Financial Statements of the Government of New Zealand for the Year Ended 30 June 2019

Ministerial Statement#

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Overall, the 2018/19 year-end results are strong. They demonstrate the Coalition Government is delivering both increased investment to address our long-term infrastructure and social deficits, together with continued delivery of responsible fiscal management.

The results show the operating balance before gains and losses (OBEGAL) surplus increasing and the Crown's net worth growing. Net core Crown debt as a percentage of GDP has decreased to 19.2% - below both the previous year's forecast and the Budget 2019 forecast.

These results demonstrate the continuing strength in the economy, with nominal GDP growing by 3.6% for the year ended 30 June 2019. Core Crown tax revenue rose from the previous year with all major tax types increasing. 2018/19 saw more people in employment, increases in average wages, additional domestic consumption and higher individual and corporate profits. The Treasury notes that some of the strength in tax revenue was partly due to the improvements in the recognition of tax revenue, enabled by the transition of the administration of income tax to START (Simplified Tax and Revenue Technology).

Both nominal private and general government consumption expanded by 5.0% in the year while residential investment increased by 7.9%. Nominal business investment grew by 2.9%. Expenditure as a percentage of GDP was 29.0%, in line with The Treasury's Budget 2019 forecast of 29.1%. Core Crown expenditure rose 8.0% from the previous year, largely due to the Government's increased investment in health and education, and continued expenditure on superannuation.

The operating balance before gains and losses (OBEGAL) reached a surplus of $7.5 billion, an increase of $2.0 billion when compared to 2017/18. This is $4.0 billion ahead of the OBEGAL position forecast at Budget 2019, and the largest surplus since 2008. The variation from the forecast is largely due to one-off factors that are not likely to continue over time, such as the $2.6 billion from the revaluation of rail assets.

Losses from the valuation of the Crown's long-term liabilities (ACC and Government Superannuation Fund) arose from changes in assumptions used to value these liabilities. This resulted in losses on non-financial instruments of $14.1 billion for the year. Investment gains of $4.4 billion (primarily in NZSF and ACC) reflected strong market performance. When these gains and losses are combined with the OBEGAL result, the total Crown operating balance was a deficit of $2.3 billion. The operating balance can fluctuate between years, due to its sensitivity to market conditions, such as equity markets and discount rates.

The Crown's assets increased by $25.8 billion to reach $365.8 billion at 30 June. Total Crown liabilities increased by $15.1 billion to $219.4 billion. Net worth attributable to the Crown increased by $10.1 billion to $139.7 billion, reflecting upward valuation of the Crown's physical assets, partly offset by the operating balance deficit.

The Government's investment programme meant capital spending exceeded net cash from the core Crown's operations, resulting in the core Crown recording a residual cash deficit of $0.7 billion. This led to net core Crown debt of $57.7 billion, $0.2 billion higher than at 2017/18. In GDP terms, net core Crown debt fell from 19.9% in 2017/18 to 19.2% this year.

All together these accounts represent a sound and resilient position, as recognised by international observers and ratings agencies. As a country we are well positioned to deal with a slowing global economy in the tail end of the economic cycle. The government will deliver our investments to deal with the long-standing issues in our economy and society. We are delivering new infrastructure investment, lifting productivity, mitigating and adapting to climate change, improving child wellbeing and addressing the other social deficits this Government inherited.

Hon Grant Robertson
Minister of Finance

30 September 2019

Statement of Responsibility#

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These financial statements have been prepared by the Treasury in accordance with the provisions of the Public Finance Act 1989. The financial statements comply with New Zealand generally accepted accounting practice and with Public Benefit Entity Accounting Standards (PBE standards) for the public sector.

The Treasury is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance that the transactions recorded are within statutory authority and properly record the use of all public financial resources by the Government Reporting Entity. To the best of my knowledge, this system of internal control has operated adequately throughout the reporting period.

Caralee McLiesh
Secretary to the Treasury

30 September 2019

I accept responsibility for the integrity of these financial statements, the information they contain and their compliance with the Public Finance Act 1989.

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2019 and its operations for the year ended on that date.

Hon Grant Robertson
Minister of Finance

30 September 2019

Commentary on the Financial Statements#

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Fiscal Overview#

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At a Glance#

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The Government's fiscal position has continued to strengthen this year with a surplus in the operating balance before gains and losses (OBEGAL), net core Crown debt reduced as a share of the economy and net worth increased in nominal terms.

• Core Crown tax revenue was $6.2 billion more than last year and was higher than the Budget 2019 forecast by $1.8 billion (page 11).
• Core Crown expenses were $6.4 billion higher than last year, but $0.3 billion less than Budget 2019 forecast (page 13).
• Core Crown residual cash was a deficit of $0.7 billion, compared to last year's residual cash surplus of $1.3 billion. This was a result of higher capital cash flows than the operating cash flows (page 18).
• Gross debt decreased nominally by $3.6 billion to $84.4 billion from the prior year, and decreased as a percentage of GDP to 28.1% (page 20).
• Net core Crown debt increased in nominal terms by $0.2 billion largely as a result of the residual cash deficit in the current year, but continued to decrease as a percentage of GDP (to 19.2%) (page 18).
• Outside of the core Crown, State-owned enterprises and Crown entities' contribution to OBEGAL was higher than last year by $1.8 billion (page 16).
• The OBEGAL surplus of $7.5 billion was $2.0 billion higher than last year (page 16). However, the level of this year's surplus is partly owing to one-off positive items. For example, the $2.6 billion positive impact from the KiwiRail impairment reversal.
• The total Crown operating balance (excluding minority interests) was a deficit of $2.3 billion largely a result of total Crown net losses of $10.1 billion arising from changes in long-term liability valuation assumptions (page 17).
• Net worth increased by $10.7 billion. This is largely owing to uplifts on the property, plant and equipment, partially offset by the operating balance deficit (page 21).

1. Core Crown tax revenue is higher than total Crown tax revenue owing to eliminations.
2. Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
3. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.
4. Excluding minority interests.

A comparison of the year end results against Budget 2019 is included on pages 25 to 27.

These financial statements[1] contain the audited results for the financial year ended 30 June 2019. The results are compared against previous years and against forecasts for the 2018/19 year:

• Budget 2018 refers to the 2018 Budget Economic and Fiscal Update published in May 2018, and
• Budget 2019 refers to the 2019 Budget Economic and Fiscal Update published in May 2019.

The financial statements of the Government received an unmodified auditor's opinion for the year ended 30 June 2019.

This commentary should be read in conjunction with the financial statements on pages 42 to 140.

Summary#

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Growth in the economy has resulted in an increase in core Crown tax revenue…

Nominal GDP grew by 3.6% in the year to reach $300.0 billion while real GDP increased 2.6%.

Real activity was supported by population growth with New Zealand's population growing 1.6% in the year to date. Both nominal private and general government consumption expanded by 5.0% while residential investment increased by 7.9%. Increased consumer spending has been supported by higher wage growth with the average hourly earnings increasing 3.5% in the year.

In addition, higher corporate profits and individuals income was partly driven by an increase in business investment of 2.9%.

Figure 1 - Core Crown tax revenue and nominal GDP growth

Source:  The Treasury

Figure 2 - Core Crown revenue and core Crown expenses

Source:  The Treasury

The above economic conditions have contributed to an increase in core Crown tax revenue, which is up $6.2 billion from last year to $86.5 billion. Growth in core Crown tax revenue in 2018/19 was greater than GDP growth, primarily owing to system changes impacting how tax revenue is calculated.

Other core Crown revenue increased by $0.6 billion to $7.2 billion.

 ... while spending decisions have driven an increase in core Crown expenses...

As a share of the economy, core Crown expenses increased to 29.0% of GDP (27.8% of GDP in 2018); in nominal terms, core Crown expenses increased by $6.4 billion (8.0%) to $87.0 billion.

The largest drivers of growth in nominal core Crown expenditure were the Government's 100-Day Plan, Budget 2018 and Budget 2019 decisions. At the time of announcement, these decisions increased core Crown expenses in 2018/19 by around $4.7 billion. In addition, expenditure on social assistance and the transport sector made up most of the remaining increase in core Crown expenses.

The increase in core Crown expenditure was the largest year-on-year increase since 2011.

…there are some large positive one-off items this year…

A portion of the strength in tax revenue is from the transition to the new processes and system used to calculate tax revenue. Refer to page 12 for more information.

Also, total expenses have been partially offset by the reversal of KiwiRail's previous impairment expense of $2.6 billion. This increase resulted from a change in the valuation approach of the rail network from a commercial basis to a public benefit basis. Refer to the box on page 15.

Figure 3 - Operating balance (excluding minority interests)

Source:  The Treasury

... which have increased the OBEGAL surplus…

The OBEGAL surplus of $7.5 billion for 2018/19 increased by $2.0 billion from last year. However, the level of this year's surplus is owing to some large one-off positive items. For example, excluding the $2.6 billion positive impact from KiwiRail, the current year's surplus is lower than the previous year.

Figure 4 - Core Crown residual cash

Source:  The Treasury

… however net losses more than offset the OBEGAL surplus.

Overall, total net losses for the year were $10.1 billion, largely owing to $14.1 billion of valuation losses in relation to long-term liability valuations for Accident Compensation Corporation (ACC) and the Government Superannuation Fund (GSF). This compares to valuation losses of $2.4 billion last year.

The valuation losses were partially offset by investment gains of $4.4 billion in 2018/19, mostly from New Zealand Superannuation Fund (NZS Fund) and ACC recording gains from their investment activities of $1.9 billion and $1.5 billion respectively.

When these net losses are combined with the OBEGAL surplus, the operating balance was a deficit of $2.3 billion.

The Crown's operating balance is particularly sensitive to changes in some key assumptions used to value assets and liabilities. For example, this year a decrease in discount rates added $10.8 billion to the ACC liability. More details of balance sheet sensitivities can be found on page 24.

Figure 5 - Net core Crown debt¹

Source:  The Treasury

1  Net core Crown debt excluding the NZS Fund and advances.

These one-off items do not flow into the cash available to the Crown...

The one-off items mentioned above are non-cash in nature, therefore, they do not impact the level of cash available for the Crown. Cash from core Crown operating activities of $6.0 billion has been generated, $1.2 billion less than last year.

… and core Crown capital spending exceeds cash from operations…

Capital spending of $6.7 billion was $0.8 billion higher than last year. The core Crown capital spending largely consisted of purchases of physical assets of $3.0 billion, investment in Crown entities of $2.7 billion and the Government's contributions to NZS Fund of $1.0 billion.

… resulting in a core Crown cash deficit, increasing net core Crown debt…

Taking into account both operating and capital activities of the Crown, there is a cash shortfall (residual cash deficit) this year of $0.7 billion.

Net core Crown debt of $57.7 billion increased by $0.2 billion from last year. As a percentage of GDP, net core Crown debt has continued to fall, from 19.9% in 2017/18 to 19.2% in 2018/19.

... while the revaluation of physical assets increased net worth.

Alongside the operating balance deficit of $2.3 billion, revaluation uplifts of physical assets increased by $12.5 billion. There was also a one-off increase in the student loan valuation of $0.6 billion. As a result, net worth increased by $10.7 billion to $146.3 billion.

Total assets grew by $25.8 billion to $365.8 billion, while liabilities increased by $15.1 billion to $219.4 billion.

Increases in property, plant and equipment and financial assets such as NZS Fund investments contributed to the growth in assets while an increase in long-term liabilities was the main driver of the increased liability.

Figure 6 - Net worth

Source:  The Treasury

Revenue#

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Total Crown revenue was $119.3 billion, an increase of $9.3 billion from last year largely owing to increased core Crown tax revenue.

Core Crown Tax Revenue

Core Crown tax revenue was $86.5 billion, up $6.2 billion (7.8%) from the year before. The increase in core Crown tax revenue was broadly a result of more people in employment, increases in average wages, additional domestic spending, and higher corporate and individual profits. In addition, some of the strength was driven by the recent transition to the new Simplified Tax and Revenue Technology (START) system, implemented in April 2019 by the Inland Revenue Department that is used to calculate tax revenue. For more details, refer to the box on page 12.

Figure 7 - Core Crown tax revenue

Source:  The Treasury

Most major tax types increased over the year with four tax types making up most of the increase (Table 3):

• Source deductions increased by $2.2 billion (7.0%). This increase was owing to growth in the number of people in employment, and the effect of rising average tax rates.
• Corporate tax revenue increased by $1.8 billion (13.0%), mainly owing to profit growth and changes to the way the new START system calculates tax revenue.
• Goods and Services Tax (GST) was $1.0 billion (5.0%) higher than last year, with most of the growth coming from domestic consumption, which was up 5.0% on the previous year.
• Other individuals tax was $0.5 billion (10.3%) higher than last year, mainly owing to income growth, and the correction of some Portfolio Investment Rates (charged on the investment returns of KiwiSaver accounts and managed funds) as a result of transitioning to Inland Revenue Department's new system.

Source:  The Treasury

Other Revenue

Total Crown other revenue was $32.8 billion, an increase of $3.1 billion from the previous year. Other revenue includes fees and levies (eg, ACC levies), revenue from operations of Crown entities and State-owned enterprises (SOEs), interest revenue and dividend revenue.

Core Crown other revenue increased by $0.6 billion to $7.2 billion. A portion of this increase was owing to revenue from the New Zealand Emissions Trading Scheme (ETS) of $0.2 billion. This increase was owing to more carbon units being surrendered to the Crown and an increase in the price of these surrendered units. The balance of the increase reflects small movements across various entities.

The SOE and Crown entity sectors (including inter-segment eliminations) recorded revenue of $25.7 billion, an increase of $2.5 billion from the prior year. This increase related largely to sales of goods and services in the SOE sector and an increase in Earthquake Commission's (EQC) insurance revenue owing to increased levy revenue and higher reinsurance income.

Figure 8 - Other revenue

Source:  The Treasury

Expenses#

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Total Crown expenses were $111.4 billion in the current year, $7.4 billion more than last year. Most of the increase occurred within the core Crown segment ($6.4 billion). The increase in Crown entities and SOEs (including eliminations) was $3.6 billion, but this is offset by a reversal of KiwiRail's previous impairment expenses of $2.6 billion, resulting in a net increase of $1.0 billion since last year. Refer to page 15 for the details on KiwiRail's impairment expenses.

Core Crown Expenses

The core Crown expenses increase of $6.4 billion is the largest year on year increase since 2011. The expenditure, as a share of the economy was higher than the previous year at 29.0% of GDP (Figure 9).

The largest drivers of growth in core Crown expenditure were the Government's 100-Day Plan, Budget 2018 and Budget 2019 decisions.

On announcement, the combination of these decisions were expected to increase core Crown expenses, by around $4.7 billion in 2018/19.

Source:  The Treasury

The budget decisions with the biggest financial impact related to social security and welfare. This was mainly funding for the Families Package. Decisions impacting health expenses were the second largest financial impact, increasing by around $1.0 billion from 2017/18.

Figure 9 - Core Crown expenses

Source:  The Treasury

In addition:

• New Zealand Superannuation costs were higher than last year by $0.9 billion. This was owing to an increase in recipient numbers from an average of around 741,300 in 2017/18, to 767,000 in 2018/19 and increased payment rates.
• Transport expenses increased by $0.3 billion from the prior year, owing to an increase in state highway maintenance.

Figure 10 shows the composition of core Crown expenses by key areas of Government spending. The three spending areas of social security and welfare, health and education expenses make up 70% of all core Crown spending.

Other core Crown expenses (18%) includes other areas of spending (eg, transport, economic, defence, and environmental protection and finance costs) and these levels of spending remained consistent with spending in the prior year.

Figure 10 - Composition of core Crown expenses

Source:  The Treasury

Other Expenses

The SOE and Crown entity sectors (including inter-segment eliminations) recorded net expenses of $24.4 billion. Excluding the $2.6 billion one-off reversal of KiwiRail's impairment expenses, the expenditure was $27.0 billion, and an increase of $3.6 billion or 15% from 2017/18.

The following key areas contributed to most of the $3.6 billion increase:

• DHB expenses were higher than the previous year as a result of increased cost of health services and additional personnel expenses from estimated liabilities under the Holidays Act 2003.
• Higher insurance expenses in ACC mostly reflecting additional claims.
• The SOE sector's higher expenses were consistent with higher revenue, although the growth in expenses was at a lower rate compared to revenue growth.

Operating Balance#

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1 Other gains and losses includes the net surplus from associates and joint ventures/operations.

OBEGAL (Operating Balance before Gains and Losses)

The OBEGAL surplus of $7.5 billion is an improvement of $2.0 billion from last year.

Figure 11 shows the composition of OBEGAL from the different reporting segments of the Government.

The core Crown segment is consistent with last year with an OBEGAL surplus of $6.6 billion.

For the year ended 30 June 2019, the SOE segment reported a surplus of $3.2 billion, up $2.5 billion from last year largely owing to the change in rail freight network valuation methodology (refer to the box on page 15). In addition, increased revenue from SOEs outpaced the increase in operating expenditure.

The Crown entity segment reported a deficit of $1.5 billion, more than the previous year's deficit of $0.8 billion. The primary driver of this relates to higher DHB deficits, and increased ACC insurance expenditure of $1.0 billion.

Figure 11 - Components of OBEGAL by segment

Source:  The Treasury

Operating Balance

When the net losses ($10.1 billion) and the net surplus from associates and joint ventures ($0.3 billion) for the year are combined with the OBEGAL surplus, this resulted in a total Crown operating balance deficit of $2.3 billion. This year's deficit of $2.3 billion compares to last year's operating balance surplus of $8.4 billion, a $10.7 billion change.

Total net losses for the year were $10.1 billion compared to the prior year's gains of $2.4 billion.

Figure 12 - Operating balance (excluding minority interests)

Source:  The Treasury

Gains on financial instruments of $4.4 billion (compared to $5.3 billion last year), mainly reflect continued favourable investment performance (primarily in NZS Fund and ACC) and a gain of $0.7 billion on student loans owing to a decrease in the discount rate (used to value expected loan repayments in today's dollars). The current year saw volatility in financial markets offset by favourable movements in exchange rates, resulting in investment gains being $0.9 billion lower than last year.

Losses on non-financial instruments of $14.3 billion (compared to $2.8 billion of losses last year) largely consisted of actuarial losses on the ACC and GSF long term liabilities. These losses were mainly owing to decreases in the discount rates used to value all outstanding claims in today's dollars. Liabilities with long durations such as ACC and GSF are particularly sensitive to discount rate movements. If discount rates reduce, the liability in today's dollar increases.

Figure 13 shows a comparison of the yield curve of forward discount rates used to value the ACC and GSF liabilities over the last four years.

Figure 13 - Discount rates

Source:  The Treasury

Debt#

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1. Net debt is defined as net core Crown debt excluding the NZS Fund and advances.
2. Gross debt is defined as gross sovereign-issued debt excluding the Reserve Bank settlement cash and Reserve Bank bills.

Net Debt

Net debt has increased by $0.2 billion from $57.5 billion in 2017/18 to $57.7 billion in 2018/19. This is largely owing to a residual cash deficit of $0.7 billion, explained below. Partly offsetting the residual cash deficit was an increase in circulating currency of $0.4 billion, driven by public demand for currency. As a share of the economy, net debt continued to fall (19.2% of GDP versus 19.9% of GDP a year earlier).

Figure 14 - Net debt

Source:  The Treasury

Residual Cash

Net cash flows from core Crown capital spending for the year exceeded net operating cash flows, resulting in a residual cash deficit of $0.7 billion. This compares to a residual cash surplus of $1.3 billion last year. Table 9 summarises the key residual cash movements from last year to the current year.

• Tax receipts were $3.6 billion higher than last year, partly driven by the increases in core Crown revenue from economic growth and particularly, the labour market.
• Sovereign other receipts were $0.5 billion higher than last year mainly owing to more ETS participants taking the ‘fixed-price option' where they can pay the Government $25 for each unit they are liable to surrender to meet their obligations.
• Operating payments (including interest) were $5.5 billion higher than last year, broadly in line with the increase in core Crown expenses.

Source:  The Treasury

Capital spending for 2018/19 totalled $6.7 billion, an increase of $0.8 billion from the previous year. Capital spending included:

• Net purchase of physical assets of $3.0 billion, including $0.9 billion by the Ministry of Education in relation to school property, $0.7 billion for defence equipment, $0.4 billion for prisons, and $0.2 billion for hospitals.
• Net investments of $2.7 billion, the largest of which was the Crown's $1.1 billion contributions to NZTA for state highways. Other investments included $0.3 billion in KiwiRail, $0.3 billion to Crown Infrastructure Partners Limited and $0.2 billion for DHBs.
• Net cash from advances (eg, Student loans) were a net outflow of $0.1 billion.
• Government contributions to the NZS Fund were $1.0 billion this year, an increase of $0.5 billion from the previous year.

Figure 16 analyses capital cash flows by sector excluding NZS Fund. This shows that 48% of capital spending ($2.8 billion) was within the transport and education sectors. The total spend in the transport sector was $1.8 billion (31%), largely for the state highway network. The education sector spent $1.0 billion (17%) purchasing physical assets for schools and upgrading existing property.

Figure 15 - Net core Crown capital cash flows

Source:  The Treasury

Figure 16 - Profile of net core Crown capital cash flows (excluding NZS Fund)

Source:  The Treasury

Gross Debt

Gross debt, which reflects the borrowings of the core Crown, decreased by $3.7 billion from $88.1 billion in 2017/18 to $84.4 billion this year (Figure 17). As a percentage of the economy, gross debt decreased by 2.3% to 28.1% of GDP (30.4% of GDP a year earlier).

The decrease in nominal gross debt was predominantly owing to the increase in repurchases and repaying bonds on maturity outpacing the issuance of Government bonds. In addition, derivatives in loss decreased as a result of market movements, particularly in relation to exchange rate movements.

Figure 17 - Gross debt

Source:  The Treasury

Total Crown Balance Sheet#

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Net Worth

Net worth is the difference between the Crown's total assets (what the government owns) and liabilities (what the government owes). This difference primarily consists of the accumulation of past operating surpluses and deficits (referred to as taxpayers' funds) and revaluation uplifts in the physical assets.

Net worth was $146.3 billion at 30 June 2019, an increase of $10.7 billion from a year earlier. This was largely owing to revaluation uplifts of the Crown's assets (eg, the rail and state highway networks). As a share of the economy, net worth grew 1.9% from 46.9% of GDP in 2017/18 to 48.8% of GDP in the current year.

Figure 18 - Net worth

Source:  The Treasury

Total Crown Balance Sheet

Total Crown assets were $365.8 billion at 30 June 2019, a $25.8 billion increase from last year. This growth was largely in property, plant and equipment (PPE) of $19.0 billion, while financial assets grew by $5.8 billion and other assets by $1.0 billion.

Total Crown liabilities were $219.4 billion, an increase of $15.1 billion from the previous year. This is largely owing to an increase of $13.3 billion in ACC insurance liabilities mainly arising from to a decrease in discount rates.

Financial Assets

Financial assets at $163.3 billion were $5.8 billion higher than last year.

The following key areas contributed to the increase:

• The financial asset portfolio managed by NZS Fund and ACC grew reflecting investment performance, as discussed earlier. The primary purpose of these assets is to help pay for ACC claims and fund future New Zealand superannuation costs.
• Growth in Kiwi Group Holdings loans and advances of $2.1 billion.
• An increase in student loans of $1.4 billion. This is owing to a one-off increase of $0.6 billion as a result of a new accounting standard and changes in the valuation assumptions, particularly discount rates.
• Offsetting the above is a decrease in financial assets that are included as part of the calculation of net core Crown debt of $4.7 billion to fund the Crown's borrowing programme and residual cash deficit.

Property, Plant and Equipment

The $19.0 billion increase in PPE was across a number of classes such as state highways, the rail network, housing, and electricity generation assets. The increase is mainly from additions and revaluation changes.

As seen in Figure 19, the largest uplifts in PPE related to the following asset classes:

• The value of state highways (including land) increased by $5.5 billion, mainly reflecting the continued valuation improvements, the development of new state highway assets and improvements to existing state highway network.
• The rail network increased by $5.2 billion mainly owing to the network now being valued as a public benefit asset (detailed on page 15 - Rail network box).
• The housing portfolio managed by Housing New Zealand Corporation increased by $1.7 billion of which $1.2 billion relates to an increase in houses, with the remainder of the increase owing to revaluation uplifts at 30 June 2019.
• Electricity generation assets increased by $1.4 billion mainly due to changes in the assumptions used in the valuations of these assets.

Figure 19 - Movements in PPE by asset classes

Source:  The Treasury

Borrowings

Total borrowings represents the borrowings undertaken by the core Crown, Crown entities and SOEs. Borrowings at $110.5 billion was $5.2 billion less than last year.

The overall decrease is driven by a combination of factors as seen in Figure 20:

• Government bonds decreased by $5.5 billion owing to changes in the Crown's borrowing programme (discussed on page 20).
• Derivatives in loss decreased by $1.1 billion as a result of market movements, particularly movements in exchange rates (mentioned in the gross debt narrative above).
• Borrowings by Crown entities increased by $1.4 billion to fund capital projects by NZTA and Housing New Zealand. This is partly offset by a decrease of small movements across various entities.
• Kiwi Group Holdings borrowings (eg, customer deposit held) increased by $2.1 billion, which offsets the increase in Kiwi Group Holdings advances (eg, mortgages) discussed on page 22.

Figure 20 - Movement in borrowings by types

Source:  The Treasury

Insurance and Retirement Liabilities

ACC's insurance liability increased this year by $13.3 billion from $43.3 billion to $56.6 billion. GSF liabilities also increased by $2.2 billion from $11.0 billion to $13.2 billion. The increases were owing to actuarial valuation changes driven largely by a decrease in the discount rates and changes in inflation assumptions.

Year End Results Compared to Budget 2019#

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The Budget Economic and Fiscal Update 2019 (Budget 2019) was published on 30 May 2019.

1. Favourable variances against forecast have a positive sign and unfavourable variances against forecast have a negative sign.

Core Crown Tax Revenue

Core Crown tax revenue was $1.8 billion (2.1%) higher than expected in Budget 2019, with the largest differences being as follows:

• Other individual tax and corporate tax revenue were $1.1 billion (23.1%) and $0.4 billion (2.7%) above forecast. This is mainly owing to expected growth in profits and the new simplified tax and revenue system implemented by Inland Revenue.
• Source deduction revenue was $0.2 billion (0.6%) above forecast. Labour market data released in early August show that employment growth and wage growth were both above forecast through the June quarter, likely contributing to the favourable forecast variance.

Source:  The Treasury

Figure 21 - Core Crown tax revenue variance to Estimated Actuals

Source:  The Treasury

Core Crown Expenses

Core Crown expenses were $0.3 billion (0.3%) lower than expected. Excluding the top-down adjustment of $0.8 billion core Crown expenses were $1.1 billion ($1.3%) lower than expected.

The lower than forecast result was largely owing to expenditure now expected to be spent in the 2019/20 fiscal year and lower than anticipated demand for some services. The most significant variances were in the transport, education, and primary industries sectors.

Figure 22 - Core Crown expenses variance to Estimated Actuals

Source:  The Treasury

OBEGAL

The OBEGAL surplus was $4.0 billion higher than Budget 2019 forecast. The variance against Budget 2019 relates to the favourable variances in core Crown revenue and core Crown expenses. In addition, SOEs results were $2.7 billion higher than forecast, largely owing to the change in the valuation method of the rail freight network owing to assumptions around its purpose. This valuation change resulted in the reversal of previous years' impairment expenses of $2.6 billion. However, the higher than forecast Crown entities deficits ($0.8 billion) partially offsets the favourable SOE segment's results.

Operating Balance

The total Crown operating balance deficit of $2.3 billion was $2.0 billion higher than the deficit forecast in Budget 2019. Although the OBEGAL surplus was $4.0 higher than expected, this was more than offset by actuarial losses. Increased actuarial losses from forecast of $9.4 billion was partially offset by increased gains of $2.4 billion on the Crown's investment portfolios primarily managed by NZS Fund and ACC. The actuarial losses were owing to updated discount rates at 30 June 2019 which were lower than the 31 January rates used at Budget 2019, and changes in the inflation assumptions.

Residual Cash

The residual cash deficit was $2.1 billion less than the deficit forecast at Budget 2019, as a result of lower than forecast operating payments of $1.2 billion and higher than forecast core Crown tax receipts of $0.5 billion. Capital payments were in line with the forecast.

Core Crown operating payments were lower than forecast, driven from timing delays and demand for services.

The increase in tax receipts was driven by source deductions and corporate tax receipts which were $0.2 billion and $0.4 billion respectively above forecast.

In addition, receipts from the ETS were $0.4 billion higher than forecast as a result of more ETS participants taking the fixed-price option where they can pay the Government $25 for each unit they are liable to surrender to meet their obligations.

Net Debt

Net debt at $57.7 billion (19.2% of GDP) was $2.6 billion below forecast, mainly driven by the lower residual cash of $2.1 billion compared to forecast. As capital spending exceeds the cash flows from operating activities, this indicates that some capital spending is continuing to be funded through borrowings. In addition to the $2.1 billion residual cash variance, higher circulating currency driven by public demand for currency, and gains and losses on financial assets and financial liabilities each contributed $0.2 billion to the net core Crown debt variance from forecast.

Gross Debt

Gross debt at $84.4 billion (28.1% of GDP) was $1.2 billion higher than forecast.

Total Borrowings

Total borrowings at 30 June 2019 were $110.5 billion and were $1.6 billion lower than the Budget 2019 forecast.

Net Worth

Net worth was $10.1 billion higher than the Budget 2019 forecast, mainly owing to an upwards revaluation of physical assets of $12.5 billion, partially offset by the operating balance deficit of $2.3 billion. Revaluations usually occur at 30 June and are not forecast.The largest revaluations were to the rail freight and state highway networks.

Historical Financial Information for the year ended 30 June 2019#

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Independent Audit Report of the Controller and Auditor-General#

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TO THE READERS OF THE FINANCIAL STATEMENTS OF THE GOVERNMENT OF NEW ZEALAND FOR THE YEAR ENDED 30 JUNE 2019

Opinion

I have audited the financial statements of the Government of New Zealand (the financial statements of the Government) for the year ended 30 June 2019 using my staff, resources, and appointed auditors and their staff. The financial statements of the Government on pages 42 to 152 comprise:

• the annual financial statements that include the statement of financial position as at 30 June 2019, the statement of financial performance, analysis of expenses by functional classification, statement of comprehensive revenue and expense, statement of changes in net worth, and statement of cash flows for the year ended on that date, a statement of segments, and notes to the financial statements that include accounting policies, borrowings as at 30 June 2019, and other explanatory information;
• a statement of unappropriated expenditure for the year ended 30 June 2019;
• a statement of expenses or capital expenditure incurred in emergencies for the year ended 30 June 2019; and
• a statement of trust money administered by departments for the year ended 30 June 2019.

The basis for my opinion is explained below and I outline the key audit matters addressed in my audit. I outline the responsibilities of the Treasury and the Minister of Finance and my responsibilities for the financial statements of the Government. I also comment on other information and explain my independence.

Basis for opinion

I carried out my audit in accordance with The Auditor-General's Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. My responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements of the Government section of this report.

I have fulfilled my responsibilities in accordance with The Auditor-General's Auditing Standards.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key audit matters

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the Government for the current year. In applying my professional judgement to determine key audit matters, I considered those matters that are complex, have a high degree of uncertainty, or are important to the public because of their size or nature. I have included the entitlements under the Holidays Act 2003 as a key audit matter because of the significant uncertainties associated with the obligations to remediate issues under the Act. There is also understandably, much public interest in this matter because it affects many current and former public servants.

The key audit matters addressed in my audit of the financial statements of the Government as a whole, and in forming my opinion thereon, are as follows.

Responsibilities of the Treasury and the Minister of Finance for the financial statements of the Government

The Treasury is responsible for preparing financial statements of the Government that:

• comply with generally accepted accounting practice in New Zealand, in accordance with Public Benefit Entity accounting standards;
• present fairly the Government's financial position, financial performance, and cash flows; and
• present fairly the Government's:
  • borrowings;
  • unappropriated expenditure;
  • expenses or capital expenditure incurred in emergencies; and
  • trust money administered by departments.

The Minister of Finance is responsible for forming an opinion that the financial statements of the Government present fairly the financial position and financial performance of the Government.

The responsibilities of the Treasury and the Minister of Finance arise from the Public Finance Act 1989.

The Treasury is also responsible for such internal control as it determines is necessary to enable the preparation of financial statements of the Government that are free from material misstatement, whether due to fraud or error. The Treasury is also responsible for the publication of the financial statements of the Government, whether in printed or electronic form.

In carrying out their respective responsibilities for the financial statements of the Government, the Treasury and the Minister of Finance are responsible for assessing the Government's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

Auditor's responsibilities for the audit of the financial statements of the Government

My objectives are to obtain reasonable assurance about whether the financial statements of the Government as a whole are free from material misstatement, whether due to fraud or error, and to issue an audit report that includes my opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with The Auditor-General's Auditing Standards will always detect a material misstatement. Misstatements are differences or omissions of amounts or disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions readers make based on the financial statements of the Government.

For the budget information reported in the financial statements of the Government, my procedures were limited to checking that the amounts agree to the Government's relevant published budgets.

I did not evaluate the security and controls over the publication, whether in printed or electronic form, of the financial statements of the Government.

As part of an audit in accordance with The Auditor-General's Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. Also:

• I identify and assess the risks of material misstatement of the financial statements of the Government, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, because fraud can involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• I obtain an understanding of internal control relevant to the audit 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 internal control used by the Treasury to prepare the financial statements of the Government.
• I evaluate the appropriateness of accounting policies used, and the reasonableness of accounting estimates and related disclosures made by the Treasury.
• I conclude on the appropriateness of using the going concern basis of accounting that has been used by the Treasury to prepare the financial statements of the Government, up to the date of my auditor's report, based on the audit evidence I have obtained.
• I evaluate the overall presentation, structure, and content of the financial statements of the Government, including the disclosures, and whether the financial statements of the Government represent the underlying transactions and events in a manner that achieves fair presentation.

As part of my audit, I obtain information from my staff and appointed auditors of the organisations that are consolidated into the financial statements of the Government, including information about:

• elimination of transactions between the organisations that are consolidated into the financial statements of the Government;
• application by those organisations of appropriate accounting policies and Treasury instructions to prepare the financial statements of the Government; and
• the risks of material misstatement of the financial statements of those organisations that may affect the financial statements of the Government.

I communicate with the Treasury, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that I identify during my audit.

From the matters communicated with the Treasury, I determine those matters that were of most significance in my audit of the financial statements of the Government for the current year and are therefore the key audit matters described in this report.

I am responsible for expressing an independent opinion on the financial statements of the Government and reporting that opinion to you based on my audit. My responsibility arises from the Public Audit Act 2001.

Other information

The Treasury is responsible for the other information. The other information comprises the information included on pages 1 to 162, but does not include the financial statements of the Government and my auditor's report thereon.

My opinion on the financial statements of the Government does not cover the other information and I do not express any form of audit opinion or assurance conclusion on that information.

In connection with my audit of the financial statements of the Government, my responsibility is to read the other information. In doing so, I consider whether the other information is materially inconsistent with the financial statements of the Government or my knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on my work, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

Independence

While carrying out this audit, my staff and appointed auditors and their staff complied with the Auditor-General's independence requirements, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code).

As an Officer of Parliament, I am constitutionally and operationally independent of the Government. The Auditor-General was, before starting his term as Auditor-General on 2 July 2018, the Deputy Director-General for the Ministry for Primary Industries. As Deputy Auditor-General, I have dealt with all matters relating to the Ministry for Primary Industries. Other than this matter, and in exercising my functions and powers under the Public Audit Act 2001 as the auditor of public entities, I have no relationship with or interests in the Government.

Greg Schollum
Deputy Controller and Auditor-General
Wellington, New Zealand

Financial Statements of the Government of New Zealand#

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Statement of Financial Performance for the year ended 30 June 2019#

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The accompanying notes (including accounting policies) are an integral part of these statements.

Analysis of Expenses by Functional Classification for the year ended 30 June 2019#

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Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by Ministers, Departments, Offices of Parliament, the NZ Superannuation Fund and the Reserve Bank, but not Crown entities and State-owned Enterprises. Details of unappropriated expenditure can be found on pages 141 to 148.

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Comprehensive Revenue and Expense for the year ended 30 June 2019#

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The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Changes in Net Worth for the year ended 30 June 2019#

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The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Cash Flows for the year ended 30 June 2019#

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The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Cash Flows (continued)
for the year ended 30 June 2019

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Cash Flows (continued)
for the year ended 30 June 2019

The accompanying notes (including accounting policies) are an integral part of these statement.

Statement of Financial Position as at 30 June 2019#

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The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Segments#

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Statement of Segments (continued)

Notes to the Financial Statements#

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Note 1: Basis of Reporting#

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Statement of compliance

These financial statements have been prepared in accordance with the Public Finance Act 1989 and with New Zealand Generally Accepted Accounting Practice (NZ GAAP) as defined in the Financial Reporting Act 2013.

For the purposes of these financial statements, the Government reporting entity has been designated as a public benefit entity (PBE). PBEs are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.

These financial statements have therefore been prepared in accordance with Public Sector PBE Accounting Standards (PBE Standards) - Tier 1. These standards are based on International Public Sector Accounting Standards (IPSAS).

The use of public resources by the Government is primarily governed by the Public Finance Act 1989, the State Sector Act 1988, the Crown Entities Act 2004 and the State-owned Enterprises Act 1986.

These financial statements were authorised for issue by the Minister of Finance on 30 September 2019.

Reporting period

The reporting period for these financial statements is for the year ended 30 June 2019.

Where necessary, the financial information for State-owned Enterprises and Crown entities that have a balance date other than 30 June has been adjusted for any transactions or events that have occurred since their most recent balance date and that are significant for the Financial Statements of the Government. Such entities are primarily in the education sector.

Basis of preparation

These financial statements have been prepared on the basis of historical cost modified by the revaluation of certain assets and liabilities, and prepared on an accrual basis, unless otherwise specified (for example, the Statement of Cash Flows).

The financial statements are presented in New Zealand dollars rounded to the nearest million, unless separately identified.

The accounting policies included in these financial statements are the significant accounting policies for the Financial Statements of the Government and appear in grey shaded boxes. A full list of Crown accounting policies can be found at http://www.treasury.govt.nz/publications/guidance/reporting/accounting.

Comparatives

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

Comparatives referred to as Budget 2018 were 2019 forecasts published in the 2018 Budget Economic and Fiscal Update, while Budget 2019 were 2019 forecasts published in the 2019 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of forecast estimates.

Forecast new capital spending is an amount provided in the forecasts to represent the impact on the financial position and cash flowsof capital initiatives expected to be introduced over the forecast period. Forecast new operating spending is an amount included in the forecasts to provide for the operating balance impact of policy initiatives, changes to demographics, and other forecasting changes expected to occur over the forecast period. The top-down adjustment is an adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper spending limits) when preparing their forecasts. As appropriations apply to the core Crown only, no adjustment is required to State-owned Enterprises or Crown entity forecasts.

Segment analysis

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

• Core Crown: This group, which includes Ministers, government departments, Offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund, most closely represents the budget sector and provides information that is useful for fiscal analysis purposes. Investments in Crown entities and State-owned Enterprises (SOE) are reported at historic cost in this segment with no impairment. This ensures losses in those entities are reflected in the appropriate segment.
• Crown entities: This group includes entities governed by the Crown Entities Act 2004. These entities have separate legal form and specified governance frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy).
• State-owned Enterprises: This group includes entities governed by the State-owned Enterprises Act 1986, and (for the purposes of these statements) also includes Air New Zealand Limited, Mercury NZ Limited, Meridian Energy Limited and Genesis Energy Limited. This group represents entities that undertake commercial activity.

Functional analysis is also provided of a number of financial statements items. This functional analysis is drawn from the Classification of the Functions of Government as developed by the Organisation for Economic Co-operation and Development (OECD) and published by the United Nations Statistical Division.

Accounting Standards issued and not yet effective and not early adopted

Standards and amendments to standards, issued but not yet effective that have not been early adopted, and that are relevant to these Financial Statements are:

Financial Instruments

In March 2019, PBE IPSAS 41 Financial Instruments was issued. This new standard will supersede PBE IFRS 9: Financial Instruments and is effective for reporting periods beginning on or after 1 Jan 2022. This new standard is based on IPSAS 41 Financial Instruments, prepared by the IPSASB, and is substantially converged with IFRS 9 Financial Instruments prepared by the IASB. As a consequence of the identical, or almost identical, requirements in PBE IFRS 9 and PBE IPSAS 41, any impact on these financial statements from PBE IPSAS 41 Financial Instruments is likely to be minimal.

These financial statements early adopted PBE IFRS 9: Financial Instruments. That standard introduced a number of changes to the recognition and measurement of financial instruments, including new classification and measurement requirements for financial assets, new hedging requirements and a new impairment model for financial assets. Its main impact in these financial statements has been on the measurement of student loans (refer note 27).

PBE IFRS 9: Financial Instruments was issued in January 2017 because of concerns that once NZ IFRS 9 Financial Instruments (the relevant accounting standard for profit oriented entities) became effective, significant differences between the IFRS-based standard and the IPSAS-based standard on financial instruments would adversely impact the compliance costs for groups such as the Government that include both public benefit entities (PBEs) and for-profit entities, and on the understandability of those group financial statements. These differences would be problematic until the IPSAS-based standard on financial instruments was updated to reflect the changes in the IFRS-based standard.

Consolidated Financial Statements

In January 2017 a suite of accounting standards was issued dealing with consolidation and group reporting issues that are effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. These standards include PBE IPSAS 35 Consolidated Financial Statements, PBE IPSAS 36 Investments in Associates and Joint Ventures, PBE IPSAS 37 Joint Arrangements and PBE IPSAS 38 Disclosure of Interests in Other Entities. The Crown intend to adopt these standards in the 2019/20 Financial Statements of the Government.

The analysis to date of these standards against the entities in which the Government has an interest, suggests any significant impact on which entities are consolidated in the financial statements is unlikely. The New Zealand Superannuation Fund will likely be consolidated as an investment entity rather than on the current line-by-line basis. As a consequence, any controlling interests it has in entities it has invested in will be reported on a fair value basis.

Employee Benefits

PBE IPSAS 39 Employee Benefits issued in January 2017 (updating the existing standard PBE IPSAS 25 Employee Benefits) is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. The Crown intends to adopt it in the 2019/20 Financial Statements of the Government.

The new standard will have an impact on the way the Government Superannuation Fund defined benefit pension scheme is presented in the financial statements with actuarial gains/losses being presented in the Statement of Comprehensive Revenue and Expense rather than as a gain or loss in the Statement of Financial Performance (refer to note 10 for values). Improved clarity over the scope of employee benefits may mean the recognition of other responsibilities of the Crown, such as veterans' benefits.

Other Accounting Standards

A number of accounting standards have been issued for profit-oriented entities and/or not-for-profit entities (eg, charities) but not for public sector entities. They have therefore affected, or will affect separate reporting by those entities, but are not yet applicable, nor available for adoption by the Government. They are, however, under active consideration by public sector accounting standard setters. These standards include:

• NZ IFRS 15 Revenue from Contracts with Customers that became effective for profit entities for reporting periods beginning on or after 1 Jan 2018. This standard revised principles to be applied in reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.
• NZ IFRS 16 Leases that became effective for profit-oriented entities effective for reporting periods beginning on or after 1 Jan 2019. This standard replaces the operating lease/financing lease distinction with a requirement that for leases of more than one year, the lessee is now required to report a right-of-use asset at fair value, which amortises over the term of the arrangement, and a financial liability for the lease obligation, on which interest is paid, and which is settled over the term of the lease.

NZ IFRS 17 Insurance Contracts and PBE IFRS 17 Insurance Contracts effective for profit-oriented entities and not-for-profit entities for reporting periods beginning on or after 1 January 2021 and 1 January 2022 respectively. This standard establishes revised principles for the recognition, measurement, presentation and disclosure of insurance contracts.

For-profit entities within the Government reporting entity (eg, SOEs) will need to adopt these NZIFRSs for their separate financial statements when effective, but must report for these financial statements using the Crown accounting policies based on PBE standards.

Government Reporting Entity as at 30 June 2019

Reporting entity

The Government reporting entity as defined in section 2(1) of the Public Finance Act 1989 means:

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

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

Basis of combination

These financial statements combine the following entities using the acquisition method of combination:

Core Crown entities

• Ministers of the Crown
• Government departments
• Offices of Parliament
• the Reserve Bank of New Zealand
• New Zealand Superannuation Fund

Other entities

• State-owned Enterprises
• Crown entities (excluding tertiary education institutions)
• Air New Zealand Limited
• Regenerate Christchurch
• Education Council of Aotearoa New Zealand
• Organisations listed in Schedule 4 and 4A (Non-listed companies in which the Crown is majority or sole shareholder) of the Public Finance Act 1989
• Organisations listed in Schedule 5 (Mixed ownership model companies) of the Public Finance Act 1989
• Legal entities listed in Schedule 6 (Legal entities created by Treaty of Waitangi Settlement Acts) of the Public Finance Act 1989

The Crown has a full residual interest in all the above entities with the exception of Air New Zealand Limited, Tāmaki Redevelopment Company Limited (listed in Schedule 4A of the Public Finance Act 1989), Regenerate Christchurch, City Rail Link Limited and the entities listed in Schedule 5 of the Public Finance Act 1989 (Mixed Ownership Model Companies).

Corresponding assets, liabilities, revenue and expenses, are added together line by line. Transactions and balances between these sub-entities are eliminated on combination. Where necessary, adjustments are made to the financial statements of controlled entities to bring the accounting policies into line with those used by the Government reporting entity.

Tertiary education institutions are equity-accounted for the reasons explained in note 17.

City Rail Link Limited is reported as a jointly controlled entity as a consequence of the agreements with Auckland Council in these financial statements for the period ended 30 June 2019 and is also equity accounted. This treatment recognises our share of these entities' net assets, including asset revaluation movements, surpluses and deficits.

The following tables list the entities within each institutional component.

Core Crown Segment

Departments

Crown Law Office
Department of Conservation
Department of Corrections
Department of Internal Affairs
Department of the Prime Minister and Cabinet
Education Review Office
Government Communications Security Bureau
Inland Revenue Department
Land Information New Zealand
Ministry for Culture and Heritage
Ministry for Pacific Peoples
Ministry for Primary Industries
Ministry for the Environment
Ministry for Women
Ministry of Business, Innovation, and Employment
Ministry of Defence
Ministry of Education
Ministry of Foreign Affairs and Trade
Ministry of Health
Ministry of Housing and Urban Development
Ministry of Justice (Includes Te Arawhiti - Office for the Māori Crown Relations as a departmental agency)
Ministry of Māori Development
Ministry of Social Development
Ministry of Transport
New Zealand Customs Service
New Zealand Defence Force
New Zealand Police
New Zealand Security Intelligence Service
Office of the Clerk of the House of Representatives
Oranga Tamariki, Ministry for Children
Parliamentary Counsel Office
Parliamentary Service
Serious Fraud Office
State Services Commission (Includes Social Investment Agency as a departmental agency)
Statistics New Zealand
Te KāhuiWhakamana Rua Tekau mā Iwa — Pike River Recovery Agency
The Treasury

Offices of Parliament

Controller and Auditor-General
Office of the Ombudsman
Parliamentary Commissioner for the Environment

Others

New Zealand Superannuation Fund
Reserve Bank of New Zealand

State-owned Enterprises Segment

State-owned Enterprises

Airways Corporation of New Zealand Limited
Animal Control Products Limited
AsureQuality Limited
Electricity Corporation of New Zealand Limited
KiwiRail Holdings Limited
Kordia Group Limited
Landcorp Farming Limited
Meteorological Service of New Zealand Limited
New Zealand Post Limited
New Zealand Railways Corporation
Quotable Value Limited
Solid Energy New Zealand Limited (in liquidation)
Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act Schedule 5) 

Genesis Energy Limited
Mercury NZ Limited
Meridian Energy Limited

Other

Air New Zealand Limited
Kiwi Group Holdings Limited (including Kiwibank)

Crown entities Segment

Crown entities

Accident Compensation Corporation
Accreditation Council
Arts Council of New Zealand Toi Aotearoa
Broadcasting Commission
Broadcasting Standards Authority
Callaghan Innovation
Children's Commissioner
Civil Aviation Authority of New Zealand
Commerce Commission
Crown Irrigation Investments Limited
Crown Research Institutes (7)
District Health Boards (20)
Drug Free Sport New Zealand
Earthquake Commission
Education New Zealand
Electoral Commission
Electricity Authority
Energy Efficiency and Conservation Authority
Environmental Protection Authority
External Reporting Board
Financial Markets Authority
Fire and Emergency New Zealand
Government Superannuation Fund Authority
Guardians of New Zealand Superannuation
Health and Disability Commissioner
Health Promotion Agency
Health Quality and Safety Commission
Health Research Council of New Zealand
Heritage New Zealand Pouhere Taonga
Housing New Zealand Corporation
Human Rights Commission
Independent Police Conduct Authority
Law Commission
Maritime New Zealand
Museum of New Zealand Te Papa Tongarewa Board
New Zealand Antarctic Institute
New Zealand Artificial Limb Service
New Zealand Blood Service
New Zealand Film Commission
New Zealand Lotteries Commission
New Zealand Productivity Commission
New Zealand Qualifications Authority
New Zealand Symphony Orchestra
New Zealand Tourism Board
New Zealand Trade and Enterprise
New Zealand Transport Agency
New Zealand Venture Investment Fund Limited
New Zealand Walking Access Commission
Office of Film and Literature Classification
Pharmaceutical Management Agency
Privacy Commissioner
Public Trust
Radio New Zealand Limited
Real Estate Agents Authority
Retirement Commissioner
School Boards of Trustees (2,418)
Social Workers Registration Board
Sport and Recreation New Zealand
Takeovers Panel
Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
Te Taura Whiri i te Reo Māori (Māori Language Commission)
Television New Zealand Limited
Tertiary Education Commission
Transport Accident Investigation Commission
WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

Agricultural and Marketing Research and Development Trust
Asia New Zealand Foundation
Fish and Game Councils (12)
Game Animal Council
Leadership Development Centre Trust
Māori Trustee
National Pacific Radio Trust
New Zealand Fish and Game Council
New Zealand Game Bird Habitat Trust Board
New Zealand Government Property Corporation
New Zealand Lottery Grants Board
Ngāi Tahu Ancillary Claims Trust
Pacific Co-operation Foundation
Pacific Island Business Development Trust
Reserves Boards (21)
Te Ariki Trust

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

Crown Asset Management Limited
Crown Infrastructure Partners Limited
Education Payroll Limited
New Zealand Green Investment Finance Limited
Ōtākaro Limited
Predator Free 2050 Limited
Research and Education Advanced Network New Zealand Limited
Southern Response Earthquake Services Limited
Tāmaki Redevelopment Company Limited
The Network for Learning Limited

Legal entities created by Treaty of Waitangi settlement Acts (Public Finance Act Schedule 6)

Te Urewera

Others

Teaching Council of Aotearoa New Zealand
Regenerate Christchurch
Christ Church Cathedral Reinstatement Trust

Other entities not fully consolidated into the financial statements of the Government with only the Crown's interest in them being included

Crown entities

Tertiary Education Institutions (27)

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

City Rail Link Limited

Subsidiaries of SOEs, Crown entities and other government entities are consolidated by their parents and not listed separately in this table.

Note 2: Key Assumptions and Judgements#

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These financial statements reflect the Government's financial position (service potential and financial capacity) as at 30 June 2019, and the financial results of operations and cash flows for the year ended on that date. Underpinning these financial statements are a number of judgements, estimations and assumptions. These include assumptions and judgements about the future, in particular, the service benefits and future cash flows in relation to existing assets and liabilities.

Key assumptions

The assumptions in these financial statements are based on the best information available at the time of their preparation. Given the inherent uncertainty of predicting the future, actual events are likely to differ from these assumptions, which may have a material impact on the results reported in these financial statements. Key assumptions are disc

The Rail Freight Network illustrates the impact of the asset purpose assumption. Treated as a for-profit asset since 2012, this asset had a carrying value of $186 million as at 30 June 2018 based on the amount of cash that could be generated or recovered from it. Following a review to consider the context of rail's purpose within a multi modal transport system, the underlying assumption of the benefits of rail were framed as: Rail enables access and mobility, transporting people and goods to where they need to go, supporting productivity and business growth, reducing emissions, congestion and road deaths, and strengthening social and cultural connections between communities. As a consequence, a valuation limited to its cash generating potential was no longer appropriate. In this year's financial statements, the rail freight network is valued using an optimised depreciated replacement cost methodology at $5,428 million. For further information, see note 16.

A number of long-term assets and liabilities are valued by estimating future cash flows which are then discounted to present value. Some of the cash flows, in particular those relating to long-term liabilities (eg, ACC and GSF obligations) use assumptions to predict cash flows as far as 80 years into the future. Therefore, changes in a number of economic variables can have a significant impact on the Government’s financial position and performance. The most significant of these are:

Sensitivity of key assumptions

The tables below outline the sensitivity of the key assumptions discussed above on the significant valuations included in the statement of financial position. They do not include second or third-order effects on forecast revenues and expenses. A negative impact on the Operating Balance is designated by the use of brackets.

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices and account for a significant portion of the financial position. At 30 June 2019 financial assets totalled $145.0 billion (2018: $142.5 billion) while financial liabilities totalled $128.2 billion (2018: $131.4 billion).

In relation to assumptions concerning property prices, land and buildings account for 54% (2018: 57%) of total property, plant and equipment and 63% (2018: 67%) of the asset revaluation reserve. A significant decline in property prices would not impact the operating balance but would reduce net worth.

Long term liabilities such as the ACC liability $56.6 billion (2018: $43.3 billion) and the GSF retirement plan $13.2 billion (2018: $11.0 billion) are particularly sensitive to the assumptions associated with estimating discounted cash flows. The table below outlines the sensitivity of those liabilities to key assumptions:

Areas of significant estimation

These financial statements include estimated amounts that have a number of uncertainties (discussed below).

Other uncertainties

In addition to those items in the statement of financial position there are a number of liabilities or assets that may arise in the future but are not currently recognised. This is because they are dependent on uncertain future events occurring or the liability/asset cannot be measured reliably. If these contingencies crystallise, there will be an associated impact on the operating balance and net worth of the Crown. These contingencies are reported in note 25 of these financial statements.

Risk management

The Crown's financial position at balance date is exposed to risks through possible changes in the key assumptions and judgements described above that could materially impact on the value of the Crown's assets and liabilities.

The Crown's current risk management framework generally involves holding individual government reporting entities responsible for managing the risks that they individually face, subject to legislation and central guidance such as the Public Finance Act 1989 and Treasury Instructions. Government-wide financial resilience is supported through relatively low debt levels, a strong financial position and effective budgeting.

With respect to its financial portfolios, the Government's financial instrument holdings expose it primarily to the financial risks of changes in interest rates, foreign exchange rates, risk of default and liquidity risk. These risks are managed at portfolio level consistent with the policy purpose of the portfolio and risk management objectives. Detailed information on the exposure to market risk and policies for managing this risk are available in the separate financial statements prepared by the entities who manage each portfolio.

The Government's exposure to market risk reflects the combination of these portfolio management practices. These practices include use of Value-at-Risk (VaR) limits and stop-loss limits to manage risk. While the Treasury and the Reserve Bank's activities collectively manage the core Crown's exposure to foreign exchange, there is no other centralised management of market or other risk.

There has been no significant change from the previous year to the manner in which the Government reporting entities that manage the Government's portfolios, manage and measure risks.

Derivative financial instruments are often used across the portfolios to manage exposure to interest rate, and foreign currency risk. Refer to pages 131 and 132 for further derivative information.

Note 3: Sovereign Revenue#

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1. Includes customs excise-equivalent duty.

More detailed unaudited information on tax revenue and receipts can be found at https://treasury.govt.nz/information-and-services/financial-management-and-advice/revenue-expenditure/tax-outturn-data

The Government provides many services and benefits that do not give rise to revenue. Further, payment of tax does not of itself entitle a taxpayer to an equivalent value of services or benefits. Such revenue is received through the exercise of the sovereign power of the Crown in Parliament.

Note 4: Sales of Goods and Services#

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Note 5: Investment Income/(Expense)#

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1. Student loans are advanced on an interest-free basis and repayments are income-contingent, therefore they are discounted to reflect their fair value. The interest unwind reflects the increase in value as the period to repayment reduces (refer note 15). Valuation of student loans changed with the adoption of PBE IFRS 9. Effective from 1 July 2018 these are measured at fair value through the operating balance (FVTOB) (see note 27 for more details), and the interest unwind has been calculated using the market discount rate at the beginning of the year (refer note 15). In 2018, when student loans were classified as amortised cost, the interest unwind was calculated using the effective interest method based on the interest rates allocated in the year loans were drawn down.
2. Financial assets classified as held for trading category was removed by PBE IFRS 9. For more details please refer to note 27.

Note 6: Other Revenue#

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1. Rental revenue has been restated for Budget 2018 to eliminate the income related rent subsidy between government reporting entities consistent with the approach taken in Budget 2019 and June actuals.

Note 7: Transfer Payments and Subsidies#

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1. The income related rent subsidy has been restated for Budget 2018 to eliminate the subsidies between government reporting entities, consistent with the approach taken in Budget 2019 and June actuals.

Note 8: Personnel Expenses#

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Key management personnel compensation was $10 million (2018: $11 million). This reflects salaries, benefits and allowances. Key management personnel are the 27 Ministers of the Crown who are members of the Executive Council (including the Prime Minister) as at 30 June 2019 (2018: 28).

The Ministers' remuneration and other benefits are set out by the Remuneration Authority under the Members of Parliament (Remuneration and Services) Act 2013. Members of Parliament, including members of the Executive,have access to other non-cash entitlements as determined by the Speaker of the House of Representatives. Details of these entitlements (eg, travel discounts) can be found on the New Zealand Parliament website (www.parliament.govt.nz).

Note 9: Other Operating Expenses#

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Other operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of entities included in the financial statements of the Government, excluding those expenses separately identified in the statement of financial performance and other notes.

Audit fees paid to the Controller and Auditor-General

Audit fees paid to the Controller and Auditor-General for the audit of the financial statements of the Government and its reporting entities were $46.5 million (2018: $42.0 million). These fees include $0.3 million (2018: $0.2 million) for the audit of these financial statements. Other fees for assurance and related services paid to the Controller and Auditor-General were $0.7 million (2018: $1.5 million). As the Controller and Auditor-General is part of the Government reporting entity, these fees are eliminated on consolidation.

Note 10: Net Gains and Losses on Non-Financial Instruments#

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Note 11: Insurance#

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At 30 June 2019 and 30 June 2018 the total amount paid or payable for damage in relation to the Canterbury earthquakes was reassessed and is now expected to be lower than previously expected. This reduction is recognised as a credit in the claims expense for Southern Response.

Further information on these liabilities may also be found in the annual reports of each of these entities and on their respective websites. The objectives, policies and procedures for managing these risks are set out in the governing statutes and policy documents of each entity.

All assets held by the three insurance entities are considered available to back present and future claims obligations. There are no deferred acquisition costs (eg, marketing costs) in respect of insurance obligations at the reporting date. In addition each of these entities is backed by a guarantee from the Crown.

The outstanding claims liability is the present value of the central estimate of expected payments for claims incurred plus a risk margin. The unearned premium liability represents premiums received to provide insurance cover after 30 June 2019. The unearned premium liability deficiency is the extent that the unearned premium liability is insufficient to cover expected future claims (ie, payments for future accidents within the period covered by the premiums received).

The remainder of this note provides detailed analysis of the ACC insurance expense and liability. ACC's insurance obligations arise primarily from the accident compensation scheme provision of no fault personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.

Net claims incurred in the table below refers to the adjustment in the liability arising from claims incurred in the current financial year and reassessment of claims incurred in previous years. This reassessment results from new information on these claims (including new claims relating to incidents incurred in previous years) and changes in assumptions.

The underwriting surplus/(deficit) below represents the net effect on the statement of financial performance from claims incurred and premiums levied during the year. It includes actuarial gains/(losses).

Analysis of ACC insurance liability

An independent actuarial estimate by Taylor Fry, consulting actuaries, has been made of the future expenditure relating to accidents that occurred prior to balance date, whether or not the claims have been reported to or accepted by ACC. The actuaries are satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Claims development historical analysis

The following table shows the development of ACC's undiscounted claims cost estimates for the seven most recent accident years.

Key Assumptions

The key assumptions and the methodology applied in the valuation of the outstanding ACC claims obligation are as follows:

(i) Risk-free discount rates

The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 2.42% (2018: 3.51%) and a long term discount rate of 4.30% beyond 53 years (2018: 4.75% beyond 39 years).

(ii) Risk margin

The outstanding claims liability includes a risk margin that relates to the inherent uncertainty in the central estimate of the present value of expected future payments. The overall risk margin is intended to achieve a 75% probability of sufficiency in meeting the actual amount of liability to which it relates.

(iii)  Inflation and indexation

ACC claims and costs are subject to inflation. Some costs are assumed to increase faster than the general rate of inflation (referred to as superimposed inflation) due to factors such as innovation in medical treatment.

(iv)  Rehabilitation rate

Assumptions for rehabilitation rate were set with reference to past observed experience with allowance for expectations of the future that is believed to be reasonable under the circumstances.

(v)  Liability adequacy test

An unearned premium liability deficiency is recognised when the amount of the present value of expected future claim cash outflows, plus a risk margin, exceeds the unearned premium liability.

Sensitivity Analysis

The present value of the ACC claims obligation is sensitive to underlying assumptions such as the discount rate, inflation rates and expected medical costs. These assumptions are closely linked. For example, a change to the discount rate may have implications on the inflation rate used. Therefore, when calculating the present value of claims it is unlikely that an assumption will change in isolation.

If the assumptions described above were to change in isolation, this would impact the measurement of the ACC claims obligation as per the table below:

Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $47,191 million (2018: $35,952 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for claims to 30 June 2019. These estimated cash flows include the effects of assumed future inflation.

Note 12: Receivables#

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Receivables from taxes, levies and fines (and any penalties associated with these activities) as well as social benefit receivables which do not arise out of a contract are collectively referred to as sovereign receivables.

In determining the recoverability of a tax or other sovereign receivables, the Government uses information about the extent to which the tax or levy payer is contesting the assessment and experience of the outcomes of such disputes, from lateness of payment, and other information obtained from credit collection actions taken. Due to the size of the tax base, the concentration of credit risk is limited and this is not a risk that is actively managed.

The Government does not hold any collateral or any other credit enhancements over receivables.

Tax receivables, ACC levy receivables and social benefit receivables are considered to be short term, so their carrying value represents a reasonable approximation of their fair value.

Other levies, fines and penalty receivables comprise debtor portfolios administered by Ministry of Justice (ie, court fines) and Inland Revenue (ie, child support). These receivables are recorded at fair value, which on initial recognition represent the face value of the amount owed to the Crown, adjusted to reflect the amount expected to be recoverable. For the current year the initial adjustment from face value to fair value of these receivables was $230 million (2018: $201 million), with $161 million (2018: $137 million) of the adjustment relating to child support debt administered by Inland Revenue.

Social benefit receivables comprise benefit overpayments, advances on benefits and recoverable special needs grants primarily administered by the Ministry of Social Development.

Trade and other receivables are relatively short term, with $4,406 million (2018: $5,668 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

The Inland Revenue Department (IRD) administers the majority of the tax receivable portfolio. The recoverable amount of the portfolio is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting at the current market rate of 5.0% (2018: 5.0%).

If the recoverable amount of the portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount. Alternatively, if the recoverable amount is more, the carrying amount is increased.

Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date. IRD has debt management policies and procedures to actively manage the collection of past due debt.

Note 13: Marketable Securities, Deposits and Derivatives in Gain#

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Marketable securities comprise bonds, commercial paper, debentures and similar tradable financial assets held by the Government for the purposes of realising capital gains or interest revenue. Long-term deposits are instruments with maturities greater than three months that are not traded in an active market.

Further information is provided on these financial assets in note 26.

Note 14: Share Investments#

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Further information is provided on these financial assets in note 26.

Note 15: Advances#

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Further information on the management of risks associated with these financial assets is provided in note 26.

Kiwi Group Holdings loans and advances are measured at amortised cost. The fair value of Kiwi Group Holdings loans and advances is $20,448 million (2018: $18,350 million). This fair value is based on a discounted cash flow model with reference to market interest rates, prepayment rates and estimated credit losses.

Kiwi Group Holdings loans and advances include a provision for expected credit losses of $40 million.

Amounts recognised in the statement of financial performance in respect to student loans are as follows:

1. The new PBE IFRS 9 accounting standard changes the student loan measurement from amortised cost to fair value, leading to gains and losses now being recognised, rather than impairment expenses.

The student loan scheme is intended to provide a cost effective means of enabling a wide range of people to access tertiary education, gaining knowledge and skills that enhance the economic and social wellbeing of New Zealand. No interest on loans to New Zealand residents is charged and there are no repayments required from those with very low incomes. Loans of those who die or become bankrupt are written off.

The Crown has early adopted PBE IFRS 9: Financial Instruments from 1 July 2018. As loan repayments are contingent on the income of borrowers, student loans do not meet the PBE IFRS 9 criteria for measurement at amortised cost and therefore, are now subsequently measured at fair value through the operating balance. Under the previous standard, PBE IPSAS 29, Student loans were deemed to be loans and receivables valued at amortised cost using the effective interest rate method, adjusted for impairments.

Advances and taxpayers' funds have increased by $628 million at 1 July 2018 for the reclassification from amortised cost to fair value. The increase relates to a change in the discount rate used to present value expected repayments. Under fair value, the entire loan book is be revalued using current market discount rates at each balance date. Previously, under amortised cost, market discount rates were applied for each year of lending and locked in for the duration of the loan. Refer to note 27 for further details.

The valuation of student loans is performed each year using actuarial and predictive models which reflect current student loan policy and macroeconomic assumptions. As such, the carrying value is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates.

1. Under amortised cost the effective interest rate is determined using market discount rates applying for each year of the lending, which are locked in for the duration of the loan. Under fair value the discount rate reflects the market rate as at 30 June 2019.

The table below outlines the sensitivity of student loans fair value to discount rates

Through everyday operations of the student loan scheme the Government is exposed to the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid. The student loan scheme does not require borrowers to provide any collateral or security to support their borrowings. As the total sum advanced is widely dispersed over a large number of borrowers, the scheme does not have any material concentrations of credit risk. The credit risk is reduced by collection of repayments through the tax system.

The Student Loan Scheme Annual Report contains more information on the student loan scheme. This can be found at: http://www.educationcounts.govt.nz/publications/series/student_loan_scheme_annual_reports

Note 16: Property, Plant and Equipment#

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The total amount of property, plant and equipment under construction is $3,805 million (2018: $3,456 million).

The opening balance has been restated for specified cultural and heritage assets to match the prior year restatement described on the next page.

Comparatives have been restated for specified cultural and heritage assets to align the treatment of accumulated depreciation on revaluation with the Crown's accounting policy.

Under Section 55 of the Public Finance Act 1989, borrowing by the Crown is a charge on the revenue of the Crown equally and rateably. Therefore, no PPE owned by the Crown has been pledged as security for liabilities. Government-owned PPE is, however, subject to a significant number of legislative and policy restrictions with respect to its use and disposal. PPE owned by State-owned Enterprises and mixed ownership companies has been pledged to secure borrowings and finance lease obligations of $3,691 million (2018: $3,761 million).

Net revaluations in the note above exclude movements attributable to minority interests and includes the share of associates revaluation of physical assets. It will therefore differ from the movements on pages 83 and 84.

Land and Buildings

Valuation Information

Carrying value of other asset classes subject to revaluation

State Highways (excluding land)

Valuation information

WSP Opus, an independent valuer, determined the valuation of the state highway as at 30 June 2019 by assigning replacement costs to the components of the state highway reported in the Road Assessment and Maintenance Management (RAMM) database and other databases as at 30 June 2018. The net capital expenditure for the year to 30 June 2019 was added to this data. The costs assigned are adjusted depending on the region and the type of terrain. The replacement cost is also adjusted for depreciation to reflect the current age and condition of the physical components. The major components of the state highway network and the optimised depreciated replacement cost of those components are shown in the table above.

State highway net revaluations increased by $3.5 billion in 2018/19. This was driven by NZTA's continuing valuation improvement programme and changes in estimates and assumptions including updates by an independent cost estimator (BondCM). The two most significant areas of uplift are:

• unit prices applied to formation costs were reviewed and some carriageways were reclassified to more appropriate formation terrain types for recently completed projects. This resulted in an uplift of $1.8 billion, and
• the inclusion of a unit rate for brownfield costs applied to the overhead rate resulted in an uplift of $1.2 billion.

Significant estimates and assumptions have been applied to the valuation, which include assumptions on: quantities used in the construction of state highway components, the unit cost to apply and the life of the assets. Changes to these underlying estimates and assumptions can cause a material movement in the valuation and are reviewed on a periodic basis. The main assumptions affecting the state highway valuation are:

The range of costs in the above table reflect regional variation and the differing costs of construction depending on terrain.

In addition, assumptions are made about the completeness of the RAMM database. These assumptions are used in determining additional items to be added so the complete network is valued. RAMM also contains assumptions to ensure appropriate allocation of all assets by region and terrain type, and on matters such as base course depth, subbase depth, shoulder formation, base course and retaining walls.

The following sensitivity analysis represents possible impacts on the state highway network valuation based on changes to estimates.

WSP Opus has performed simulation analysis on the valuation to quantify the range of valuation outcomes that could occur as a result of changes in the different valuation inputs.

WSP Opus has concluded that the overall valuation is between -7.5% to +10% of the current value (-$2.8 billion to +$3.7 billion).

Electricity generation assets

Valuation and sensitivity information

There are a number of key assumptions used to value electricity generation assets. These judgements and assumptions predominantly relate to future revenue streams (eg, wholesale electricity prices, generation volumes) and operating expenses, as well as the discount rate used to calculate the present value of those revenues and expenses.

The following tables provide information on each of the entities' key assumptions as disclosed in the individual annual reports of the individual electricity generation companies (part of the State-owned Enterprises segment). The electricity price path assumptions, stated below, for each electricity generation company are substantially the same. However, the Meridian Energy and Mercury NZ assumption is conveyed in real terms while Genesis Energy's assumption is in nominal terms.

There are a range of reasonable judgements and assumptions that could be used in estimating the fair value of these assets. These key assumptions are subject to significant uncertainties driven by unobservable market data, such as growth expectations within various sectors of the economy, planned capital projects and varying risk factors. These assumptions interact dynamically with each other. For example, wholesale electricity prices can affect the amount of generation volumes and operating costs.

Meridian Energy

Genesis Energy

Mercury NZ

For further information on the valuation of electricity generations assets, refer to the individual annual reports of each entity.

Specified cultural and heritage assets

Valuation information

Rail network

Carrying value of the rail network

The rail network comprises around 3,700 kilometres of track (excluding yards and sidings) and is used primarily for freight transport. In addition to freight, the network is used by KiwiRail for long distance passenger transport and access is provided to two regional authorities, Greater Wellington Regional Council and Auckland Transport for metro passenger services. Some tracks are dual purpose (ie, used for both freight and metro), however there are a number of tracks which serve metro transport only (eg, the Johnsonville line). The rail infrastructure earns revenue from freight and long distance passenger charges. In addition, network access charges are collected from the two regional authorities in relation to the metro services.

Since the restructuring of KiwiRail as a profit-oriented entity in 2012, the rail network infrastructure used for freight services (including dual use assets required for freight operations) has been measured at fair value, reflecting the recoverable amount that could be expected to be received from a third party in an orderly transaction. The portion of dual use assets not required for freight operations and metro only assets were reported in these financial statements at an optimised depreciated replacement cost basis, as the community benefits enabled by this investment do not provide a return at the whole-of-Government level.

Last year's financial statements reported that the Government had initiated a Review of Rail, recognising the challenges in making investment decisions, marrying the duality of commercial “for profit” activities that align with an SOE's commercial mandate with other “public benefit” activities that deliver social benefits rather than commercial returns, and integrating relatively short-term funding commitments with prudent investment decisions for long-life assets such as rail infrastructure. The findings of the Review of Rail were reported to Ministers in May 2019, who noted that all rail, including freight, contributes to national and regional economic growth and reduces emissions and congestion, reduces road deaths and injuries, facilitates wider social benefits, and provides resilience and connection between communities. The report also noted the necessity of continued commercial disciplines and focus of KiwiRail to support efficiency in asset management, and to drive commercial returns from the provision of freight, property and tourism operations. Cabinet agreed in principle to a resilient and reliable rail system to deliver on the outcomes for transport and wider benefits the Government seeks, and budget decisions were taken on that basis.

As a consequence it is no longer appropriate at the whole-of-government level to reflect the rail freight network as a cash generating asset (ie, at its recoverable amount) given the wider reasons for the Crown's investment in the rail infrastructure. This changed view at a whole-of-government level does not affect the treatment of the assets in the financial statements of KiwiRail itself, as it remains a profit-oriented entity.

The impact is to increase the value to $6.3 billion, compared to a value of $1.0 billion that would be reported on the previous basis. In 2012, when the previous approach was adopted, an impairment expense of $1.4 billion was recorded in OBEGAL. Of the $5.2 billion increase in valuation this year, the accounting treatment reinstating the ODRC approach resulted in a $2.3 billion increase to the revaluation reserves and a $2.6 million reversal of impairment expense in the Statement of Financial Performance which includes the loss of $1.4 billion recorded in 2012. The Statement of Financial Performance impact is disclosed in note 9.

Other significant classes of PPE

Specialist military equipment

Aircraft (excluding specialised military)

Aircraft (excluding military)

Public Private Partnerships

A public private partnership (also known as a service concession arrangement) is an arrangement between the Government and a private sector partner. The Crown's obligation to pay for these assets is included in other borrowings.

Movements in carrying value for Public Private Partnerships

Details on individual PPP's can be found in the annual reports of individual agencies (Ministry of Education, New Zealand Transport Agency and the Department of Corrections).

Note 17: Equity Accounted Investments#

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Tertiary Education Institutions (TEIs)

TEIs are Crown entities, and the Government has a number of legislative powers with respect to them in the interests of public accountability and has some significant reserve controls in the event of an institution facing financial risk. However, the Government does not determine the operating and financing policies of TEIs, if they are not at financial risk, but rather is committed to safeguarding their academic freedom and autonomy. By so doing, the Government obtains the benefits of an effective tertiary education sector. Their relationship to the Crown is managed by a plan agreed between them and the Tertiary Education Commission.

Summarised financial information in respect of TEIs is set out below:

Kaingaroa Timberlands Partnership

The New Zealand Superannuation Fund has a 42% ownership interest (2018: 42%) in Kaingaroa Timberlands Partnership (KTP). For the year ended 30 June 2019, KTP recognised revenue of $604 million (2018: $555 million), profit of $341 million (2018: $1,033 million), assets of $4,723 million (2018: $4,701 million), liabilities of $36 million (2018: $33 million) and equity of $4,688 million (2018: $4,668 million).

City Rail Link Limited

City Rail Link Limited (CRLL) is a jointly controlled Crown entity company, co-funded by the Crown and Auckland Council, for the purpose of designing and constructing of the Auckland City Rail Link (an underground rail line between the city centre and the existing western line). Following a cost reforecast, and a scope change to futureproof for forecast patronage growth, the expected costs of the project are $4.4 billion, which will be confirmed once all the contracts are finalised. The Government's share of costs is $2.2 billion.

For the year ended 30 June 2019, CRLL recognised revenue of $4 million (2018: $3 million), a deficit of $25 million (2018: $8 million), assets of $721 million (2018: $625 million), liabilities of $27 million (2018: $11 million) and equity of $694 million (2018: $614 million).

The Crown also recognises a 50% share of capital commitments held by CRLL of $152 million (2018: $128 million).

New Zealand Local Government Funding Agency (NZLGFA) (included in Other)

The Government holds $5 million of the $25 million paid-up capital of NZLGFA.

For the year ended 30 June 2019, NZLGFA recognised revenue of $361 million (2018: $343 million) and a surplus of $11 million (2018: $12 million). NZLGFA's assets were $10,382 million (2018: $8,835 million) and liabilities were $10,308 million (2018: $8,771 million). The Crown's share of the net assets is $15 million (2018: $13 million). The Crown is not a guarantor of the NZLGFA and has no share of any contingent liabilities of the NZLGFA.

Note 18: Payables#

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1. The June 2018 actuals for accounts payable have been restated to include an amount previously categorised as a provision to align with the classification in June 2019.

Note 19: Borrowings#

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This note constitutes a Statement of Borrowings as required by the Public Finance Act 1989.

All principal, interest and other money payable in relation to money borrowed by the core Crown is a charge on, and payable out of, the revenues of the core Crown equally and rateably with all other general borrowing obligations of the core Crown.

The Government is not liable to contribute towards the payments of debts of Government entities, their subsidiaries or any entity in which the Government has an interest or that is controlled or wholly owned by the Government. Exceptions to this rule only occur for items the Government is liable for under any Act, any guarantee given by the Government, by virtue of an action a creditor has against the Government, or liability the Government has to a creditor of the Reserve Bank.

Government Bonds

The fair value of Government bonds measured at amortised cost is $66,454 million (2018: $67,289 million). This valuation is based on observable market prices.

New Zealand Government bonds are rated Aaa by Moody's and AA+ by S&P and Fitch. The rating outlook is stable with Moody's, S&P and Fitch.

Kiwi Group Holdings customer deposits

The fair value of Kiwi Group Holdings customer deposits measured at amortised cost is $18,255million (2018: $16,172 million). For fixed term deposits by customers, fair values have been estimated using a discounted cash flow model with reference to market interest rates. For other deposits by customers, the carrying amount is a reasonable estimate of fair value.

Kiwi Group Holdings customer deposits exclude deposits held by other government reporting entities and will therefore differ from the total customer deposits reported by Kiwi Group Holdings.

Settlement deposits with Reserve Bank

Settlement deposits with the Reserve Bank represent the amount of money deposited with the Reserve Bank by commercial banks. They act as a liquidity mechanism used to settle wholesale obligations amongst the banks and provide the basis for settling most of the retail transactions that occur every working day between corporates and individuals.

Settlement deposits with the Reserve Bank are technically a form of borrowing by the Reserve Bank, where the liability is matched by a corresponding financial asset (reported as an element of marketable securities and deposits). Settlement deposits are reported at amortised cost, which is equivalent to the amount payable to depositors given the short term (ie, overnight) nature of these liabilities.

Settlement accounts are administered through the Exchange Settlement Account System (ESAS). ESAS account holders generally receive interest at the Official Cash Rate on their end-of-day balances. The Reserve Bank provides collateralised overnight borrowing facilities for banks, at an interest rate set at a margin over the Official Cash Rate.

Derivatives in loss

Derivative financial instruments are recognised both initially and subsequently at fair value. They are reported as either assets or liabilities depending on whether the derivative is in a net gain or net loss position respectively.

Treasury bills

Treasury bills are reported at amortised cost. As these are short-term sovereign-issued instruments, the carrying value is not materially affected by changes in Sovereign credit risk and the carrying value approximates the amount payable at maturity.

Other borrowings

Other borrowings includes $3,066 million (2018: $3,090 million) of sovereign-guaranteed debt administered by the Reserve Bank and the Treasury.

The fair value of other borrowings measured at amortised cost is $15,285 million (2018: $13,624 million). The fair value of financial liabilities with standard terms and conditions traded on active liquid markets was determined by reference to quoted market prices. Where such prices are not available, use is made of estimated discounted cash flow models with reference to market interest rates.

For those other borrowings measured at fair value, the value of these instruments will be affected by changes in interest rates due to credit risk and broader market influences.

The table above identifies the difference between the carrying value and amount payable at maturity as well as the extent that fair value movements have resulted from changes in credit risk of the issuing entity. The carrying value can differ from the amount actually payable on maturity where the effect of discounting cash flows is material.

Of the other borrowings measured at fair value, $4,060 million (2018: $4,261 million) was designated as such to prevent an accounting mismatch because this debt and associated derivatives are managed as one integrated portfolio.

Note 20: Retirement Plan Liabilities#

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The Government operates a defined benefit superannuation plan for qualifying employees who are members of the Government Superannuation Fund (GSF). The members' entitlements are defined in the Government Superannuation Fund Act 1956. Contributing members make regular payments to GSF and in return, on retirement, receive a defined level of income. GSF has been closed to new members since 1 July 1992.

The GSF obligation has been calculated by GSF's actuary as at 30 June 2019. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

Amounts recognised in the statement of financial position in respect of GSF are as follows:

Amounts recognised in the statement of financial performance in respect of GSF are as follows:

The Government expects to make a contribution of $711 million (2018: $727 million in the year ending 30 June 2019) to GSF in the year ending 30 June 2020. In addition to its obligations to past and present employees, because GSF is liable for income tax, the Crown will be required to make additional contributions equivalent to the tax on future investment income.

The principal assumptions used for the purposes of the GSF actuarial valuations are as follows:

Assumed inflation increases of 1.7% each year to year 18, then gradually increases, reaching 2.0% in year 52.

The defined benefit obligation increased in the year to 30 June 2019 by $2,134 million, mainly due to a decrease in the short and medium term discount rates over the last year.

The discount rate used to present value the pension cash flows associated with this obligation has a risk-free rate based on the market yield curve of New Zealand Government Bonds. Given the short-term nature of market data on Government Bonds in New Zealand, we also assume a single long-term equilibrium risk-free interest rate of 4.30% based on macroeconomic extrapolation. Discount rates are then smoothed over a minimum of 10 years from the end of the market yield curve to that long-term rate.

The major categories of GSF plan assets at 30 June are as follows:

The expected rate of return on the plan assets of 5.0% (2018: 5.0%) has been calculated by taking the expected long-term returns from each asset class, reduced by tax (using the current rates of tax).

The actual return on plan assets for the year ended 30 June 2019 was 3.6%, or $161 million (2018: 11.1% or $466 million).

Sensitivity Analysis

The present value of the GSF obligation is sensitive to underlying assumptions such as the discount rate, inflation rates and expected salary increases. These assumptions are closely linked. For example, a change to the discount rate may have implications on the inflation rate used. Therefore, when calculating the present value of pension payments, it is unlikely that an assumption will change in isolation.

If the discount rate was to change in isolation, this would impact the measurement of GSF obligation as per the table below.

The plan's assets are exposed to share price risks arising from its holding of equity instruments. Equity instruments are reported at fair value. Movements in share prices therefore directly translate into movements in the value of the share investment portfolio.

The sensitivity analysis below has been determined based on GSF's exposure to share price risks at the reporting date.

Historical Analysis

Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred in the year) and the effects of changes in actuarial assumptions on valuation date. The history of the present value of the unfunded defined benefit obligation and experience adjustments is as follows:

Undiscounted defined benefit obligation

The reported GSF defined benefit obligation of $17,692 million (2018: $15,558 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for entitlements to 30 June 2019. These estimated cash flows include the effects of assumed future inflation.

Note 21: Provisions#

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1. The June 2018 actuals for other provisions has been restated to remove an accounts payable amount previously categorised as a provision to align with the classification in June 2019.

Employee entitlements

The provision for employee entitlements represents annual leave, accrued long service leave, retiring leave and sick leave entitlements accrued by employees. Probability assumptions about continued future service affecting entitlements accrued as at reporting date have been made using previous employment data. For entitlements that vest over a period exceeding one year discount rates applied rise from 1.26% (2018: 1.78%) next year to 4.30% (2018: 4.75%) in later years.

This balance also includes a provision for compliance with the Holidays Act 2003. A number of entities have commenced or completed a review of calculations in recent years in order to ensure compliance with the legislation. Where possible, a provision has been made in these financial statements for obligations arising from those reviews or settlements that have been made in the current or previous years. These estimates and assumptions may differ to the actual results as further work is completed and could result in further adjustments to the carrying amount of the provision in the next financial year. While District Health Boards have recognised a Holidays Act 2003 provision, an indicative range for the final liability could be between $550 million and $650 million. To the extent that an obligation cannot reasonably be quantified at 30 June 2019, an unquantified contingent liability has been disclosed in note 25.

Emissions Trading Scheme

The Emissions Trading Scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The carbon price used to calculate the ETS provision at 30 June 2019 is $NZ23.15 (2018: $NZ21.10). The ETS provision represents the tradeable NZ units outstanding, that will be accepted by the Government as emitters honour the emissions obligations under the ETS. The carbon price used by the Ministry for the Environment is determined by the quoted NZU spot price at the end of the reporting date as published by OM Financial Limited on their website: https://commtrade.co.nz.

National Provident Fund guarantee

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF). Included in the provision is the NPF's DBP Annuitants Scheme unfunded liability position of $879 million (2018: $835 million), represented by a gross estimated pension obligation of $916 million (2018: $871 million) with net investment assets valued at $37 million (2018: $36 million).

Aircraft lease return costs

Where a commitment exists to maintain aircraft held under operating lease arrangements, a provision is made during the lease term for the lease return obligations specified within those lease arrangements. The provision is based upon historical experience, manufacturers' advice and, where appropriate, contractual obligations.

Firearms buy-back scheme

The Government announced a buy-back scheme for firearms, magazines and parts that were prohibited by the Arms (Prohibited Firearms, Magazines, and Parts) Amendment Act 2019. A provision of $150 million has been recognised during the current fiscal year as an estimate of the Government's obligation under this scheme (a possible range of between $80 million and $250 million). One of the uncertainties in determining the overall cost of the buy-back scheme is a limitation in data relating to firearms eligible under the scheme. Therefore, New Zealand Police have estimated the provision using key judgements and assumptions around the number of prohibited firearms that are likely to be surrendered and the conditions of these firearms. In forming a view on these critical assumptions, New Zealand Police have engaged with subject matter experts from the industry. Due to the buy-back scheme still being in its early stages and the data limitations to inform our estimate, there is a degree of uncertainty around what the ultimate cost for the Government will be under the scheme.

Other provisions

Other provisions are recognised where there is a present obligation as a result of a past event, where it is probable that this obligation will be settled and the liability can be reliably estimated. Other provisions include rehabilitation and restoration provisions.

Note 22: Minority Interests#

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Transactions with minority interests include items such as dividend payments and dividend reinvestments. Other minority interests consists of minority interests in New Zealand Superannuation Fund investments and the Kiwi Group Holdings capital notes issued.

Note 23: Capital Objectives and Fiscal Policy#

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The Government's fiscal policy is pursued in accordance with the principles of responsible fiscal management set out in the Public Finance Act 1989:

• reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year
• once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
• achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
• managing prudently the fiscal risks facing the Government
• when formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates
• when formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy
• when formulating fiscal strategy, having regard to its likely impact on present and future generations, and
• ensuring that the Crown's resources are managed effectively and efficiently.

Further information on the Government's fiscal strategy can be found in The Wellbeing Budget published with the Government's budget.

The Government's fiscal strategy is expressed through its long term objectives and short term intentions for fiscal policy.

Long Term Fiscal Objectives - Fiscal Strategy Report 2019

Debt

Maintain total debt at prudent levels.

The Government will reduce the level of net core Crown debt to 20 per cent of GDP within five years of taking office and maintain it at prudent levels thereafter. Prudent levels of net core Crown debt are within a range of 15 to 25 per cent of GDP (subject to any significant shocks to the economy).

Operating balance

The Government will deliver a sustainable operating surpluses (before gains and losses) across an economic cycle.

Operating expenses

The Government will maintain its expenditure to within the recent historical range of spending as a ratio of GDP.

The Government will take a prudent approach to ensure expenditure is phased, controlled and directed to maximise its benefits, in particular prioritising investments to address the long-term financial and sustainability challenges facing New Zealand.

Operating revenues

The Government will ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.

Net worth

The Government will strengthen net worth consistent with the debt and operating balance objectives.

Note 24: Commitments#

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1. State highway project commitments have been calculated using a forecast of approved cash flows for each project, where that project is in the construction phase.

Note 25: Contingent Liabilities and Contingent Assets#

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Contingent liabilities are:

• costs that the Crown will have to face if a particular event occurs, or
• present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities).

Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability was realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. However, in the case of some contingencies (eg, uncalled capital), the negative impact would be restricted to net core Crown debt.

Contingent assets are possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Contingent liabilities and contingent assets involving amounts of over $20 million are separately disclosed. Any quantifiable contingencies less than $20 million are included in the “other quantifiable” total. Some contingencies of the Crown are not able to be quantified; these unquantifiable contingent liabilities and contingent assets are disclosed as at 30 June 2019 where they are expected to be material but not remote. Where there is an obligation under New Zealand GAAP, amounts have been recognised in the financial statements.

Contingent Liabilities

a) Uncalled Capital

As part of the Crown's commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of the organisations listed below, contributes capital by subscribing to shares in certain institutions. The capital (when called) is typically used to raise additional funding for loans to member countries, or in the case of the quota contributions to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid-in” capital and “callable capital or promissory notes”.

i) Asian Development Bank (ADB)

New Zealand was a founding-regional member of the ADB, whose aim is to accelerate economic development in developing countries in Asia and the South Pacific. New Zealand is a regional member but as a donor is not entitled to borrow from the Bank. Accordingly, New Zealand is in a similar position to a non-regional member, and contributes to the ADB's resources only as required by ADB.

ii)  IMF Promissory Notes

New Zealand's subscription to the IMF is partly paid in cash and partly in promissory notes (being uncalled capital). The respective levels of called and uncalled capital change when calls are made by the IMF under the Financial Transactions plan to provide loan packages to borrowing countries. Even though promissory notes are technically “at call”, they are treated as contingent liabilities, as there are significant restrictions on the actual ability to call them, and there is no realistic estimate of either the amount or the timeframe of any call.

iii) International Bank for Reconstruction and Development (IBRD)

The IBRD is the main lending organisation of the World Bank Group. New Zealand, along with 188 other countries, is a member country and shareholder in the World Bank Group. The percentage of ownership is determined by the size of the economy and the amount of capital contributed to support the Bank's borrowing activities among international capital markets. Accordingly, as New Zealand is a member, we contribute to the IBRD only as required by the IBRD.

iv) IMF arrangements to borrow

The Crown has agreed to make funds available to the IMF to support international financial systems in the event of a significant crisis. This is a contingent liability as it will depend upon uncertain trigger events occurring and the IMF calling the funds.

v) Asian Infrastructure Investment Bank (AIIB)

New Zealand was a founding-regional member of the AIIB. AIIB is a Chinese-initiated multilateral investment bank aimed at addressing the significant gap in infrastructure investment across Asia. The Crown has agreed to make funds available to the AIIB, the occurrence and amounts of which will depend upon uncertain trigger events and AIIB calling the funds.

b) Guarantees and Indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or performance of an obligation of another party, should that party default. Guarantees generally relate to the payment of money but may require the performance of services.

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event.

i) New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office provides a range of guarantee products to assist New Zealand exporters manage risk and capitalise on trade opportunities around the globe. The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector.

ii) Air New Zealand letters of credit and performance bonds 

The letters of credit are primarily given in relation to passenger charges and airport landing charges. Guarantees are also provided in respect of credit card obligations. The performance bonds are primarily given in respect of engineering contracts.

iii) Share of OECD employee benefits

The New Zealand Government is a member of the OECD and as a member has a proportional responsibility for the employee benefits obligations such as pension and healthcare recorded by the OECD. The OCED has increased its measurement of its obligation to €3.873 billion on the OECD Balance Sheet. $29 million represents New Zealand's share of the unfunded portion of this balance. There is significant uncertainty as to when or if this responsibility will be triggered.

c) Legal proceedings and disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown. The amount shown is 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.

i)  New Zealand Transport Agency – Contractual disputes

Legal proceedings and disputes represent the amounts claimed by plaintiffs relating to roading and other contract disputes. In February 2019, the Transport Agency received a claim for $352 million from the Wellington Gateway Partnership in relation to the Transmission Gully public-private partnership. The claim relates to the delays in the commencement of work. The amount above represents this claim and other contractual disputes.

ii) Legal tax proceedings 

When a taxpayer disagrees with an assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court. This contingent liability represents the maximum liability Inland Revenue has in respect of these cases.

iii) Kiwifruit vine disease Psa-V

A post-harvest operator, has filed a claim against the Ministry of Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease, Psa-V. This plaintiff filed a notice of particulars of loss in September 2016, which quantifies its loss as $93 million. The Ministry defended the claim. On 27 June 2018 the High Court found that the Ministry did not owe a duty of care to Seeka. An appeal was heard in the Court of Appeal in the weeks 11 and 18 March 2019 and the Courts decision was reserved.

iv) Ministry of Health – Contractual disputes

The Fletcher Construction Company (Fletcher) filed a dispute against the Ministry for Grey Base hospital. Fletcher requested that mediation be conducted as the first phase of contract dispute resolution. Mediation was held 17 September 2019 between the Ministry and Fletcher, with both parties unable to come to resolution on disputed costs. The next likely stage for dispute resolution is arbitration. Fletcher is yet to file to commence this process.

v) Ministry of Education – Contractual disputes

Legal proceedings and disputes represent the amounts claimed by plaintiffs in relation to the performance of the Ministry of Education's statutory role.

vi) Customs legal dispute

Customs assesses duty payable by taxpayers. Taxpayers may apply for refunds, drawbacks or remission of duty or may challenge the amount of duty assessed. Parties may challenge assessments or refusal of refund applications in the Customs Appeal Authority. Applications for refunds or duty claims challenged in the customs appeal authority are recorded as contingent liabilities. The liability is shown as the maximum liability the Crown faces.

d) Other quantifiable contingent liabilities

i)  Unclaimed monies

Under the Unclaimed Money Act 1971, entities (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.

ii) Air New Zealand partnership

The Air New Zealand Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engine Centre (CEC), holding a 49% interest. By the nature of the agreement, joint and several liabilities exist between the two parties; the contingent liability represents Air New Zealand's share of CEC's liabilities.

iii) Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for Bonamia Ostreae, Mycoplasma Bovis and post entry quarantine. These claims can be quantified but do not meet the tests for recognising a provision.

Unquantifiable Contingent Liabilities

This part of the statement provides details of those contingent liabilities of the Crown which are not quantified, excluding those that are considered remote, reported by the following categories: indemnities, legal disputes and other contingent liabilities.

Indemnities

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event.

A number of these indemnities are provided to organisations within the Crown's control. If these indemnities were to crystallise, the Crown would compensate the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt.

Legal claims and proceedings

There are numerous legal actions that have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case, or if the Crown were to lose it would be unlikely to have greater than a $20 million impact. Based on these factors, not all legal actions are individually disclosed. The claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs.

i) Accident Compensation Corporation (ACC) litigations 

Litigation involving ACC arises almost exclusively from challenges to operational decisions made by ACC through the statutory review and appeal process. No accrual has been made for contingent liabilities which could arise, as these disputes are issue based and ACC's active management of litigation means that it will be either settling or defending, depending on the merits of the issue in dispute. ACC's Board believes the resolution of outstanding appeals will not have any material effect on the financial statements of ACC and therefore are not material for the Crown.

Cover is not available in the Treatment Injury Account for injuries arising as an ‘ordinary consequence' of treatment. The term ‘ordinary consequence' in legislation previously had no established legal or clinical meaning. In a case decided on 2 November 2018, the High Court found that ‘ordinary consequence' means a consequence that has more than a 50% chance of occurring (ie, more likely than not). Therefore, any injury from treatment that has a 50% or less chance of occurring is not ‘ordinary' and is covered. While ACC did not rely on any precise percentage in determining whether a consequence was ‘ordinary', in broad terms if all relevant factors put the likelihood of injury at 10% or more, claims would commonly be declined on the grounds of ‘ordinary consequence'. ACC has appealed the High Court's decision which is expected to be heard by the Court of Appeal in November 2019. ACC considers the High Court's decision is inconsistent with Parliament's intention when the treatment injury provisions were enacted.

ii) Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for incursions including fruit fly, pea weevil, bonamia ostraea, myrtle rust, Mycoplasma bovis and the Post Entry Quarantine (PEQ) response. Due to the complexity and uncertainty of the amount of these claims the amounts are unquantified. To the extent that an obligation can be quantified, provision has been made in these accounts of $138 million as at 30 June 2019.

iii) Kiwifruit vine disease Psa-V

Approximately 210 growers have filed a claim against the Ministry for Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease, Psa-V. The plaintiffs have not quantified their losses, but have publicly claimed it is in the vicinity of $450 million, citing total industry losses of $885 million. The Ministry defended the claim. On 27 June 2018 the High Court found that the MPI owed a duty of care to Strathboss and claimants; an appeal was heard in the Court of Appeal in the weeks of 11 and 18 March 2019 and the Court's decision was reserved.

The Ministry is still unable to quantify Strathboss' claim because the extent of any loss will be dealt with at a second trial in the High Court. That trial will not occur, and the claim will not be quantified, unless all appeals are exhausted and the Crown remains liable.

iv) Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge certain claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Crown with respect to land that has been transferred by the Crown to a SOE or tertiary institution, or is subject to the Crown Forest Assets Act 1989.

On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

v) Canterbury insurance disputes

Southern Response Earthquake Services Limited (SRESL) from time to time receives notification of legal claims and disputes in relation to claim settlements as a commercial outcome of conducting its business.

A representative action proceeding was filed against SRESL on 29 May 2018. The financial statements make no allowance for the outcome of these proceedings, as the range of possible outcomes cannot be reliably quantified at this time. These claims are being defended because there are a wide range of potential outcomes, any estimate of a possible obligation resulting from this proceeding would be unreliable.

vi) Wakatu

Crown Law is acting for the Attorney-General on behalf of the Crown in right of New Zealand in Proprietors of Wakatu v Attorney-General (CIV‑2010-485-181), in which it is claimed that the Crown breached trust, fiduciary and other equitable obligations relating to land transactions in the top of the South Island in the 1840s. The plaintiff seeks the return of land he says the Crown holds on trust for the successors of the original owners and compensation, or other relief, for alleged breach of trust, fiduciary and other equitable obligations. In February 2017, the Supreme Court held that the Crown owed a fiduciary duty in relation to the land transactions concerned, but remitted matters of breach, defences and remedy to the High Court for a further hearing or hearings. The matter is large and complex and could take up to a further 10 years to resolve.

Other unquantified contingent liabilities

i) Environmental liabilities

Under common law and various statutes, the Crown may have a responsibility to remedy adverse effects on the environment arising from Crown activities. Entities managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

In accordance with PBE IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions. Where costs cannot be reliably measured, they are disclosed as an unquantified contingent liability.

ii) Remediation of Per- and Poly-Fluoroalkyl Substances Contamination

Local and central government entities are investigating per- and poly-fluoroalkyl substances (PFAS) contamination from the historic use of specialised firefighting foam at sites on, and in the vicinity of, airports, New Zealand Defence Force bases, fuel storage facilities and other sites. Various government agencies have been undertaking a programme to review, investigate and develop a comprehensive approach to manage the impact of PFAS at sites around New Zealand. Once a response is agreed, it is possible the Crown may incur costs for the response to PFAS contamination, however these costs cannot be estimated without the agreed response being finalised, so an unquantified contingent liability has been disclosed.

iii) Treaty of Waitangi claims - settlement relativity payments

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1.0 billion in 1994 present-value terms, the mechanism provides that the Crown is liable to make payments to maintain the real value of Ngāi Tahu's and Waikato-Tainui's settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

iv) Holidays Act compliance

A number of entities have commenced or completed a review of calculations in recent year in order to ensure compliance with the Holidays Act 2003. Where possible, a provision has been made in these financial statements for obligations arising from those reviews that have been made in the current or previous years. To the extent that an obligation cannot reasonably be quantified at 30 June 2019, there is an unquantified contingency. Further work continues to be undertaken by entities to calculate the potential liability. For some entities, there are complexities and this issue is taking longer to resolve (eg, District Health Boards and Schools).

v) Criminal Proceeds (Recovery) Act

The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required.

Contingent Assets

i) Tax disputes

A contingent asset is recognised when the Inland Revenue has advised a taxpayer of a proposed adjustment to their tax assessment. The taxpayer has the right to dispute this adjustment and a disputes resolution process can be entered into. The contingent asset is based on the likely cash collectable from the disputes process based on experience and similar prior cases, net of losses carried forward.

ii) New Zealand Defence Force Earthquake Insurance Recoveries (NZDF)

As at 30 June 2019, there are unquantifiable contingent assets in relation to claims with NZDF insurers for business interruption following the 2016 Kaikōura/Hurunui Earthquakes.

Unquantifiable Contingent Assets

NZDF Earthquake Insurance Recoveries

As at 30 June 2019, there are unquantified contingent assets relating to the claim with the Defence House landlord for damage to hard fixtures and fit-out for historic contributions to the landlord for build costs.

Note 26: Financial Instruments#

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The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as the Treasury, Reserve Bank, New Zealand Superannuation Fund, Inland Revenue, Kiwi Group Holdings Limited and ACC. The financial management objectives of each of these portfolios are influenced by the purpose and associated governance framework for which the portfolio is held. The purposes of a portfolio may cover:

• Funding purposes. Primarily financial assets and liabilities are held to finance the Government's borrowing requirements and provide funds to Government entities. Examples include Government bonds and Treasury bills. Financing activity exposes the Government to financial risks from interest rates and global demand for New Zealand Government bonds.
• Social policy purposes. Primarily held to achieve social policy objectives. A large portion of the financial instruments for social policy purposes relates to student loans to support tertiary education policy. The associated risk for the Student Loan portfolio is that borrowers will default on their obligation.
• Investment purposes. Primarily held for the purpose of generating returns to assist in funding long-term obligations. The main investment portfolios are managed by ACC and the NZ Superannuation Fund. Associated risks include performance of the New Zealand and global markets.
• Central bank purposes. Primarily held for the Reserve Bank's foreign reserve management and market operations. The main financial risks to which the Reserve Bank is exposed includes foreign exchange risks, liquidity risks and financial stability risks.
• Commercial purposes. Primarily held by entities that operate on a commercial basis, who will hold financial instruments arising from their normal business activity. The main examples are State owned enterprises (including the mixed ownership model companies). Associated risks include interest rates risks, foreign exchange risks and price risks.

These purposes are not mutually exclusive, with portfolios typically established for, or arising from, a public policy objective, such as pre-funding future superannuation expenses, but in doing so are managed to maximise economic returns consistent with the policy objective.

Reporting to Ministers on these portfolios is done on a portfolio-by-portfolio basis. Detailed risk management policy disclosure of Government reporting entities can be found in an individual entity's Annual Report.

The institutional frameworks and policy objectives of these portfolios are reviewed periodically. Otherwise, reporting on the consolidated financial management and performance of these portfolios is done in the context of the interim and annual Financial Statements of the Government, the forecasts reported in the Half Year and Budget Economic and Fiscal Updates, and a more in-depth analysis of the Crown's assets in regular Investment Statements.

This note provides the following details of the Crown's financial instruments:

• Non-derivative financial instrument policies (pages 125 to 127)
• Classification of financial assets and financial liabilities (pages 128 to 129)
• Fair value measurement (page 130)
• Derivative disclosures (pages 131 to 132)
• Risk management (pages 132 to 136), and
• Sensitivity analysis (pages 136 to 137).

Classification of Financial Assets and Financial Liabilities

Financial instruments are measured at either fair value or amortised cost. Changes in the fair value of an instrument may be reported in the statement of financial performance or directly in other comprehensive revenue and expense depending on its measurement.

Financial Assets

1. Available for sale and Held for trading categories were removed with PBE IFRS 9 implementation. Financial assets Held for Trading were reclassified to FVTOB. Fair value through the other comprehensive revenue and expenses category was introduced by PBE IFRS 9. Please refer to note 27 for more details.

As at 30 June 2019, the carrying value of financial assets that had been pledged as collateral was $1,601 million (2018: $2,418 million). These transactions are conducted under terms that are usual and normal to standard securities borrowing. The amount will fluctuate depending on the market values of derivatives held that are in a loss position at 30 June 2019 and that require collateral to be posted as per the terms. The increase in collateral pledged is largely as a result of securities pledged as collateral by the Reserve Bank and the New Zealand Superannuation Fund. For more information, refer to the individual entity's annual report.

Financial Liabilities

Fair Value Measurement

The following hierarchy details the basis for the valuation of financial assets and financial liabilities measured at fair value. This includes financial assets and financial liabilities measured at both fair value through the operating balance and fair value through other comprehensive revenue and expense. Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair value may be determined using different methods depending on the type of asset or liability. Fair values are determined according to the following hierarchy:

• Quoted Market Price - Financial instruments with quoted prices for identical instruments in active markets (level 1).
• Valuation Technique Using Observable Inputs ­- Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets, and financial instruments valued using models where all significant inputs are observable (level 2).
• Valuation Technique with Significant Non-observable Inputs - Financial instruments valued using models where one or more significant inputs are not observable (level 3).

Fair Value Financial Instruments by Measurement Hierarchy

Significant non observable inputs

The following table details movements in fair value of financial instruments measured using significant non-observable inputs.