the Australian National University and a BEc (Hons) from the University of Adelaide. He was awarded the Public Service Medal in 2008.

Ms Joan Withers

Ms Joan Withers is a full-time company director with significant senior executive and corporate governance experience. She is Chair of Mighty River Power Ltd, Deputy Chair of Television New Zealand and an independent director of ANZ Bank New Zealand. She was previously Chief Executive of Fairfax Media in New Zealand and of the Radio Network. Ms Withers’ not-for-profit involvement is through trusteeships of The Tindall Foundation and the Louise Perkins Foundation (Sweet Louise) and through her chairmanship of a steering group which has developed a pipeline for Māori and Pacific students at three South Auckland high schools through tertiary study into employment at Counties Manukau District Health Board.

Note: Positions are as at date of publication.

Risk and Audit Committee#

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RAC is a committee of the Treasury Board. The Committee supports the Chief Executive by providing independent advice, assurance and observations on the adequacy of the internal control and management systems, processes and activities across the Treasury.

The Committee comprises two members of the Board (Susan Macken and Paul Baines) plus an independent person (Roy Tiffin) with significant public sector audit committee experience. Susan Macken is the Chair. The primary benefit of RAC is its independence and objectivity in relation to management, and the specialist skills of members.

The focus of the Committee includes:

• risk management framework and processes
• internal control environment and mechanisms
• internal and external audit activities relating to the Treasury and non-departmental activities managed and administered by the Treasury on behalf of the Crown
• processes relating to the preparation and audit of financial statements of the Treasury and of the Financial Statements of the Government
• the integrity of performance information (including financial reporting)
• the governance framework and processes, and
• policies, processes and activities to ensure compliance with legislation, policies and procedures.

RAC does not manage risk on behalf of the organisation. Rather, it engages with management on areas of risk and provides advice and assurance to the Board and Chief Executive on the completeness, effectiveness and relevance of the arrangements in place to manage risk and ensure sound financial management in the Treasury.

In discharging these responsibilities RAC separates its focus between Treasury departmental operations and the preparation of the Financial Statements of the Government. During 2013/14 RAC met five times.

Following a review of RAC function and the establishment of the Commercial Advisory Board, the Chief Executive has changed the nature of the Treasury assurance arrangements. From 2014/15 RAC will focus on providing advice and assurance on departmental operations and a new Audit Committee will provide advice and assurance on the Financial Statements of the Government.

Mr Roy Tiffin#

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Mr Roy Tiffin serves in an independent advisory role on the Treasury's RAC. He has extensive audit and probity experience, and in addition to consulting work is currently a member of several public sector audit committees. Mr Tiffin was an Audit Partner at KPMG in Wellington from 1999 to 2004, and previously an Audit Partner at Deloitte in South Africa. He was also the Director of Audit New Zealand from 1994 to 1999 and, in 2005, was the President of the New Zealand Institute of Chartered Accountants (NZICA).

Quality Standards for Policy Advice#

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Ministerial Servicing - Service Standards#

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Ministerial Servicing will not exceed budgeted costs.

Monitoring of Statutory Agencies and Shareholdings#

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The Treasury has ongoing monitoring responsibility for the following Statutory Agencies and Shareholdings:

State-Owned Enterprises

• Airways Corporation of New Zealand Ltd (Airways)
• Animal Control Products Ltd (ACP)
• AsureQuality Ltd (AsureQuality)
• Electricity Corporation of New Zealand Ltd (ECNZ) (the residual company)
• KiwiRail Holdings Ltd (KiwiRail)
• Kordia Group Ltd (Kordia)
• Landcorp Farming Ltd (Landcorp)
• Learning Media Ltd (LML) in liquidation
• Meteorological Service of New Zealand Ltd (MetService)
• New Zealand Post Ltd (NZ Post)
• New Zealand Railways Corporation
• Quotable Value Ltd (Quotable Value)
• Solid Energy NZ Ltd
• Transpower New Zealand Ltd (Transpower)
• Other Crown Companies:
• Crown Asset Management Ltd (CAML)
• Crown Fibre Holdings Ltd (CFH)
• Crown Irrigation Investments Ltd (Crown Irrigation)
• Health Benefits Ltd (supporting the Ministry of Health in monitoring this company)
• Radio New Zealand Ltd (RNZ)
• Southern Response Earthquake Services Ltd (SRESL)
• Television New Zealand Ltd (TVNZ)
• The Network for Learning Ltd (N4L)

Entities for which we undertake a secondary monitoring role with the MBIE:

• AgResearch Ltd (AgResearch)
• Fairway Resolution Ltd (Fairway)
• Institute of Environmental Science & Research Ltd (ESR)
• Institute of Geological & Nuclear Sciences Ltd (GNS Science)
• Landcare Research New Zealand Ltd (Landcare Research)
• National Institute of Water & Atmospheric Research Ltd (NIWA)
• New Zealand Forest Research Institute Ltd (Scion)
• New Zealand Venture Investment Fund Ltd (NZVIF)
• Research & Education Advanced Network NZ Ltd
• The New Zealand Institute for Plant & Food Research Ltd (Plant & Food Research)
• Other:
• Accident Compensation Corporation (ACC)
• Earthquake Commission
• Government Superannuation Fund Authority (GSF)
• Housing New Zealand Corporation (HNZC)
• New Zealand Lotteries Commission (Lotteries)
• New Zealand Superannuation Fund (NZSF)
• Public Trust
• Entities the Crown has a partial interest in:
• Air New Zealand Ltd
• Christchurch International Airport Ltd (CIAL)
• Dunedin International Airport Ltd (DIAL)
• Genesis Energy Ltd
• Hawkes Bay Airport Ltd (HBAL)
• Meridian Energy Ltd
• Mighty River Power Ltd
• National Provident Fund (NPF)
• NZ Local Government Funding Agency (supporting DIA in monitoring this enitity)
• Tāmaki Redevelopment Company Ltd (TRC)

The Treasury administers the board appointment processes for all of the above companies/entities. In addition, the Treasury administers the board appointment processes for the following entities: Crown Forestry Rental Trust, Government Superannuation Appeals Board, National Infrastructure Advisory Board, New Zealand Productivity Commission, Nominating Committee for the Guardians of New Zealand Superannuation, and RBNZ. The Treasury also serves as the secretariat function for the Government Superannuation Appeals Board.

Research and Policy Publications#

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The Treasury's research and policy publications present work-in-progress perspectives on a variety of economic, financial, trade and social issues. The aim in publishing this work is to make the papers available to a wider audience, and to inform and encourage public debate on important areas of work.

List of Acronyms#

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