Ministerial Statement

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

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

Fiscal Overview

Fiscal Overview

At a Glance

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).
Table 1 - Financial results
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Core Crown tax revenue1 66,636 70,445 75,644 80,224 86,468 83,901 84,650
Core Crown expenses 72,363 73,929 76,339 80,576 87,022 86,720 87,300
Residual cash (1,827) (1,322) 2,574 1,346 (710) (3,875) (2,785)
Gross debt2 86,125 86,928 87,141 88,053 84,449 81,853 83,287
     as a percentage of GDP 35.2% 33.8% 31.8% 30.4% 28.1% 26.9% 27.8%
Net core Crown debt3 60,631 61,880 59,480 57,495 57,736 64,204 60,299
     as a percentage of GDP 24.7% 24.1% 21.7% 19.9% 19.2% 21.1% 20.1%
OBEGAL4 414 1,831 4,069 5,534 7,508 3,737 3,465
Operating balance4 5,771 (5,369) 12,317 8,396 (2,274) 6,773 (284)
Total borrowings 112,580 113,956 111,806 115,652 110,477 112,890 112,057
Net worth 92,236 95,521 116,472 135,637 146,313 130,317 136,166
  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

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

Figure 1 - Core Crown tax revenue and nominal GDP growth

Source:  The Treasury

Figure 2 - Core Crown revenue and core Crown expenses

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)

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

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

Figure 5 - Net core Crown debt

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

Figure 6 - Net worth

Source:  The Treasury

Revenue

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

Table 2 - Breakdown of revenue
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Core Crown tax revenue 66,636 70,445 75,644 80,224 86,468 83,901 84,650
Core Crown other revenue 5,577 5,676 6,138 6,554 7,157 7,064 6,949
Core Crown revenue 72,213 76,121 81,782 86,778 93,625 90,965 91,599
Crown entities, SOEs and eliminations (Other) 21,592 21,295 21,640 23,195 25,668 24,332 24,819
Total Crown revenue 93,805 97,416 103,422 109,973 119,293 115,297 116,418
% of GDP              
Core Crown tax revenue 27.2% 27.4% 27.6% 27.7% 28.8% 27.5% 28.2%
Core Crown other revenue 2.3% 2.2% 2.3% 2.3% 2.4% 2.4% 2.4%
Core Crown revenue 29.5% 29.6% 29.9% 30.0% 31.2% 29.9% 30.6%
Crown entities, SOEs and eliminations (Other) 8.8% 8.2% 7.9% 8.0% 8.6% 8.0% 8.2%
Total Crown revenue 38.3% 37.8% 37.8% 38.0% 39.8% 37.9% 38.8%

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

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 $0.5 billion (10.3%) higher than last year, mainly owing to income growth, and the correction of some Portfolio Investment Rates (charged on the investment returns of KiwiSaver accounts and managed funds) as a result of transitioning to Inland Revenue Department's new system.
Table 3 - Increase in core Crown tax revenue in nominal terms
Year ended 30 June ($ billion)
2018 core Crown tax revenue 80.2
Source deductions 2.2
Corporate tax 1.8
GST 1.0
Other individuals tax 0.5
Other movements 0.8
2019 core Crown tax revenue 86.5

Source:  The Treasury

Core Crown tax revenue recognition process change

For financial reporting purposes, tax revenue is recognised when taxable income is earned by a taxpayer and it can be reliably measured. The recognition of tax revenue requires a degree of estimation. Over recent years, the Inland Revenue Department has been working to improve the accuracy of this estimation. Actual tax revenue is not known until the tax returns for the period have been filed. This usually happens sometime after the publication of the financial statements. For example, the final calculation of the income tax for a 31 March 2019 taxpayer may not be due until April 2020.

In April 2019, the administration of income tax (mainly corporate and individuals tax) moved to Inland Revenue Department's new system, START (Simplified Tax and Revenue Technology). Other tax types (eg, GST) transitioned to START in previous years, but income tax is the most complex to estimate for reporting purposes. START has improved the way tax revenue is recognised as estimates are based on the most recently-available data for each individual and corporate taxpayer. The previous process relied on the forecast of provisional tax revenue. This change in process has resulted in bringing forward the recognition of some tax revenue for the 2018/19 year (cash has not changed).

The fundamental change in the approach means that it is not practical to estimate the amount of tax revenue brought forward this year from transitioning to START.

The key judgements and assumptions underpinning tax revenue estimates are discussed in note 2 (page 61) of the financial statements.

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

Figure 8 - Other revenue

Source:  The Treasury

Expenses

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.

Table 4 – Breakdown of expenses
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Social security and welfare 23,523 24,081 25,294 25,999 28,844 28,949 28,961
Health 15,058 15,626 16,223 17,159 18,268 18,071 18,277
Education 12,879 13,158 13,281 13,629 14,293 14,663 14,312
Core government services 4,134 4,102 3,957 4,670 5,314 5,046 5,326
Law and order 3,515 3,648 3,882 4,184 4,625 4,419 4,757
Other core Crown expenses 13,254 13,314 13,702 14,935 15,678 15,572 15,667
Core Crown expenses 72,363 73,929 76,339 80,576 87,022 86,720 87,300
Crown entities, SOEs and eliminations (Other) 20,701 21,208 22,668 23,438 24,417 24,396 25,259
Total Crown expenses 93,064 95,137 99,007 104,014 111,439 111,116 112,559
% of GDP              
Social security and welfare 9.6% 9.4% 9.2% 9.0% 9.6% 9.5% 9.7%
Health 6.1% 6.1% 5.9% 5.9% 6.1% 5.9% 6.1%
Education 5.3% 5.1% 4.8% 4.7% 4.8% 4.8% 4.8%
Core government services 1.7% 1.6% 1.4% 1.6% 1.8% 1.7% 1.8%
Law and order 1.4% 1.4% 1.4% 1.4% 1.5% 1.5% 1.6%
Other core Crown expenses 5.5% 5.1% 5.2% 5.2% 5.2% 5.1% 5.2%
Core Crown expenses 29.6% 28.7% 27.9% 27.8% 29.0% 28.5% 29.1%
Crown entities, SOEs and eliminations (Other) 8.4% 8.3% 8.3% 8.1% 8.1% 8.0% 8.4%
Total Crown expenses 38.0% 37.0% 36.2% 35.9% 37.1% 36.5% 37.6%

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.

Table 5 - Movement in core Crown expenses
Year ended 30 June ($ billion)
2018 core Crown expenses 80.6
Budget decisions 4.7
New Zealand Superannuation 0.9
Transport expenses 0.3
Other movements 0.5
2019 core Crown expenses 87.0

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

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

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.

Rail network

Background

The rail network comprises around 3,700 kilometres of track (excluding yards and sidings) and is used primarily for freight transport. In addition, it is also used by KiwiRail for long distance passenger transport and 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 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 valued 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, reflecting the community benefits of this investment rather than treating this portion as a cash generating asset at a whole-of-Government level. Those valuation approaches reflected the government purpose in holding the assets.

Change in valuation method

Following a review to consider the context of KiwiRail's purpose within a multi modal transport system, the underlying assumption of the benefits of rail were reframed 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 for the rail freight network that only reflected its cash generating potential was no longer appropriate.

These financial statements include the valuation of all the rail infrastructure using an Optimised Depreciated Replacement Cost method. To the extent that the assets deliver public benefits and would be replaced, a replacement cost approach is used, depreciated to reflect the extent the assets are through their useful lives. The valuation is ‘optimised' by reporting components within the network that do not produce benefits, as surplus assets that are measured at their recoverable amount.

Fiscal impacts

The impact is to increase the value of the rail freight network to $6.3 billion compared to a value of $1.0 billion that would have been reported under the previous basis. Table 6 shows how the increase flows through these financial statements.

Table 6 - Increase in the rail freight network valuation
Year ended 30 June ($ billion)
Increase in the rail freight network value 5.3
Reflected through:  
  Reversal of prior year impairments that impacts OBEGAL 2.6
  Increase in the revaluation reserves that impacts net worth  2.3
  Other movements (eg, additions and disposals) 0.4
Total increase in net worth 5.3

Source:  The Treasury

Operating Balance

Table 7 - Total Crown operating balance (excluding minority interests)
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Total Crown OBEGAL 414 1,831 4,069 5,534 7,508 3,737 3,465
Gains and losses:              
ACC actuarial gain/(loss) (1,352) (5,099) 387 (1,881) (11,367) - (3,676)
GSF actuarial gain/(loss) (322) (2,028) 964 (553) (2,759) - (1,017)
Student loans gain/(loss) - - - - 981 - -
ETS net position (366) (1,503) 73 (462) (225) - (558)
Investment portfolios:              
   NZS Fund 3,156 (76) 5,512 3,564 1,986 2,641 1,677
   ACC 2,397 1,420 901 1,713 1,534 215 (480)
Other gains/(losses)1 1,844 86 411 481 68 180 305
Total Crown gains/(losses) 5,357 (7,200) 8,248 2,862 (9,782) 3,036 (3,749)
Total Crown operating balance 5,771 (5,369) 12,317 8,396 (2,274) 6,773 (284)
% of GDP              
Total Crown OBEGAL 0.2% 0.7% 1.5% 1.9% 2.6% 1.2% 1.2%
Total Crown gains/(losses) 2.2% (2.8)% 3.0% 1.0% (3.3)% 1.1% (1.3)%
Total Crown Operating balance 2.4% (2.1)% 4.5% 2.9% (0.8)% 2.2% (0.1)%

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

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)

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

Figure 13 - Discount rates

Source:  The Treasury

Debt

Table 8 - Net debt, residual cash and gross debt)
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Net debt1 ($m) 60,631 61,880 59,480 57,495 57,736 64,204 60,299
Net debt (% GDP) 24.8% 24.0% 21.7% 19.9% 19.2% 21.1% 20.1%
Residual cash ($m) (1,827) (1,322) 2,574 1,346 (710) (3,875) (2,785)
Residual cash (% GDP) (0.7%) (0.5%) 0.9% 0.5% (0.2%) (1.3%)  (0.9%) 
Gross debt2 ($m) 86,125 86,928 87,141 88,053 84,449 81,853 83,287
Gross debt (% GDP) 35.2% 33.8% 31.8% 30.4% 28.1% 26.9% 27.8%
Total Borrowings ($m) 112,580 113,956 111,806 115,652 110,477 112,890 112,057
Total Borrowings (% GDP) 46.0% 44.3% 40.8% 39.9% 36.8% 37.1% 37.4%
  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

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 $5.5 billion higher than last year, broadly in line with the increase in core Crown expenses.
Table 9 - Movement in residual cash
Year ended 30 June ($ billion)
2018 core Crown residual cash surplus 1.3
Increase in tax receipts 3.6
Increase in sovereign other receipts 0.5
Increase in operating payments (5.5)
Increase in capital spending (0.8)
Other movements 0.2
2019 core Crown residual cash deficit (0.7)

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

Figure 15 - Net core Crown capital cash flows

Source:  The Treasury

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

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

Figure 17 - Gross debt

Source:  The Treasury

The Crown's borrowing programme

The total level of borrowing outstanding (denominated in Government Bonds and Treasury Bills) as at 30 June 2019 was $4.3 billion lower than at the end of the previous year. The proceeds from bond issuance during the year contributed to funding the March 2019 bond maturity and beginning repurchases of the April 2020 bond. Repurchasing the April 2020 bond prior to maturity assists in smoothing the Crown's cash profile, reducing risk, and minimising any residual market impacts associated with the maturity of this bond.

Table 10 - Cash proceeds from debt programme
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Issue of government bonds 8,058 8,079 7,847 7,043 8,372 7,862 8,430
Repayment of government bonds (8,684) (1,779) (6,080) (6,828) (11,908) (11,240) (11,974)
Net issue/(repayment) of short-term borrowing1 4,179 (3,513) 160 100 730 (2,000) (705)
Total market debt cash flows 3,553 2,787 1,927 315 (4,266) (5,378) (4,249)
Issue of government bonds - - - - - - -
Repayment of government bonds (482) (139) (830) - - - -
Net issue/(repayment) of short-term borrowing (480) (100) - - - - -
Total non-market debt cash flows (962) (239) (830) - - - -
Total debt programme cash flows 2,591 2,548 1,097 315 (4,266) (5,378) (4,249)
  1. Short-term borrowings consists of Treasury Bills and may include Euro-Commercial Paper.

Total Crown Balance Sheet

Table 11 - Net worth
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Net worth attributable to the Crown 86,454 89,366 110,532 129,644 139,746 124,457 129,999
Net worth attributable to minority interests 5,782 6,155 5,940 5,993 6,567 5,860 6,167
Total net worth 92,236 95,521 116,472 135,637 146,313 130,317 136,166
Net worth as a % of GDP 37.7% 37.1% 42.5% 46.9% 48.8% 42.8% 45.4%

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

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.

Table 12 - Composition of the total Crown balance sheet
Year ended 30 June
$ million
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
30 June 2019
Budget
2018
Budget
2019
Financial assets 135,787 138,255 147,050 157,520 163,304 149,662 153,767
Property, plant and equipment 124,558 134,499 144,550 159,018 178,025 155,867 164,316
Other assets 18,869 19,925 22,009 23,394 24,427 23,404 23,295
Total assets 279,214 292,679 313,609 339,932 365,756 328,933 341,378
Borrowings 112,580 113,956 111,806 115,652 110,477 112,890 112,057
Insurance liabilities 36,431 42,126 42,786 45,294 58,364 44,732 49,794
Other liabilities 37,967 41,076 42,545 43,349 50,602 40,994 43,361
Total liabilities 186,978 197,158 197,137 204,295 219,443 198,616 205,212
Total net worth 92,236 95,521 116,472 135,637 146,313 130,317 136,166
Minority interests (5,782) (6,155) (5,940) (5,993) (6,567) (5,860) (6,167)
Net worth attributable to the Crown 86,454 89,366 110,532 129,644 139,746 124,457 129,999

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

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

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.

Sensitivities and Risks to the Crown Balance Sheet

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. Fair value can be calculated using comparable market prices, but where these are not available, values can be estimates based on certain assumptions. While the measurement at fair value is more relevant for decision making purposes, it can be volatile, resulting in fluctuations in the value of the assets and liabilities with changes in the underlying assumptions. Below is a summary of some of the key sensitives to the valuation of the Crown's major assets and liabilities.

Interest rates, share prices and exchange rates

Financial assets were $163.3 billion at 30 June 2019, a significant proportion of the Crown's balance sheet and increasing by $69.9 billion over the last 10 years. Entities like NZS Fund and ACC hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. Table 13 shows the sensitivity of the financial assets to changes in these variables.

Table 13 - Financial instrument sensitivities
Impact on operating balance % change $ million
New Zealand interest rates + 1 % (476)
- 1 % 701
Share prices + 10 % 4,023
- 10 % (4,023)
NZD exchange rate + 10 % (1,353)
- 10 % 1,538

Source: The Treasury

Discount rates and inflation rates

The Crown has two significant liabilities that have long durations. Both the ACC insurance and GSF retirement liabilities are valued by actuaries and are based on present valuing estimated future cash flows, some up to 80 years into the future. Inflation rates are used to help estimate future cash flows while discount rates are used to determine the value of those future cash flows in today's dollars. Changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods (eg, ACC's cash flows of $87.1 billion are discounted to $53.3 billion). Table 14 shows the impact that a 1% change in inflation and discount rates would have on these liabilities (and the gain or loss as a result of the change). For example, this year, a change in the discount rate for ACC's short term cash flow duration decreased by 1.09%, which contributed to a large actuarial loss flowing through to the Crown's operating balance.

Table 14 - Long-term liability sensitivities
Impact on operating balance
$ million
Discount rate Inflation rate
+ 1 % - 1 % + 1 % - 1 %
ACC outstanding claims 8,594 (11,977) (12,059) 8,575
GSF retirement liability 1,971 (2,407) (2,202) 1,857

Source: The Treasury

Changes in other estimates

Outside of market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. New and updated information is a source of valuation volatility, especially if changes in assumptions are significant one-off adjustments in any given year. Some examples of this include:

  • Student loans: assumptions around the expectations of student incomes and repayment rates affects the value of these loans, with changes being reported as gains or losses.
  • Property, plant and equipment asset revaluations: revaluations of these assets, using a combination of market data and assumptions, led to a $12.5 billion increase, mainly on the rail network (refer to the box on page 15) and state highway networks.
Other risks to the balance sheet

In addition to those items on the balance sheet there are a number of liabilities or assets that may arise in the future but are not yet included; either because they are dependent on an uncertain future event occurring (eg, outcome of litigation) or the liability or asset cannot be measured reliably. If these contingencies crystallise, there will be associated impacts on the operating balance. Refer to note 25 for a list of these areas as at 30 June 2019.

Year End Results Compared to Budget 2019

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

Table 15 - Comparison to Budget 2019
Year ended 30 June
$ million
Actual
2019
Budget
2019
Variance to
Budget 2019
1
$m
Variance to
Budget 2019

%
Core Crown tax revenue 86,468 84,650 1,818 2.1
Core Crown expenses 87,022 87,300 278 0.3
OBEGAL (excluding minority interests) 7,508 3,465 4,043 116.7
Operating balance (excluding minority interests) (2,274) (284) (1,990) 700.7 
Residual cash (710) (2,785) 2,075 74.5
Gross debt 84,449 83,287 (1,162) (1.4)
             as a percentage of GDP 28.1% 27.8%    
Net debt 57,736 60,299 2,563 4.3
             as a percentage of GDP 19.2% 20.1%    
Total Borrowings 110,477 112,057 1,580 1.4
Net worth 146,313 136,166 10,147 7.5
  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 $0.2 billion (0.6%) above forecast. Labour market data released in early August show that employment growth and wage growth were both above forecast through the June quarter, likely contributing to the favourable forecast variance.
Table 16 - Core Crown tax revenue compared to Estimated Actuals
Year ended 30 June ($ billion)
Budget 2019 core Crown tax revenue 84.7
Other individuals tax 1.1
Corporate tax 0.4
Source deductions 0.2
Other movements 0.1
Actual 2019 core Crown tax revenue 86.5

Source:  The Treasury

Figure 21 - Core Crown tax revenue variance to Estimated Actuals

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

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

Historical Financial Information $ million
Year ended 30 June
$ million
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
Statement of Financial Performance                    

Core Crown tax revenue

50,744 51,557 55,081 58,651 61,563 66,636 70,445 75,644 80,224 86,468
Core Crown other revenue 5,013 5,642 5,347 5,154 5,530 5,577 5,676 6,138 6,554 7,157
Core Crown revenue 55,757 57,199 60,428 63,805 67,093 72,213 76,121 81,782 86,778 93,625
Crown entities, SOE revenue and eliminations 17,976 23,448 22,321 21,873 21,443 21,592 21,295 21,640 23,195 25,668
Total Crown revenue 73,733 80,647 82,749 85,678 88,536 93,805 97,416 103,422 109,973 119,293
Social security and welfare 20,814 21,724 21,956 22,459 23,026 23,523 24,081 25,294 25,999 28,844
Health 13,128 13,753 14,160 14,498 14,898 15,058 15,626 16,223 17,159 18,268
Education 11,724 11,650 11,654 12,504 12,300 12,879 13,158 13,281 13,629 14,293
Core government services 2,974 5,563 5,428 4,294 4,502 4,134 4,102 3,957 4,670 5,314
Law and order 3,103 3,312 3,338 3,394 3,463 3,515 3,648 3,882 4,184 4,625
Other core Crown expenses 11,811 14,097 12,403 12,813 12,985 13,254 13,314 13,702 14,935 15,678
Core Crown expenses 63,554 70,099 68,939 69,962 71,174 72,363 73,929 76,339 80,576 87,022
Crown entities, SOE expenses and eliminations 16,494 28,944 23,050 20,068 20,005 20,701 21,208 22,668 23,438 24,417
Total Crown expenses 80,048 99,043 91,989 90,030 91,179 93,064 95,137 99,007 104,014 111,439
OBEGAL (excluding minority interests) (6,315) (18,396) (9,240) (4,414) (2,802) 414 1,831 4,069 5,534 7,508
Gains/(losses) 1,806 5,036 (5,657) 11,339 5,741 5,357 (7,200) 8,248 2,862 (9,782)
Operating balance (excluding minority interests) (4,509) (13,360) (14,897) 6,925 2,939 5,771 (5,369) 12,317 8,396 (2,274)
Statement of Financial Position                    
Property, plant and equipment 113,330 114,854 108,584 109,833 116,306 124,558 134,499 144,550 159,018 178,025
Financial assets 95,971 115,362 116,178 118,779 123,918 135,787 138,255 147,050 157,520 163,304
Other assets 14,054 14,999 15,556 15,804 16,600 18,869 19,925 22,009 23,394 24,427
Total assets 223,355 245,215 240,318 244,416 256,824 279,214 292,679 313,609 339,932 365,756
Borrowings 69,733 90,245 100,534 100,087 103,419 112,580 113,956 111,806 115,652 110,477
Other liabilities 58,634 74,083 80,004 74,318 72,708 74,398 83,202 85,331 88,643 108,966
Total liabilities 128,367 164,328 180,538 174,405 176,127 186,978 197,158 197,137 204,295 219,443
Net worth  94,988 80,887 59,780 70,011 80,697 92,236 95,521 116,472 135,637 146,313
Minority interests 402 308 432 1,940 5,211 5,782 6,155 5,940 5,993 6,567
Net worth attributable to the Crown 94,586 80,579 59,348 68,071 75,486 86,454 89,366 110,532 129,644 139,746
Cash position                    
Core Crown residual cash (9,000) (13,343) (10,644) (5,742) (4,109) (1,827) (1,322) 2,574 1,346 (710)
Debt Indicators                    
Net debt 26,738 40,128 50,671 55,835 59,931 60,631 61,880 59,480 57,495 57,736
Gross debt 53,591 72,420 79,635 77,984 81,956 86,125 86,928 87,141 88,053 84,449
Historical Financial Information as % of GDP
Year ended 30 June
$ million
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
Nominal GDP (revised) 196,734 205,829 215,121 218,756 236,722 244,860 257,419 273,843 289,504 300,032
Statement of financial performance                    
Core Crown tax revenue 25.8% 25.0% 25.6% 26.8% 26.0% 27.2% 27.4% 27.6% 27.7% 28.8%
Core Crown other revenue 2.5% 2.8% 2.5% 2.4% 2.3% 2.3% 2.2% 2.3% 2.3% 2.4%
Core Crown revenue 28.3% 27.8% 28.1% 29.2% 28.3% 29.5% 29.6% 29.9% 30.0% 31.2%
Crown entities, SOE and elimination revenue 9.2% 11.4% 10.4% 10.0% 9.1% 8.8% 8.2% 7.9% 8.0% 8.6%
Total Crown revenue 37.5% 39.2% 38.5% 39.2% 37.4% 38.3% 37.8% 37.8% 38.0% 39.8%
Social security and welfare 10.6% 10.6% 10.2% 10.3% 9.7% 9.6% 9.4% 9.2% 9.0% 9.6%
Health 6.7% 6.7% 6.6% 6.6% 6.3% 6.1% 6.1% 5.9% 5.9% 6.1%
Education 6.0% 5.7% 5.4% 5.7% 5.2% 5.3% 5.1% 4.8% 4.7% 4.8%
Core government services 1.5% 2.7% 2.5% 2.0% 1.9% 1.7% 1.6% 1.4% 1.6% 1.8%
Law and order 1.6% 1.6% 1.6% 1.6% 1.5% 1.4% 1.4% 1.4% 1.4% 1.5%
Other core Crown expenses 5.9% 6.8% 5.7% 5.8% 5.5% 5.5% 5.1% 5.2% 5.2% 5.2%
Core Crown expenses 32.3% 34.1% 32.0% 32.0% 30.1% 29.6% 28.7% 27.9% 27.8% 29.0%
Crown entities, SOE and elimination expenses 8.4% 14.0% 10.8% 9.2% 8.4% 8.4% 8.3% 8.3% 8.1% 8.1%
Total Crown expenses 40.7% 48.1% 42.8% 41.2% 38.5% 38.0% 37.0% 36.2% 35.9% 37.1%
OBEGAL (excluding minority interests) (3.2%) (8.9%) (4.3%) (2.0%) (1.2%) 0.2% 0.7% 1.5% 1.9% 2.5%
Gains/(losses) 0.9% 2.4% (2.6%) 5.2% 2.4% 2.2% (2.8%) 3.0% 1.0% (3.3%)
Operating balance (excluding minority interests) (2.3%) (6.5%) (6.9%) 3.2% 1.2% 2.4% (2.1%) 4.5% 2.9% (0.8%)
Statement of financial position                    
Property, plant and equipment 57.6% 55.8% 50.5% 50.2% 49.1% 50.9% 52.2% 52.8% 54.9% 59.3%
Financial assets and sovereign receivables 48.8% 56.0% 54.0% 54.3% 52.3% 55.5% 53.7% 53.7% 54.4% 54.4%
Other assets 7.1% 7.3% 7.2% 7.2% 7.1% 7.6% 7.8% 8.0% 8.1% 8.2%
Total assets 113.5% 119.1% 111.7% 111.7% 108.5% 114.0% 113.7% 114.5% 117.4% 121.9%
Borrowings 35.4% 43.8% 46.7% 45.8% 43.7% 46.0% 44.3% 40.8% 39.9% 36.8%
Other liabilities 29.8% 36.0% 37.2% 33.9% 30.7% 30.4% 32.3% 31.2% 30.7% 36.3%
Total liabilities 65.2% 79.8% 83.9% 79.7% 74.4% 76.4% 76.6% 72.0% 70.6% 73.1%
Net worth   48.3% 39.3% 27.8% 32.0% 34.1% 37.6% 37.1% 42.5% 46.8% 48.8%
Minority interests 0.2% 0.2% 0.2% 0.9% 2.2% 2.3% 2.4% 2.1% 2.0% 2.2%
Net worth attributable to the Crown 48.1% 39.1% 27.6% 31.1% 31.9% 35.3% 34.7% 40.4% 44.8% 46.6%
Cash position                    
Core Crown residual cash (4.6%) (6.5%) (4.9%) (2.6%) (1.7%) (0.7%) (0.5%) 0.9% 0.5% (0.2%)
Debt Indicators                    
Net debt 13.6% 19.5% 23.6% 25.5% 25.3% 24.8% 24.0% 21.7% 19.9% 19.2%
Gross debt 27.2% 35.2% 37.0% 35.6% 34.6% 35.2% 33.8% 31.8% 30.4% 28.1%

Notes

  1. [1] The financial statements of the Government of New Zealand refer to both core Crown and total Crown results. Core Crown is comprised of Ministers of the Crown, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank. Total Crown is comprised of the core Crown, State-owned Enterprises (including mixed ownership model companies) and Crown entities.

Independent Audit Report of the Controller and Auditor-General

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.

In my opinion, the financial statements of the Government on pages 42 to 152:

  • present fairly, in all material respects, the Government’s:
    • financial position as at 30 June 2019;
    • financial performance and cash flows for the year ended on that date;
    • borrowings as at 30 June 2019;
    • unappropriated expenditure for the year ended 30 June 2019;
    • expenses or capital expenditure incurred in emergencies for the year ended 30 June 2019; and
    • trust money administered by departments for the year ended 30 June 2019;
  • comply with generally accepted accounting practice in New Zealand, in accordance with Public Benefit Entity accounting standards.

My audit was completed on 30 September 2019. This is the date on which my opinion is expressed.

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.

Key audit matters
Recognising tax revenue How we addressed this matter

The Government recognised tax revenue of $85.7 billion for the year ended 30 June 2019. Of that amount $56.4 billion was direct income tax, primarily from individuals and companies.

As outlined in Note 2, direct income tax from companies and other persons is subject to significant assumptions and judgements because of the timing differences between the reporting date and when taxpayers file tax returns.

To record direct income tax revenue, judgement is applied to estimating:

  • the amount of tax revenue to be collected from provisional taxpayers who have not yet filed their final tax return;
  • the amount of tax revenue where payments have been received but no provisional or final tax return has been filed; and
  • the amount of tax revenue to be collected from, or refunded to, taxpayers who are not subject to provisional tax.

During the year, a new IT system was implemented by Inland Revenue, which changed the process for estimating direct income tax revenue. It is now based on individual taxpayers, rather than macro-economic cash flow forecasts. The change in process for estimating direct income tax revenue means that some different assumptions and judgements have had to be applied this year.

We obtained an understanding of the systems, processes, and controls for the receipt and review of provisional and final tax returns, tax assessments, and tax revenue receipts. This included understanding Inland Revenue's new IT system.

We reviewed the assumptions and judgements applied in the new process for estimating direct income tax revenue.

We assessed controls in place over significant reconciliation processes.

We tested the underlying data used in the various tax revenue estimation models to ensure that it was relevant and was used appropriately. We did this by reviewing evidence to support key assumptions. We also tested the sensitivity of key assumptions.

I am satisfied that the assumptions and judgements applied in estimating direct income tax revenue use the best information available, and are reasonable and supportable.

Valuing property, plant, and equipment How we addressed this matter

The Government owns significant physical assets totalling $178.0 billion.

The valuation of some of these assets requires significant judgement. There are uncertainties inherent in the valuation of these assets, the quality of data available, and the benefits these assets provide. I have identified some specific assets where such judgements are evident.

 

State highway network

As outlined in Note 16, the state highway network (excluding land) has been valued at $37.2 billion at 30 June 2019 by an independent external valuer. Due to the unique nature of the state highway network, the value of the assets cannot be measured with precision. Significant estimates and assumptions have been applied to the valuation, which include assumptions about: quantities and rates used in the construction of state highway network components, the remaining life of the assets, and the unit costs to apply. Changes to the underlying estimates and assumptions can cause a material movement in the state highway valuation.

We obtained an understanding of how the state highway network is valued, the significant estimates and assumptions used, and their reasonableness. This involved confirming the competence, capabilities, and objectivity of the valuer, challenging the valuer’s key assumptions, and assessing the valuation procedures, including the information extracted from databases. We also considered whether there were any limitations placed on the valuer and the appropriateness of centrally calculated rates that were applied to the valuation.

We also carried out audit procedures to confirm that key controls were operating over the systems and processes used to record cost and other asset information about the state highway network.

Valuing property, plant, and equipment How we addressed this matter

There continue to be uncertainties associated with the valuation of the state highway network. As part of the continuing valuation improvement programme, the costs relating to the formation component have been updated. Work continues on improving the data quality that underpins the valuation.

Some of the costs associated with road construction (for example, traffic management) in urban areas have been assessed as a significant part of the network that may be undervalued. An allowance to recognise these costs has been included since 2014 where a reliable estimate can be made. This year a unit rate was determined for these costs and included in the valuation.

I am satisfied that the value of the state highway network at 30 June 2019 is reasonable and consistent with valuation practices, and that the disclosures outlining the inherent uncertainties in the valuation are appropriate.

Rail network

As outlined in Note 16, the rail network has been valued at $6.4 billion at 30 June 2019. In arriving at this value, the entire rail network (used for both freight and metro transport) has been valued on the basis of its public benefit nature.

In previous years, the freight part of the network has been valued on a commercial basis. The extent to which the Government views the freight part of the network as commercial has been open to debate for a number of years.

The Government is currently reviewing rail, to define its purpose, determine the appropriate structure and capital requirements, and determine how to fund it in future.

This review is ongoing and it recognises the challenges in making investment decisions, given the duality of commercial “for profit” activities that align with a State-owned enterprise's commercial mandate, and other “public benefit” activities that deliver social benefits rather than commercial returns. It also recognises the challenges of integrating relatively short-term funding commitments with prudent investment decisions for long-life assets such as rail infrastructure.

Cabinet received the first of three review reports in May 2019. The paper 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.

Cabinet agreed in principle to a resilient and reliable rail system to deliver the outcomes for transport and wider benefits the Government seeks, and budget decisions were made on this basis.

As a consequence of that agreement, it is no longer appropriate for the Government to value the rail freight network on a commercial basis. 

Therefore, the rail network assets are recorded at Optimised Depreciated Replacement Cost in these financial statements, in keeping with Public Benefit Entity accounting standards.

We considered the evidence to support the public benefit nature of the rail network. This evidence included reviewing:

  • the first Cabinet paper about the rail review;
  • Budget announcements
  • strategy documents; and
  • forecast results.

Although the rail review is still underway, it is sufficiently advanced and provided enough evidence to support valuing the rail network on the basis of its public benefit nature.

The evidence showed that the Government intends to seek wider social benefits from its investment in rail.

Based on Cabinet decisions and associated budget announcements, I am satisfied that the judgement to value the rail network on a public benefit basis in the Government’s financial statements is appropriate.

We obtained an understanding of how the rail network is valued, the significant estimates and assumptions used, and the reasonableness of them. This involved confirming the competence, capabilities, and objectivity of the valuer, challenging the valuer’s key assumptions, and assessing the valuation procedures, including the information extracted from databases.

We considered whether there were any limitations placed on the valuer and the appropriateness of centrally calculated rates that were applied to the valuation.

We also carried out audit procedures to confirm that key controls were operating over the systems and processes used to record cost and other asset information related to the rail network.

We ensured that the revaluation movements and reversals of previous impairments were correctly accounted for.

I am satisfied that the value of the rail network at 30 June 2019 is reasonable and consistent with valuation practices, and that the adjustments to reflect the change in the valuation are appropriate.

Valuing property, plant, and equipment How we addressed this matter

Electricity generation assets

As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $17.2 billion at 30 June 2019.The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create.

As a result, small changes to these assumptions, in particular, the forecast prices of electricity and the discount rates used to determine the present value of these prices - could significantly change the value of these assets.

We obtained an understanding of how electricity generation assets are valued. This involved confirming the competence, capabilities, and objectivity of the valuers, testing the valuers’ procedures for carrying out the valuations, including the information they used to carry them out, and challenging the valuers’ critical assumptions and judgements. We also used our own valuation specialists to assess the valuers’ procedures.

We tested the sensitivity of the key underlying assumptions used by the valuers to ensure that they were reasonable, and we compared the forecast prices of electricity to the expected longer-term wholesale prices and market data where it was available.

I am satisfied that the valuation of electricity generation assets at 30 June 2019 is reasonable, and that the disclosures appropriately outline the sensitivity and the complexity of the valuation of electricity generation assets.

Valuing insurance and superannuation liabilities How we addressed this matter

The Government has insurance liabilities of $58.4 billion and public servants' superannuation liabilities of $13.2 billion as at 30 June 2019. The valuation of these liabilities is complex and requires actuaries to estimate the value, based on assumptions about the future. I have identified some specific liabilities because of the significance of the value of those liabilities and the uncertainties inherent in the valuations.

 

Accident Compensation Corporation's outstanding claims liability

As outlined in Note 11, the outstanding claims liability of the Accident Compensation Fund (ACC) has been valued at $53.3 billion at 30 June 2019 by an independent actuary.

Key assumptions used to value the outstanding claims liability include:

  • selecting an appropriate risk-free discount rate to present value future cash flows;
  • selecting an appropriate risk margin for the inherent uncertainty in the estimate of the present value of future cash flows;
  • estimating the effects of inflation and innovation on future medical costs; and
  • estimating the length of rehabilitation from injuries.

The sensitivity of each assumption is analysed in Note 11. This sensitivity analysis indicates that assumptions are closely linked, cannot be viewed in isolation, and changes in assumptions can have a large impact on the value of the liability, as well as the actuarial gain or loss recognised.

We obtained an understanding of how ACC's outstanding claims liability is valued by assessing the reasonableness of the approach taken. We also reviewed ACC's key assumptions for each significant claim type to ensure that these were appropriate.

We tested the systems and controls and carried out detailed testing of the process for recording claims.

We tested key assumptions by evaluating them against past claims experience. We assessed the reasonableness of forecasts that diverged from past experience by looking at the evidence supporting the forecasts.

We engaged our own actuary to review the scope, approach, and reasonableness of the estimate of the liability.

We tested the reconciliations of the underlying claims data to ACC's systems, examined the sensitivity analysis for movements in key assumptions, and evaluated the related financial statement disclosures.

I am satisfied that the assumptions and judgements applied in estimating ACC's outstanding claims liability at 30 June 2019 are reasonable, and that the disclosures outline the sensitivity of the valuation to changes in assumptions.

Valuing insurance and superannuation liabilities How we addressed this matter

Government Superannuation Fund's unfunded liability

As outlined in Note 20, the Government's liability for public servants' superannuation entitlements for past and current members of the Government Superannuation Fund has been valued at $13.2 billion at 30 June 2019 by an independent actuary.

The present value of the unfunded liability is also sensitive to the estimated return on the Fund's assets, expected rates of salary increases for public servants who are members of the Fund, and estimated inflation and discount rates. The Fund'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 of critical assumptions and judgements is analysed in Note 20. This sensitivity analysis indicates that assumptions are closely linked, cannot be viewed in isolation, and changes in assumptions can have a large effect on the value of the liability.

We obtained an understanding of how the Government's liability for public servants' superannuation entitlements is valued. This involved confirming the competence, capabilities, and objectivity of the actuary, as well as testing the actuary’s valuation procedures. We engaged our own actuary to review the assumptions, judgements, and procedures used to value the liability.

We tested key controls that ensure the completeness and accuracy of membership data that was used in the actuary's valuation.

We evaluated the appropriateness of key assumptions used in estimating the return on assets owned by the Fund and compared the expected rates of salary increases against external benchmarks.

I am satisfied that the Government's reported liability for public servants' superannuation entitlements at 30 June 2019 is reasonable, and that the disclosures outline the sensitivities of the valuation to changes in assumptions.

Valuing financial assets and liabilities How we addressed this matter

As outlined in Note 26, as at 30 June 2019, the Government had financial assets of $145.1 billion (of which $89.6 billion was valued at fair value and $55.5 billion was valued at amortised cost) and financial liabilities of $128.7 billion (of which $8.4 billion was valued at fair value and $120.3 billion was valued at amortised cost).

Financial assets and liabilities measured at fair value include derivatives (which have a principal value of $222.2 billion), marketable securities, and share investments.

Where quoted market prices are not available to determine the value of financial assets and liabilities, fair value must be estimated. This is done by applying a valuation approach that is most appropriate for the asset or liability, such as using valuation models. Inputs into the models will use market data when available; otherwise inputs are derived from non-market data, which requires judgement.

The fair value of financial assets and financial liabilities that are valued using non-observable inputs are valued at $15.4 billion and $0.2 billion respectively.

We obtained an understanding of the valuation techniques, controls, and inputs used to determine the fair value of financial assets and liabilities. 

We also carried out a range of audit procedures that reflected the nature of the financial assets and liabilities being valued, the valuation techniques adopted, and the uncertainties that existed in determining their fair values. These audit procedures included:

  • testing the internal controls in place over data relating to financial assets and liabilities that have been entered into financial and treasury systems;
  • obtaining an understanding of the controls and valuation approaches applied where a fund manager carries out the valuation;
  • comparing the fair value of financial assets and liabilities to independent information and investigating any significant variances; and
  • assessing the appropriateness of the inputs used for valuing financial assets and liabilities where the fair value was dependent on non-observable inputs.

I am satisfied that the fair values of financial assets and liabilities at 30 June 2019 are reasonable and that the disclosures outline the significant judgements.

Entitlements under the Holidays Act 2003 How we addressed this matter

As outlined in Note 25, a number of entities have started or completed a review of current and historical payroll calculations to ensure compliance with the Holidays Act 2003 and other relevant legislation.

Where possible, provision has been made in the financial statements of the Government for obligations arising from those reviews and where settlement has not been made in the current or previous financial years.

To the extent that an obligation cannot reasonably be quantified at 30 June 2019, an unquantified contingent liability has been disclosed. Entities continue to calculate the potential liability required to remediate the issues associated with these entitlements. In the case of certain sectors, in particular for District Health Boards (DHBs), there are complexities and the calculation of the liability is taking longer than expected to resolve. Entities in these sectors employ many people and the liabilities to settle these obligations remain uncertain.

As outlined in Note 21, DHBs have recognised provisions. However, the Government has noted that the indicative potential liability could be within a range of $550 million to $650 million. This is based on selecting a small, non-statistical sample of former and current employees, applying a number of assumptions, agreed to by the sector and then calculating an indicative liability by extrapolating the result over the known population. A significant amount of work is still required to finalise the liability, and therefore, there remains a high level of uncertainty over this liability which could fall outside the range of $550 million to $650 million.

For those entities most significantly affected, we obtained an understanding of the progress made in resolving the payroll calculation issues and we assessed the reasonableness of the approach to the financial reporting of these issues.

We carried out a range of procedures to audit the liabilities recognised, including:

  • reviewing processes followed for valuing the liabilities and testing a sample of transactions,
  • ensuring the completeness of the data used in the valuation of the liability,
  • assessing the competence, capabilities, and objectivity of independent experts who were involved in the valuation,
  • challenging critical assumptions and judgements made in estimating the liabilities; and
  • reviewing the disclosures made.

I am satisfied that the liabilities recognised for entitlements are materially correct and that, in those cases where a liability cannot be reliably measured, the disclosures are appropriate.

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

Statement of Financial Performance
for the year ended 30 June 2019

2019 Forecast at   Note Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Revenue      
83,241 83,957 Taxation revenue 3 85,723 79,596
5,633 5,827 Other sovereign revenue 3 6,028 5,223
88,874 89,784 Total sovereign revenue   91,751 84,819
19,237 19,386 Sales of goods and services 4 19,885 18,228
2,966 2,694 Interest revenue 5 2,685 2,798
4,220 4,554 Other revenue 6 4,972 4,128
26,423 26,634 Total revenue earned through operations   27,542 25,154
115,297 116,418 Total revenue (excluding gains)   119,293 109,973
    Expenses      
28,394 28,192 Transfer payments and subsidies 7 28,190 25,366
24,369 24,977 Personnel expenses 8 25,983 23,690
4,840 4,972 Depreciation 16 4,557 4,275
44,976 45,692 Other operating expenses 9 42,774 41,614
4,045 3,987 Interest expenses 5 4,059 4,151
4,877 5,274 Insurance expenses 11 5,876 4,918
760 265 Forecast new operating spending  
(1,145) (800) Top-down expense adjustment  
111,116 112,559 Total expenses (excluding losses)   111,439 104,014
444 394 Less minority interests share of operating balance before gains and losses   346 425
3,737 3,465 Operating balance before gains and losses (OBEGAL) (excluding minority interests)   7,508 5,534
2,887 1,445 Net gains/(losses) on financial instruments 5 4,397 5,331
(83) (5,340) Net gains/(losses) on non-financial instruments 10 (14,348) (2,802)
2,804 (3,895) Total gains/(losses)   (9,951) 2,529
17 76 Less minority interests share of total gains/(losses)   115 87
2,787 (3,971) Gains/(losses) (excluding minority interests)   (10,066) 2,442
249 222 Net surplus from associates and joint ventures   284 420
6,773 (284) Operating balance (excluding minority interests)   (2,274) 8,396
    Operating balance consists of:      
6,773 (284) Operating balance (excluding minority interests)   (2,274) 8,396
461 470 Minority interests share of operating balance 22 461 512
7,234 186 Operating balance (including minority interests)   (1,813) 8,908

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

Analysis of Expenses by Functional Classification - Total Crown expenses
2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Total Crown expenses    
33,660 33,777 Social security and welfare 34,006 30,195
17,507 17,850 Health 18,660 16,746
15,509 15,235 Education 15,280 14,607
4,755 4,914 Core government services 4,880 4,495
4,816 5,182 Law and order 5,050 4,494
9,150 9,982 Economic and industrial services 10,433 8,928
10,938 11,205 Transport and communications 8,429 9,940
2,366 2,410 Defence 2,390 2,239
1,057 1,123 Environmental protection 1,108 1,227
2,603 2,582 Heritage, culture and recreation 2,503 2,518
2,090 2,428 Primary services 2,395 2,134
2,318 2,132 Housing and community development 2,020 1,878
135 173 GSF pension expenses 130 163
552 114 Other 96 299
4,045 3,987 Finance costs 4,059 4,151
760 265 Forecast new operating spending
(1,145) (800) Top-down expense adjustment
111,116 112,559 Total Crown expenses (excluding losses) 111,439 104,014

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.

Analysis of Expenses by Functional Classification - Core Crown expenses
2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Core Crown expenses    
28,949 28,961 Social security and welfare 28,844 25,999
18,071 18,277 Health 18,268 17,159
14,663 14,312 Education 14,293 13,629
5,046 5,326 Core government services 5,314 4,670
4,419 4,757 Law and order 4,625 4,184
3,307 3,028 Economic and industrial services 3,006 2,732
2,622 3,212 Transport and communications 2,889 2,559
2,374 2,418 Defence 2,395 2,251
1,058 1,125 Environmental protection 1,119 1,238
756 1,088 Primary services 960 807
880 913 Heritage, culture and recreation 918 850
878 711 Housing and community development 727 552
122 159 GSF pension expenses 116 150
552 114 Other 96 299
3,408 3,434 Finance costs 3,452 3,497
760 265 Forecast new operating spending
(1,145) (800) Top-down expense adjustment
86,720 87,300 Total core Crown expenses (excluding losses) 87,022 80,576

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
7,234 186 Operating balance (including minority interests) (1,813) 8,908
    Other comprehensive revenue and expense    
(33) Revaluation of physical assets 12,179 10,090
Share of associates revaluation of physical assets 294 578
69 240 Transfers to/(from) reserves (202) 59
9 (Gains)/losses transferred to the statement of financial performance (2) (25)
Foreign currency translation differences on foreign operations (49) 122
(50) (24) Other movements (12) (34)
19 192 Total other comprehensive revenue and expense 12,208 10,790
7,253 378 Total comprehensive revenue and expense 10,395 19,698
    Attributable to:    
445 651  - minority interests 952 586
6,808 (273)  - the Crown 9,443 19,112
7,253 378 Total comprehensive revenue and expense 10,395 19,698

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

2019 Forecast at   Note Actual
Budget
2018
$m
Budget
2019
$m
Taxpayer
funds
$m
Reserves
$m
Minority
interests
$m
Total
net
worth
$m
116,472 116,472 Net worth at 30 June 2017   26,456 84,076 5,940 116,472
7,446 8,908 Operating balance   8,396 512 8,908
(22) 10,668 Net revaluations 16 10,598 70 10,668
273 59 Transfers to/(from) reserves   12 49 (2) 59
5 (25) (Gains)/losses transferred to the statement of financial performance   (25) (25)
32 122 Foreign currency translation differences on foreign operations   115 7 122
(97) (34) Other movements   (23) (10) (1) (34)
7,637 19,698 Total comprehensive revenue and expense   8,385 10,727 586 19,698
(542) (533) Transactions with minority interests 22 (533) (533)
123,567 135,637 Net worth at 30 June 2018   34,841 94,803 5,993 135,637
628 Impact of adoption NZ PBE IFRS 9 27 599 60 659
123,567 136,265 Adjusted opening net worth   35,440 94,863 5,993 136,296
7,234 186 Operating balance   (2,274) 461 (1,813)
(33) Net revaluations 16 11,884 589 12,473
69 240 Transfers to/(from) reserves   130 (255) (77) (202)
9 (Gains)/losses transferred to the statement of financial performance   (2) (2)
Foreign currency translation differences on foreign operations   (39) (10) (49)
(50) (24) Other movements   (18) 17 (11) (12)
7,253 378 Total comprehensive revenue and expense   (2,162) 11,605 952 10,395
(503) (477) Transactions with minority interests 22 (378) (378)
130,317 136,166 Net worth at 30 June 2019   33,278 106,468 6,567 146,313

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

Statement of Cash Flows
for the year ended 30 June 2019

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Cash Flows From Operations    
    Cash was provided from    
81,963 82,622 Taxation receipts 83,018 78,566
4,710 4,860 Other sovereign receipts 5,187 4,594
19,260 19,331 Sales of goods and services 19,817 18,387
2,462 2,462 Interest receipts 2,562 2,466
4,909 4,271 Other operating receipts 4,586 4,038
113,304 113,546 Total cash provided from operations 115,170 108,051
    Cash was disbursed to    
29,308 28,156 Transfer payments and subsidies 27,982 25,382
71,438 73,036 Personnel and operating payments 72,177 67,687
4,052 4,056 Interest payments 4,025 4,098
760 265 Forecast new operating spending
(1,145) (800) Top-down expense adjustment
104,413 104,713 Total cash disbursed to operations 104,184 97,167
8,891 8,833 Net cash flows from operations 10,986 10,884
    Cash Flows From Investing Activities    
    Cash was provided from    
300 182 Sale of physical assets 305 418
108,834 125,116 Sale of shares and other securities 104,587 102,569
Sale of intangible assets 1
3,165 1,834 Repayment of advances 2,268 1,898
42 111 Sale of investments in associates 280 127
112,341 127,243 Total cash provided from investing activities 107,441 105,012
    Cash was disbursed to    
10,491 10,025 Purchase and construction of physical assets 8,830 8,090
102,717 115,523 Purchase of shares and other securities 100,642 107,361
723 913 Purchase of intangible assets 792 817
3,368 3,563 Advances made 4,170 2,397
462 146 Acquisition of investments in associates 144 505
1,267 458 Forecast new capital spending
(600) (1,250) Top-down capital adjustment
118,428 129,378 Total cash disbursed to investing activities 114,578 119,170
(6,087) (2,135) Net cash flows from investing activities (7,137) (14,158)
2,804 6,698 Net cash flows from operating and investing activities 3,849 (3,274)

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
2,804 6,698 Net cash flows from operating and investing activities 3,849 (3,274)
    Cash Flows From Financing Activities    
    Cash was provided from    
196 233 Issue of circulating currency 437 395
7,862 8,430 Issue of Government bonds 8,372 7,043
449 241 Issue of foreign currency borrowings 1,877 358
11,912 18,332 Issue of other New Zealand dollar borrowings 16,344 16,950
20,419 27,236 Total cash provided from financing activities 27,030 24,746
    Cash was disbursed to    
11,240 11,974 Repayment of Government bonds 11,908 6,828
(9) 2,392 Repayment of foreign currency borrowings 389 1,028
12,554 16,083 Repayment of other New Zealand dollar borrowings 16,874 13,895
532 518 Dividends paid to minority interests 504 541
24,317 30,967 Total cash disbursed to financing activities 29,675 22,292
(3,898) (3,731) Net cash flows from financing activities (2,645) 2,454
(1,094) 2,967 Net movement in cash 1,204 (820)
18,068 19,340 Opening cash balance 19,340 18,732
2 (93) Foreign-exchange gains/(losses) on opening cash 348 1,428
16,976 22,214 Closing cash balance 20,892 19,340

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

2019 Forecast at Reconciliation Between the Net Cash Flows
from Operations and the Operating Balance
Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
8,891 8,833 Net Cash Flows from Operations 10,986 10,884
    Gains/(losses)    
2,887 1,445 Net gains/(losses) on financial instruments 4,397 5,331
(83) (5,340) Net gains/(losses) on non-financial instruments (14,348) (2,802)
17 76 Less minority interests share of net gains/(losses) 115 87
2,787 (3,971) Total gains/(losses) (10,066) 2,442
    Other Non-cash Items in Operating Balance    
(4,840) (4,972) Depreciation (4,557) (4,275)
(729) (751) Amortisation and impairment of non-financial assets (934) (906)
(762) (902) Cost of concessionary lending (763) (704)
(16) 158 Impairment of financial assets (excl receivables) (41) 105
Reversal of Rail network impairment 2,576
592 594 Change in accumulating pension expenses 571 568
(623) (824) Change in accumulating insurance expenses (1,703) (628)
264 (532) Other non-cash items (39) 529
(6,114) (7,229) Total other non-cash items in operating balance (4,890) (5,311)
    Movements in Working Capital    
1,270 1,163 Increase/(decrease) in receivables 4,188 1,614
485 53 Increase/(decrease) in accrued interest 48 265
(23) 75 Increase/(decrease) in inventories 175 177
(7) 67 Increase/(decrease) in prepayments 36 (8)
(108) 39 Decrease/(increase) in deferred revenue (97) (200)
(408) 686 Decrease/(increase) in payables/provisions (2,654) (1,467)
1,209 2,083 Total movements in working capital 1,696 381
6,773 (284) Operating balance (excluding minority interests) (2,274) 8,396

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

Statement of Financial Position
as at 30 June 2019

2019 Forecast at   Note Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Assets      
16,976 22,214 Cash and cash equivalents   20,892 19,340
20,770 21,622 Receivables 12 24,287 21,385
42,630 38,533 Marketable securities, deposits and derivatives in gain 13 44,453 51,117
39,344 39,267 Share investments 14 40,615 36,256
29,942 32,131 Advances 15 33,057 29,422
1,036 1,418 Inventory   1,519 1,344
2,637 2,914 Other assets   2,887 2,817
155,867 164,316 Property, plant & equipment 16 178,025 159,018
15,384 15,729 Equity accounted investments 17 16,109 15,416
3,980 4,026 Intangible assets and goodwill   3,912 3,817
1,452 458 Forecast new capital spending  
(1,085) (1,250) Top-down capital adjustment  
328,933 341,378 Total assets   365,756 339,932
    Liabilities      
6,636 6,609 Issued currency   6,813 6,375
13,484 13,726 Payables 18 17,723 14,877
2,414 2,384 Deferred revenue   2,523 2,424
112,890 112,057 Borrowings 19 110,477 115,652
44,732 49,794 Insurance liabilities 11 58,364 45,294
9,987 11,414 Retirement plan liabilities 20 13,179 10,991
8,473 9,228 Provisions 21 10,364 8,682
198,616 205,212 Total liabilities   219,443 204,295
130,317 136,166 Total assets less total liabilities   146,313 135,637
    Net Worth      
40,293 35,205 Taxpayer funds   33,278 34,841
84,089 94,686 Property, plant and equipment revaluation reserve 16 106,502 94,750
75 108 Other reserves   (34) 53
124,457 129,999 Total net worth attributable to the Crown   139,746 129,644
5,860 6,167 Net worth attributable to minority interests 22 6,567 5,993
130,317 136,166 Total net worth   146,313 135,637

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

Statement of Segments

Current Year Actual vs Estimated Actuals (Budget 2019)
  Core Crown Crown entities State-owned
enterprises
Inter-segment
eliminations
Total Crown
Actual
2019
$m
Forecast
Budget
2019
$m
Actual
2019
$m
Forecast
Budget
2019
$m
Actual
2019
$m
Forecast
Budget
2019
$m
Actual
2019
$m
Forecast
Budget
2019
$m
Actual
2019
$m
Forecast
Budget
2019
$m
Revenue                    
Taxation revenue 86,468 84,650 (745) (693) 85,723 83,957
Other sovereign revenue 1,977 1,963 5,588 5,399 (1,537) (1,535) 6,028 5,827
Revenue from core Crown funding 30,602 30,940 216 191 (30,818) (31,131)
Sales of goods and services 1,672 1,638 2,224 2,251 16,533 16,092 (544) (595) 19,885 19,386
Interest revenue 1,099 1,098 1,016 1,054 1,014 987 (444) (445) 2,685 2,694
Other revenue 2,409 2,250 3,845 3,591 873 867 (2,155) (2,154) 4,972 4,554
Total Revenue (excluding gains) 93,625 91,599 43,275 43,235 18,636 18,137 (36,243) (36,553) 119,293 116,418
Expenses                    
Transfer payments and subsidies 29,119 29,128 (929) (936) 28,190 28,192
Personnel expenses 7,844 7,662 15,085 14,321 3,096 3,033 (42) (39) 25,983 24,977
Other operating expenses 46,608 47,611 29,528 29,481 10,945 13,128 (33,874) (34,282) 53,207 55,938
Interest expenses 3,451 3,434 117 78 1,045 1,041 (554) (566) 4,059 3,987
Forecast new operating spending 265 265
Top-down expense adjustment (800) (800)
Total Expenses (excluding losses) 87,022 87,300 44,730 43,880 15,086 17,202 (35,399) (35,823) 111,439 112,559
Minority interest share of operating balance before gains/(losses) (9) (355) (414) 18 20 (346) (394)
Operating Balance before gains and losses (excluding minority interests) 6,594 4,299 (1,455) (645) 3,195 521 (826) (710) 7,508 3,465
Gains/(losses) and other items 463 562 (7,739) (2,319) 168 144 (2,674) (2,136) (9,782) (3,749)
Operating Balance (excluding minority interests) 7,057 4,861 (9,194) (2,964) 3,363 665 (3,500) (2,846) (2,274) (284)
Assets                    
Financial assets 106,471 99,866 57,604 52,577 27,624 26,935 (28,395) (25,611) 163,304 153,767
Property, plant and equipment 44,084 42,677 93,731 87,878 40,210 33,762 (1) 178,025 164,316
Investments in associates, CEs and SOEs 48,432 48,728 13,311 12,858 290 322 (45,924) (46,179) 16,109 15,729
Other assets 3,912 3,993 1,795 1,696 2,682 2,727 (71) (58) 8,318 8,358
Forecast adjustments (792) (792)
Total Assets 202,899 194,472 166,441 155,009 70,806 63,746 (74,390) (71,849) 365,756 341,378
Liabilities                    
Borrowings 91,739 91,722 6,931 6,838 32,563 32,418 (20,756) (18,921) 110,477 112,057
Other liabilities 39,271 34,684 69,507 58,214 9,315 8,423 (9,127) (8,166) 108,966 93,155
Total Liabilities 131,010 126,406 76,438 65,052 41,878 40,841 (29,883) (27,087) 219,443 205,212
Net Worth 71,889 68,066 90,003 89,957 28,928 22,905 (44,507) (44,762) 146,313 136,166
Cost of Acquisition of Physical Assets (Cash) 2,748 2,933 4,295 4,875 1,787 2,217 8,830 10,025

Statement of Segments (continued)

Current Year Actual vs Prior Year Actual
  Core Crown Crown entities State-owned
enterprises
Inter-segment
eliminations
Total Crown
Actual
2019
$m
Actual 2018
$m
Actual
2019
$m
Actual 2018
$m
Actual
2019
$m
Actual 2018
$m
Actual
2019
$m
Actual 2018
$m
Actual
2019
$m
Actual 2018
$m
Revenue                    
Taxation revenue 86,468 80,224 (745) (628) 85,723 79,596
Other sovereign revenue 1,977 1,638 5,588 4,966 (1,537) (1,381) 6,028 5,223
Revenue from core Crown funding 30,602 29,017 216 139 (30,818) (29,156)
Sales of goods and services 1,672 1,598 2,224 2,269 16,533 14,911 (544) (550) 19,885 18,228
Interest revenue 1,099 1,175 1,016 1,032 1,014 964 (444) (373) 2,685 2,798
Other revenue 2,409 2,143 3,845 3,176 873 858 (2,155) (2,049) 4,972 4,128
Total Revenue (excluding gains) 93,625 86,778 43,275 40,460 18,636 16,872 (36,243) (34,137) 119,293 109,973
Expenses                    
Transfer payments and subsidies 29,119 26,237 (929) (871) 28,190 25,366
Personnel expenses 7,844 7,249 15,085 13,546 3,096 2,935 (42) (40) 25,983 23,690
Other operating expenses 46,608 43,593 29,528 27,584 10,945 11,731 (33,874) (32,101) 53,207 50,807
Interest expenses 3,451 3,497 117 95 1,045 1,058 (554) (499) 4,059 4,151
Total Expenses (excluding losses) 87,022 80,576 44,730 41,225 15,086 15,724 (35,399) (33,511) 111,439 104,014
Minority interest share of operating balance before gains/(losses) (9) (2) (355) (448) 18 25 (346) (425)
Operating Balance before gains and losses (excluding minority interests) 6,594 6,200 (1,455) (765) 3,195 700 (826) (601) 7,508 5,534
Gains/(losses) and other items 463 3,243 (7,739) 291 168 161 (2,674) (833) (9,782) 2,862
Operating Balance (excluding minority interests) 7,057 9,443 (9,194) (474) 3,363 861 (3,500) (1,434) (2,274) 8,396
Assets                    
Financial assets 106,471 104,255 57,604 51,302 27,624 25,287 (28,395) (23,324) 163,304 157,520
Property, plant and equipment 44,084 41,279 93,731 84,300 40,210 33,438 1 178,025 159,018
Investments in associates, CEs and SOEs 48,432 45,838 13,311 12,698 290 250 (45,924) (43,370) 16,109 15,416
Other assets 3,912 3,656 1,795 1,659 2,682 2,729 (71) (66) 8,318 7,978
Total Assets 202,899 195,028 166,441 149,959 70,806 61,704 (74,390) (66,759) 365,756 339,932
Liabilities                    
Borrowings 91,739 97,749 6,931 5,517 32,563 30,628 (20,756) (18,242) 110,477 115,652
Other liabilities 39,271 34,758 69,507 53,974 9,315 8,517 (9,127) (8,606) 108,966 88,643
Total Liabilities 131,010 132,507 76,438 59,491 41,878 39,145 (29,883) (26,848) 219,443 204,295
Net Worth 71,889 62,521 90,003 90,468 28,928 22,559 (44,507) (39,911) 146,313 135,637
Cost of Acquisition of Physical Assets (Cash) 2,748 2,334 4,295 3,991 1,787 1,765 8,830 8,090

Notes to the Financial Statements

Note 1: Basis of Reporting

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

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

  Assumption
Foreign exchange rates That foreign currency denominated financial assets and liabilities will be able to be translated to New Zealand dollars at the exchange rate prevailing at balance date.
Share prices That listed share investments, which consist of approximately 95% of the Government's total share investments, can be realised at quoted market prices at balance date.
Interest rates That current market yield curves provide an appropriate basis for determining the value of the majority of marketable securities and borrowings.
Carbon price That the carbon price, determined by the Ministry for the Environment based on the quoted New Zealand Unit spot price at the end of the reporting date as published by OM Financial Limited on their CommTrade Carbon website, reflects the value of units that will be surrendered to the Crown.
Property prices That current property prices, determined using market evidence, provide the most relevant basis on which to value land and buildings owned by the Crown (unless it is a specialised asset where optimised depreciated replacement cost will be used).
Depreciation rates That the economic useful life of assets (used to determine depreciation rates) will equate to the estimates determined using a combination of engineering and historical evidence.
Student loans That the discount rate, consumer price index adjustment, future salary inflation rate and interest rate for overseas borrowers are appropriate for the valuation of student loans.
Asset Purpose Assets that are held for commercial purposes are subject to a commercially recoverable amount test (the higher of the income that can be generated from the asset, or the proceeds from its sale). Assets that are held for public benefit purposes are generally valued at optimised depreciated replacement cost. Optimisation means that surplus assets are identified. If not surplus, it can be assumed the asset will be replaced, and therefore the asset value is not reduced below its optimised depreciated replacement cost. If surplus, the asset will be valued at its net selling price.

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:

Economic variable Assumptions and Methodology
Inflation rates Inflation rate assumptions are used to help estimate future cash flows, as prices are expected to increase through time. The consumer price index (CPI) is most commonly used to indicate the inflation rate. However, some costs (referred to as superimposed inflation) are assumed to increase faster than the rate of inflation due to factors such as innovation in medical treatment.
Discount rates (time value of money) Discount rates are used to determine the value of future cash flows in today's dollar values. The Treasury sets a risk free discount rate for accounting valuation purposes. In the near term discount rates are based on market data and then smoothed to a single long-term risk-free interest rate of 4.30%. A full description of the evidence and methodology used to determine this rate can be found at: http://www.treasury.govt.nz/publications/guidance/reporting/accounting/discountrates
Amount and duration of future cash flows

Judgements around the amount and duration of future cash flows are critical for valuations. Some examples of this are:

  • the length of rehabilitation from injuries for the ACC obligation
  • mortality rates for the GSF obligation
  • repayment rates of student loans.

These assumptions are largely based on extrapolating historical experience. As time goes on, better information becomes available and estimates are updated to reflect more current information.

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).

  Impact on operating balance
2019
$m
2018
$m
NZ dollar exchange rate strengthens by 10% (1,353) (846)
NZ dollar exchange rate weakens by 10% 1,538 983
Share prices strengthen by 10% 4,023 3,580
Share prices weaken by 10% (4,023) (3,580)
Increase in NZ interest rates 1% (100 basis points) (476) (472)
Decrease in NZ interest rate 1% (100 basis points) 701 532
NZD carbon price increases by $1 (118) (120)
NZD carbon price decreases by $1 118 120

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:

Sensitivity of assumptions Change Impact on operating balance
2019
$m
2018
$m
Risk-free discount rate +1% 10,565 7,392
-1% (14,384) (9,559)
Inflation rates (including superimposed inflation) +1% (14,261) (9,566)
-1% 10,432 7,375
Social rehabilitation benefits - superimposed inflation
after four years for serious injury claims (ACC only)
+1% (5,465) (3,272)
-1% 4,922 2,555
Average weighted term to settlement from reporting date (ACC only) +1 year 41 470
-1 year (44) (479)
Areas of significant estimation

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

Key estimation Basis of estimation
Recognition of tax revenue and associated receivables

The New Zealand tax system is predicated on self-assessment where taxpayers are expected to understand the tax laws and comply with them. This has an impact on the completeness of tax revenues when taxpayers fail to comply with tax laws, for example, if they do not report all of their income.

Income tax

Income tax revenue is recognised on an accruals basis in the period the taxable event occurs. It is deemed to accrue evenly over the period to which it relates.

Where income tax returns have not been filed for the relevant period, accrued income tax revenue receivable or payable has been estimated based on current provisional assessments or prior year provisional or terminal assessments. The outcome of income tax revenue and refunds is not known with certainty until income tax returns for the period have been filed. This usually occurs sometime after the publication of these financial statements.

The measurement of the tax revenue accruals requires significant estimates. Key features of the estimation used include:

  • Where taxpayers subject to the provisional tax regime have not yet filed a terminal tax assessment for the period, provisional tax assessments are accrued based on the provisional tax method adopted by the taxpayer.
  • Where taxpayers have made payments to Inland Revenue but have not submitted a provisional tax assessment for the period or where the payment is more than the provisional tax assessment submitted, their credit balance is accrued as revenue.
  • For taxpayers not subject to provisional tax, an estimate is made of the tax revenues receivable and refundable based on prior year returns.

Change in estimations

Over recent years, Inland Revenue (IR) have been working to improve the processes used to recognise income tax revenue through IR's business transformation programme. This year further refinements were achieved as a result of the administration of income tax moving to IR's new system, START (Simplified Tax and Revenue Technology). The improvements from START include a new process for the estimation of income tax with income tax now estimated for all taxpayers every month based on their provisional tax method. Previously income tax was recognised based on provisional tax due and forecast provisional tax payments. This process change has had the effect of bringing forward the recognition of some tax revenue for the 2018/19 fiscal year. The Budget 2019 fiscal forecasts assumed a transitional adjustment, increasing tax revenue by $0.6 billion in the 2018/19 fiscal year. Due to the fundamental differences between the models, it is not practical to estimate the effect of the change on current and future years.

Electricity generation assets

These financial statements report the value of electricity generation assets at $17.2 billion (2018: $15.9 billion). The assets are made up mainly of hydro, thermal stations and wind farms owned by three electricity generation mixed ownership model entities. There are a range of reasonable judgements and assumptions that could be used in estimating the fair value of these 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 assumptions and sensitivity analysis of these are set out in note 16.

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.

State Highway network (excluding land) These financial statements report the value of the state highway network at $37.2 billion (2018: $31.7 billion). There are necessarily significant assumptions and judgements required in determining the replacement values assigned to different components (pavement, formation, bridges, etc) of the state highway network, the appropriate overhead cost factors to apply and the life of component assets for depreciation. These assumptions and sensitivity analysis are set out in note 16.
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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Direct Income Tax Revenue    
    Individuals    
32,248 32,683 Source deductions 32,879 30,721
6,968 6,782 Other persons 7,663 6,819
(1,764) (2,614) Refunds (2,429) (2,102)
572 558 Fringe benefit tax 585 559
38,024 37,409 Total individuals 38,698 35,997
    Corporate Tax    
13,301 14,376 Gross companies tax 14,892 13,022
(207) (196) Refunds (343) (157)
669 655 Non-resident withholding tax 650 627
Foreign-source dividend withholding payments 3
13,763 14,835 Total corporate tax 15,199 13,495
    Other Direct Income Tax    
1,737 1,613 Resident withholding tax on interest revenue 1,659 1,531
769 743 Resident withholding tax on dividend revenue 838 753
2,506 2,356 Total other direct income tax 2,497 2,284
54,293 54,600 Total direct income tax 56,394 51,776
    Indirect Income Tax Revenue    
    Goods and Services Tax    
35,339 35,721 Gross goods and services tax 35,860 33,899
(13,370) (13,745) Refunds (13,998) (13,086)
21,969 21,976 Total goods and services tax 21,862 20,813
    Other Indirect Taxation    
1,969 1,976 Petroleum fuels excise and duty1 1,982 1,898
1,741 1,959 Tobacco excise and duty1 1,980 1,807
1,500 1,655 Road user charges 1,673 1,551
1,053 1,066 Alcohol excise and duty1 1,086 1,017
172 177 Other customs duty 172 172
544 548 Miscellaneous indirect taxation 574 562
6,979 7,381 Total other indirect taxation 7,467 7,007
28,948 29,357 Total indirect taxation 29,329 27,820
83,241 83,957 Total taxation revenue 85,723 79,596
    Other Sovereign Revenue    
2,874 2,851 ACC levies 3,014 2,643
581 573 Fire service levies 579 568
384 387 EQC levies 387 309
227 225 Child support and working for families penalties 225 231
96 107 Court fines 124 118
1,471 1,684 Other miscellaneous items 1,699 1,354
5,633 5,827 Total other sovereign revenue 6,028 5,223
88,874 89,784 Total sovereign revenue 91,751 84,819
  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.

Tax revenue is recognised when a tax recognition point has occurred and the tax revenue can be reliably measured as described in the table below.

Revenue type Revenue recognition point
Source deductions When an individual earns income that is subject to PAYE
Resident withholding tax (RWT) When an individual is paid interest or dividends subject to deduction at source
Fringe benefit tax (FBT) When benefits are provided that give rise to FBT
Income tax The earning of assessable income during the taxation period by the taxpayer
Goods and services tax (GST) When the purchase or sale of taxable goods and services occurs during the taxation period
Customs and excise duty When goods become subject to duty
Road user charges and motor vehicle fees When payment of the fee or charge is made
Other indirect taxes When the debt to the Crown arises
ACC levies The levy revenue is earned evenly over the levy period
Other levies When the obligation to pay the levy is incurred

Note 4: Sales of Goods and Services

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
9,524 9,994 Sales of goods 10,356 9,155
9,713 9,392 Rendering of services 9,529 9,073
19,237 19,386 Total sales of goods and services 19,885 18,228

Revenue from the supply of goods and services to third parties is measured at the fair value of consideration received.

Revenue from the supply of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from the supply of services is recognised on a straight-line basis over the specified period for the services unless an alternative pattern of recognition better represents the stage of completion of the transaction.

Note 5: Investment Income/(Expense)

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Interest Revenue    
1,230 1,335 Other financial assets classified as amortised cost 1,356 1,223
1,149 927 Financial assets classified as fair value through the operating balance 935 967
584 432 Student loans (interest unwind)1 394 604
3 Financial assets classified as held for trading2 4
2,966 2,694 Total interest revenue 2,685 2,798
    Interest Expense    
4,127 3,700 Financial liabilities classified as amortised cost 3,812 3,803
(118) 263 Financial liabilities classified as fair value through the operating balance 198 309
36 24 Interest unwind on provisions and other interest 49 39
4,045 3,987 Total interest expenses 4,059 4,151
(1,079) (1,293) Net interest income/(expense) (1,374) (1,353)
    Gains and Losses on Financial Instruments    
28 Foreign exchange gains on financial assets and financial liabilities measured at amortised cost 291 1,486
(221) Foreign exchange losses on financial assets and financial liabilities measured at amortised cost (7) (183)
Change in fair value of financial assets and financial liabilities classified as held for trading2 4
(5) 128 Gains/(losses) on disposal of financial assets and financial liabilities measured at amortised cost (112) (107)
2,131 (729) Change in fair value of financial assets and financial liabilities classified as fair value through the operating balance 2,306 7,491
192 Change in fair value of student loans classified as fair value through the operating balance 981
2,126 (602) Net gains/(losses) on financial assets and financial liabilities 3,459 8,691
761 2,047 Net gain/(loss) on derivatives 938 (3,360)
2,887 1,445 Net gains/(losses) on financial instruments 4,397 5,331
    Other investment income/(expense)    
951 990 Dividend income (refer to note 6) 1,086 877
951 990 Total other investment income/(expense) 1,086 877
2,759 1,142 Total investment income/(expense) 4,109 4,855
  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.

Interest revenue and expense on financial assets and financial liabilities classified at amortised cost is accrued using the effective interest method. The effective interest rate discounts estimated future cash receipts/payments through the expected life of the financial instrument's net carrying amount. The method applies this rate to the principal outstanding to determine interest revenue or expense each period. This means interest is allocated at a constant rate of return over the expected life of the financial instrument based on the estimated cash flows.

Interest revenue on financial assets classified as fair value through the operating balance is recognised as it accrues.

The interest unwind on student loans reflects the increase in value of the loans as the period to repayment reduces. Student loans are classified as fair value through the operating balance and the interest unwind is calculated using the market discount rate at the beginning of the year.

Gains and losses may be reported in the Statement of Financial Performance when assets and liabilities are revalued in certain circumstances as described in the accounting policies for those assets and liabilities. For the purposes of reporting the operating balance before gains and losses (OBEGAL) these gains and losses are excluded from total revenue and total expenses; and presented elsewhere in the Statement of Financial Performance.

Note 6: Other Revenue

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
951 990 Dividends 1,086 877
663 706 Donations 754 726
667 606 Rental revenue1 616 581
1 288 EQC insurance claim on reinsurers 460 83
187 235 Sale of royalties 259 270
1,751 1,729 Other revenue 1,797 1,591
4,220 4,554 Total other revenue 4,972 4,128

Rental revenue is recognised in the statement of financial performance on a straight-line basis over the term of the lease. Lease incentives granted are recognised evenly over the term of the lease as a reduction in total rental revenue.

Dividend revenue from investments is recognised when the Government's rights as a shareholder to receive payment have been established.

  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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
14,539 14,562 New Zealand superannuation 14,562 13,699
2,628 2,271 Family tax credit 2,131 1,639
1,712 1,854 Jobseeker support and emergency benefit 1,854 1,697
1,508 1,641 Accommodation assistance 1,640 1,204
1,555 1,556 Supported living payment 1,556 1,541
1,084 1,116 Sole parent support 1,115 1,117
966 892 KiwiSaver subsidies 951 897
693 697 Official development assistance 708 643
560 543 Other working for families tax credits 635 556
581 583 Student allowances 583 511
443 441 Winter energy payment 441
379 386 Disability allowances 386 379
268 299 Hardship assistance 300 355
218 225 Orphan's/unsupported child's benefit 225 225
80 52 Best start 48
110 27 Income related rent subsidy1 45 19
1,070 1,047 Other social assistance benefits 1,010 884
28,394 28,192 Total transfer payments and subsidies 28,190 25,366

Welfare benefits and entitlements, including New Zealand Superannuation, are recognised as an expense in the period when an application for a benefit has been received and the eligibility criteria have been met.

  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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
22,830 23,121 Salaries and wages 23,622 21,812
557 615 Costs incurred on defined contribution plans (eg, KiwiSaver) 651 628
155 188 Costs incurred on GSF and other defined benefit plans 154 174
827 1,053 Other personnel expenses 1,556 1,076
24,369 24,977 Total personnel expenses 25,983 23,690

Employee entitlements to salaries and wages, annual leave, long service leave, retiring leave and other similar benefits are recognised as an expense in the statement of financial performance when they accrue to employees. Employee entitlements to be settled within 12 months are reported at the amount expected to be paid. The liability for long-term employee entitlements is reported as the present value of the estimated future cash outflows.

Obligations for contributions to defined contribution retirement plans are recognised in the statement of financial performance as they fall due. Obligations for defined benefit retirement plans are recorded at the latest actuarial value of the Crown liability. All movements in the liability, including actuarial gains and losses, are recognised in full in the statement of financial performance in the period in which they occur.

Termination expenses are recognised in the statement of financial performance only when there is a demonstrable commitment to either terminate employment prior to normal retirement date or as the expense arises as a result of an offer to encourage voluntary redundancy. Termination expenses settled within 12 months are reported at the amount expected to be paid, otherwise they are reported as the present value of the estimated future cash outflows.

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
6,137 6,130 Grants and subsidies 5,682 5,436
Reversal of Rail network impairment (refer to note 16) (2,576)
1,582 1,592 Repairs and maintenance 2,265 2,209
1,378 1,467 Rental and leasing costs 1,431 1,363
1,294 1,348 Clinical supplies 1,343 1,290
729 751 Amortisation and impairment of non-financial assets 934 906
800 692 Impairment of financial assets 920 590
762 902 Cost of concessionary lending 763 704
710 651 Lottery prize payments 645 686
370 245 Inventory expenses 239 278
3 4 Fees paid to audit firms other than the Auditor-General (refer below) 5 4
31,211 31,910 Other operating expenses 31,123 28,148
44,976 45,692 Total other operating expenses 42,774 41,614

Where grants and subsidies are at the Government's discretion until payment, the expense is recognised when the payment is made. Otherwise, the expense is recognised when the specified criteria for the grant or subsidy have been fulfilled and notice has been given to the government.

Operating leases, where the lessor substantially retains the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter. Lease incentives received are recognised evenly over the term of the lease as a reduction in rental expense.

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

2019 Forecast at   Note Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
(3,676) Actuarial gains/(losses) on ACC outstanding claims 11 (11,367) (1,881)
(1,017) Actuarial gains/(losses) on GSF liability 20 (2,759) (553)
(558) Gains/(losses) on the Emissions Trading Scheme 21 (225) (462)
(83) (89) Gains/(losses) on disposal or revaluation of property, plant and equipment   (122) 71
Other gains/(losses) on non-financial instruments   125 23
(83) (5,340) Net gains/(losses) on non-financial instruments   (14,348) (2,802)

The ACC and GSF liabilities are valued by an independent actuary (refer notes 11 and 20). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when previously calculating the liability and the effect of changes in actuarial assumptions (experience adjustments).

Note 11: Insurance

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Insurance expense by entity    
4,837 5,012 Accident Compensation Corporation (ACC) 5,362 4,363
76 207 Earthquake Commission (EQC) 476 514
(46) (19) Southern Response (40) (28)
10 74 Other 78 69
4,877 5,274 Total insurance expenses 5,876 4,918

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.

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Insurance liability by entity    
44,285 48,441 ACC liability 56,611 43,314
411 986 EQC property damage liability 1,342 1,453
186 Southern Response liability 216 401
36 181 Other (incl. Inter-segment eliminations) 195 126
44,732 49,794 Total insurance liabilities 58,364 45,294
    By component    
    Outstanding claims liability 54,834 42,351
    Unearned premium liability 2,295 2,134
    Unearned premium liability deficiency 1,235 809
    Total insurance liabilities 58,364 45,294
    By maturity    
    Expected to be settled within one year 8,996 6,920
    Expected to be outstanding for more than one year 49,368 38,374
    Total insurance liabilities 58,364 45,294
    Assets arising from insurance obligations are:    
    Receivables for premiums 3,475 2,381
    Reinsurance claim recoveries 635 236

The future cost of outstanding insurance claims liabilities are valued based on the latest actuarial information. The liability includes estimated payments associated with claims reported and accepted, claims incurred but not reported, claims that may be re-opened, and the costs of managing these claims. Movements of the claims liabilities are reflected in the statement of financial performance. Financial assets backing these liabilities are designated at fair value through the operating balance.

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.

  Actual
30 June
2019
$m
30 June
2018
$m
Analysis of ACC Insurance Expense    
By type    
Claims expense 16,787 6,578
Movement in unearned premium deficiency liability 432 92
Other underwriting expenses 176 191
Total ACC claims and other expenses 17,395 6,861
Less expenses reported elsewhere in the statement of financial performance    
Actuarial gain/(loss) - (refer note 10) (11,367) (1,881)
Operating costs relating to claims (666) (617)
Total ACC insurance expenses (excluding gains/(losses) and operations) 5,362 4,363

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.

  Actual
30 June
2019
$m
30 June
2018
$m
ACC Claims Incurred    
Current year net ACC claims incurred    
Gross claims incurred and related expenses - undiscounted 9,236 8,435
Discount and discount movement (3,424) (3,820)
Total current year net claims incurred 5,812 4,615
Previous years' net ACC claims incurred    
Reassessment of gross claims and expenses - undiscounted (601) 696
Discount and discount movement 11,576 1,267
Total previous years' net claims incurred 10,975 1,963
ACC claims expense 16,787 6,578

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).

  Actual
30 June
2019
$m
30 June
2018
$m
Net ACC Underwriting Result    
Premium revenue (refer to note 3) 3,014 2,643
ACC underwriting revenue 3,014 2,643
Less claims and other expenses (17,395) (6,861)
Net ACC underwriting surplus/(deficit) (14,381) (4,218)
ACC operating cash flows associated with the underwriting  result are:    
Cash receipts 2,782 2,844
Cash payments (4,179) (3,904)
Net ACC operating cash flows (1,397) (1,060)
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.

  Actual
30 June
2019
$m
30 June
2018
$m
The ACC liability comprises:    
ACC outstanding claims liability 53,319 40,605
ACC unearned premium liability 2,088 1,937
ACC unearned premium liability deficiency 1,204 772
Total ACC liability 56,611 43,314
Analysis of Outstanding ACC Claims Liability    
Undiscounted outstanding claims liability 87,054 83,021
Discount adjustment (39,863) (47,069)
Risk margin 6,128 4,653
Total outstanding ACC claims liability 53,319 40,605
Discounted central estimate of future payments for outstanding claims 44,638 33,856
Claims handling expenses 2,553 2,096
Outstanding claims liability before risk margin 47,191 35,952
Risk margin 6,128 4,653
Total outstanding ACC claims liability 53,319 40,605
Movement in Outstanding ACC Claims Liability    
Opening balance 40,605 37,739
Claims incurred for the year 5,511 4,688
Claims paid out in the year (4,856) (4,436)
Discount rate unwind 692 733
Experience adjustments (actuarial gains and losses):    
- actual and assumed claim experience 634 (735)
- change in discount rate 10,793 2,724
- change in inflation rate (60) (108)
Closing outstanding ACC claims liability 53,319 40,605
  Actual
30 June
2019
$m
30 June
2018
$m
Movement in ACC Unearned Premium Liability    
Opening balance 1,937 1,870
Earning of premiums previously deferred (1,937) (1,870)
Deferral of premiums on current year contracts 2,088 1,937
Closing ACC unearned premium liability 2,088 1,937
Analysis of ACC unearned premium liability deficiency    
Unearned premium liability 2,088 1,937
Adjusted for unearned premium relating to claims arising from medical misadventure premium liabilities without deficiency (55) (112)
Adjusted ACC unearned premium liability 2,033 1,825
Discounted central estimate of payments for insured future claims 2,908 2,333
Risk margin 329 264
Present value of expected cash flows for future accident claims 3,237 2,597
Total ACC unearned premium liability deficiency 1,204 772
Claims development historical analysis

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

  2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
30 June
2019
$m
Estimate of ultimate claims costs:                
At the end of the accident year 6,794 7,264 7,192 6,884 7,914 8,038 8,828  
One year later 6,608 6,547 6,682 7,272 7,160 7,738    
Two years later 5,762 5,823 7,062 7,230 7,430      
Three years later 5,007 6,252 7,382 7,518        
Four years later 5,180 6,316 7,261          
Five years later 5,633 6,229            
Six years later 5,465              
Current estimate of cumulative claim costs 5,465 6,229 7,261 7,518 7,430 7,738 8,828 50,469
Cumulative payments (1,751) (1,914) (2,052) (2,059) (2,036) (1,966) (1,222) (13,000)
Outstanding claims undiscounted 3,714 4,315 5,209 5,459 5,394 5,772 7,606 37,469
Discount               (18,478)
Claims handling costs               2,881
2012 and prior claims (net present value)               31,434
Short tail outstanding claims               13
Total outstanding ACC claims liability               53,319
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.

  30 June
2019
Next Year
30 June
2019
Beyond
Next Year
30 June
2018
Next Year
30 June
2018
Beyond
Next Year
Summary of assumptions        
Average weighted term to settlement from reporting date 16 years   16 years  
8 months   8 months  
Weighted average risk margin 13.0%   13.0%  
Probability of adequacy of liability 75.0%   75.0%  
Weighted average risk margin for liability adequacy test 13.0%   13.0%  
Probability of adequacy of liability to cover unearned premiums 75.0%   75.0%  
Risk-free discount rate 1.3% 1.0% to 4.3% 1.8% 1.9% to 4.8%
Inflation rates (excluding superimposed inflation):        
    Weekly compensation 2.0% 1.9% to 2.2% 1.9% 1.9% to 2.2%
    Impairment benefits 1.5% 1.7% to 2.0% 1.7% 1.7% to 2.0%
    Social rehabilitation benefits (serious and non serious injury) 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
    Hospital rehabilitation benefits 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
    Medical costs 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
Superimposed inflation:        
    Social rehabilitation benefits (serious injury care) 1.4% 0.0% to 2.0% 0.2% 0.0% to 3.2%
    Social rehabilitation benefits (serious injury capital expenditure) 0.7% 0.8% to 3.2% 0.7% 0.8% to 3.2%
    Hospital rehabilitation benefits 3.0% 3.0% 3.0% 3.0%
    Medical costs (GPs) 2.0% 2.0% 3.0% 3.0%
    Medical costs (Radiology) 2.0% 2.0% 2.0% 2.0%
    Medical costs (Physiotherapists) 2.0% 2.0% 2.0% 2.0%
    Medical costs others (specialists) 2.0% 2.0% 2.5% 2.5%
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:

  Change Impact on liability
Actual
30 June
2019
$m
30 June
2018
$m
Sensitivity of assumptions      
Average weighted term to settlement from reporting date +1 year (41) (470)
-1 year 44 479
Risk-free discount rate +1% (8,594) (5,791)
-1% 11,977 7,624
Inflation rates (including superimposed inflation) +1% 12,059 7,781
-1% (8,575) (5,859)
Social rehabilitation benefits - superimposed inflation for non-serious injury claims +1% 1,874 1,494
-1% (1,292) (1,206)
Social rehabilitation benefits - superimposed inflation after two years for serious injury claims +1% 5,465 3,272
-1% (4,922) (2,555)
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.

  Actual
30 June
2019
$m
30 June
2018
$m
No later than 1 year 2,915 2,712
Later than 1 year and no later than 2 years 2,076 1,927
Later than 2 years and no later than 5 years 5,378 4,948
Later than 5 years and no later than 10 years 8,085 7,523
Later than 10 years and no later than 15 years 7,495 7,016
Later than 15 years and no later than 20 years 7,128 6,666
Later than 20 years and no later than 25 years 6,869 6,423
Later than 25 years and no later than 30 years 6,589 6,190
Later than 30 years and no later than 35 years 6,252 5,927
Later than 35 years and no later than 40 years 5,851 5,633
Later than 40 years and no later than 45 years 5,404 5,285
Later than 45 years and no later than 50 years 4,903 4,860
Later than 50 years 18,109 17,911
Undiscounted outstanding claims liability 87,054 83,021

Note 12: Receivables

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
11,148 12,181 Tax receivables 14,212 11,559
3,237 2,331 ACC levy receivables 2,541 2,308
827 877 Social benefit receivables 964 808
360 369 Other levies, fines and penalty receivables 505 325
15,572 15,758 Sovereign receivables 18,222 15,000
51 396 Reinsurance receivables 635 236
5,147 5,468 Trade and other receivables 5,430 6,149
20,770 21,622 Total receivables 24,287 21,385
    By maturity    
19,223 19,523 Expected to be realised within one year 21,903 19,711
1,547 2,099 Expected to be outstanding for more than one year 2,384 1,674
20,770 21,622 Total receivables 24,287 21,385

Receivables arising from sovereign revenue will be initially recognised at fair value. These receivables are subsequently adjusted for penalties and interest as they are charged, and as they are tested for impairment. Interest and penalties charged on tax receivables are presented as tax revenue in the statement of financial performance.

Reinsurance receivables on paid claims and outstanding claims, are recognised as revenue in the statement of financial performance.

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.

30 June 2019 Gross
receivable
$m
Impairment
$m
Net
receivable
$m
Tax receivables 16,554 (2,342) 14,212
ACC levy receivables 2,656 (115) 2,541
Social benefit receivables 1,762 (798) 964
Other levies, fines and penalty receivables 3,034 (2,529) 505
Reinsurance receivables 635 635
Trade and other receivables 5,550 (120) 5,430
Total receivables 30,191 (5,904) 24,287
30 June 2018 Gross
receivable
$m
Impairment
$m
Net
receivable
$m
Tax receivables 13,594 (2,035) 11,559
ACC levy receivables 2,418 (110) 2,308
Social benefit receivables 1,617 (809) 808
Other levies, fines and penalty receivables 2,855 (2,530) 325
Reinsurance receivables 236 236
Trade and other receivables 6,256 (107) 6,149
Total receivables 26,976 (5,591) 21,385

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.

  Actual
30 June
2019
$m
30 June
2018
$m
Gross Tax Receivable    
Current 13,033 10,491
Past due 3,521 3,103
Total gross tax receivable 16,554 13,594
% past due 21.3% 22.8%
Impairment of Tax Receivables    
Opening balance 2,035 2,035
Impairment losses recognised during the year 834 619
Amounts written off as uncollectible (527) (619)
Closing balance 2,342 2,035
Tax Receivable Net of Impairment    
Current 13,888 11,246
Past due 324 313
Total tax receivable net of impairment 14,212 11,559
% past due 2.3% 2.7%
Ageing of Tax Receivables Past Due (Gross)    
Less than six months 946 813
Between six months and one year 421 331
Between one year and two years 633 710
Greater than two years 1,521 1,249
Total tax receivables past due (Gross) 3,521 3,103

Note 13: Marketable Securities, Deposits and Derivatives in Gain

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    By type    
33,633 28,821 Marketable securities 32,799 40,532
4,184 3,496 Long term deposits 4,731 5,379
2,922 3,882 Derivatives in gain 4,596 3,153
1,891 2,334 IMF financial assets 2,327 2,053
42,630 38,533 Total marketable securities, deposits and derivatives in gain 44,453 51,117
    Expected Realisation    
20,512 19,771 Expected to be realised within one year 24,634 32,195
22,118 18,762 Expected to be held for more than one year 19,819 18,922
42,630 38,533 Total marketable securities, deposits and derivatives in gain 44,453 51,117

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.

Marketable securities and derivatives in gain are reported at their fair value. Fair value is either based on quoted market price or the use of a valuation model if there is no active market. The valuation models used generally calculate the expected cash flows under the terms of each specific contract and then discount these values back to present value.

Long-term deposits are measured at amortised cost. Their carrying amount provides a reasonable approximation of their fair value.

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

Note 14: Share Investments

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Expected Realisation    
26,647 25,612 Expected to be realised within one year 26,907 24,109
12,697 13,655 Expected to be held for more than one year 13,708 12,147
39,344 39,267 Total share investments 40,615 36,256

Share investments are reported at fair value. The fair value of listed share investments is based on quoted market prices. The fair value of unlisted share investments is determined from the initial cost of the investment and adjusted for performance of the business and changes in equity market conditions since purchase.

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

Note 15: Advances

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    By type    
19,502 19,946 Kiwi Group Holdings loans and advances 20,411 18,281
9,217 10,085 Student loans 10,731 9,301
1,223 2,100 Other advances 1,915 1,840
29,942 32,131 Total advances 33,057 29,422

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Kiwi Group Holdings Loans and Advances    
    By maturity    
1,411 1,322 Expected to be repaid within one year 1,476 1,268
18,091 18,624 Expected to be outstanding for more than one year 18,935 17,013
19,502 19,946 Total Kiwi Group Holdings loans and advances 20,411 18,281

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.

2019 Forecast at   Note Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Student Loans      
15,745 15,869 Nominal value   16,034 15,869
(6,528) (5,784) Write-down on initial recognition, impairment and other fair value changes   (5,303) (6,568)
9,217 10,085 Total student loans   10,731 9,301
    By maturity      
    Expected to be repaid within one year   1,371 1,333
    Expected to be outstanding for more than one year   9,360 7,968
    Total student loans   10,731 9,301
    Movement During the Year      
    Opening balance   9,301 9,197
    Impact of adoption NZ PBE IFRS 9 27 628
    Net new lending (including fees)   1,361 1,336
    Initial write-down to fair value   (563) (594)
    Repayments made during the year   (1,371) (1,348)
    Interest unwind 5 394 604
    Movement in impairment during the year   106
    Unwind of administration costs   36
    Experience/actuarial adjustments:      
    -    Projected repayments   211
    -    Change in discount rates   734
    Closing balance student loans   10,731 9,301

Student loans are recognised initially by writing the amount lent down to fair value. Subsequently student loans are measured at fair value through the operating balance.

Fair value is the amount for which the loans could be exchanged between knowledgeable, willing parties on an arm's-length basis.

Fair value on initial recognition of student loans is determined by projecting forward estimated repayments from borrowers under the scheme and discounting them back at an appropriate discount rate.

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

  Note Actual
30 June
2019
$m
30 June
2018
$m
Interest Revenue      
Interest unwind 5 394 604
Other operating expenses      
Initial write-down to fair value   (563) (594)
Movement in impairment during the year   106
Total included in other operating expenses   (563) (488)
Net Gains/(Losses) on Financial Instruments      
Experience/actuarial adjustments: 1      
-    Projected repayments   211
-    Change in discount rates   734
Unwind of administration costs   36
Total Net Gains/(Losses) on Financial Instruments 5 981
  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.

  Actual
30 June
2019
30 June
2018
Significant assumptions behind the carrying value are:    
Effective interest rate - weighted average1 6.8%
Interest rate applied to loans for overseas borrowers 2.6%-5.0% 3.7%-5.5%
Consumer Price Index 1.4%-2.1% 1.0%-2.0%
Future salary inflation 3.0%-3.5% 2.9%-3.3%
Discount rate1 4.4%
  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

  Actual
30 June
2019
$m
30 June
2018
$m
Impact on fair value of a 1% increase in discount rate (580) (520)
Impact on fair value of a 1% decrease in discount rate 648 579

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

For the year ended 30 June 2019 Total
$m
Land
$m
Buildings
$m
State highways
$m
Electricity generation assets
$m
Electricity distribution network
$m
Aircraft (excluding military)
$m
Specialist military equipment
$m
Specified cultural and heritage assets
$m
Rail network
$m
Other plant and equipment
$m
Gross carrying amount                      
Opening balance 1 July 2018 175,377 52,693 39,109 31,702 16,124 5,850 4,686 4,373 3,492 2,418 14,930
Additions 9,523 906 3,549 2,051 115 271 682 546 36 324 1,043
Disposals (1,157) (131) (135) (78) (1) (18) (31) (4) (11) (748)
Net revaluations 9,611 1,994 39 3,512 1,045 (350) (42) (278) 3,691
Transfers from/(to) other asset classes (110) (136) (40) 35 -   31
Other (30) 11 (41) (31) 6 - 2 23
Total gross carrying amount 193,214 55,337 42,481 37,222 17,252 6,103 4,993 4,873 3,239 6,435 15,279
Accumulated Depreciation and Impairment                      
Opening balance 1 July 2018 16,359 1,930 246 1,753 1,189 354 1,230 9,657
Eliminated on disposal (789) (14) (15) (7) (3) (9) (741)
Eliminated on transfer to other asset classes (2) (2)
Eliminated on revaluation (2,452) (1,925) (497) (739) (338) (282) 1,329
Impairment losses charged to operating balance (2,516) (4) 3 (2,576) 61
Depreciation expense 4,557 1,682 497 508 192 345 334 26 45 928
Other 32 38 (5) (1)
Total accumulated depreciation and impairment 15,189 1,707 13 1,930 1,520 89 28 9,902
Carrying value as at 30 June 2019 178,025 55,337 40,774 37,222 17,239 4,173 4,993 3,353 3,150 6,407 5,377
By holding                      
Leasehold 3,060 1 241 2 2,787 29
Public Private Partnerships 2,963 339 1,308 1,316
Freehold (excluding PPP) 172,002 54,997 39,225 35,906 17,237 4,173 2,206 3,353 3,150 6,407 5,348
Carrying value as at 30 June 2019 178,025 55,337 40,774 37,222 17,239 4,173 4,993 3,353 3,150 6,407 5,377

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.

For the year ended 30 June 2018 Total
$m
Land
$m
Buildings
$m
State highways
$m
Electricity generation assets
$m
Electricity distribution network
$m
Aircraft (excluding military)
$m
Specialist military equipment
$m
Specified cultural and heritage assets
$m
Rail network
$m
Other plant and equipment
$m
Gross carrying amount                      
Opening balance 1 July 2017 160,631 49,640 36,491 23,829 15,875 5,666 4,112 4,042 3,677 2,021 15,278
Additions 8,966 708 2,886 2,232 315 216 669 344 38 398 1,160
Disposals (1,864) (167) (229) (11) (1) (31) (26) (13) (3) (1,383)
Net revaluations 7,697 2,491 (47) 5,651 (81) (98) 24 (243)
Transfers from/(to) other asset classes 93 134 72 (28) (85)
Other (146) (113) (64) 1 16 (1) 57 (24) 23 (1) (40)
Total gross carrying amount 175,377 52,693 39,109 31,702 16,124 5,850 4,686 4,373 3,492 2,418 14,930
Accumulated Depreciation and Impairment                      
Opening balance 1 July 2017 16,081 1,836 9 1,586 923 580 1,082 10,065
Eliminated on disposal (1,490) (113) (28) (2) (33) (3) (1,311)
Eliminated on transfer to other asset classes (71) (25) (28) (18)
Eliminated on revaluation (2,530) (1,347) (383) (267) (286) (251) 4
Impairment losses charged to operating balance 103 112 (9)
Depreciation expense 4,275 1,587 383 505 195 316 304 26 35 924
Other (9) (8) (1) (5) 2 1 2
Total accumulated depreciation and impairment 16,359 1,930 246 1,753 1,189 354 1,230 9,657
Carrying value as at 30 June 2018 159,018 52,693 37,179 31,702 15,878 4,097 4,686 3,184 3,138 1,188 5,273
By holding                      
Leasehold 3,318 229 2 3,060 27
Public Private Partnerships 2,152 224 1,073 855
Freehold (excluding PPP) 153,548 52,469 35,877 30,847 15,876 4,097 1,626 3,184 3,138 1,188 5,246
Carrying value as at 30 June 2018 159,018 52,693 37,179 31,702 15,878 4,097 4,686 3,184 3,138 1,188 5,273

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.

Items of Property, Plant and Equipment (PPE) are initially recorded at cost. Cost may include transfers from net worth of any gains or losses on qualifying cash flow hedges of foreign currency purchases of PPE. Where an asset is acquired for nil or nominal consideration the asset is recognised initially at fair value, where fair value can be reliably determined, as revenue in the statement of financial performance.

Generally, Government borrowings are not directly attributable to individual assets. Therefore, borrowing costs incurred during the period, including any that could be allocated as a cost of completing and preparing assets for their intended use are expensed rather than capitalised.

Subsequent to initial recognition, classes of PPE are accounted for as set out below.

Revaluations are carried out for a number of classes of PPE to reflect the service potential or economic benefit obtained through control of the asset. Revaluation is based on the fair value of the asset, with changes reported by class of asset.

Classes of PPE that are revalued are revalued at least every five years or whenever the carrying amount differs materially to fair value.

Items of PPE are revalued to fair value for the highest and best use of the item on the basis of the market value of the item, or on the basis of market evidence, such as discounted cash flow calculations. If no market evidence of fair value exists, an optimised depreciated replacement cost approach is used as the best proxy for fair value. Where an item of PPE is recorded at its optimised depreciated replacement cost, this cost is based on the estimated present cost of constructing the existing item of PPE by the most appropriate method of construction, less allowances for physical deterioration and optimisation for obsolescence and relevant surplus capacity. Where an item of PPE is recorded at its optimised depreciated replacement cost, the cost does not include any borrowing costs.

When an item of PPE is revalued, any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.

Unrealised gains and losses arising from changes in the value of PPE are recognised as at balance date. To the extent that a gain reverses a loss previously charged to the statement of financial performance for the asset class, the gain is credited to the statement of financial performance. Otherwise, gains are added to an asset revaluation reserve for that class of asset. To the extent that there is a balance in the asset revaluation reserve for the asset class, any loss is deducted from that reserve. Otherwise, losses are reported in the statement of financial performance.

Depreciation is charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of PPE, less any estimated residual value, over its remaining useful life.

Class of PPE

Accounting policy
Land and buildings

Land and buildings are recorded at fair value and, for buildings, less depreciation and impairment accumulated since the assets were last revalued.

Land associated with the rail network and state highways is valued using an estimate based on adjacent use, as an approximation to fair value.

Valuations undertaken in accordance with standards issued by the New Zealand Property Institute are used where applicable.

Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998, may be used if they have been confirmed as appropriate by an independent valuer.

When revaluing buildings, there must be componentisation to the level required to ensure adequate representation of the material components of the buildings. At a minimum, this requires componentisation to three levels: structure, building services and fit-out.

Specialist military equipment

Specialist military equipment is recorded on an optimised depreciated replacement cost basis less depreciation and impairment accumulated since the assets were last revalued.

Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the basis for the valuation is confirmed as appropriate by an independent valuer.

State highways State highways are recorded on an optimised depreciated replacement cost basis representing the cost of replacing the network asset in its current condition.
Electricity distribution Electricity distribution network assets are recorded at cost, less depreciation and impairment losses accumulated since the assets were purchased.
Other plant and equipment Other plant and equipment, which includes motor vehicles and office equipment, are recorded at cost less depreciation and impairment losses accumulated since the assets were purchased.

Typically, the estimated useful lives of different classes of PPE are as follows:

Class of PPE Estimated useful lives
Buildings 25 to 150 years
Electricity distribution network 2 to 80 years
Other plant and equipment 3 to 30 years

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).

Property, plant and equipment revaluation reserve
  Actual
30 June
2019
$m
30 June
2018
$m
Opening revaluation reserve 94,750 84,164
Net revaluations 12,473 10,668
Minority interest share of revaluation reserve (589) (70)
Transfers from/(to) taxpayer funds (132) (12)
Closing revaluation reserve 106,502 94,750
Class of Asset    
Land 41,437 39,366
Buildings 25,767 23,824
State highways 22,478 18,469
Electricity generation assets 11,965 10,774
Specified cultural and heritage assets 1,535 1,520
Specialist military equipment 561 448
Rail network 2,388 11
Other reserves 371 338
Closing revaluation reserve 106,502 94,750

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
Land and Buildings
Breakdown of land and buildings
(total valuation over $500m)
30 June 2019
Actual
Land
$m
Buildings
$m
Total
$m
Housing stock 18,819 11,407 30,226
School property 5,772 13,627 19,399
State highway corridor land 13,745 6 13,751
Hospitals 1,230 5,968 7,198
Conservation estate 6,630 66 6,696
Rail network corridor land 3,516 3,516
Prisons and Department of Corrections 185 3,282 3,467
Defence Force land and buildings 1,002 2,010 3,012
Landcorp farmland and buildings 1,073 153 1,226
Ministry of Justice land and buildings 248 942 1,190
Fire Stations 311 399 710
Police stations 241 367 608
Other 2,565 2,547 5,112
Total land and buildings 55,337 40,774 96,111
Land and Buildings
30 June 2018 Actual
Land
$m
Buildings
$m
Total
$m
Housing stock 18,301 10,196 28,497
School property 5,709 13,083 18,792
State highway corridor land 12,351 7 12,358
Hospitals 1,202 5,493 6,695
Conservation estate 6,063 63 6,126
Rail network corridor land 3,522    -  3,522
Prisons and Department of Corrections 178 2,288 2,466
Defence Force land and buildings 982 1,735 2,717
Landcorp farmland and buildings 1,117 152 1,269
Ministry of Justice land and buildings 239 897 1,136
Fire Stations 296 362 658
Police stations 241 351 592
Other 2,492 2,552 5,044
Total land and buildings 52,693 37,179 89,872
Valuation Information
Description Valuer/Reviewer Approach Timing
Housing stock Quotable Value Limited Valuations based on market evidence using sales comparison data. Annual valuation with the latest completed in the 30 June 2019 financial year.
School property Quotable Value Limited or experienced staff (reviewed by Quotable Value Limited) Valuations based on market evidence where possible, or optimised depreciated replacement cost (ODRC). Annual valuation with the latest completed as at 30 June 2019.
State highway corridor land and held properties Darroch Ltd, a registered property valuation company, peer reviewed by WSP Opus with NZ Transport Agency (NZTA)

Valued using opportunity cost based on adjacent use as an approximation to fair value.

The valuation for held properties was determined by reference to quoted prices in an active or liquid market unless it is a specialised asset, where the optimised depreciated replacement cost was used.

A full valuation is completed on a rolling regional basis, with each region fully valued at least once every 1-9 years. The latest valuation and indexation was completed as at 30 June 2019.
Conservation estate (national parks, forest parks, conservation areas, reserves) Quotable Value Limited rateable valuations reviewed by Logan Stone Limited Valued based on current year rateable valuations from Quotable Value Limited. Land not matched to a rateable valuation was assessed using a calculated average per hectare rate. Land that is not subject to a full valuation in the current year is subject to a valuation update through the use of price indices from CoreLogic. Annual valuation with the latest completed as at 30 June 2019.
Hospitals Each District Health Board uses an independent valuer Land values and non-specialised properties were based on market evidence while buildings were valued at ODRC. Each DHB revalues land and buildings on a two to five year cycle with varying valuation dates.
New Zealand Railways Corporation rail corridor land Jones Lang LaSalle Limited (JLL) Land associated with the rail corridor was valued using an opportunity cost based on adjacent use, as an approximation to fair value. Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2017.
Prisons and Department of Corrections Beca Limited

Prison complex assets considered to be specialised assets are valued using a cost approach with the land component valued using a market approach.

Other non-specialised land and buildings are valued using income, market and cost approaches as appropriate.

Valuations are completed at least once every three years with the latest completed as at 30 June 2019.
NZ Defence Force Land and Buildings WSP Opus Valued using market based approaches for buildings outside defence areas and land. An index/ODRC method has been used for buildings inside defence areas. Valuations completed at least once every five years with the latest full independent land and buildings valuation completed as at 30 June 2019.
Carrying value of other asset classes subject to revaluation
State Highways (excluding land)
State Highways (excluding land)
  Actual
30 June
2019
$m
30 June
2018
$m
State highways 37,222 31,702
State Highways (excluding land)
State Highway Components 2019
$m
2018
$m
Formation 14,193 11,497
Pavement (structure) 6,285 6,099
Pavement (surface) 1,039 878
Bridges 8,067 7,431
Drainage 1,770 1,564
Traffic Facilities 1,451 1,383
Culverts and subways 738 762
Other structures 3,679 2,088
Total 37,222 31,702

Accounting policy

Estimated useful lives
State highways are recorded on an ODRC basis representing the cost of replacing the network asset in its current condition. The valuation reflects the estimated present cost of constructing the existing asset by the most appropriate method of construction, reduced by allowances for the age and condition of the asset (depreciation). The estimated current cost is expected to change over time.

Formation - Permanent

Pavement structure (subbase) - Permanent

Pavement structure (base course) - 50 years

Pavement surface - 9 to 14 years

Bridges 90 to 100 years

Valuation information

Description Valuer/Reviewer Approach Timing
Roads, bridges, culverts, tunnels, underpasses including the formation works, road structure, drainage works and traffic facilities. WSP Opus State Highways are valued using the ODRC of the existing asset database. A full valuation is completed annually where the majority of assets are indexed. The latest valuation was completed as at 30 June 2019.

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:

  2019 2018
Asset Lives    
Formation Permanent Permanent
Pavement structure - subbase Permanent Permanent
Pavement structure - base course 50 years 50 years
Pavement surface 9-14 years 9 years
Bridges 90-100 years 90-100 years
Overhead Factors    
Professional Fees 15% 15%
Preliminary & general costs 35% 34%
Formation    
$ per square metre cost in flat terrain $23 $24-$43
$ per square metre cost in rolling terrain $67 $40-$60
$ per square metre cost in mountainous terrain $127 $65-$92
Pavement    
Asphalt ($/m2) $26-$108 $34.70
Chipseal ($/m2) $7-$8 $7.50
Bridges    
Routine (single span) ($/m2) $4,199 $3,961
Routine (multi span) ($/m2) $3,431 $3,237
Motorway ramps ($/m2) $4,967 $4,686

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.

Movement 2019
($m)
2018
($m)
External professional fees from 12% to 13.15%
(2018: from 12% to 22%)[2]
188 2,688
Preliminary & general costs from 34.3% to 37.7% 931 788
Formation unit costs increase or decrease by 10% 1,288/(1,288) 1,064/(1,064)
Unit costs of bridges, culverts, pavements, railings
and barriers increase or decrease by 10%
1,613/(1,613)  1,522/(1,522)
Brownfield costs increase or decrease by 10%
(new sensitivity in 2018/19)
124/(124) N/A[3]

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
  Actual
30 June
2019
$m
30 June
2018
$m
Meridian Energy 8,747 7,845
Mercury NZ 5,347 5,216
Genesis Energy 3,308 2,980
Inter segment eliminations (163) (163)
Total electricity generation assets 17,239 15,878

Accounting policy

Estimated useful lives
Electricity generation assets are recorded at fair value less depreciation accumulated since the assets were last revalued. 25 to 100 years
Valuation and sensitivity information
Description Valuer/Reviewer Approach Timing
Meridian Energy: Hydro stations and wind farms PwC, Independent valuer Based on an income valuation approach based primarily on the capitalisation of earnings with additional consideration of the discounted cash flows to establish a valuation range on which the Board's ultimate valuation decision is based. Revaluations are performed with sufficient regularity
to ensure that the carrying amount does not differ materially from that which would be determined
using fair values as at
30 June 2019.
Mercury NZ Limited: Hydro and Geothermal stations PwC, Independent valuer Based on net present value of future earnings of the assets on an existing use basis excluding disposal and restoration costs. Annual valuation with the latest completed as at 30 June 2019.
Genesis Energy: Thermal and Hydro stations and Wind farms Internal valuation Based on the present value of estimated future cash flows of the assets. Valuations are performed with sufficient regularity to ensure the carrying amount does not materially differ from the estimated fair value at balance date. The latest valuation being as at 30 June 2019.

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
Key input Sensitivity range Valuation Impact on fair value of generation assets
NZ Generation volumes 13,520 GWh p.a to 15,500 GWh p.a +/- 250 GWh $240 million / ($240) million
Operating expenditure $291 million p.a. (in real terms) +/- $10 million p.a. $153 million / ($153) million
EBITDAF earnings multiple 12.6 x EBITDAF +/- 0.5x $395 million / ($395) million
Genesis Energy
Key input Sensitivity range Valuation Impact on fair value of generation assets
Wholesale electricity price path $91/MWh to $127/MWh referenced to the Otahuhu 220KV location node from July 2019 to July 2039 (in nominal terms) +/- 10% $579 million / ($579) million
Generation volume 2,820 GWh to 6,732 GWh per annum, the low end of the range relates to periods where there is no thermal generation +/- 10% $415 million / ($415) million
Discount rate Pre-tax equivalent discount rate
of 9.9%
+/- 1%. ($334) million / $387 million
Mercury NZ
Key input Sensitivity range Valuation Impact on fair value of generation assets
Future wholesale electricity price path $75/MWh to $106/MWh (in real terms) +/- 10% $833 million / ($837) million
Discount rate Post-tax discount rate between 7.2% to 7.6% +/- 0.5% $(531) million / $641 million
Operational expenditure $158 million p.a. +/- 10% ($235) million / $235 million

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

Specified cultural and heritage assets
  Actual
30 June
2019
$m
30 June
2018
$m
National Library 1,059 1,056
Te Papa 942 947
National Archives 628 625
Conservation 460 449
Other 61 61
Total specified cultural and heritage assets 3,150 3,138
 

Accounting policy

Estimated useful lives
Specified cultural and heritage assets comprise national parks, conservation areas and related recreational facilities, as well as National Archives holdings and the collections of the National Library, Parliamentary Library and Te Papa. Of these, non-land assets are recorded at fair value less subsequent impairment losses. Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, and where no market exists to provide a valuation. 5 to 100 years except for Te Papa collections that have indefinite life and are generally of not depreciable nature.
Valuation information
Description Valuer/Reviewer Approach Timing
National Library collections Ashley and Associates The collection was divided into categories by format to associate records that could be said to have a broad commonality of value. Items were then valued based on market assessments and comparisons with other items of a similar nature. Valuations completed cyclically with all collections valued at least once every three years with the latest full valuation completed as at 30 June 2017.
Te Papa collections

Art: Art & Object

Library, History, Mataraunga Māori, Pacific and International and Photography: Dunbar Sloane

Philatelic: Mowbray Collectables

Natural History Dunbar Sloane & internal experts

Art, Library, History, Mataraunga Māori, Philatelic, Pacific and International and Photography Collections are valued based on market value by independent valuers.

The Natural History Collection is valued at replacement cost value and based on market value by independent valuers where available.

Valuations completed cyclically with all collections valued at least once every three years with the latest valuations completed as at 30 June 2019.
National Archives Dunbar Sloane The collection was divided into categories by format and age to associate records that could be said to have a broad commonality of value. Items were then valued based on market assessments and comparisons with other items of a similar nature. Documents of exceptional value (including Treaty of Waitangi) are valued independently based on overseas market research. Valuations completed cyclically with all collections valued at least once every three years with the latest full valuation completed as at 30 June 2017.
Conservation estate assets including visitor buildings, tracks, roads, fences and infrastructure Internal valuations reviewed by Logan Stone Limited Revaluations use the movement in the appropriate capital goods index as supplied by Statistics New Zealand to estimate the change in asset values. Assets are revalued at least once every five years. Visitor structures, camping grounds and amenity areas and carparks, signs, fences and infrastructure assets were valued at fair value effective as at 30 June 2019.
Rail network
Carrying value of the rail network
Recoverable
amount
$m
ODRC
 
$m
30 June
2018
Carrying
value
$m
  Recoverable
amount
$m
ODRC
$m
30 June
2019
Carrying
value
$m
186 5,331 186 Network required for freight 154 5,428 5,428
20 871 871 Network not required for freight (including metro) 16 836 836
206 6,202 1,057 Total rail infrastructure 170 6,264 6,264
    41 Buildings     54
    90 Capital work in progress     89
    1,188 Rail network     6,407
Accounting policy Estimated useful lives
The Rail Network is recorded on an ODRC basis representing the cost of replacing the network asset in its current condition. This is a change from the approach in previous years (see explanation below). The valuation reflects the estimated present cost of constructing the existing asset by the most appropriate method of construction, reduced by allowances for the age and condition of the asset (depreciation). The estimated current cost is expected to change over time.

Track and ballast - 40 to 50 years

Tunnels and bridges - 75 to 200 years 

Overhead traction and Signalling - 15 to 80 years

Description Valuer/Reviewer Approach Timing
Buildings, tracks, sleepers, bridges, yards, loops and sidings, turnouts, tunnels, signalling, electrification assets

Buildings - Jones Lang LaSalle Limited

Other Rail Network Assets - Ernst & Young

Non-specialised building assets not on the rail corridor were valued based on market evidence using comparable sales. Specialised building assets and buildings on rail corridor land were valued using ODRC.

The Rail Network is valued using the ODRC of the existing asset database. Recoverable amount information is also obtained

A full valuation is completed annually where the majority of assets are indexed. The latest valuation was completed as at 30 June 2019.
Rail Network Component 2019
$m
2018
$m
Tunnels 2,066 2,058
Bridges 1,425 1,411
Rail (includes allowance for formation) 682 678
Sleepers 746 798
Electrification 605 503
Other 740 754
Total 6,264 6,202

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

Accounting policy

Estimated useful lives
Specialist military equipment is recorded on an ODRC basis less depreciation accumulated since the assets were last revalued. 5 to 55 years
Description Valuer/Reviewer Approach Timing
Specialist military equipment Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the basis for the valuation is confirmed as appropriate by the Australian Defence Force. Valued using an ODRC method. Valuation completed at least once every five years with the latest valuation being as at 30 June 2018.
Aircraft (excluding specialised military)

Accounting policy

Estimated useful lives
Aircraft (excluding specialised military equipment) are recorded at fair value less depreciation accumulated since the assets were last revalued. 10 to 20 years
Aircraft (excluding military)
Description Valuer/Reviewer Approach Timing
Aircraft and spare engines and flight simulators The Aircraft Value Analysis Company An external valuation is obtained to ascertain indicative market values of each aircraft on a stand-alone basis. Annual valuation with the latest completed as at
30 June 2019.
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.

  Actual
30 June
2019
$m
30 June
2018
$m
Transmission Gully 854 603
Education Assets 599 503
Auckland South Corrections Facility 344 310
Auckland Prison 361 359
Waikeria Corrections Facility 212    - 
Puhoi to Warkworth State Highway 593 377
Total public private partnerships 2,963 2,152
Carrying value of assets by source    
Provided by private sector partner 2,624 1,895
Existing government assets 339 257
Total public private partnerships 2,963 2,152

Movements in carrying value for Public Private Partnerships

Gross carrying amount  Actual
30 June
2019
$m
30 June
2018
$m
Opening balance 1 July 2,174 1,643
Assets provided by private sector partner(s) 705 545
Existing Government assets 71 15
Net revaluations 17 (30)
Other 11 1
Total Gross Carrying Amount 2,978 2,174
Accumulated Depreciation and Impairment    
Opening balance 1 July 22 7
Eliminated on revaluation (44) (9)
Depreciation expense 37 24
Total accumulated depreciation 15 22
Carrying value as at 30 June 2,963 2,152
 
The assets in a public private partnership (PPP) are recognised as assets of the Government. As the assets are progressively constructed, the Government recognises work-in-progress at cost. At the same time a financial liability of the same value is also recognised. When the assets are fully constructed, the total asset cost and the matching financial liability reflect the value of the future compensation to be provided to the private-sector partner for the assets.

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
12,309 12,622 Tertiary Education Institutions 13,024 12,505
1,608 1,901 Kaingaroa Timberlands Partnership 1,830 1,885
686 386 City Rail Link Limited 347 307
781 820 Other 908 719
15,384 15,729 Total equity accounted investments 16,109 15,416

NZ GAAP determines the combination bases for entities that make up the Government reporting entity and is used by public benefit entities to determine whether they control another entity.

The Treasury's view is that because the Government cannot determine the operating and financing policies of tertiary education institutions, but does have a number of powers in relation to these entities, it is appropriate to treat them as associates. City Rail Link and Kaingaroa Timberlands Partnership are joint operations or ventures that the Government jointly controls with its joint venture partners.

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:

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Operating Results    
2,675 2,486 Revenue from Crown 2,480 2,461
2,692 2,822 Other revenue 2,903 2,714
(5,236) (5,242) Expenses (5,229) (5,226)
131 66 Net surplus 154 (51)
    Assets    
1,301 1,756 Financial assets 2,056 2,039
12,212 12,339 Property, plant and equipment 12,323 11,675
1,299 1,107 Other assets 1,202 1,436
14,812 15,202 Total assets 15,581 15,150
    Liabilities    
728 361 Borrowings 418 399
1,775 2,219 Other liabilities 2,139 2,246
2,503 2,580 Total liabilities 2,557 2,645
12,309 12,622 Net worth 13,024 12,505
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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    By type    
9,147 8,485 Accounts payable1 11,430 9,676
4,337 5,241 Taxes repayable 6,293 5,201
13,484 13,726 Total payables 17,723 14,877
    By maturity    
12,850 13,140 Expected to be settled within one year 16,848 13,721
634 586 Expected to be outstanding for more than one year 875 1,156
13,484 13,726 Total payables 17,723 14,877

Government entities have financial internal control procedures in place to ensure that accounts payable are settled accurately and on a timely basis. The carrying value is a reasonable approximation of the fair value for accounts payable, as they are typically short-term in nature.

Taxes repayable represent refunds due to the taxpayer as a result of assessments being filed. Refunds are issued to taxpayers once account and refund reviews are complete. The carrying value is a reasonable approximation of the fair value for taxes repayable.

  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

2019 Forecast   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    By type    
59,505 58,701 Government bonds 56,874 62,393
17,262 17,033 Kiwi Group Holdings customer deposits 18,231 16,160
7,063 6,713 Settlement deposits with Reserve Bank 6,891 7,603
2,694 2,784 Derivatives in loss 3,954 5,067
1,937 3,312 Treasury bills 3,455 4,114
2,351 2,537 Finance lease liabilities 1,328 1,318
183 177 Government retail stock 169 182
21,895 20,800 Other borrowings 19,575 18,815
112,890 112,057 Total borrowings 110,477 115,652
    By maturity    
35,125 36,017 Expected to be settled within one year 40,553 47,472
77,765 76,040 Expected to be outstanding for more than one year 69,924 68,180
112,890 112,057 Total borrowings 110,477 115,652
    By guarantee    
77,510 76,759 Sovereign-guaranteed debt 74,946 83,230
35,380 35,298 Non-sovereign debt 35,531 32,422
112,890 112,057 Total borrowings 110,477 115,652

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

Government bonds are measured at amortised cost.

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

Kiwi Group Holdings customer deposits are measured at amortised cost using the effective interest rate method. Amortisation and foreign exchange gains and losses are recognised in the Statement of Financial Performance as is any gain or loss when the liability is derecognised.

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
  Actual
30 June
2019
$m
30 June
2018
$m
Other borrowings measured at amortised cost 15,154 13,655
Other borrowings measured at fair value 4,421 5,160
Total other borrowings 19,575 18,815

Other borrowings held for trading or designated at fair value through the operating balance (to avoid an accounting mismatch) are measured at fair value. The movements in fair value are reported in the statement of financial performance, except for other borrowings designated as fair value where the changes in own credit risk are included in other comprehensive revenue and expenses.

All other borrowings are reported at amortised cost.

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.

  Actual
30 June
2019
$m
30 June
2018
$m
Other borrowings measured at fair value    
Carrying value 4,421 5,160
Amount payable on maturity 4,138 5,016
Fair value impact from changes in credit risk for the year (12) (19)
Cumulative fair value impact from changes in credit risk 83 95

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
9,985 11,411 Government Superannuation Fund (GSF) 13,161 10,988
2 3 Other funds 18 3
9,987 11,414 Total retirement plan liabilities 13,179 10,991

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:

  Actual
30 June
2019
$m
30 June
2018
$m
Net GSF Obligation    
Present value of defined benefit obligation 17,692 15,558
Fair value of plan assets (4,531) (4,570)
Present value of unfunded defined benefit obligation 13,161 10,988
Present value of defined benefit obligation    
Opening defined benefit obligation 15,558 15,272
Expected current service cost 60 65
Expected unwind of discount rate 270 293
Actuarial losses/(gains) 2,697 810
Benefits paid (893) (882)
Closing defined benefit obligation 17,692 15,558
Fair value of plan assets    
Opening fair value of plan assets 4,570 4,268
Expected return on plan assets 220 209
Actuarial gains/(losses) (62) 257
Funding of benefits paid by Government 702 719
Contributions from other entities 16 17
Contributions from members 23 26
Benefits paid (893) (882)
Other (45) (44)
Closing fair value of plan assets 4,531 4,570

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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Personnel Expenses    
    Expected current service cost 60 65
    Expected unwind of discount rate on GSF obligation 270 293
    Expected return on plan assets (220) (209)
    Contributions from members and funding employers (39) (43)
    Other expenses 45 44
    Past service cost
122 159 Total included in personnel expenses 116 150
    Net (Gains)/Losses on Non-Financial Instruments    
1,017 Actuarial (gain)/loss recognised in the year 2,759 553
122 1,176 Total GSF expense 2,875 703

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:

  Actual
30 June
2019
%
30 June
2018
%
Summary of assumptions    
For following year    
Discount rate 1.3% 1.8%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation 1.7% 1.7%
Beyond next year    
Discount rates between 2 and 21 years 1.0% to 2.7% 1.9% to 4.0%
Discount rates between 22 and 29 years 2.8% to 3.1% 4.0% to 4.4%
Discount rates between 30 and 36 years 3.2% to 3.5% 4.4% to 4.7%
Discount rates between 37 and 52 years 3.5% to 4.3% 4.8%
Discount rate from 53 years onwards 4.3% 4.8%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation from years 2 to 18 1.7% 1.7%

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:

  Actual
30 June
2019
$m
30 June
2018
$m
Equity instruments 3,053 3,023
Other debt instruments 419 599
Cash and short term investments 279 313
Property 1 3
Other 779 632
Fair value of plan assets 4,531 4,570

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.

Sensitivity of assumptions Impact on net GSF obligation
Change Actual
  30 June
2019
$m
30 June
2018
$m
Discount rate (present value of the obligation) + 1% (1,971) (1,601)
  - 1% 2,407 1,935
Share price (fair value of equity instruments) + 10% (305) (302)
  - 10% 305 302
Expected rate of inflation + 1% 2,202 1,785
  - 1% (1,857) (1,516)
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:

  Actual
30 June
2019
$m
30 June
2018
$m
30 June
2017
$m
30 June
2016
$m
30 June
2015
$m
Present value of defined benefit obligation 17,692 15,558 15,272 16,406 14,932
Fair value of plan assets (4,531) (4,570) (4,268) (3,965) (4,087)
Present value of unfunded defined benefit obligation 13,161 10,988 11,004 12,441 10,845
Experience adjustment - increase/(decrease) in plan assets (62) 257 289 (182) 325
Less experience adjustment - increase/(decrease) in plan liabilities 37 (16) (90) 184 157
Total experience adjustments - (losses)/gains (99) 273 379 (366) 168
Changes in actuarial assumptions (2,660) (826) 585 (1,662) (490)
Actuarial (losses)/gains recognised in the year (2,759) (553) 964 (2,028) (322)
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.

  30 June
2019
$m
30 June
2018
$m
No later than 1 year 920 923
Later than 1 year and no later than 2 years 917 918
Later than 2 years and no later than 5 years 2,750 2,759
Later than 5 years and no later than 10 years 4,469 4,496
Later than 10 years and no later than 15 years 4,100 4,145
Later than 15 years and no later than 20 years 3,478 3,554
Later than 20 years and no later than 25 years 2,712 2,804
Later than 25 years and no later than 30 years 1,941 2,039
Later than 30 years and no later than 35 years 1,261 1,351
Later than 35 years and no later than 40 years 731 803
Later than 40 years and no later than 45 years 369 419
Later than 45 years and no later than 50 years 154 184
Later than 50 years 61 80
Undiscounted defined benefit obligation 23,863 24,475

Note 21: Provisions

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    By type    
3,510 3,679 Provision for employee entitlements 4,582 3,677
2,357 2,671 Provision for Emission Trading Scheme credits 2,884 2,541
751 782 Provision for National Provident Fund guarantee 879 835
Aircraft Lease Return Costs 268 265
Provision for firearms buy-back 150
1,855 2,096 Other provisions1 1,601 1,364
8,473 9,228 Total provisions 10,364 8,682
    By longevity    
3,904 3,780 Expected to be settled within one year 4,419 3,539
4,569 5,448 Expected to be outstanding for more than one year 5,945 5,143
8,473 9,228 Total provisions 10,364 8,682
For the year ended 30 June 2019 Employee
entitlements
$m
ETS
$m
NPF
guarantee
$m
Aircraft
lease
return costs
$m
Opening Provision 3,677 2,541 835 265
Additional Provision 2,585 543 94
Provision Utilised (1,490) (425) (67) (83)
Reversal of previous provision (190) (80) (9)
(Gains) / Losses on NZ Units 225
Other Movements 191 1
Closing Provision 4,582 2,884 879 268
For the year ended 30 June 2018 Employee
entitlements
$m
ETS
guarantee
$m
NPF
lease
$m
Aircraft
return costs
$m
Opening Provision 3,582 2,028 856 266
Additional Provision 1,927 720 -   86
Provision Utilised (1,533)  (669)  (69)  (86)
Reversal of previous provision (150) (57) (11)
(Gains) / Losses on NZ Units 462
Other Movements (149) -   105 10
Closing Provision 3,677 2,541 835 265

Provisions are recorded at the best estimate of the expenditure required to settle the obligation. Liabilities and provisions to be settled beyond 12 months are recorded at the present value of their estimated future cash outflows.

  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

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Net Worth Attributable to Minority Interests    
5,918 5,993 Opening minority interest 5,993 5,940
461 470 Operating balance attributable to minority interests 461 512
(503) (477) Transactions with minority interests (378) (533)
(3) 73 Movement in reserves attributable to minority interests 502 74
(13) 108 Other movements (11)
5,860 6,167 Closing minority interest 6,567 5,993
    Consisting of interests in:    
    Meridian Energy 2,520 2,213
    Mercury NZ 1,573 1,461
    Air New Zealand 1,251 1,294
    Genesis Energy 995 912
    Other 228 113
    Minority share of Operating Balance    
    Air New Zealand 98 286
    Mercury NZ 161 104
    Meridian Energy 157 92
    Genesis Energy 27 27
    Other 18 3
    Operating balance attributable to minority interests 461 512

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

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.

Short Term Fiscal Intentions
Fiscal Strategy Report 2018 Fiscal Strategy Report 2019 Fiscal Position 2019[4]

Debt

The Government's intention is to reduce the level of net core Crown debt to 20% of GDP within five years of taking office (subject to any significant shocks to the economy).

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 27.3% of GDP in 2021/22.

Net core Crown debt (excluding NZS Fund and advances) is forecast to be 20.6% of GDP in 2019/20, 20.2% of GDP in 2020/21 and 19.1% in 2021/22.

This assumes new capital allowances of $3.8 billion in Budget 2018, $3.7 billion in Budget 2019, $3.4 billion in Budget 2020, and $3.0 billion in Budget 2021.

Debt

The Government's intention is to reduce the level of net core Crown debt to 20% of GDP within five years of taking office (subject to any significant shocks to the economy).

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 26.9% of GDP in 2022/23.

Net core Crown debt (excluding NZS Fund and advances) is forecast to be 20.4% of GDP in 2019/20, 20.7% of GDP in 2020/21, 19.9% of GDP in 2021/22, and 18.7% of GDP in 2022/23.

This assumes a multi-year capital allowance of $14.8 billion for Budget 2019 and the next three Budgets.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2019 was 30.3% of GDP (2018: 33.0%).

Net core Crown debt (excluding NZS Fund and advances) at 30 June 2019 was 19.2% of GDP (2018: 19.9%).

Operating balance

The Government's intention is to deliver operating surpluses (before gains and losses) to ensure net debt falls to 20% of GDP within five years of taking office.

The operating balance (before gains and losses) is forecast to be 1.1% of GDP in 2017/18, rising to 1.7% of GDP in 2019/20 and 2.1% of GDP in 2021/22. This is consistent with the long-term objective for the operating balance.

The operating balance is forecast to be 3.3% of GDP in 2021/22.

Operating balance

The Government's intention is to deliver operating surpluses (before gains and losses) to ensure net debt falls to 20% of GDP within five years of taking office.

The operating balance (before gains and losses) is forecast to be 1.2% of GDP in 2018/19, rising to 1.3% of GDP in 2021/22 and 1.7% of GDP in 2022/23. This is consistent with the long-term objective for the operating balance.

The operating balance is forecast to be 3.0% of GDP in 2022/23.

Operating balance

The operating balance (before gains and losses) for the year ended 30 June 2019 was a surplus of 2.5% of GDP
(2018: surplus of 1.9%).

The operating balance for the year ended 30 June 2019 was
a deficit of 0.8% of GDP (2018: surplus of 2.9%).

Expenses

The Government's intention is to ensure expenses are consistent with the operating balance objective.

Core Crown expenses are forecast to be 28.1% of GDP in 2017/18 and 28.0% of GDP in 2021/22.

Total Crown expenses are forecast to be 36.2% of GDP in 2021/22.

This assumes new operating allowances of $2.8 billion per year in Budget 2018 and $2.4 billion per year in Budget 2019, 2020 and 2021.

Expenses

The Government's intention is to ensure expenses are consistent with the operating balance objective.

Core Crown expenses are forecast to fall from 29.1% of GDP in 2018/19 to 28.8% of GDP in 2022/23.

Total Crown expenses are forecast to be 36.5% of GDP in 2022/23.

This assumes new operating allowances of $3.8 billion per year in Budget 2019, $3.0 billion per year in Budget 2020 and $2.4 billion per year in Budgets 2021 and 2022.

Expenses

Core Crown expenses for the year ended 30 June 2019 were 29.0% GDP (2018: 27.8%).

Total Crown expenses for the year ended 30 June 2019 were 37.1% of GDP (2018: 35.9%).

 

Revenues

The Government's intention is to ensure sufficient revenue to meet the operating balance objective.

Total Crown revenues are forecast to be 38.4% of GDP in 2021/22.

Core Crown revenues are forecast to be 30.4% of GDP in 2021/22.

Core Crown tax revenues are forecast to be 28.3% of GDP in 2021/22.

Revenues

The Government's intention is to ensure sufficient revenue to meet the operating balance objective.

Total Crown revenues are forecast to be 38.3% of GDP in 2022/23.

Core Crown revenues are forecast to be 31.1% of GDP in 2022/23.

Core Crown tax revenues are forecast to be 28.8% of GDP in 2022/23.

Revenues

Total Crown revenues for the year ended 30 June 2019 were 39.8% of GDP (2018: 38.0%).

Core Crown revenues for the year ended 30 June 2019 were 31.2% of GDP (2018: 30.0%).

Core Crown tax revenues for the year ended 30 June 2019 were 28.8% of GDP (2018: 27.7%).

 

Net worth

The Government's intention is to increase net worth consistent with the operating balance objective.

Total net worth attributable to the Crown is forecast to be 44.2% of GDP in 2021/22.

Total Crown net worth is forecast to be 45.8% of GDP in 2021/22.

Net worth

The Government's intention is to increase net worth consistent with the operating balance objective.

Total net worth attributable to the Crown is forecast to be 43.9% of GDP in 2022/23.

Total Crown net worth is forecast to be 45.4% of GDP in 2022/23.

Net worth

Total net worth attributable to the Crown as at 30 June 2019 was 46.6% of GDP (2018: 44.8%).

Total Crown net worth as at 30 June 2019 was 48.8% of GDP (2018: 46.9%).

 

Note 24: Commitments

  Actual
30 June
2019
$m
30 June
2018
$m
Capital Commitments    
State highways 4,436 4,410
Aircraft (excluding military) 1,066 1,526
Specialist military equipment 1,786 377
Land and buildings 4,618 3,016
Other property, plant and equipment 919 502
Other capital commitments 863 398
Tertiary Education Institutions 595 752
Total capital commitments 14,283 10,981
Operating Lease Commitments    
Non-cancellable accommodation leases 4,779 3,708
Other non-cancellable leases 3,206 2,879
Tertiary Education Institutions 936 649
Total operating lease commitments 8,921 7,236
Total commitments 23,204 18,217
By source    
Core Crown 9,738 5,885
Crown entities 9,173 7,980
State-owned Enterprises 4,472 4,526
Inter-segment eliminations (179) (174)
Total commitments  23,204 18,217
By Term    
Capital Commitments    
One year or less 5,970 5,041
From one year to two years 2,803 2,083
From two to five years 3,001 1,337
Over five years 2,509 2,520
Total capital commitments  14,283 10,981
Operating Lease Commitments    
One year or less 1,498 1,217
From one year to two years 1,370 1,003
From two to five years 1,990 1,915
Over five years 4,063 3,101
Total operating lease commitments  8,921 7,236
Total commitments 23,204 18,217
  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.

Commitments are future expenses and liabilities to be incurred on contracts that have been entered into at balance date.

Commitments are classified as:

  • capital commitments: aggregate amount of capital expenditure contracted for but not recognised as paid or provided for at balance date, and
  • lease commitments: non-cancellable operating leases with a lease term exceeding one year.

Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising the option to cancel are reported at the value of those penalty or exit costs (ie, the minimum future payments).

Interest commitments on debts, commitments for funding, inventory and commitments relating to employment contracts are not separately reported as commitments.

Note 25: Contingent Liabilities and Contingent Assets

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
  Note Actual
30 June
2019
$m
30 June
2018
$m
Quantifiable Contingent Liabilities      
Uncalled capital a 8,245 8,330
Guarantees and indemnities b 190 236
Legal proceedings and disputes c 734 332
Other quantifiable contingent liabilities d 488 502
Total quantifiable contingent liabilities   9,657 9,400
By source      
Core Crown   9,175 9,297
Crown entities   392 17
State-owned Enterprises   191 203
Inter-segment eliminations   (101) (117)
Total quantifiable contingent liabilities   9,657 9,400

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident or when a present liability is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liability). Contingent liabilities, including unquantifiable liabilities, are disclosed if the possibility that they will crystallise is more than remote. Contingent assets are disclosed if it is probable that the benefits will be realised.

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”.

  Note Actual
30 June
2019
$m
30 June
2018
$m
Asian Development Bank i 3,216 3,231
International Monetary Fund - promissory notes ii 2,145 2,255
International Bank for Reconstruction and Development iii 1,654 1,643
International Monetary Fund - arrangements to borrow iv 660 634
Asian Infrastructure Investment Bank v 551 548
Other uncalled capital   19 19
Total uncalled capital   8,245 8,330
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.

  Note Actual
30 June
2019
$m
30 June
2018
$m
New Zealand Export Credit Office guarantees i 109 137
Air New Zealand letters of credit and performance bonds ii 31 32
Share of OECD employee benefits iii 29 12
Other guarantees and indemnities   21 55
Total guarantees and indemnities   190 236
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.

  Note Actual
30 June
2019
$m
30 June
2018
$m
New Zealand Transport Agency - Contractual disputes i 385 8
Legal tax proceedings ii 134 146
Kiwifruit vine disease Psa-V iii 93 94
Ministry of Health - Contractual disputes iv 31
Ministry of Education - Contractual disputes v 23 24
Customs legal dispute vi 1 37
Other legal proceedings and disputes   67 23
Total legal proceedings and disputes   734 332
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
  Note Actual
30 June
2019
$m
30 June
2018
$m
Unclaimed monies i 174 161
Air New Zealand partnership ii 155 158
Ministry for Primary Industries - Bonamia ostreae iii 138 86
Land Information New Zealand - Quake outcasts iv 35
Other contingent liabilities   21 62
Total other contingent liabilities   488 502
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.

Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Limited Deed of indemnity issued 24 September 2001 Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact Energy's outstanding land rights and geothermal asset rights at Wairakei The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party.
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993 As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.
Genesis Energy Genesis acquisition of Tekapo A & B power stations Indemnity against any damage to the beds of lakes and rivers subject to operating easements.
 

Justices of the Peace, Community Magistrates and Disputes Tribunal Referee

Section 50 of the District Courts Act 2016 and Section 4F of the Justices of the Peace Act 1957

Section 58 of the Disputes Tribunal Act 1988

Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information Any losses arising from a breach of the deed.
New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill Costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority.
New Zealand Local Authorities Section 39 of the Civil Defence Emergency Management Act 2002 National Civil Defence Emergency Management Plan The Guide to the National Civil Defence Emergency Management Plan (‘the Guide') states that, with the approval of the Minister, the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is approved and issued by the Director of Civil Defence Emergency Management.
New Zealand Railways Corporation Section 10 of the Finance Act 1990 Guarantees all loan and swap obligations of the New Zealand Railways Corporation.
Southern Response Earthquake Services Limited (SRES) Deed of Indemnity SRES continues to work through and settle the claims of AMI residential policyholders which arose from the Canterbury earthquake series. However, it has not proven possible to settle some claims through the normal internal process or with external assistance such as mediation. In light of certain litigation that has arisen, the Minister of Finance provided SRES with a Deed of Indemnity for that litigation on 25 September 2018.

Synfuels-Waitara Outfall Indemnity

1990 sale of the Synfuels plant and operations to New Zealand Liquid Fuels Investment Limited (NZLFI) The Crown transferred to NZLFI the benefit and obligation of a Deed of Indemnity between the Crown and Borthwick-CWS Limited (and subsequent owners) in respect of the Waitara effluent transfer line which was laid across the Waitara meat processing plant site. The Crown has the benefit of a counter indemnity from NZLFI which has since been transferred to Methanex Motunui Limited.

Westpac New Zealand Limited

 

The Domestic Transaction Banking Services Master

The Crown Transactional Banking Services Agreement with Westpac New Zealand Limited dated 24 September 2015. The Crown has indemnified Westpac New Zealand Limited:

  • for all amounts paid by Westpac New Zealand under letters of credit issued on behalf of the Crown, and
  • against certain cost, damages and losses to third parties resulting from:
    • unauthorised, forged or fraudulent payment instructions
    • unauthorised or incorrect direct debit instructions, or
    • cheques mistakenly drawn in favour of a third party rather than drawn in favour of the Crown.
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
  Note Actual
30 June
2019
$m
30 June
2018
$m
Contingent assets      
Tax disputes i 35 49
New Zealand Defence Force Insurance Recoveries ii 21 46
Other contingent assets   16 38
Total contingent assets   72 133
By source      
Core Crown   70 133
Crown entities  
State-owned Enterprises   2
Total quantifiable contingent assets   72 133
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.

Notes
  1. [4]GDP for the year ended 30 June 2019 was $300,032 million (2018: $289,504 million revised).

Note 26: Financial Instruments

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).

Non-derivative financial assets

Financial assets are initially recognised at fair value and subsequently measured in accordance with the business model in which assets are managed and their contractual cash flow characteristics. Financial assets are measured at:

  • amortised cost where the business model is to hold the financial assets in order to collect contractual cash flows and those cash flows represent solely payments of principal and interest
  • fair value through other comprehensive revenue and expense (“FVCRE”) where the business model is to both collect contractual cash flows and sell financial assets and the cash flows represent solely payments of principal and interest. Non-traded equity instruments can also be measured at fair value through other comprehensive revenue and expense, or
  • fair value through operating balance (“FVTOB”) if they are held for trading or if the cash flows of the asset do not solely represent payments of principal and interest. Financial assets may also be designated into this category if this accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related liabilities or is part of a group of financial assets that is managed and evaluated on a fair value basis.

The maximum loss due to default on any financial asset is the carrying value reported in the statement of financial position.

Major financial asset type Measurement
Cash and cash equivalents All measured at amortised cost
Trade and other receivables All measured at amortised cost
Long-term deposits Generally measured at amortised cost
Marketable securities Generally measured at fair value through the operating balance
IMF financial assets All measured at amortised cost
Share investments Generally measured at fair value through the operating balance
Kiwi Group Holdings  loans and advances All measured at amortised cost
Student loans All measured at fair value through operating balance
Other advances Generally measured at amortised cost

Financial assets measured at amortised cost are initially recognised at fair value plus transaction costs. They are subsequently measured at amortised cost using the effective interest method (refer interest revenue policy). If issued with durations of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Interest, impairment losses and foreign exchange gains and losses are recognised in the statement of financial performance.

Financial assets measured at fair value through other comprehensive revenue and expense (FVCRE) are initially recorded at fair value plus transaction costs. They are subsequently recorded at fair value with any resultant fair value gains or losses recognised in the statement of comprehensive revenue and expense, with some exceptions. Those exceptions are for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (such as debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset. These latter items are recognised in the statement of financial performance. For non-monetary financial assets at FVCRE (eg, some equity instruments) the fair value movements recognised in the statement of comprehensive revenue and expense include any related foreign exchange component. Dividends related to these assets are recorded in the statement of financial performance. At de-recognition, the cumulative fair value gain or loss previously recognised in the statement of comprehensive revenue and expense, is recognised in tax payers funds for non-monetary financial assets and in the statement of financial performance for monetary financial assets.

An expected credit loss (ECL) model is used to recognise and calculate impairment losses for financial assets subsequently measured at amortised cost and debt instruments subsequently measured at FVCRE. Financial assets are to be assessed at each reporting date for any significant increase in the credit risk since initial recognition.

The simplified approach to providing for expected credit losses is applied to trade and other receivables and lease receivables.The simplified approach involves making a provision at an amount equal to lifetime expected credit losses.The allowance is assessed on a portfolio basis based on the number of days overdue, and taking into account the historical loss experience and incorporating any external and future information.

The general model prescribed is adopted for individual financial assets or groups of financial assets held at amortised cost or FVCRE, other than trade and other receivables and lease receivables. This model recognises impairment losses in line with the credit quality stage of the financial asset.

Impairment of financial assets that are individually significant are determined on an individual basis. Specific lifetime expected credit losses allowance is recognised for these assets under both the general and simplified impairment model.

Financial assets measured at fair value through the operating balance (FVTOB) are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance. Transaction costs are expensed as they are incurred.

Financial assets classified at FVTOB are not assessed for impairment as their fair value reflects the credit quality of the instruments and changes in fair value are recognised in the statement of financial performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with an original maturity of no more than three months.

Fair values of quoted investments are based on market prices. Regular way purchases and sales of all financial assets are accounted for at trade date. If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques, as set out in the notes to the financial statements. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Non-derivative financial liabilities

Financial liabilities are initially recognised at fair value and generally subsequently measured at amortised cost except of those measured at fair value through the operating balance.

Financial liabilities measured at fair value through the operating balance (FVTOB) comprise liabilities held-for-trading and financial liabilities irrevocably designated as FVTOB on initial recognition.

  • A financial liability is classified as held-for-trading if it is incurred principally for the purpose of trading in the short term, or forms a part of a portfolio of financial instruments that are managed together and for which there is evidence of recent short-term profit-taking, or it is a derivative.
  • Financial liabilities may be designated as FVTOB if this accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with a related asset or is part of a group of financial assets that is managed and evaluated on a fair value basis.
 
Major financial liability type Designation
Accounts payable All measured at amortised cost
Government stock All measured at amortised cost
Treasury bills All measured at amortised cost
Government retail stock All measured at amortised cost
Settlement deposits with Reserve Bank All measured at amortised cost
Issued currency Not designated: Recognised at face value
Other borrowings Generally measured at amortised cost

Financial liabilities held-for-trading and financial liabilities designated at FVTOB are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance. For financial liabilities designated as measured at fair value, gains or losses relating to changes in the entity's own credit risk are included in other comprehensive revenue and expense. Transaction costs are expensed as they are incurred.

Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Financial liabilities entered into with durations of less than 12 months are recognised at their nominal value. Amortisation and, in the case of monetary items, foreign exchange gains and losses, are recognised in the statement of financial performance as is any gain or loss when the liability is derecognised.

Currency issued for circulation, including demonetised currency after 1 July 2004, is recognised at face value. Currency issued represents a liability in favour of the holder.

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
Financial Assets
  Note Actual
30 June
2019
$m
30 June
2018
$m
By class      
Cash and cash equivalents   20,892 19,340
Reinsurance, trade and other receivables 12 6,065 6,385
Long-term deposits 13 4,731 5,379
Derivatives in gain 13 4,596 3,153
Marketable securities 13 32,799 40,532
IMF financial assets 13 2,327 2,053
Share investments 14 40,615 36,256
Kiwi Group Holdings loans and advances 15 20,411 18,281
Student loans 15 10,731 9,301
Other advances 15 1,915 1,840
Total financial assets   145,082 142,520
By valuation methodology      
Amortised cost   55,528 62,232
Fair value      
     Available for sale1   1,240
     Held for trading1   3,194
     Fair value through the operating balance   88,800 75,854
     Fair value through the other comprehensive revenue and expenses1   754
Total financial assets at fair value   89,554 80,288
Total financial assets   145,082 142,520
  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
Financial Liabilities
  Note Actual
30 June
2019
$m
30 June
2018
$m
By class      
Issued currency   6,813 6,375
Accounts payable 18 11,430 9,676
Borrowings: 19    
     Government bonds   56,874 62,393
     Kiwi Group Holdings customer deposits   18,231 16,160
     Settlement deposits with Reserve Bank   6,891 7,603
     Derivatives in loss   3,954 5,067
     Treasury bills   3,455 4,114
     Finance lease liabilities   1,328 1,318
     Government retail stock   169 182
     Other borrowings   19,575 18,815
Total borrowings   110,477 115,652
Total financial liabilities   128,720 131,703
By valuation methodology      
Amortised cost   120,345 121,476
Fair value      
     Held for trading   3,954 5,067
     Fair value through the operating balance   4,421 5,160
Total financial liabilities at fair value   8,375 10,227
Total financial liabilities   128,720 131,703
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
Fair Value Financial Instruments by Measurement Hierarchy
  Actual
30 June
2019
$m
30 June
2018
$m
Financial assets    
Quoted market price 48,922 45,782
Observable market inputs 25,271 30,202
Significant non-observable inputs 15,361 4,304
Total financial assets at fair value 89,554 80,288
Financial liabilities    
Quoted market price 410 986
Observable market inputs 7,782 9,178
Significant non-observable inputs 183 63
Total financial liabilities at fair value 8,375 10,227
Net financial instruments at fair value 81,179 70,061

Significant non observable inputs

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

Significant non observable inputs
  Actual
30 June
2019
$m
30 June
2018
$m
Financial assets 15,361 4,304
Financial liabilities 183 63
Net financial instruments 15,178 4,241
Opening balance 4,241 3,238
Impact of adoption of PBE IFRS 9 (Student Loans) 9,929
Opening balance after transition 14,170 3,238
Total gains/(losses) recognised in the   statement of financial performance 363 138
Total gains/(losses) recognised in the statement of comprehensive revenue and expense (112) 47
Purchases 733 1,120
Sales (541) (165)
Issues 51 1
Settlements (211) (249)
Student Loan movement during the year (refer note 15 Advances) 802  
Transfers into and out of non-observable inputs (77) 111
Closing balance 15,178 4,241
Derivatives

Derivative financial instruments are used across the portfolios to manage exposure to interest rate, foreign currency and electricity sector risk. These transactions do not generally involve any principal exchange at commencement, they are an agreement to change the characteristics of the underlying transactions. The credit exposure is therefore limited to the net market value movement resulting from changes in relevant interest rates, currencies or electricity price and volume.

  Carrying Value
As at 30 June 2019
Carrying Value
As at 30 June 2018
Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Foreign exchange contracts 931 515 416 496 2,004 (1,508)
Cross currency swaps 637 592 45 560 862 (302)
Interest rate swaps 2,147 2,124 23 1,238 1,464 (226)
Futures 22 22 26 1 25
Other derivatives 859 701 158 833 736 97
Total derivatives 4,596 3,954 642 3,153 5,067 (1,914)

The notional value is a reference to the calculation base, not a reflection of the counterparty exposure.

  Notional Value
As at 30 June 2019
Notional Value
As at 30 June 2018
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$m
Foreign exchange contracts 51,050 32,558 83,608 22,783 67,175 89,958
Cross currency swaps 9,084 7,803 16,887 7,682 11,014 18,696
Interest rate swaps 41,599 48,826 90,425 43,147 43,256 86,403
Futures 4,423 7,189 11,612 3,258 4,985 8,243
Other derivatives 9,915 9,802 19,717 17,806 11,434 29,240
Total derivatives 116,071 106,178 222,249 94,676 137,864 232,540
Derivatives liquidity analysis

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. Recognition of the movements in the value of derivatives depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged (see Hedging section below).

Derivatives that are not designated for hedge accounting are classified as held-for-trading financial instruments with fair value gains or losses recognised in the statement of financial performance. Such derivatives may be entered into for risk management purposes, although not formally designated for hedge accounting, or for tactical trading.

Individual entities consolidated within the Government reporting entity apply hedge accounting after considering the costs and benefits of adopting hedge accounting, including:

  1. whether an economic hedge exists and the effectiveness of that hedge
  2. whether the hedge accounting qualifications could be met, and
  3. the extent to which it would improve the relevance of reported results.

Where a derivative qualifies as a hedge of variability in asset or liability cash flows (cash flow hedge), the effective portion of any gain or loss on the derivative is recognised in the statement of comprehensive revenue and expense and the ineffective portion is recognised in the statement of financial performance. Where the hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability (eg, where the hedge relates to the purchase of an asset in a foreign currency), the amount recognised in the statement of comprehensive revenue and expense is included in the initial cost of the asset or liability. Otherwise, gains or losses recognised in the statement of comprehensive revenue and expense transfer to the statement of financial performance in the same period as when the hedged item affects the statement of financial performance (eg, when the forecast sale occurs). Effective portions of the hedge are recognised in the same area of the statement of financial performance as the hedged item.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in net worth at that time remains in net worth and is recognised when the forecast transaction is ultimately recognised in the statement of financial performance. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in the statement of comprehensive revenue and expense is transferred to the statement of financial performance.

Where a derivative qualifies as a hedge of the exposure to changes in fair value of an asset or liability (fair value hedge) any gain or loss on the derivative is recognised in the statement of financial performance together with any changes in the fair value of the hedged asset or liability. The carrying amount of the hedged item is adjusted by the fair value gain or loss on the hedged item in respect of the risk being hedged.

Derivatives liquidity analysis

The following table shows the undiscounted cash flows of derivatives based on the earliest date on which the Government reporting entities can be required to pay. Some derivatives are settled on a net basis and others on a gross basis.

As at 30 June 2019 Total
cash flows
$m
<1 year
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Derivatives  settled gross            
 - inflow 98,594 87,185 1,409 5,364 4,414 222
 - outflow (98,409) (86,740) (1,429) (5,291) (4,690) (259)
Total settled gross 185 445 (20) 73 (276) (37)
Derivatives in loss  settled net 2,726 773 521 1,020 323 89
As at 30 June 2018 Total
cash flows
$m
<1 year
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Derivatives settled gross            
 - inflow 106,584 94,224 1,885 4,530 5,307 638
 - outflow (108,364) (95,844) (1,899) (4,515) (5,362) (744)
Total settled gross (1,780) (1,620) (14) 15 (55) (106)
Derivatives in loss  settled net 2,982 965 514 970 454 79
Interest rate risk

The Government is exposed to interest rate risk as entities in the Government reporting entity borrow and invest funds at both fixed and floating interest rates. This risk is managed at the entity level in accordance with their capital objectives and risk management policies. These objectives and policies include maintaining an appropriate mix between fixed and floating rate borrowings.

Foreign currency risk

The Government undertakes transactions denominated in foreign currencies, and therefore is exposed to exchange rate fluctuations. Exchange rate exposures are managed within approved policy parameters utilising derivatives such as forward exchange contracts and cross currency interest rate swaps. The carrying amounts of the Government's foreign currency denominated financial assets and financial liabilities translated to NZD before and after the impact of derivatives are as follows:

 

30 June
2019
$m

30 June
2018
$m

Financial Assets (excluding derivatives)    
New Zealand Dollar 56,854 54,571
United States Dollar 38,818 40,960
Yen 11,343 9,863
Euro 9,700 9,103
Other 23,771 24,870
Total financial assets (excluding derivatives) 140,486 139,367
Financial Liabilities (excluding derivatives)    
New Zealand Dollar 113,419 115,841
United States Dollar 6,111 6,407
Yen 1,118 978
Euro 902 819
Other 3,216 2,591
Total financial liabilities (excluding derivatives) 124,766 126,636
Derivatives in gain/(loss)    
New Zealand Dollar 54,589 57,299
United States Dollar (25,984) (30,166)
Yen (10,735) (9,332)
Euro (8,181) (9,590)
Other (9,047) (10,125)
Total derivatives 642 (1,914)
Net Financial Assets/(Liabilities)    
New Zealand Dollar (1,976) (3,971)
United States Dollar 6,723 4,387
Yen (510) (447)
Euro 617 (1,306)
Other 11,508 12,154
Net Financial Assets/(Liabilities) 16,362 10,817

Transactions in foreign currencies are initially translated at the foreign exchange rate at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance, except when recognised in the statement of comprehensive revenue and expense when hedge accounting is applied.

Foreign exchange gains and losses arising from translating monetary items that form part of the net investment in a foreign operation are reported in a translation reserve in net worth and recognised in the statement of comprehensive revenue and expense.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Government. The carrying value of financial assets equates to the maximum exposure to credit risk as at balance date. Credit risk is managed at the entity level in accordance with their capital objectives and risk management policies. These objectives and policies include limits to individual and industry counterparty exposure, collateral requirements, and counterparty credit ratings.

Of the financial assets held by the Government at 30 June 2019, the fair value of collateral held that could be sold or repurchased was $20,555 million (2018: $20,415 million). The majority of this relates to Kiwi Group Holdings, who can enforce their collateral in satisfying the debt in the event of the borrower failing to meet their contractual obligations.

Concentrations of credit exposure classified by credit rating, geography and industry of the counterparty are provided in the following tables.

Kiwi Group Holdings loans and advances consist mainly of residential lending. Therefore, these financial assets have been classified as non-rated and individuals for the purposes of credit risk.

Concentration of credit exposure by credit rating (using Standard & Poor's ratings)

Concentration of credit exposure by credit rating (using Standard & Poor's ratings)
As at 30 June 2019 Total
$m
AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Cash and cash equivalents 20,892 2,976 7,687 10,143 40 46
Trade and other receivables 6,065 28 373 759 726 4,179
Long-term deposits 4,731 3,541 1,060 100 30
Derivatives in gain 4,596 2,477 1,837 63 219
Marketable securities 32,799 10,829 12,153 3,055 3,244 3,518
IMF financial assets 2,327 -   2,327
Share investments 40,615 766 4,602 9,252 9,827 16,168
Kiwi Group Holdings loans and advances 20,411 20,411
Student loans 10,731 10,731
Other advances 1,915 1 48 122 202 1,542
Total credit exposure by credit rating 145,082 14,600 30,881 26,228 16,529 56,844
Concentration of credit exposure by credit rating (using Standard & Poor's ratings)
As at 30 June 2018 Total
$m
AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Cash and cash equivalents 19,340 4,936 6,312 7,966 79 47
Trade and other receivables 6,385 55 186 6,144
Long-term deposits 5,379 4,490 963 167 (241)
Derivatives in gain 3,153 1,242 1,758 48 105
Marketable securities 40,532 13,861 15,091 3,522 2,591 5,467
IMF financial assets 2,053 2,053
Share investments 36,256 716 3,689 8,580 8,123 15,148
Kiwi Group Holdings loans and advances 18,281 18,281
Student loans 9,301 9,301
Other advances 1,840 129 93 321 1,297
Total credit exposure by credit rating 142,520 19,513 31,008 23,068 13,382 55,549
  30 June
2019
$m
30 June
2018
$m
Financial Assets    
Concentration of credit exposure by geographical area    
New Zealand 56,024 55,397
USA 32,437 26,759
Europe 17,582 21,511
Japan 11,374 9,818
Australia 12,113 12,616
Other 15,552 16,419
Total financial assets 145,082 142,520
Concentration of credit exposure by industry    
Individuals 31,497 27,727
Sovereign issuers 26,023 26,996
New Zealand banking 10,527 11,100
Foreign banking 16,718 14,847
Supranational 4,155 7,507
Other 56,162 54,343
Total financial assets 145,082 142,520

At 30 June 2019, 15.4% (2018: 15.1%) of student loan borrowers were overseas. As the total advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk.

Liquidity risk

Liquidity risk refers to the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is managed on an individual entity basis generally by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows.

The following table details the Government's remaining contractual maturity for its financial liabilities. The table was compiled based on:

  • the undiscounted cash flows of financial liabilities based on the earliest date on which the Government can be required to pay, and
  • both interest and principal cash flows.
Financial Liabilities (excluding derivatives) 30 June
2019
$m
30 June
2018
$m
Less than 1 year 59,117 61,828
1-2 years 17,126 13,093
2-5 years 19,982 30,727
5-10 years 30,680 22,048
More than 10 years 18,823 19,428
Total contractual cash flows 145,728 147,124
Total carrying value 124,766 126,636

The Government holds loan commitments of $4,225 million (2018: $3,213 million) which primarily all have contractual cash flows of less than five years.

In addition to the above financial liabilities, the Crown has entered into various financial guarantees and indemnities totalling $908 million (2018: $236 million) which expose the Crown to liquidity risk. These guarantees are classified as contingent liabilities and are set out in note 25. For all these guarantees, the earliest period which the Crown would be required to pay if the guarantees are called upon is less than one year.

The Government has access to financing facilities, of which the total unused amount at 30 June 2019 was $1,424 million (2018: $885 million). The Government expects to meet its obligations from operating cash flows, from the results of bond tenders, and proceeds of maturing financial assets.

In addition, the Crown purchases (or underwrites) KiwiBuild properties to help builders and property developers to build more affordable homes, in places where they are needed most.  The underwrite creates a legal obligation to the Crown, in the event that the developer cannot sell the property after an agreed number of days after completion, the developer at their discretion can request the Crown to purchase the properties.

Sensitivity analysis

The sensitivity of the fair value of the Government's financial assets and liabilities to changes in interest rates, New Zealand exchange rate and share prices are shown below. Any change would impact the operating balance and net worth of the Government. The 2018 sensitivity analysis for NZ interest rates has been restated due to a refinement of calculation by ACC.

  Impact on operating balance Impact on net worth
2019
$m
2018
$m
2019
$m
2018
$m
Increase in NZ interest rates 1% (100 basis points) (476) (472) (530) (483)
Decrease in NZ interest rate 1% (100 basis points) 701 532 765 538
NZ dollar exchange rate strengthens by 10% (1,353) (846) (1,365) (873)
NZ dollar exchange rate weakens by 10% 1,538 983 1,553 1,014
Share prices strengthen by 10% 4,023 3,580 4,023 3,580
Share prices weaken by 10% (4,023) (3,580) (4,023) (3,580)
Interest rate sensitivity

The effect on the operating balance is primarily from changes in interest revenue and interest expense on floating rate instruments and changes in the value of instruments measured at fair value through the operating balance. The Government does not have material exposure to foreign interest rates.

The sensitivity analysis has been determined based on the exposure to interest rates for both derivatives and non-derivative financial instruments at the balance sheet date. The effect of exposure to interest rates on the valuation of non-financial instruments, such as the ACC liability and GSF defined benefit plan, are provided in the relevant notes to the financial statements.

Movements in interest rates affect the financial results of the Government in the following manner:

  • the resulting valuation changes for fixed interest instruments that are measured at fair value through the operating balance will affect the operating balance, while the valuation changes of fixed interest instruments designated as available-for-sale will affect equity reserves
  • the resulting changes in interest expense and interest revenue on floating rate instruments will affect the operating balance, and
  • where derivatives are designated as cash flow hedges of floating rate instruments, equity reserves will be affected by the resulting changes in the fair value of these derivatives.

If interest rates had been 100 basis points higher/ (lower) at balance date and all other variables were held constant, the effect of financial instruments would increase/ (decrease) the Government's financial results as outlined in the table above.

The Government's sensitivity to interest rates has increased since last year. Interest rate sensitivity on financial instruments have a minor impact compared with other longer-dated obligations such as ACC outstanding claims liability and the GSF defined benefit obligations (refer note 11 and note 20 for sensitivity information for these long-term liabilities).

Foreign currency sensitivity

The sensitivity analysis does not include the impact on prices of goods and services purchased or sold in foreign currencies.

The Government's sensitivity to foreign currency has increased during the current period. This change is largely in relation to financial instrument portfolios held by the Treasury, NZS Fund and ACC.

Equity market sensitivity

Share investments 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 above has been determined based on the exposure of the NZS Fund and ACC to share price risks at the reporting date. These portfolios combined make up 99% of the Government's total share investments (2018: 99%).

The Government's sensitivity to share prices has increased from the prior year in line with an increase in the level of share investments held.

Note 27: Impact of Adoption of PBE IFRS 9: Financial Instruments

The Crown early adopted PBE IFRS 9 Financial Instruments with effect from 1 July 2018. This accounting standard replaces PBE IPSAS 29 Financial Instruments: Recognition and Measurement. This has ensured that the reporting of financial instruments changed simultaneously for the Government and all its sub-entities, whether public benefit entities or for profit entities under the New Zealand financial reporting framework, minimising differences between the two reporting frameworks. This note explains the nature and effect of the changes in accounting policies applied to these Financial Statements of Government due to the application of PBE IFRS 9.

The Crown adopted the transition arrangements option under PBE IFRS 9 in not restating financial instrument comparatives for classification, measurement and impairment.

In accordance with transition options under PBE IFRS 9 the Government has opted to continue to apply the hedge accounting requirements of PBE IPSAS 29. Therefore there have been no changes to the classification and measurement when accounting for hedges.

The following changes to accounting policies due to early adoption of PBE IFRS 9 have been applied to the Financial Statements of Government.

Classification and measurement of Financial Instruments under PBE IFRS 9

PBE IFRS 9 contains a classification and measurement approach for financial assets that reflects the business model in which assets are managed and their contractual cash flow characteristics. Financial assets are now measured at amortised cost only where the business model is to hold the financial assets in order to collect contractual cash flows and those cash flows represent solely payments of principal and interest.

Held to maturity and Available for sale financial assets categories were removed at the same time PBE IFRS 9 introduced the new measurement category “fair value through other comprehensive revenue and expense” (FVCRE). This measurement applies to financial assets where the business model is to both collect contractual cash flows and sell financial assets and the cash flows represent solely payments of principal and interest. Non-traded equity instruments can also be measured at fair value through other comprehensive revenue and expense.

Financial Assets at fair value through other operating balance under PBE IPSAS 29 had two sub categories: financial assets held for trading and those designated to the category at inception (generally to avoid an accounting mismatch). To line up the classification of financial assets with the PBE IFRS 9 the Crown decided to merge these two sub categories under a common measurement category being “Fair value through the operating balance” (FVTOB).

The following table summarises the classification and measurement changes by balance sheet asset category on 1 July 2018:

Financial assets
  Measurement classification Carrying amount
30 June
2018 under PBE IPSAS 29
$m
1 July
2018 under PBE
IFRS 9
$m
Variance
$m
Under PBE IPSAS 29 Under PBE IFRS 9
Cash and cash equivalents Loans and Receivables at amortised cost Amortised cost 19,340 19,340
Reinsurance, trade and other receivables Loans and Receivables at amortised cost Amortised cost 6,385 6,383 (2)
Long-term deposits Generally loans and Receivables at amortised cost Generally amortised cost 5,379 5,379
Derivatives in gain Fair value through the operating balance Fair value through the operating balance 3,153 3,153
Marketable securities Generally fair value through the operating balance Generally fair value through the operating balance 40,532 40,565 33
IMF financial assets Loans and Receivables at amortised cost Amortised cost 2,053 2,053
Share investments Generally fair value through the operating balance Generally fair value through the operating balance 36,256 36,256
Kiwi Group Holdings loans and advances Loans and Receivables at amortised cost Amortised cost 18,281 18,281
Student loans Loans and Receivables at amortised cost Fair value through the operating balance 9,301 9,929 628
Other advances Generally loans and Receivables at amortised cost Generally amortised cost 1,840 1,840
Total financial assets     142,520 143,179 659
Financial liabilities          
Issued currency Recognised at face value Recognised at face value 6,375 6,375
Accounts payable Loans and Receivables at amortised cost Amortised cost 9,676 9,676
Borrowings:          
     Government bonds Loans and Receivables at amortised cost Amortised cost 62,393 62,393
     Kiwi Group Holdings
customer deposits
Loans and Receivables at amortised cost Amortised cost 16,160 16,160
     Settlement deposits with
Reserve Bank
Loans and Receivables at amortised cost Amortised cost 7,603 7,603
     Derivatives in loss Fair value through the operating balance Fair value through the operating balance 5,067 5,067
     Treasury bills Generally loans and Receivables at amortised cost Amortised cost 4,114 4,114
     Finance lease liabilities Loans and Receivables at amortised cost Amortised cost 1,318 1,318
     Government retail stock Loans and Receivables at amortised cost Amortised cost 182 182
     Other borrowings Generally loans and Receivables at amortised cost Generally amortised cost 18,815 18,815
Total borrowings     115,652 115,652
Total financial liabilities     131,703 131,703

The main changes from adoption of PBE IFRS 9 are outlined below:

Advances

Student loans are deemed to be concessionary loans under PBE IFRS 9 as they are granted at below market terms (ie, interest free and repayments are income-contingent). 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 FVTOB. Under PBE IPSAS 29 Student loans were deemed to be loans and receivables valued at amortised cost using the effective interest rate method, and adjusted for impairments.

Loans and taxpayers' funds have increased by $628 million at 1 July 2018 for the reclassification from amortised cost to fair value (and if Budget 2018 numbers were restated this change would have increased student loans by $537 million). 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.

Marketable Securities

Debt security instruments, previously measured at amortised cost, but now measured at fair value, increased in value by $33 million.

Loans and Receivables

Application of the expected credit loss model resulted in the earlier recognition of impairment losses and led to a decrease in trade and other receivables of $2 million on 1 July 2018.

Reserves

PBE IFRS 9 adoption has led to the creation of a “fair value through other comprehensive revenue and expenses reserve”. As a result, there were $66 million of movements from Taxpayers Funds to Other Reserves, mainly related to changes in the credit risk of financial instruments measured at FVCRE, which used to go through the operating balance.

Note 28: Related Parties

Related parties of the Government include key management personnel, and their close family members. Key management personnel are Ministers of the Crown, and their close family members are their spouses, children and dependants. Transactions between these related parties and a Government entity are disclosed in these financial statements only if they have taken place within a Minister's portfolio and they are not transactions entered into in the same capacity as an ordinary citizen.

Tertiary Education Institutions, joint ventures and the Government Superannuation Fund are also related parties of the Government due to the Government's influence over these entities. Transactions between these entities and Government entities are separately disclosed where material.

There are no other related parties as no other parties control the Government, and no other parties are controlled by the Government, other than those that are consolidated into the Financial Statements of the Government.

The Government comprises a large number of commonly controlled entities. Transactions between these entities are eliminated in these financial statements and therefore not separately disclosed.

Transactions where the financial results may have been affected by the existence of a related party relationship are disclosed in the financial statements.

Related party relationships are a normal feature of commerce. Therefore, the Government will transact with related parties as a matter of course.

Given the breadth of Government activities these related parties transact with the government sector in the same capacity as ordinary citizens. Such transactions include the payment of taxes and user charges (such as purchase of electricity), and the receipt of entitlements and services (such as access to education). These transactions have not been separately disclosed in this note.

Other transactions with these related parties can include the employment of Ministers' spouses, children and dependants by a Government entity, including ministerial offices, departments, Crown entities and State-owned Enterprises, receipt of grants from, or the purchase or sale of goods and services to, a Government entity by Ministers, their spouses, children and dependants, or private-sector entities they own or jointly control. Such related party transactions will be disclosed if they have taken place within the Minister's portfolio or if they involve lending or guaranteeing Ministers.

There were no related party transactions to be separately disclosed.

Note 29: Events Subsequent to Balance Date

Crown's global settlement with the Christchurch City Council

On 23 September 2019, Cabinet approved the Global Settlement Agreement (GSA) with the Christchurch City Council (the Council). This agreement facilitates the sale and purchase and final ownership of certain assets (eg, the Bus Interchange) that are held by the Crown as at 30 June 2019.

As a result of the negotiations, the Crown will recognise a provision and expenses of just over $100 million for the expected loss on transfer of the assets covered by the GSA. The loss is not recognised in these financial statements because the commitment to transfer these assets only arises on the approval of the GSA, which occurred after balance date.

There will be on-going discussions with the Council on other aspects of the Greater Christchurch Regeneration programme that are not part of the GSA, which could potentially result in costs to the Government in the future.

Earthquake affected properties in Canterbury that were ‘over-cap' and have subsequently been sold

On 15 August 2019 the New Zealand Government announced a Ministerial Directive that will allow owners of on-sold over-cap (cost of repairs exceeded $100,000 +GST) properties in Canterbury to apply for an ex-gratia Government payment to have their homes repaired and that this process will be facilitated by the Earthquake Commission. These customers have effectively purchased a property that requires additional remediation work, however, the Earthquake Commission has settled its liability and the homeowners are not able to access private insurance, ie, they have an uninsured gap between policy or Act entitlement, and the cost to repair their property. It is estimated that there are approximately 1,000 property owners in this position.

Other than those noted above, there have been no material events subsequent to balance date.

Notes

  1. [2]The 2018/19 sensitivity range was updated to reflect a more expected change in the assumption.
  2. [3]This is a new sensitivity in 2018/19. 2018/19 was the first year an overhead rate has been applied for brownfield costs.

Supplementary Statements

Statement of Unappropriated Expenditure

for the year ended 30 June 2019

Parliament's approval for the incurring of expenses or capital expenditure is generally given either by means of an Appropriation Act or an Imprest Supply Act followed by an Appropriation Act.

Imprest Supply Acts authorise the Government to incur expenses and capital expenditure, in advance of the passing of an Appropriation Act, up to a specified amount. Cabinet rules require any use of imprest supply to be authorised by a specific Cabinet decision or in some instances by delegated authority to joint ministers. All expenses and capital expenditure incurred under an Imprest Supply Act must be subsequently approved by Parliament prior to the end of the financial year. If not approved by Parliament prior to the end of the financial year, then the expenditure must be validated in an Appropriation (Confirmation and Validation) Act.

Expenses or capital expenditure that is incurred without an appropriation or other authority (such as an Imprest Supply Act) or that is incurred under imprest supply but not included in an Appropriation (Supplementary Estimates) Act by the end of the financial year, is classed as “unappropriated expenditure” and remains so until it is subsequently validated by Parliament.

Unappropriated expenditure is subject to specific requirements in the Public Finance Act 1989:

  • it must be disclosed in the annual financial statements of the Government, and of the relevant administering department, and
  • it must be retrospectively validated by Parliament through the passing of an Appropriation (Confirmation and Validation) Act.

The following table describes the various types of unappropriated expenditure that can typically occur during the year. Categories (A) to (C) represent unappropriated expenses with authority, whilst categories (D) to (F) represent unappropriated expenditure without authority. All unappropriated expenditure is confirmed or validated via an Appropriation Bill in the following year.

Category of unappropriated expenditure Reporting requirements to Parliament under the Act
(A)Approved by the Minister of Finance under Section 26B of the Public Finance Act 1989 Where the amount in excess (but within the scope) of an existing appropriation was within $10,000 or 2% of the appropriation, Section 26B of the Act authorises the Minister of Finance to approve these items. Such items must also be confirmed by Parliament in the Appropriation Act for the year.
(B)With Cabinet authority to use imprest supply but in excess of appropriation prior to the end of the financial year

Where the unappropriated items exceed the limits available for approval under Section 26B, they fall into one of five categories of unappropriated expenditure.

All such instances are unlawful unless validated by Parliament through an Appropriation Act (Section 26C of the Act).

The validating legislation will be accompanied by a report to the House of Representatives that sets out each unappropriated item together with an explanation made by the Minister responsible for the appropriation.

(C)With Cabinet authority to use imprest supply but without appropriation prior to the end of the financial year
(D)In excess of appropriation and without prior Cabinet authority to use imprest supply
(E)Outside scope of an appropriation and without prior Cabinet authority to use imprest supply
(F)  Without appropriation and without prior Cabinet authority to use imprest supply

The following graphs show the number of unappropriated items by category of unappropriated expenditure over the last five years as well as the amount of unappropriated expenditure.

Unappropriated expenditure by category

This graph shows any unappropriated expenditure in the year that it related to and not the year it was reported.

In 2019, there were a total of 840 appropriations (2018: 825). In the 2019 financial year there were 14 instances of expenditure (2018: 21) that either exceeded the amount appropriated or did not have an appropriation.

30 June
2019
Number
30 June
2018
Number
    30 June
2019
$m
30 June
2018
$m
    By category      
4 3 Approved by the Minister of Finance A 11 16
4 Cabinet authority to use imprest supply but in excess of appropriation B 11
1 Cabinet authority to use imprest supply but without appropriation C 23
4 7 Without Cabinet authority and in excess of appropriation D 161 12
2 3 Without Cabinet authority and outside scope E 6 49
4 3 Without Cabinet authority and without appropriation F 27 17
14 21 Total unappropriated expenditure   205 128

This table shows any unappropriated expenditure in the year that it related to and not the year it was reported.

(A) Expenses and capital incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989

(A) Expenses and capital incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
Department of Conservation      
Vote Conservation Departmental Output Expenses    
  Management of Recreational Opportunities 165,782 2,911

The Department of Conservation incurred expenses in excess of their appropriation predominately due to the West Coast storm event that occurred in March 2019. The storm severely damaged a number of visitor assets and led to unplanned operational expenditure in the last quarter of the financial year.

(A) Expenses and capital incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
Ministry of Foreign Affairs and Trade      
Vote Foreign Affairs and Trade Departmental Output Expenses    
  Policy Advice and Representation - Other Countries 275,735 1,479
       
  Departmental Output Expenses    
  Consular Services 27,097 315

The Ministry of Foreign Affairs and Trade has recognised an increased liability for non-compliance with the Holiday Act 2003 resulting in increased costs allocated to the Consular Services and Policy Advice and Representation - Other Countries appropriations.

(A) Expenses and capital incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
Ministry of Health      
Vote Health Non-Departmental Output Expenses    
  National Disability Support Services 1,351,707 6,690

The Ministry of Health incurred expenses that were higher than appropriated, in the National Disability Support Services appropriation, mainly due to higher costs and growing demand.

(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
Ministry of Business, Innovation and Employment      
Vote Building and Housing Non-Departmental Other Expenses    
  Housing Infrastructure Fund - Fair Value Write Down (MYA) 0 151,862

Between 1 July and 30 September 2018, Ministry of Business, Innovation and Employment (MBIE) signed Housing Infrastructure Fund loan agreements to provide interest-free loan facilities of up to $539.400 million. The expense, in relation to the concession (interest free nature of the loans), was not recognised against the Housing Infrastructure Fund - Fair Value Write-Down appropriation until after the entire appropriation was transferred to the Ministry of Housing and Urban Development. Therefore, since no authority was retained by MBIE, the fair value write-down expense was incurred in excess of appropriation.

(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
Ministry for the Environment      
Vote Environment Non-Departmental Other Expenses    
  Waste Disposal Levy Disbursements to Territorial Local Authorities 18,000 489

The Crown is required to pay 50% of the revenue collected from the Waste Disposal Levy to Territorial Local authorities. As the revenue collected this year was higher than expected, this has resulted in expenses for this year exceeding the amount appropriated.

(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Authority at the
time of breach

$000
Amount without or
exceeding appropriation
$000
New Zealand Defence Force      
Vote Defence Force Departmental Output Expenses    
  Army Capabilities Prepared for Joint Operations and Other Tasks    
  2018/19 862,038 5,521
  2014/15 700,000 8,572
  Air Force Capabilities Prepared for Joint Operations and Other Tasks    
  2017/18 810,216 1,425
  2016/17 743,953 3,496
  2015/16 736,934 4,919
  2014/15 737,300 5,143
  Navy Capabilities Prepared for Joint Operations and Other Tasks    
  2016/17 443,943 369
  2015/16 459,709 2,570
  2014/15 454,000 1,361
  Multi-Category Appropriation    
  Protection of New Zealand and New Zealanders    
  2018/19 477,945 3,070
  2017/18 439,795 4,156
  2016/17 437,254 1,791
  2015/16 430,412 29

Due to a change in the technical accounting for the treatment of cost recoveries (primarily related to service housing and barracks) the New Zealand Defence Force (NZDF) has incurred costs that were higher than appropriations. In all previous financial years the NZDF had offset cost recoveries against the related expense. These cost recoveries are now treated as revenue, increasing the related expense to more than the total authority, resulting in unappropriated expenditure.

The NZDF has offset the cost recoveries against the related expense since the formation of the NZDF under the Defence Act 1990. Given the timespan, it is not possible to quantify the amount of unappropriated expenses prior to the 2014/15 financial year.

(E) Expenses and capital expenditure incurred outside of scope of an appropriation and without prior Cabinet authority to use imprest supply

(E) Expenses and capital expenditure incurred outside of scope of an appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Ministry of Social Development    
Vote Social Development Benefits or Related Expenses  
  Winter Energy Payment 3,373

A small portion of payments from the Winter Energy Payment (WEP) appropriation were outside of its scope. These situations were; WEP being paid to clients who pay the maximum contribution to the cost of their residential care, and who receive a top up subsidy from a District Health Board; and where a client was overseas during the eligibility period, WEP was paid even when clients were overseas for longer than four weeks. The Social Securities Act 1964 has been amended by way of the Social Security (Winter Energy Payment) Amendment Act, to allow for payments in these situations, from 1 May 2019.

(E) Expenses and capital expenditure incurred outside of scope of an appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Ministry of Education    
Vote Education Non-Departmental Output Expenses  
  School Risk Management Scheme  
  2018/19 2,401
  2017/18 2,969
  2016/17 3,401
  2015/16 2,247
  2014/15 2,895

The Ministry of Education operates insurance activities under the School Risk Management Scheme as per the Education Act 1989 section 78D. The expenses incurred as an insurer were outside of scope of the Primary Education and Secondary Education appropriations. These unappropriated expenses have been incurred since the scheme was started in 1991. Given the timespan, it is not possible to quantify the entire amount of unappropriated expenses prior to 2014/15. A new Non-Departmental Output Expense appropriation was established in April 2019.

(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Department of the Prime Minister and Cabinet    
Vote Prime Minister and Cabinet Non-Departmental Other Expenses  
  Settlement of Legal Dispute 500

The Department of the Prime Minister and Cabinet made a payment to settle a legal dispute inherited from the former Canterbury Earthquake Recovery Authority. As no suitable Non-Departmental Other Expenses appropriation existed for this purpose the expenditure was unappropriated.

(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Ministry of Business, Innovation and Employment    
Vote Business Science and Innovation Multi-Category Appropriation  
  Regional Economic Development: Provincial Growth Fund  
  Departmental Output Expenses  
  Operational Support of Regional and Sector Investments 2,527

On 12 August 2018 the Minister of Finance approved operational funding for the Provincial Development Unit. Though this funding was approved, the approval to establish the necessary new appropriation category was overlooked. This was discovered in September 2018 and the new appropriation category was approved on 7 October 2018. However, expenses incurred in this category between 12 August and 7 October 2018 were unappropriated.

(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Ministry of Business, Innovation and Employment    
Vote Building and Housing Non-Departmental Other Expenses  
  Remediation of Facades and Parapets of Unreinforced Masonry Buildings in at risk areas 926

Ministry of Business, Innovation and Employment sought an expense transfer to move some of the appropriation from 2017/18 to 2018/19. The approval for this transfer was after the expense was incurred, resulting in unappropriated expenditure.

(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply
Department
Vote
Expense type
Appropriation Name
Amount without or
exceeding appropriation
$000
Ministry of Health    
Vote Health Non-Departmental Other Expenses  
  Write off of Crown Investments 22,588

The Ministry of Health had a number of health related capital investments reported as assets in prior years. In the current year an assessment of these investments found they needed to be written off. The total amount of these investments was $22,588,000. There was no appropriation authorising these write offs to occur resulting in unappropriated expenditure.

Statement of Expenses or Capital Expenditure Incurred in Emergencies
for the year ended 30 June 2019

Under section 25 of the Public Finance Act 1989, if a state of national emergency is declared under the Civil Defence Act 1983, Civil Defence Emergency Management Act 2002, or if the Government declares an emergency because of any situation that affects the public health or safety of New Zealand, the Minister of Finance may approve expenses or capital expenditure to meet such emergency or disaster whether or not an appropriation by Parliament is available for the purpose. Once expenses or capital expenditure have been incurred, the amounts that have not been appropriated must be disclosed in the annual financial statements of the Government for the financial year and sanctioned by Parliament in an Appropriation Act.

During the year there were no such emergency expenses or capital expenditure incurred.

Statement of Trust Money
for the year ended 30 June 2019

Trust money is defined by section 66 of the Public Finance Act 1989 as:

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

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

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

Under the Act, the Treasury has the responsibility to manage and invest trust money. The Treasury may appoint agents (including departments) to act on its behalf. Written Notices of Appointment to Manage and Invest Trust Money are issued in these cases. Section 68 of the Act establishes the constraints on the investment of trust money.

Statement of Trust Money (continued)
for the year ended 30 June 2019
Department
     Trust Account
As at
30 June
2018
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2019
$000
Department of Conservation            
Bonds/Deposits Trust 7,025 331  (274) 198 -   7,280
Conservation Project Trust 2,445 816  (1,868) 40 -   1,433
National Parks Trust 182 127  (102) 3 -   210
Walkways Trust 12 -   -   -   -   12
Wildlife and Reserves Trusts1 -   -   -   -   -   -  
Department of Corrections            
Prisons Trust 1,994 19,877  (19,748) -   -   2,123
Crown Law Office            
Legal Claims Trust 62 1,199  (1,256) 1  (1) 5
Ministry of Business, Innovation and Employment            
Coal and Minerals Deposits Trust 291 26  (1) -   -   316
Criminal Assets Management and Enforcement Regulators Association Trust 19 -    (19) -   -   -  
Employment Relations Service Trust 676 659  (592) 12  (20) 735
Employment Relations Act Security of costs Trust1 -   -   -   -   -   -  
New Zealand Immigration Service Trust 696 87 (324) 10 -   469
Official Assignee's Office Trust 24,719 26,482  (15,061) 701  (14,365) 22,476
Patent Co-operation Treaty Fees Trust 248 836  (939) 7  (47) 105
Petroleum Deposits Trust 80 -   -   -   -   80
Proceeds of Crime Trust 136,262 50,629  (15,114) 2,201  (7,367) 166,611
Residential Tenancies Bond Trust 545,950 255,782 (214,042) 21,573  (21,573) 587,690
Weathertight Services Financial Assistance Trust -   12,536  (12,536) -   -   -  
Ministry for Culture and Heritage            
Dictionary of New Zealand Biography Trust 10 -   -   -    (10) -  
New Zealand Historical Atlas Trust 162 -   -   1  (57) 106
New Zealand History Research Trust 1,359 -    (75) 44 -   1,328
New Zealand Oral History Awards Trust 707 -    (98) 21 -   630
War History Trust 48 -   -   1  (28) 21
National War Memorial Trust 8 -   -   -    (8) -  
New Zealand Customs Services            
Customs Regional Deposit/Bonds Trust No.1, No.2 & No.3 52,185 13,000  (10,215) -   -   54,970
Health Promotion Agency Trust 1,009 13,178  (13,330) -   -   857
Heavy Engineering Research Association Trust 187 1,947  (1,962) -   -   172
New Zealand Customs Service IBM New Zealand Customs Service IBM MSA Trust1 -   -   -   -   -   -  
New Zealand Customs Service Multiple Deposit Scheme Release Trust 113 10,301  (9,937) -   -   477
New Zealand Customs Service Multiple Deposit Scheme Suspense Trust 6 13,444  (13,391) -   -   59
Statement of Trust Money (continued)
for the year ended 30 June 2019
Department
Trust Account
As at
30 June
2018
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2019
$000
Ministry of Education            
Code of Practice for Providers who Enrol International Students Trust 2,648 4,092  (729) 68  (870) 5,209
Conferences Trust -   -   -   -   -        -  
Ngārimu VC and 28th (Māori) Battalion Memorial Scholarship Fund Board Trust   1,211 136  (193) 51  (84) 1,121
Capital Works Construction Funds Trust1   -   -   -   -   -         -  
Ministry of Foreign Affairs and Trade            
Afghanistan New Zealand Aid Programme Trust 3 -   -   -   -              3
Cook Island Trust 1 2,000  (1,676) 2 -      327
Government Administration Building, Niue Trust 34 -   -   -   -          34
New Zealand/France Friendship Trust 53 58  (47) 1  (13)       52
Egna Electrification Project, Papua New Guinea Trust2   -   6,341 -   6 -   6,347
Niue Development Assistance Trust 6,173 1,382  (2,286) 79 -   5,348
Ministry of Health            
Medicines Review Objectors Deposit Trust1 -   -   -   -   -   -
Inland Revenue Department            
Child Support Agency Trust 38,122 263,737  (278,564) -   -   23,295
KiwiSaver Returned Transactions Trust 143 147,003  (147,011) -   -      135
KiwiSaver Employer Trust1 -   -   -   -   -            -  
Reciprocal Child Support Agreement Trust 536 14,670  (14,691) -   -       515
Department of Internal Affairs            
Christchurch Earthquake Appeal Trust 2,383 2,876  (4,188) 811  (1,850)          32
Interloan Billing System Trust 42 -   -   453  (453)          42
Macklin Bequest Fund Trust  299 -   -   9  (308)          -  
Retention Trust Account      340 314  (289) -   -       365
Market Place Trust Account2   -   -   -   -   -             -  
New Zealand 1990 Scholarship Trust1 -   -   -   -   -             -  
Ministry of Justice            
Courts Law Trust  9,993 40,120  (29,160) -   -   20,953
Election Candidates Deposit Trust1 -   -   -   -   -                    -  
Employment Court Trust 174 439  (323) -   -   290
Fines Trust  46,149 195,040  (196,898) -   -   44,291
Foreign Currency Euro Fund Trust -   -   -   -   -   -  
Foreign Currency United States Dollar Trust -   -   -   -   -   -  
Legal Complaints Review Officer Trust1 -   -   -   -   -   -  
Māori Land Court Trust  42 19 -   -   -   61
Supreme Court Trust 86 117  (87) -   -   116
Victims' Claims Trust 147 513  (391) -   -   269
Statement of Trust Money (continued)
for the year ended 30 June 2019
Department
Trust Account
As at
30 June
2018
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2019
$000
Land Information New Zealand            
Crown Forestry Licences Trust 512 6,046  (5,451) -   -   1,107
Deposits Trust1 -   -   -   -   -                -  
Endowment Rentals Trust 5,697 376  (6,018) -   -             55
Hunter Gift for the Settlement of Discharged Soldiers Trust 57 1 -   -   -             58
New Zealand Police            
Bequests, Donations and Appeals Trust 13 5  (10) -   -                  8
Found Money Trust 194 228  (227) -   -        195
Money in Custody Trust 18,719 7,655  (11,190) -   -   15,184
Reparation Trust 1 59  (59) -   -                  1
Money forfeited to Crown 90 2,130  (2,019) -   -        201
Ministry for Primary Industries            
MAF Overfishing Account Trust 3,576 9,834  (10,946) 143 -   2,607
MAF Fish Forfeit Property Trust 1,422 778  (1,559) 188 -        829
Meat Board Levies Trust     174 63,223  (63,396) -    (1)              -  
National Animal Identification Tracing Trust 255 2,493  (2,613) -   -        135
Seized Timber Trust1   -   -   -   -   -                -  
Department of the Prime Minister and Cabinet            
Christchurch Cathedral Restoration Trust    1 -   -   -   -   1
Ministry of Social Development            
Australian Dollar Embargoed Arrears Trust 519 11,965  (11,648) 16 -        852
Australian Recovery Debt Trust 1 6  (7) -   -                -  
Maintenance Trust 31 513  (515) 3 -             32
Netherlands Recovery Debt Trust -   113  (98) -   -             15
Overseas Debt Recovery Trust1 -   -   -   -   -                -  
Oranga Tamariki - Ministry for Children            
CYF Custody Trust Account    6 -   -    1 -                  7
WR Wallace Trust 493 32  (15) 15 -        525
The Treasury            
Genesis Share Offer Trust 1 -   -   -   -                  1
Mighty River Share Offer Trust 1 -   -   -   -                  1
Trustee Act 1956 Trust 12,779 3,058  (322) -   -   15,515
Total 929,576 1,208,629  (1,123,510) 26,659  (47,055) 994,299
  1. Inoperative trust account
  2. New trust account

Additional Financial Information

Fiscal Indicator Analysis

for the year ended 30 June 2019

The purpose of the following fiscal indicator analysis is to provide a link between the financial statements (published on pages 42 to 140) and the fiscal indicators used to measure the Government's performance against the fiscal objectives set out in the Fiscal Strategy Report.

The fiscal analysis comprises two statements: core Crown residual cash and debt.

Core Crown Residual Cash

The core Crown residual cash statement measures the core Crown cash surplus (or deficit), after operating and investing cash requirements are met, that is available for the Government to invest, repay, or, in the case of a deficit, fund in any given year.

Debt

The debt statement presents the calculation of both gross debt and core Crown net debt.

Gross debt is defined as gross-sovereign issued debt and represents debt issued by the sovereign (core Crown) and includes Government stock held by the NZS Fund, Accident Compensation Corporation, and the Earthquake Commission. Gross debt excludes Reserve Bank settlement cash and Reserve Bank bills as these are issued for liquidity management purposes.

Core Crown net debt represents gross debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing.

Fiscal Indicator Analysis - Core Crown Residual Cash
for the year ended 30 June 2019

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Core Crown Cash Flows from Operations    
83,525 83,238 Tax receipts 83,716 80,079
952 982 Other sovereign receipts 1,359 900
692 691 Interest receipts 712 650
3,324 3,236 Sale of goods & services and other receipts 3,200 3,127
(29,308) (29,097) Transfer payments and subsidies (28,910) (26,253)
(51,171) (52,146) Personnel and operating costs (50,591) (47,740)
(3,442) (3,487) Finance costs (3,450) (3,483)
(760) (265) Forecast for future new operating spending
1,145 800 Top-down expense adjustment
4,957 3,952 Net core Crown operating cash flows 6,036 7,280
(3,229) (3,362) Net purchase of physical assets (3,002) (2,515)
(54) (94) Net repayment / (issue) of advances (86) (92)
(3,882) (3,073) Net purchase of investments (2,658) (2,827)
(1,000) (1,000) Contribution to NZS Fund (1,000) (500)
(1,267) (458) Forecast for future new capital spending
600 1,250 Top-down capital adjustment
(8,832) (6,737) Net Core Crown capital cash flows (6,746) (5,934)
(3,875) (2,785) Residual cash surplus / (deficit) (710) 1,346
    Residual cash is (invested) / funded as follows:    
    Debt programme cash flows    
    Market:    
7,862 8,430      Issue of government bonds 8,372 7,043
(11,240) (11,974)      Repayment of government bonds (11,908) (6,828)
(2,000) (705)      Net issue/(repayment) of short-term borrowing1 (730) 100
(5,378) (4,249) Total market debt cash flows (4,266) 315
    Non market:    
     Repayment of government bonds
     Net issue/(repayment) of short-term borrowing
Total non-market debt cash flows
(5,378) (4,249) Total debt programme cash flows (4,266) 315
    Other borrowing cash flows    
(451) 643 Net (repayment)/issue of other New Zealand dollar borrowing (2,239) 2,190
425 (2,235) Net (repayment)/issue of foreign currency borrowing 1,547 (865)
(26) (1,592) Total other borrowing cash flows (692) 1,325
    Investing cash flows    
9,082 10,178 Other net sale/(purchase) of marketable securities and deposits 5,163 (3,041)
196 233 Issues of circulating currency 437 396
1 (1,785) Decrease/(increase) in cash 68 (341)
9,279 8,626 Total investing cash flows 5,668 (2,986)
3,875 2,785 Residual cash (invested) / funded 710 (1,346)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper

Fiscal Indicator Analysis - Debt
as at 30 June 2019

2019 Forecast at   Actual
Budget
2018
$m
Budget
2019
$m
30 June
2019
$m
30 June
2018
$m
    Gross and net core Crown debt analysis:    
112,890 112,057 Total borrowings 110,477 115,652
37.1% 37.4% As a percentage of GDP 36.8% 39.9%
    Net core Crown debt:    
91,655 91,725 Core Crown borrowings1 92,062 98,295
(2,284) (2,679) Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (1,132) (2,858)
89,371 89,046 Gross sovereign-issued debt2 90,930 95,437
79,453 83,889 Less core Crown financial assets3 88,938 88,226
9,918 5,157 Net core Crown debt (including NZS Fund)4 1,992 7,211
42,302