Financial Statements of the Government of New Zealand for the Year Ended 30 June 2021

Ministerial Statement#

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The 2020/21 accounts show New Zealand's economy is continuing to perform strongly and better than expected during the economic shock caused by the COVID-19 pandemic. This year's results show a lower deficit, higher tax take and lower net debt than forecast by the Treasury in Budget 2021. This means New Zealand is well placed to handle the on-going impact of this shock on the economy and is in a strong position to rebuild from COVID-19.

New Zealand went into this pandemic in a strong fiscal position. Although there remains volatility in the global outlook, New Zealand is in a good position to deal with any uncertainties.

The Government's financial results show the operating balance before gains and losses (OBEGAL) was a deficit of $4.6 billion (1.3% of GDP) in 2020/21. While the deficit was expected due to the impact of COVID-19, it was $10.6 billion better than what the Treasury forecast in Budget 2021, largely owing to the economy continuing to exceed Treasury forecasts.

Core Crown tax revenue of $98 billion was $6.4 billion higher than forecast in Budget 2021. With the country being in lower Alert Levels for most of the year, economic conditions were better than forecast and both labour market conditions and consumption have driven the increase in tax revenue.

Core Crown expenditure of $107.8 billion was $3 billion lower than forecast but on a similar level to last year's expenditure. Last year the COVID Response and Recovery Fund (CRRF) was established with $50 billion signalled for funding the Government's response. As at 30 June 2021, the majority of the CRRF had been allocated with $4.7 billion remaining to be allocated to support future health and economic responses needed in the case of further COVID-19 resurgences such as the recent delta outbreak.

Net core Crown debt was 30% of GDP at 30 June, below the 34% forecast in the Budget 2021 which is significantly lower than other countries around the world.

Investment in infrastructure continues to grow with the Crown infrastructure investment this year being $9.4 billion, $0.4 billion higher than in the previous year. Core Crown capital investment was $12.7 billion during the year, $3.3 billion higher than the previous year and included $2.1 billion invested into the Super Fund to help cover future retirement costs. The core Crown residual cash deficit was $13.8 billion, compared to a forecast deficit of $25.3 billion at the Budget 2021. This lower cash deficit meant less cash needed to be borrowed and resulted in a lower net debt position than forecast.

The COVID-19 pandemic will continue to have an effect on the New Zealand and global economies, with the most recent delta outbreak in New Zealand likely to affect next year's results. However, the 2020/21 Crown accounts on the back of a solid result in 2019/20 put New Zealand in a strong position to support social and economic recovery and development.

 

Hon Grant Robertson
Minister of Finance

30 September 2021

Statement of Responsibility#

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

The Treasury is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance that the transactions recorded are within statutory authority and properly record the use of all public financial resources by the Crown. 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 2021

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

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2021 and its operations for the year ended on that date.

 

Hon Grant Robertson
Minister of Finance

30 September 2021

Commentary on the Financial Statements#

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Fiscal Overview#

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Fiscal Strategy#

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

The main purpose of the Government's fiscal indicators is as a communications device, designed with the objective of improving the quality of information available to inform and analyse how the Government is performing against its fiscal strategy. These indicators can be generally accepted accounting practice (GAAP) measures but can also be derived from the GAAP numbers presented in the financial statements.

Further information on the Government's fiscal strategy can be found in The Wellbeing Budget 2021: Securing Our Recovery published with the Government's budget on 20 May 2021.

Source: The Treasury

1. The ‘Actual 2019' comparators have been restated for the impact of new accounting standards effective from 1 July 2019. At this point in time, the earlier years in the table have not been restated. Refer to note 28 in the 2020 Financial Statements of Government for more details.
2. Gross sovereign-issued debt including Reserve Bank of New Zealand (Reserve Bank) settlement cash and Reserve Bank bills.
3. Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
4. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.
5. Excluding minority interests.
6. GDP is updated to reflect the most recently published numbers (Source: Stats NZ).

The table below shows the Government's performance against its fiscal strategy with regards to the short-term fiscal intentions.

Source: The Treasury

Fiscal Indicators#

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OBEGAL (Operating Balance before Gains and Losses)

The OBEGAL deficit of $4.6 billion for 2020/21 represents an improvement of $18.5 billion from the OBEGAL deficit recognised last year. This is largely a reflection of an increase in core Crown revenue as the economy rebounded from the initial impact of the COVID-19 pandemic and a reduction in core Crown costs. In addition, Crown entities and State-owned Enterprises (SOE's) have reduced their deficits (see Figure 1).

The improvement in the economy has driven an increase in core Crown tax revenue of $12.9 billion in the year to 30 June 2021. Core Crown expenses have remained relatively consistent, being $1.0 billion lower than the prior year at $107.8 billion. The changing response to the COVID-19 pandemic has seen a reduction in social security and welfare expenses after the large increase in 2019/20 and an increase in health and transport spending. When this is combined with the improved results from Crown entities and SOEs, there is an improvement in the OBEGAL deficit. The changes in revenue and expenses are discussed further on pages 15 to 18.

Figure 1 shows the composition of OBEGAL from the different reporting segments of the Government. The most significant change is in the core Crown segment, which reported an OBEGAL deficit of $2.8 billion, an improvement of $14.1 billion from the deficit reported last year. This is largely attributable to the rise in core Crown tax revenue discussed further on page 15.

Figure 1 - Components of OBEGAL by segment

Source:        The Treasury

The Crown entity segment reported a deficit of $2.1 billion, $2.0 billion less than the previous year's deficit of $4.1 billion. The primary driver of this is higher recoveries from reinsurance with a reduction in insurance expense and underwriting costs recognised by the Earthquake Commission (EQC). The remainder of the improvement is across a number of entities.

For the year ended 30 June 2021, the SOE segment reported a deficit of $0.1 billion, an improvement of $0.8 billion from the $0.9 billion deficit last year. The current year deficit is partly owing to there being lower impairment expenses in the current year.

The OBEGAL deficit of $4.6 billion is also an improvement on the OBEGAL deficit of $15.1 billion forecast in Budget 2021. The variance against Budget 2021 is primarily owing to core Crown tax and other revenue, which have been higher than forecast and core Crown expenses which have been lower than forecast (discussed further on pages 27 and 28).

Operating Balance

Overall, the operating balance for the year was a surplus of $16.2 billion (see Figure 2), largely owing to $8.2 billion of actuarial gains on ACC outstanding claims and net gains on financial instruments of $18.1 billion, mostly from the NZS Fund and ACC investment activities. Partially offsetting these gains are losses of $4.0 billion recognised relating to the Large-Scale Asset Purchase (LSAP) programme (refer to page 19), and $1.5 billion of losses in relation to the Emissions Trading Scheme (ETS). A large portion of these gains and losses are non-cash valuation changes. These movements are discussed further on page 21. It is expected that future interest savings over time will largely offset the losses of the LSAP programme. A reconciliation of the operating balance and OBEGAL can be seen on page 157.

Figure 2 - Operating balance (excluding minority interests)

Source: The Treasury

Core Crown Residual Cash

For the year ended 30 June 2021, there was a residual cash deficit of $13.8 billion. This was the result of a net core Crown operating cash flow deficit of $1.1 billion, combined with a $12.7 billion deficit in net cash flows from core Crown capital spending. This is a $9.9 billion improvement in the residual cash deficit from last year (see Figure 3).

Figure 3 - Core Crown residual cash

Source: The Treasury

Tax receipts were $96.6 billion, an increase of $12.3 billion on the year to 30 June 2020. The increase in tax receipts is broadly in line with the increase in core Crown tax revenue (discussed on page 15) and largely reflects the improvement in economic conditions in the year to 30 June 2021.

Core Crown capital spending for 2020/21 totalled $12.7 billion, an increase of $3.3 billion from the previous year. Advances by the core Crown have increased primarily as the Funding for Lending Programme (FLP) commenced, being $3.1 billion of lending, partially offset by a reduction in lending via the Small Business Cashflow Scheme. Other components of the increase in capital spending include an additional $0.7 billion invested in the NZS Fund and an additional $0.5 billion invested in the Ngāpuhi Investment Fund, Crown Regional Holdings and City Rail Link.

Net Core Crown Debt

Net core Crown debt has increased by $18.7 billion from $83.4 billion in 2019/20 to $102.1 billion in 2020/21. As a share of the economy, net core Crown debt increased to 30.1% of GDP (compared to 26.3% of GDP a year earlier) (see Figure 4). The residual cash shortfall of $13.8 billion is the main driver of the increase, as explained in the residual cash section above.

Figure 4 - Net core Crown debt

Source: The Treasury

In addition to the residual cash deficit, the LSAP programme has adversely impacted net core Crown debt as the level of the increase in settlement deposits with Reserve Bank is greater than the reduction in government bonds borrowing backed out on consolidation (as discussed on page 19).

The net core Crown debt balance at 30 June 2021 was $11.6 billion below forecast at Budget 2021, mainly driven by the residual cash deficit being $11.5 billion lower than forecast at Budget 2021.

Gross Sovereign-Issued Debt

Gross sovereign-issued debt (GSID) has increased by $7.1 billion to $131.3 billion to fund cash deficits that could not be funded from assets already available. As a percentage of the economy, GSID decreased to 38.6% of GDP (39.1% of GDP a year earlier).

GSID at $131.3 billion was $5.7 lower than forecast at Budget 2021, largely due to the Reserve Bank borrowings being below forecast, relating to variances in the system liquidity management requirements.

Financial Statements Summary#

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The Financial Statements of the Government reflects a stronger than expected recovery to the initial shock of the COVID‑19 pandemic which has been a key factor in the Government's fiscal performance and position during the 2020/21 fiscal year. This is shown in a return to surplus in the operating balance and a significant increase in net worth attributable to the Crown. These results are stronger than forecast in Budget 2021.

• Core Crown tax revenue was $12.9 billion higher than last year and higher than the Budget 2021 forecast by $6.4 billion (page 15).
• Core Crown expenses were $1.0 billion lower than last year and $3.0 billion lower than the Budget 2021 forecast (page 16).
• The operating balance was a surplus of $16.2 billion largely a result of higher core Crown revenue of $13.0 billion along with gains on financial and non-financial instruments being $30.5 billion greater than last year (page 21).
• Net worth has increased by $41.3 billion to $157.2 billion (page 22) largely as a result of the operating balance surplus and significant upward property, plant and equipment revaluations.

These financial statements contain the audited results for the financial year ended 30 June 2021. The results are compared against the previous year and against forecasts for the 2020/21 year:

• Budget 2020 refers to the 2020 Budget Economic and Fiscal Update published in May 2020, and
• Budget 2021 refers to the 2021 Budget Economic and Fiscal Update published in May 2021.

A comparison of the year end results against Budget 2020 is included on pages 13 to 14 and against Budget 2021 is included on pages 27 to 28.

The Financial Statements of the Government received an unmodified auditor's opinion for the year ended 30 June 2021.

This commentary should be read in conjunction with the audited financial statements on pages 41 to 153.

Source: The Treasury

1. The 'Actual 2019' comparators have been restated for the impact of new accounting standards effective from 1 July 2019. At this point in time, the earlier years in the table have not been restated. Refer to note 28 in the 2020 Financial Statements of Government for more details.
2. Excluding minority interests.

A strong economic recovery from the initial shock of the COVID-19 pandemic has led to an increase in core Crown tax revenue…

The economy has recovered from the initial impacts of the first COVID-19 lockdown, with strong economic growth since 30 June 2020. In 2020 New Zealand had two quarters of negative GDP growth and unemployment was expected to rise. Since then the economy has shown strong signs of recovery, with Stats NZ reporting GDP growth of 5.1% over the June 2021 year.

Unemployment for the 2021 June year came in slightly below (-0.1%) the previous year. In addition, the annual increase in the working-age population (0.8%), number of people employed (1.7%) and average wage rates (2.1%) in the year to the June 2021 quarter was stronger than expected. The stronger than expected economic conditions have contributed to an increase in core Crown tax revenue, which is up $12.9 billion from last year to $98.0 billion (see Figure 5). There have been significant improvements in most forms of tax revenue. Of particular note, GST revenue has increased by $3.8 billion as household consumption and residential investment increased. Corporate and other persons’ tax have increased by $3.7 billion and $1.8 billion respectively indicating higher taxable profits for these groups as the economy recovered from the initial impact of the COVID-19 pandemic.

Figure 5 - Core Crown tax revenue and nominal GDP growth

Source: The Treasury

...while core Crown expenses remain consistent with the prior year...

While costs are largely consistent with the prior year, there is a change in the mix of expenditure reflecting new budget decisions and changes in the Government's response to the COVID-19 pandemic.

Of the changes in core Crown expenses (see Figure 6), the most significant growth was in health expenditure of $2.9 billion as a result of Budget 2020 decisions and the on-going pandemic response. Transport expenditure has also increased by $2.5 billion and includes costs associated with the COVID-19 pandemic.

Figure 6 - Core Crown expenses

Source: The Treasury

The largest reduction in core Crown expenses was in social security and welfare costs which were lower by $7.3 billion, largely owing to a reduction in wage subsidy costs of $10.9 billion during the financial year (see box on pages 18 to 20). Lower interest rates during 2020/21 were the main driver behind lower core Crown finance costs of $1.3 billion.

As a share of the economy, core Crown expenses reduced to 31.7% of GDP (34.3% of GDP in 2020); in nominal terms, core Crown expenses are relatively consistent at $107.8 billion, a slight reduction of $1.0 billion on the prior year.

…the operating results from Crown entities and SOEs have improved…

Crown entities and SOEs have recorded a $2.2 billion operating balance deficit, a change of $2.8 billion from the $5.0 billion deficit the previous year.

A number of Crown entities and SOEs are showing stronger results than the prior year and one-off costs that occurred in the prior year are not being incurred in the current year. Reductions in insurance expenditure has also positively impacted the operating balance.

…and substantial net gains have positively impacted the operating balance…

Overall, total net gains for 2020/21 were $21.0 billion. This is largely owing to $18.1 billion of gains on financial instruments, primarily NZS Fund and ACC investment gains, and the ACC outstanding claims liability being valued downwards by $8.2 billion. Offsetting these gains were losses in relation to the LSAP programme of $4.0 billion and losses on ETS obligations of $1.5 billion.

...resulting in an operating balance surplus…

All of the factors outlined above led to an operating balance surplus of $16.2 billion for the year ended 30 June 2021 (see Figure 7).

Figure 7 - Operating balance (excluding minority interests)

Source: The Treasury

...and an increase in net worth as the growth in assets exceeds that in liabilities

The increase in net worth has been largely driven by property, plant and equipment asset revaluations of $22.1 billion. The defined benefit plans and veterans' disability entitlement liabilities were revalued downward by $2.8 billion, which also increased net worth.

When these revaluations are combined with the operating balance surplus of $16.2 billion and minority interest transactions, net worth increased to $157.2 billion, an increase of $41.3 billion (see Figure 8).

Figure 8 - Net worth

Source: The Treasury

Total assets grew by $45.2 billion in the 2020/21 year to reach $438.6 billion, while at the same time liabilities increased by $3.9 billion to reach $281.4 billion.

Of the increase in assets, property, plant and equipment increased the most by $26.7 billion (including revaluation uplifts of $22.1 billion) and financial assets grew by $17.9 billion. Of the increase in liabilities, borrowings increased by $9.8 billion, which was offset by insurance liabilities decreasing by $6.4 billion.

Revenue#

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Total Crown revenue was $129.3 billion, an increase of $13.3 billion from last year largely owing to increases in core Crown tax revenue.

Source: The Treasury

Core Crown Tax Revenue

Core Crown tax revenue was $98.0 billion, up $12.9 billion (15.1%) from the year before. The increase in core Crown tax revenue was broadly as a result of the economic rebound since the initial outbreak of the COVID-19 pandemic in the first half of 2020 (see Figure 9).

Figure 9 - Core Crown tax revenue

Source: The Treasury

Most major tax types have increased over the year with four tax types making up most of the movement (see Table 8):

• Goods and Services Tax (GST) was $3.8 billion (17.5%) higher than last year, mostly owing to stronger private consumption and residential investment.
• Corporate tax and other persons' tax revenue increased by $3.7 billion (29.3%) and $1.8 billion (31.4%) respectively. This reflects the strength in taxable profits since the initial impact of the COVID-19 pandemic.
• Source deductions increased by $3.2 billion (9.2%). This increase was owing to wage increases and an increase in the number of people employed.
• Other tax types were relatively static compared to 2019/20.

Source: The Treasury

Expenses#

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Total Crown expenses were $133.7 billion in the current year, $5.2 billion less than last year. Core Crown expenses remained relatively static, decreasing by $1.0 billion. There has been increased funding from the Government for Crown entities, however a large portion of the expenditure by Crown entities is yet to be incurred (for example funding to Crown Infrastructure Partners).

Source: The Treasury

Core Crown Expenses

Core Crown expenses are largely comparable to the prior year, being $107.8 billion in the year to 30 June 2021, $1.0 billion less than the prior year (see Table 10). As a share of the economy, core Crown expenses were 31.7% of GDP, down from 34.3% of GDP last year.

Source: The Treasury

While core Crown expenses are largely the same as the prior year, the functional mix has changed.

The wage subsidy scheme had net expenditure of $1.2 billion in the current year, a reduction of $10.9 billion when compared to the prior year. The current year expense includes refunds of $0.4 billion from recipients of the wage subsidy scheme, which has the effect of reducing the overall expense recognised.

Additionally, core Crown finance costs have reduced by $1.3 billion from the prior year reflecting the lower interest rate environment.

Partially offsetting this decrease are new costs associated with the Government's response to the COVID‑19 pandemic, that include costs related to managed isolation and quarantine, and purchasing and roll out of the vaccine.

Overall, health expenditure increased by $2.9 billion, primarily driven by the COVID‑19 pandemic costs mentioned above, but also as a result of additional funding received for industry cost pressures that were agreed through Budget 2020.

Transport costs have increased by $2.5 billion as funding has been provided to maintain air transport links and contracts have been renegotiated.

New Zealand Superannuation costs were higher than last year by $1.0 billion. This was owing to an increase in recipient numbers due to an ageing population and increasing payment rates.

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 (20%) includes other areas of functional spending (eg, transport, economic and industrial services, defence, environmental protection and finance costs).

Other Expenses

The Crown entity segment expenditure increased by $1.5 billion when compared to last year, with the largest increase being District Health Boards, with an increase of $1.3 billion.

The SOE segment expenditure has decreased by $1.4 billion in the current year, largely relating to Air New Zealand, as impairments recorded last year have not been incurred in the current year and result in a reduction in overall expenditure.

Figure 10 - Composition of core Crown expenses

Source: The Treasury

Operating Balance#

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Operating Balance

The operating balance represents the net position of total Crown revenues, expenses, gains and losses.

Figure 14 shows when overall net gains are combined with total Crown revenue and expenses, the operating balance (excluding minority interests) was a surplus of $16.2 billion.

Figure 14 - Operating balance (excluding minority interests)

Source: The Treasury

Gains on financial instruments of $18.1 billion in the year have increased significantly from the $1.9 billion recognised last year. This reflects the economic rebound in the investment returns after the initial shock of the COVID‑19 pandemic (primarily in NZS Fund and ACC portfolios). This has also driven the student loan valuation increase of $0.7 billion.

Gains on non-financial instruments of $6.9 billion (compared to $7.4 billion of losses last year) largely consisted of actuarial gains on the ACC long term liability, offset by losses on ETS obligations. The ACC liability had a favourable valuation movement of $8.2 billion primarily as a result of increases in discount rates compared to the prior year. The ETS loss was as a result of an increase in the carbon price (from $32.10 last year to $43.45 this year) used to value the ETS liability. Liabilities with long durations such as ACC outstanding claims are particularly sensitive to discount rate movements. If discount rates increase, the liability in today's dollar reduces.

Figure 15 illustrates the increase in risk free discount rates used in the valuation of the ACC liability and GSF liability over the last year.

Figure 15 - Discount rates

Source The Treasury

Total losses of $4.0 billion have been recognised relating to the LSAP programme. The losses arise as repurchased bonds are bought back at the current market bond prices, which have been generally higher than when the bonds were originally issued. It is expected that future interest savings will largely offset the losses of the programme.

Total Crown Balance Sheet#

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Net Worth

Net worth is the difference between total Crown assets (what the government owns) and total Crown 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 of physical assets.

Net worth was $157.2 billion as at 30 June 2021, an increase of $41.3 billion from a year earlier (see Figure 16).

Figure 16 - Net worth

Source: The Treasury

The increased net worth has more than recovered from the reduction in 2019/20, primarily as a result of the operating surplus of $16.2 billion and revaluation uplifts of physical assets of $22.1 billion. Also, favourable revaluations of liabilities, in particular the Government Superannuation Fund and veterans' disability entitlements resulted in $2.8 billion of additional increases, which are presented directly in net worth (not in the operating balance like ACC valuation gains).

As a share of the economy, net worth increased 9.7% from 36.5% of GDP in 2019/20 to 46.2% of GDP in the current year.

Source: The Treasury

Total Crown Balance Sheet

Total Crown assets were $438.6 billion at 30 June 2021, a $45.2 billion increase, with significant increases in financial assets and property, plant and equipment. Total Crown liabilities have increased by a much lower amount, by $3.9 billion from the previous year to reach a total of $281.4 billion, the increase primarily owing to increased borrowings, offset by reductions in insurance liabilities.

The combination of the movements above and the removal of minority interests has resulted in an overall increase in total net worth attributable to the Crown of $41.1 billion in the year to 30 June 2021.

Source: The Treasury

Financial Assets

Financial assets at $201.2 billion were $17.9 billion higher than last year.

The following key areas contributed to the increase:

• The financial asset portfolios managed by ACC and NZS Fund grew by $17.2 billion reflecting strong 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.
• The introduction of the Funding for Lending Programme and Term Lending Facility by the Reserve Bank, which has increased advances by $4.4 billion.
• Growth in Kiwi Group Holdings advances of $3.0 billion primarily through additional mortgage lending.
• Tax receivables have increased by $1.4 billion reflecting increases in tax revenue in the current year.
• Increases in student loan lending of $0.4 billion primarily as a result of revaluations.
• Offsetting these increases is a reduction in marketable securities of $0.3 billion held by Kāinga Ora as the proceeds from prior year's borrowings were used in developing social housing.

Property, Plant and Equipment

The $26.7 billion increase in property, plant and equipment (PPE) was as a result of movements across a number of asset classes such as land, buildings, state highways, electricity generation assets and the rail network (see Figure 17). The increase is mainly a combination of additions and revaluation changes.

Figure 17 - Movements in PPE by asset classes

Source: The Treasury

The land and building asset classes have seen the most significant increases in value over the twelve-months to 30 June 2021, with average residential property values rising across New Zealand.

Figure 18 shows, per CoreLogic's quarterly property market & economic update, the national average value of housing stock has risen by 22.8% over the past year. While REINZ has reported an increase in the value of housing stock of 29.8% over the year to 30 June 2021. Figure 19 shows how this is reflected in the Crown's land and buildings revaluation, largely driven by the level of social housing stock held.

Of the increase in land revaluation, $5.8 billion is owing to social housing land held by Kāinga Ora and Tāmaki Regeneration and represents 47.5% of the overall land revaluation uplift of $12.2 billion.

The largest movements in PPE related to the following:

• The housing portfolio managed by Kāinga Ora and Tāmaki Regeneration, increased by $8.2 billion and $0.6 billion respectively, across both land and buildings. Of the increase in Kāinga Ora, $6.9 billion is owing to revaluation uplifts at 30 June 2021 and represents 21.2% of their total land and buildings value.
• The carrying amount of state highways (including public private partnerships) increased by $3.3 billion, reflecting valuation increases of $2.1 billion and additions of $1.8 billion partially offset by depreciation and other movements. The value of state highway corridor land has increased by $3.7 billion which is mainly owing to revaluation of the land at 30 June 2021, reflecting market movements.
• Land and buildings, in relation to the Education portfolio, have been revalued upwards by $3.5 billion. The valuation uplift represents a 15.6% increase on the prior year. In addition to the revaluation movement, a further $1.5 billion has been invested in school buildings.
• New Zealand Defence Force land and buildings have increased in value by $0.8 billion, primarily as a result of increases in residential property values and cost pressures associated with construction for those assets that are valued on an optimised depreciated replacement cost. In addition, a further $0.7 billion of military assets have been added primarily due to the completion of the HMNZS Aotearoa.

Figure 18 - Land and buildings revaluation

Sources: The Treasury, CoreLogic and REINZ

Figure 19 - Land and buildings revaluation by component

Source: The Treasury

The valuation of property, plant and equipment used to deliver Government services is an estimate of the value to replace the existing assets used by the Government. The increase in value indicates an increased cost to replace or expand existing facilities when compared to the prior year. As assets, in particular, land and buildings are largely used to deliver social services, the increase in their value generally does not represent an investment gain or increased future cash flows.

Borrowings

Total borrowings represent the borrowings undertaken by the core Crown, Crown entities and SOEs. Borrowings at $162.6 billion were $9.8 billion more than last year.

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

• Settlement deposits with the Reserve Bank increased by $6.4 billion, mainly owing to the LSAP programme and the Funding for Lending Programme. The repurchase of Government bonds by the Reserve Bank has the impact of reducing Government bonds (as the bonds are eliminated on consolidation for the Financial Statements of the Government) and increasing bank settlement deposits.
• Government bonds have increased by $6.3 billion compared to the previous year. As discussed in the Crown's borrowing programme box on page 26, $48.5 billion of Government bonds were issued in the year offset by $11.1 billion of Government bond repayments. This has been further offset by the Reserve Bank large scale asset purchases which reduces the level of Government bonds held by third parties, as discussed above.
• Treasury bills decreased by $3.7 billion, owing to changes in the Crown's borrowing programme. In 2020 short term borrowing was issued to manage immediate liquidity needs.
• Public private partnership (PPP) liabilities have increased by $0.4 billion as work continues to be completed on PPP assets, primarily in the construction of the state highway network and prisons.
• Other borrowings have decreased by $0.2 billion. There has been decreased issuances of European-Commercial Paper (ECP) through the Crown's borrowing programme, repayments of 3rd party debt by SOEs and reduced outstanding settlements at year end, for ACC and New Zealand Superfund.
• Kiwi Group Holdings borrowings (eg, customer deposit held) increased by $1.1 billion, which partially offsets the increase in Kiwi Group Holdings advances (eg, mortgages) discussed on page 23.
• Derivatives in loss reduced by $0.5 billion as a result of market movements, particularly relating to favourable interest rate movements.

Figure 20 - Increase in borrowings by types

Source: The Treasury

Insurance and Retirement Liabilities

ACC's insurance liability decreased this year by $5.8 billion from $64.9 billion to $59.1 billion. Government Superannuation Fund (GSF) liabilities also decreased by $3.0 billion from $14.0 billion to $11.0 billion. The decreases were largely owing to valuation changes, which are influenced by changes in economic assumptions, such as discount rates and inflation.

As a result of the increases in the discount rate in the year to 30 June 2021, ACC's outstanding claims liability, being the majority of the ACC liability, decreased by $13.1 billion and GSF liability decreased by $2.1 billion. If discount rates increase, the liability in today's dollars decreases.

However, partially offsetting these gains, an increase in the inflation assumption in the year to 30 June 2021 resulted in ACC's outstanding claims liability increasing by $4.4 billion and the GSF liability increased by $0.7 billion.

Year End Results Compared to Budget 2021#

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The Budget Economic and Fiscal Update 2021 (Budget 2021) was published on 20 May 2021.

1. Percentage variances greater than 300% are presented as '-' as the variance is not meaningful.

Source: The Treasury

Core Crown Tax Revenue

Source: The Treasury

Core Crown tax revenue was $6.4 billion (7.0%) higher than expected in Budget 2021, with the major differences as follows:

• Corporate tax revenue was $2.4 billion (17.4%) above forecast, mostly owing to higher than forecast provisional tax and Portfolio Investment Entity (PIE) tax and is indicative of higher than forecast corporate profits.
• Net other persons' tax revenue was $1.2 billion (18.9%) above forecast, mainly owing to above forecast provisional and terminal tax revenue. This indicates that unincorporated profits are higher than forecast.
• Source deductions revenue was $1.1 billion (2.9%) above forecast, owing to a stronger than anticipated labour market. Statistics New Zealand's June 2021 quarterly labour force numbers showed continued improvement in levels of employment and signs of increasing wage growth.
• GST revenue was $1.0 billion (4.2%) above forecast, owing to stronger-than-expected growth in private consumption (9.0% vs a forecast of 6.2%) and residential investment (24.7% vs forecast of 22.0%).
• Other taxes are primarily made up of resident withholding tax revenue (RWT) on interest and dividends which was $0.5 billion (21.9%) above forecast as a result of higher than forecast dividends.

Core Crown Expenses

Core Crown expenses of $107.8 billion is $3.0 billion (2.7%) below forecast across a range of Government departments. Key drivers of the underspend are the COVID-19 pandemic initiatives being below forecast as well as other delays in spending, for example MIQ costs being below forecast and grants and subsidies being delayed.

Figure 21 - Core Crown expenses variance to Budget 2021

Source: The Treasury

Crown entity and SOE results

Crown entities reported an operating balance before gains and losses deficit which was $0.6 billion better than the forecast deficit, while SOE's reported a surplus in line with the Budget 2021 forecast.

Operating Balance

The total Crown operating balance surplus of $16.2 billion was $14.9 billion greater than the surplus forecast in Budget 2021. This has been largely driven by favourable variances in core Crown tax revenue and core Crown expenses discussed above. In addition, favourable variances have been supported by larger than forecast net gains on financial instruments and lower than net forecast losses due to the LSAP programme. The gain recognised on financial instruments is $5.3 billion higher than the forecasted gain, primarily as a result of higher than forecast gains within the ACC and NZS Fund portfolios. The LSAP programme losses were $0.6 billion less than forecast. Gains on non-financial instruments were lower than forecast as unfavourable movements in assumptions increased the valuations of the associated liabilities.

Total Borrowings

Total borrowings at 30 June 2021 were $162.6 billion, which is $10.7 billion lower than the Budget 2021 forecast. This variance is primarily a result of lower than expected settlement deposits with the Reserve Bank of $9.3 billion. Settlement deposits are below forecast as the LSAP programme and Funding for Lending programme which are funded via settlement deposits are below forecast. The LSAP programme being below forecast is a driver for Government bonds being above forecast by $2.1 billion.

Net Worth

Net worth was $39.9 billion higher than the Budget 2021 forecast, mainly owing to revaluations of physical assets being $22.9 billion greater than budget. Further contributions to the variance are the operating balance surplus, being $14.9 billion above budget and the revaluation of the Government Superannuation Fund and veterans' disability entitlement of $2.1 billion favourable to forecast. Property, plant and equipment revaluations usually occur at 30 June and are not forecast.The largest revaluations were to the land and buildings, largely reflecting the increase in residential property values.

Historical Financial Information#

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Independent Audit Report of the Controller and Auditor-General#

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TO THE READERS OF THE FINANCIAL STATEMENTS OF THE GOVERNMENT OF NEW ZEALAND FOR THE YEAR ENDED 30 JUNE 2021

I have audited the financial statements of the Government of New Zealand (the financial statements of the Government) for the year ended 30 June 2021 using my staff and resources and appointed auditors and their staff. The financial statements of the Government on pages 41 to 153 comprise:

• the annual financial statements that include the statement of financial position as at 30 June 2021, the statement of financial performance, 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, statement of borrowings as at 30 June 2021, and other explanatory information;
• a statement of unappropriated expenditure for the year ended 30 June 2021;
• a statement of expenses or capital expenditure incurred in emergencies for the year ended 30 June 2021; and
• a statement of trust money administered by departments for the year ended 30 June 2021.

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 Secretary to 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 my opinion#

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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#

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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 making this determination, 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.

Key audit matters were addressed in the context of my audit of the financial statements of the Government as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.

During the period and subsequent to 30 June 2021, Covid-19 significantly affected the Government. The effects have been disclosed in note 3 on pages 62 to 66 to the financial statements of the Government. I refer to those disclosures where they are relevant to the key audit matters.

The key audit matters for my audit are described below.

Responsibilities of the Secretary to the Treasury and the Minister of Finance for the financial statements of the Government#

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The Secretary to 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 Secretary to the Treasury is also responsible for establishing and maintaining internal controls as necessary, to enable the preparation of financial statements of the Government that are free from material misstatement, whether due to fraud or error. The Secretary to the Treasury is also responsible for the publication of the financial statements of the Government, whether in printed or electronic form.

In carrying out their respective responsibilities for the financial statements of the Government, the Secretary to 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.

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

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

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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 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 controls 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 controls used by the Secretary to 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 Secretary to the Treasury.
• I conclude on the appropriateness of using the going concern basis of accounting that has been used by the Secretary to 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 Secretary to 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 Secretary to 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#

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The Secretary to the Treasury and Minister of Finance are responsible for the other information. The other information comprises the information included on pages 1 to 31 and pages 154 to 166.

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#

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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: International Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board.

My staff and I, and my appointed auditors and their staff, may deal with certain public entities on normal terms in the ordinary course of trading activities of these entities. This has not impaired my staff, my appointed auditors and their staff's independence, or me in exercising my functions and powers under the Public Audit Act 2001 as the auditor of public entities.

Other than these matters, 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.

 

John Ryan
Controller and Auditor-General | Tumuaki o te Mana Arotake
Wellington, New Zealand

Audited Financial Statements of the Government of New Zealand#

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Statement of Financial Performance
for the year ended 30 June 2021#

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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 2021#

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

Statement of Changes in Net Worth
for the year ended 30 June 2021#

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

Statement of Cash Flows
for the year ended 30 June 2021#

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

Statement of Cash Flows (continued)
for the year ended 30 June 2021#

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

Statement of Cash Flows (continued)
for the year ended 30 June 2021#

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

Statement of Financial Position
as at 30 June 2021#

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

Statement of Segments#

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

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

Notes to the Financial Statements#

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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 Public Service Act 2020, 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 2021.

Reporting period

The reporting period for these financial statements is for the year ended 30 June 2021.

Where necessary, the financial information for State-owned Enterprises (SOE) 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. Entities with a differing reporting date are listed on page 161.

Basis of preparation

These financial statements have been prepared on a going concern basis, and the accounting policies have been applied consistently throughout the year. These financial statements have been prepared on an accrual basis unless otherwise specified (for example, the Statement of Cash Flows). Under an accrual basis, revenues are recognised when rights to assets are earned or levied rather than when cash is received, and expenses are recognised when obligations are incurred rather than when they are settled. 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 2020 were 2021 forecasts published in the 2020 Budget Economic and Fiscal Update.

The forecast comparatives include some items that are not applicable for reporting actual results. Forecast new capital spending is an amount provided in the forecast to represent the impact on the financial position and cash flowsof capital spending expected to be appropriated after budgets. Forecast new operating spending is an amount included in the forecast to provide for the operating balance and cash flow impact of new policy initiatives, cost pressures of existing policy (eg, changes in inflation, wage growth and demand), and COVID-19 fiscal support measures expected to be appropriated after budgets. 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 Government 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. Investments in Crown Entities and SOE's 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.

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 is likely to be minimal. These financial statements will adopt this standard from 1 July 2022.

Cash flows disclosure

An amendment to PBE IPSAS 2 Cash flow statements requires entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. This amendment is effective for periods beginning on or after 1 January 2021. The Financial Statements of the Government will adopt this new disclosure in the year ending 30 June 2022.

Government Reporting Entity as at 30 June 2021

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.

The following new entities have been added to the Government reporting entity since 30 June 2020.

Core Crown segment:

• the Strategic Planning Reform Board as an interdepartmental executive board, serviced by the Ministry for the Environment, and the Border Executive Board as an interdepartmental executive board, serviced by the New Zealand Customs Service.

Crown entities segment:

• the Criminal Cases Review Commission, the Mental Health and Wellbeing Commission, Taumata Arowai—the Water Services Regulator, and Ngāpuhi Investment Fund Limited.

Additionally, Regenerate Christchurch was formally disestablished on 30 June 2020 and therefore removed from the Government reporting entity.

Basis of combination

These financial statements consolidate the following entities into the Government reporting entity:

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 Universities and Wānanga)
• Air New Zealand Limited
• Christ Church Cathedral Reinstatement Trust
• Kiwi Group Holdings Limited (including Kiwibank)
• Venture Capital Fund
• 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

Government departments are defined by the Public Finance Act 1989 and include departments (as defined in the Public Service Act 2020), departmental agencies, interdepartmental executive boards, interdepartmental ventures, the New Zealand Defence Force, the New Zealand Police, the Parliamentary Counsel Office, the Office of the Clerk of the House of Representatives and the Parliamentary Service.

The Crown has a full residual interest in all the above entities with the exception of Air New Zealand Limited, Tāmaki Redevelopment Company Limited and City Rail Link Limited (listed in Schedule 4A of the Public Finance Act 1989) 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 (with the exception of the New Zealand Superannuation Fund investments in controlled enterprises). Transactions and balances between these sub-entities are eliminated on consolidation. 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.

Universities and Wānanga are equity-accounted as explained in note 18.

As a consequence of the agreements with Auckland Council, City Rail Link Limited (CRL) is reported as a joint venture in these financial statements and is, therefore, equity accounted. This treatment recognises the government share of CRL's 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 - (includes National Emergency Management Agency as a departmental agency)
• 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 (services Strategic Planning Reform Board as an interdepartmental executive board)
• Ministry for Women
• Ministry of Business, Innovation, and Employment
• Ministry of Defence
• Ministry of Education
• Ministry of Foreign Affairs and Trade
• Ministry of Health - (includes Cancer Control Agency as a departmental agency)
• Ministry of Housing and Urban Development
• Ministry of Justice - (includes Te Arawhiti - Office for Māori Crown Relations as a departmental agency)
• Ministry of Māori Development - Te Puni Kōkiri
• Ministry of Social Development
• Ministry of Transport
• New Zealand Customs Service (services Border Executive Board as an interdepartmental executive board)
• 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
• Public Service Commission - (includes Social Wellbeing Agency as a departmental agency)
• Serious Fraud Office
• Statistics New Zealand
• Te Kāhui Whakamana 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
• 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
• Climate Change Commission
• Commerce Commission
• Criminal Cases Review 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
• Human Rights Commission
• Independent Police Conduct Authority
• Kāinga Ora - Homes and Communities
• Law Commission
• Maritime New Zealand
• Mental Health and Wellbeing Commission
• 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 Growth Capital Partners Limited
• New Zealand Infrastructure Commission/Te Waihanga
• 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 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 (2,424)
• Social Workers Registration Board
• Sport and Recreation New Zealand
• Takeovers Panel
• Taumata Arowai—the Water Services Regulator
• Te Pūkenga—New Zealand Institute of Skills and Technology
• 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
• 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

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

• Te Urewera

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
• Crown Regional Holdings Limited (formerly Provincial Growth Fund Limited)
• Education Payroll Limited
• New Zealand Green Investment Finance Limited
• Ngāpuhi Investment Fund 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

Others

• Christ Church Cathedral Reinstatement Trust
• Venture Capital Fund

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 (11)
• (8 Universities and 3 Wānanga)

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 entities listed above and are 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 2021, 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 about the future, in particular, the service benefits and future cash flows in relation to existing assets and liabilities and judgements in the application of accounting policies.

Individual note disclosures show the sensitivity of the values reported in respect of relevant assumptions.

Use of observable market transactions or market information

In making these assumptions and judgements, observable market transactions or market information are used where these are available. If they are not available, assumptions, including assumptions about risk, are necessary to price the assets or liabilities.

Assumptions over future cash flows

The assumptions over future cash flows largely reflect the rights and obligations that exist at 30 June 2021 and the extent to which experience has shown that payments owing to the Government will be honoured, and when and the extent that obligations owed by the Government will come due.

Judgements around the amount and duration of future cash flows are critical for valuations. 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. Some examples of these are the length of rehabilitation from injuries for the ACC obligation; mortality rates for the GSF obligation and repayment rates of student loans and the small business cashflow (loan) scheme (SBCS).

Assumptions over the future value of money

A large amount of future cash outflows will occur a long time in the future, in particular those associated with outstanding ACC claims, defined retirement benefits, and veterans' disability entitlements. To reflect the time value of money and reflect these obligations for future cash flows in present value terms, a risk-free discount rate is applied to long-term liabilities.

Certain accounting valuations reported in these financial statements use a centrally prepared table of risk-free discount rates and consumer price index (CPI) inflation assumptions that are applied to obligations valued in present value terms. The methodology adopted to determine the table of risk-free discount rates is fully explained in www.treasury.govt.nz on the page: Discount Rates and CPI Assumptions for Accounting Valuation Purposes. The risk-free discount rate methodology uses the market yield curve of New Zealand Government Bonds as the most appropriate proxy for the return on a very safe asset (which covers around 15 - 20 years of future cash flows to be present-valued). For valuing cash flows beyond this timeframe, the methodology assumes a single long-term risk-free rate (4.30% nominal, and 2.30% real after inflation expectations) and a bridging assumption to determine a gradual line between the market yields and the long-term rate.

Determining the nominal amounts to be settled or received in the future is likely to be impacted by inflation which is specific to the liability or asset being measured. The CPI inflation assumption (based on references to CPI forecasts and inflation-indexed bonds), is used, but each valuation may be adjusted to consider the appropriate inflation index to use relative to CPI.

The discount rate and CPI assumption are particularly sensitive to changes in interest rates and CPI expectations. They are used as a building block for the valuation ofother items in the balance sheet. For example, the discount rate is risk-adjusted for student loans to reflect their risks, and an additional health related inflation is superimposed for the ACC liability.

The Treasury's central risk-free discount rates and CPI assumptions used for certain accounting valuations are:

For the detailed table of annual risk-free discount rates and CPI assumptions refer to www.treasury.govt.nz on the page: Discount Rates and CPI Assumptions for Accounting Valuation Purposes.

Specific accounting estimates and assumptions

Other uncertainties

In addition to those items in the statement of financial position, there are a number of possible assets or liabilities that may arise in the future but are not currently recognised. These include the contingencies reported in note 26 of these financial statements and the Government's future policy objectives and targets (eg, climate change commitments, child poverty reduction targets) that are subject to ongoing policy decisions. These do not meet the requirements for recognition under generally accepted accounting practice as they are dependent on future events within the control of the government or the asset/liability cannot be measured reliably at this point. If these future policy objectives and targets or contingencies eventuate, there will be an impact on the operating balance and net worth.

Note 3: Impact of the COVID-19 pandemic

The support measures in response to the COVID-19 pandemic impacting on these financial statements can be broadly grouped into the following categories:

• Health response
• Direct business support
• Wider sector support
• Monetary Policy response.

Also, despite the relative containment of COVID-19 during the 2020/21 financial year, there is significant risk and uncertainty on economic impacts going forward. The recent outbreak of the delta variant of COVID-19 during August 2021 illustrates just how quickly circumstances can change in New Zealand. In addition, the global outlook is highly uncertain, particularly the path away from the COVID-19 emergency fiscal and monetary measures that have been introduced internationally. These uncertainties impact on the estimates and judgements used in estimating the future economic benefits and sacrifices associated with the Government's assets and liabilities.

Health response

During the 2021 financial year core Crown health expenses were $22,784 million, an increase of $2,893 million (or 14.5%) compared to the previous financial year with a large portion of this increase attributable to the Government's COVID-19 health response measures. The expenses under the health response are reported as other operating expenses at the time the expense is incurred (note 10). The most material aspects of the health response which are directly attributable to the impact of COVID-19 have been set out in the table below.

Managed isolation and quarantine (MIQ) represent the costs incurred by the Government for MIQ facilities, including health services within MIQ facilities. In August 2020, fees were introduced for some users of the MIQ facilities with the aim of sharing some of the costs of MIQ with the Government, these fees are reported as sales of goods and services revenue (note 5). At 30 June 2021, these fees totalled $124 million, $59 million of which have not yet been received. MIQ fees that have been written off have been recorded as costs of concessionary lending.

The COVID-19 testing and laboratory capacity includes the costs associated with the delivery and processing of tests within the community to detect the presence of COVID-19. Personal protection equipment is expensed as used by the frontline healthcare workforce and essential services workforce. Contact tracing services includes the costs associated with the telehealth consultation service and boosting Public Health capacity. The Pharmaceutical Budget and PHARMAC costs are to meet the increase in the price of medicines precured by PHARMAC resulting from the disruption to supply.

Direct business support

Significant direct business support measures in response to COVID-19 are outlined in the table below:

Wage Subsidy Scheme

Expenses under the wage subsidy scheme are reported as transfer payments at the time the expense is incurred (note 8). As there is only a small delay between the application and payment dates there is little uncertainty around the amounts reported in the financial statements. The amount reported includes repayments of the wage subsidy which for the year ended 30 June 2021 totalled $444 million (2020: $230 million).

Small Business Cashflow (Loan) Scheme

The net lending under the SBCS during 2021 totalled $186 million. The overall value of loans issued by the Government is reported in the advances note (note 16). The loans under the SBCS are reported at fair value, and the concessionary element is reported as an expense. The key assumptions in determining the fair value are the timing of principal and interest repayments and the expected default rate over the five-year loan term.

Resurgence support payments

Payments under the Resurgence Support Payment (RSP) scheme during 2020/21 are reported as transfer payments and subsidies within transfer payments and subsidies (note 8). As there is only a small delay between the application and payment dates there is little uncertainty around the amounts reported in the financial statements.

Business Finance Guarantee Scheme

Business Finance Guarantee Scheme (BFGS) loans by lenders are indemnified for 80% of the value of the loans. The indemnities under the scheme are initially reported at fair value as a financial guarantee contract and included as part of other provisions (note 22). This amount represents the indemnity fee foregone by providing the indemnity without charge. The scheme closed on 30 June 2021 with lending facilities totalling $2.86 billion.

Wider Sector and Economic Support

As part of the response to and recovery from COVID-19, the Government has provided significant levels of funding to various sectors directly impacted by the pandemic. A few government reporting entities have been adversely impacted from the COVID-19 pandemic, with lower income resulting in revenue shortfalls (eg, Air New Zealand and NZTA amongst others). The Government has been providing fiscal support to these government reporting entities in order to maintain operations. Support to sectors includes but is not limited to the tourism and transport sectors. The most material support packages which have impacted the Government's financial results and position during 2020/21 are detailed below.

In addition, the Government has funded initiatives to support the economic recovery for New Zealand. One of the most significant policies was the Infrastructure Reference Groups shovel ready projects. Further details of the projects which have been funded in the 2020/21 year can be found at: https://www.crowninfrastructure.govt.nz/irg/

Monetary Policy Response

The Reserve Bank's monetary policy responses below have largely been funded through an increase in the Settlement deposits liability (note 20).

Large Scale Asset Purchase (LSAP) programme

Under the LSAP programme, as at 30 June 2021 the Reserve Bank has purchased, from the secondary market, $52,965 million New Zealand Government Bonds (NZGBs), $2,878 million of New Zealand Inflation-Indexed Government Bonds and $1,653 million Local Government Funding Agency (LGFA) bonds. The LSAP programme's impact on the consolidated financial statements can be broadly summarised as follows:

• a loss of $3,976 million (2020: $3,258 million) is reported in the Statement of Financial Performance (note 6). The loss represents the difference between the Reserve Bank's purchase price of NZGBs (driven by the market price on purchase date) and the NZGBs liability (valued at amortised cost)
• a benefit of lower borrowing rates as the fixed interest rate payable on the NZGBs is replaced by the lower floating OCR rate (currently 0.25%) payable on settlement deposits (note 6)
• the elimination of NZGBs liabilities that were purchased by the Reserve Bank from the market as these bonds are no longer held by third parties, and
• the recognition of LGFA bonds in marketable securities at fair value.

On 14 July 2021, the Monetary Policy Committee agreed that further asset purchases under the LSAP programme were no longer necessary for monetary policy purposes. The Reserve Bank halted additional asset purchases under the LSAP programme on 23 July 2021.

Funding for Lending Programme (FLP)

The loans issued under the FLP are classed as advances and totalled $3,059 million as at 30 June 2021. At a total Crown level, once FLP loans within the Crown have been eliminated, the closing value of the loans is $2,558 million (note 16). The loans under the FLP Tranche 1 are measured at amortised cost. There is an increase in settlement deposits with Reserve Bank (note 20) to fund the FLP.

Term Lending Facility (TLF)

At 30 June 2021, a total of $1,813 million has been borrowed through the TLF. The facility closed following the completion of the final scheduled facility window on 28 July 2021.

Economic Impacts

Estimates of some of the revenue, expenses, assets and liabilities in the reported financial statements are underpinned by judgements over the prevailing economic conditions.

Tax revenue

Most of the tax revenue reported in a financial year is received from taxpayers in the same year, however some estimations at 30 June 2021 are still required. The economic impact of the COVID-19 pandemic has affected some assumptions used to estimate tax revenue, particularly tax revenue subject to the provisional tax regime (note 4).

Sales of goods and services

Some Government reporting entities are experiencing reduced revenue levels owing to the impacts of the COVID-19 pandemic. Overall, total provision of services were $6,462 million, a decrease of $1,987 million from the 2019/20 financial year.

Valuation of assets and liabilities

Most valuations contain an element of uncertainty. While property and capital markets have remained open, active and liquid throughout the 2020/21 financial year providing good price evidence, the following uncertainties are noted:

• Ongoing valuation impacts of the COVID-19 pandemic in the aviation sector and the impact to the valuation of aircraft assets (note 17).
• ACC outstanding claims, defined retirement benefits and veterans' disability entitlements valued by discounting future payments to today's dollars using the risk free-discount rate that are likely to be impacted by future changes in monetary conditions (note 12 and note 22).
• Student Loan assumptions regarding future income levels, repayment behaviour, inflation and discount rates (note 16).

Note 4: Sovereign Revenue

1. Includes customs excise-equivalent duty.
2. This increase is due to the recognition of unpaid child support assessments relating to Crown entitlements, increasing revenue by $155 million.

More detailed unaudited information on tax revenue and receipts can be found at www.treasury.govt.nz/government/revenue/taxoutturn

Tax revenue represents revenue for the year ended 30 June 2021 based on the revenue recognition point described in the table above. While most of this revenue is also received in cash in the same financial year, these financial statements include tax receivables of $15,642 million (2020: 14,290 million) reported in note 13 Receivables.

Where income tax returns for other persons and corporates 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. Tax revenue is recognised proportionally based on the balance date of the taxpayer. The amount of income tax receivable or refundable is not known with certainty until income tax returns for the period have been filed. The filing of terminal tax returns can happen more than a year after the tax year.

The income tax revenue estimation process is based on a rebuttable presumption that the forecast of firms' net operating surplus, from the most recent Treasury forecast, is used as the uplift assumption. Refer to Note 2 Key Assumptions and Judgements for more information. In summary, the following uplift assumptions have been used to estimate income tax:

• An annual average growth in firms' net operating surplus for the tax year to 31 March 2021 of 2.68% (based on Stats NZ's new quarterly data series released on 22 July 2021).
• An annual average growth in the Treasury's forecast of firms' net operating surplus for the tax year to 31 March 2022 of 1.24%.

Other persons and corporate income tax revenue has a high degree of estimation and is therefore uncertain. Application of the uplift assumptions may not necessarily reflect actual tax returns when they are filed and forecasts of firms' net operating surplus are inherently uncertain and volatile, particularly with the ongoing impact of the COVID‑19 pandemic on the economy. The table below reports the impact if there were a change in the uplift assumption:

Note 5: Sales of Goods and Services

Note 6: Investment and Finance Income/(Expense)

1. Concessionary loans are advanced at below market rates, as such they are discounted to reflect their fair value. The interest unwind reflects the increase in value as the period to repayment reduces (note 16).

Net gains/(losses) on Large Scale Asset Purchases

These financial statements reflect monetary policy measures including the Large Scale Asset Purchases (LSAP) programme. The LSAP programme has resulted in a loss of $3,976 million in the 2020/21 financial year (2020: $3,258 million).

Under the LSAP programme, New Zealand Government Bonds (NZGBs) are purchased by the Reserve Bank at market prices from 3rd parties. It is not possible for NZGBs purchased to be individually matched back to their original issuance. Therefore, for reporting purposes, it is assumed the oldest holdings of the NZGB liabilities are eliminated first against the NZGB assets. Broadly speaking, this reflects the change in the value of repurchased bonds since they were first issued owing to movements in market interest rates.

There is also a benefit of lower interest rates as the fixed interest rate payable on the NZGBs is replaced by the lower floating OCR rate (currently 0.25%) payable on settlement deposits.

Note 7: Other Revenue

Note 8: Transfer Payments and Subsidies

Wage Subsidy Scheme

Expenses under the wage subsidy scheme are reported as transfer payments at the time the expense is incurred. As there is only a small delay between the application and payment dates there is little uncertainty around the amounts reported in the financial statements. The amount reported includes repayments of the wage subsidy which for the year ended 30 June 2021 was $444 million (2020: $230 million).

Note 9: Personnel Expenses

Key Management Personnel

Key management personnel compensation was $9 million (2020: $10 million). This reflects salaries, benefits and allowances. Key management personnel are the 26 Ministers of the Crown who are members of the Executive Council as at 30 June 2021 (2020: 27).

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 10: Other Operating Expenses

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

Fees paid to the Controller and Auditor-General (including independent auditors providing services on behalf of the Controller and Auditor-General) for the audit of the financial statements of the Government and its reporting entities were $54.0 million (2020: $50.0 million). These fees include $0.5 million (2020: $0.3 million) for the audit of these financial statements. Fees paid for other assurance and related services paid to the Controller and Auditor-General were $0.7 million (2020: $0.6 million). As the Controller and Auditor-General is part of the Government reporting entity, these fees are eliminated on consolidation.

Note 11: Net Gains/(Losses) on Non-Financial Instruments

Note 12: Insurance Expenses and Liabilities

Further information on the insurance liabilities of ACC, EQC and Southern Response may be found in their annual reports 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 major insurance entities are available to fund present and future claims obligations. There are no deferred acquisition costs (eg, marketing costs) in respect of insurance obligations at the reporting date.

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 2021. 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 or events 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.

The next table separates the adjustment in the liability arising from claims incurred in the current financial year from the 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 valuation assumptions.

Undiscounted claims expenses increased mainly due to higher inflation assumptions this year, but the primary driver of the overall decrease in claims expense is owing to an increase in the discount rate assumption, which reduces future claims expenses to reflect their value in today's dollars. In addition, there are more new claims this year compared to 2019/20 because during last year's restrictions under New Zealand's Alert Level 4 lockdown, fewer claims were filed.

Revaluation movements as a result of changes in discount rate and inflation rates are reported as part of actuarial gains and losses, rather than as insurance expenses in the Statement of Financial Performance.

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

Analysis of ACC insurance liability

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

Refer to ACC's annual report for a table showing an historical analysis of claims development.

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 (note 2). The equivalent single effective discount rate taking into account ACC's projected future cash flow pattern is 3.00% (2020: 1.86%) This takes into account the Treasury's published discount rates, which has a long-term discount rate of 4.30% beyond 30 years (2020: 4.30% beyond 62 years). Risk-free interest rates have increased significantly during 2021 and this has brought forward when the long-term discount rate is expected to be reached.

(ii) Risk margin

The outstanding claims and the unearned premium include 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.

Refer to ACC's annual report for a table that lists all the main long-term assumptions used in valuing the outstanding ACC claims obligation.

Sensitivity Analysis

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

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

Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $49,134 million (2020: $54,393 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 2021. These estimated cash flows include the effects of assumed future inflation.

Note 13: Receivables

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 tax or other sovereign receivables, 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 is considered. 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.

There is no collateral held or any other credit enhancements over receivables.

Tax receivables, ACC levy receivables and social benefit receivables are short-term. Their carrying value represents a reasonable approximation of their fair value.

Other levies, fines and penalty receivables comprise debtor portfolios administered by the 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, 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 a reduction of $342 million (2020: $242 million), with $290 million (2020: $190 million) of the adjustment relating to child support debt.

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 short-term in nature and totalled $6,044 million (2020: $5,868 million). Their carrying amount provides a reasonable approximation of their fair value.

The Inland Revenue administers the majority of the tax receivable portfolio. 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. The recoverable amount of the portfolio is calculated by forecasting the expected repayments based on analysis of historical debt data up to June 2021, deducting an estimate of service costs and then discounting the net expected repayments at the current market rate of 5.0% (2020: 5.0%).

Tax receivables are classified as either current (not due) or past due. Current tax receivables comprise estimations or assessments for tax where the tax has been recorded based on the relevant tax recognition point (note 4) but is not yet due to be paid and for returns that have been filed before due date. Approximately half of the current tax receivable amount relates to estimates and assessments of income tax (both other persons and corporate tax), with about a third relating to GST and the balance relating mainly to employer taxes, such as PAYE.

Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date. Due dates will vary, depending on the type of revenue owing (for example, income tax, GST) and the taxpayer's balance date. Past due debt includes debts collected under instalment, debts under dispute, default assessments and debts of taxpayers who are bankrupt, in receivership or in liquidation. Inland Revenue has debt management policies and procedures in place to actively manage the collection of past due debt.

The average impairment percentage applied to past due debt as a result of the June 2021 valuation is 74.5% (2020: 78.5%).

Taxes repayable are recorded as a liability with further information in note 19.

Note 14: Marketable Securities, Deposits and Derivatives in Gain

Marketable securities comprise bonds, commercial paper, debentures and similar tradable financial assets held by the Government for the purposes of realising capital gains and/or interest revenue. Long-term deposits are instruments with maturities greater than three months that are not traded in an active market. Further information is provided on these financial assets in note 27.

Note 15: Share Investments and Investments in Controlled Enterprises

Share investments and investments in controlled enterprises that are categorised within level 3 of the fair value hierarchy make up a minority of the overall portfolio, these investments, by their nature, are inherently more subjective and are more exposed to valuation uncertainty as at 30 June 2021. This category predominantly includes private equity investments held directly or via investment funds, controlled enterprises and other externally managed investment vehicles.

Further information is provided on these financial assets in note 27.

Note 16: Advances

Further information on the management of risks associated with these financial assets is provided in note 27.

Kiwi Group Holdings loans and advances

The fair value of Kiwi Group Holdings loans and advances is $25,130 million (2020: $22,291 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 $62 million (2020: $86 million).

Student loans

The fair value of student loans has increased by $487 million largely as a result of updating assumptions around projected repayments and by $220 million due to reductions in the discount rates since 2020. The discount rate is based on the Treasury risk-free rate (which increased) with a risk-adjustment added (which reduced by more than the increase in the risk-free component).

When valuing the portfolio last year, it was assumed borrower repayments, both domestically and overseas, would be adversely affected by unemployment and underemployment as a result of the COVID-19 pandemic, which resulted in an actuarial valuation loss in 2020. It is now expected that fewer borrowers will be adversely impacted by the COVID‑19 pandemic than previously assumed owing to the New Zealand economy showing greater resilience than initially assumed, resulting in a positive actuarial adjustment this year. An increase in the wage inflation assumptions and improvements in the valuation data and model are other contributors to the valuation gain.

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

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 to those who die or become bankrupt are written off.

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 several underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates. There are two key types of risk to the valuation, payment risk and modelling risk, both are exacerbated as a result of COVID-19. Payment risk represents the risk of current and repayment behaviours changing, either improving or worsening - two particularly important payment risks are the number of long-term New Zealand low earners, and the number of long-term overseas non-payers. Modelling risk represents the risk of the model and assumptions not adequately reflecting future repayment behaviour.

The next table outlines the sensitivity of student loans fair value to discount rates and salary inflation.

1. Considering 1% increase/decrease over the next 5 years

The student loan scheme creates an exposure to the risk that borrowers will default on their obligation to repay their loans or pass away 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 many 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.

Funding for Lending advances

On 11 November 2020, the Reserve Bank announced that additional economic stimulus would be provided through the FLP. The FLP is designed to lower market interest rates by the Reserve Bank offering lending to financial institutions for three years at the Official Cash Rate (OCR). The borrowing rate will adjust over the term of the transaction if the OCR changes, whether up or down.

Access to FLP funding is available over a 2-year period from 7 December 2020 to 6 December 2022, subject to any extension by the Reserve Bank. A participant may access funding up to the value of its Funding Allocation (comprising an Initial Allocation and an Additional Allocation).

The Initial Allocation (FLP tranche 1) is available for the first 18 months from 7 December 2020 to 6 June 2022. The Additional Allocation (FLP tranche 2), based on the participant's lending growth, is available over the full 2-year period from 7 December 2020 to 6 December 2022. Under FLP tranche 2, in addition to being charged interest on FLP funding provided at the OCR, participants may also be charged a facility fee if the volume of their eligible loans decrease. No allocation of FLP tranche 2 has been undertaken as at 30 June 2021. For the purpose of the FLP, eligible loans mean gross resident loans and advances to households, non-financial businesses, and non-profit institutions serving households.

Small business cashflow loans

The SBCS is administered by Inland Revenue and provides 5-year loans to eligible small businesses to manage the impact of lower cash flows due to the COVID-19 pandemic. Borrowers under the SBCS are not charged interest if the loan is fully repaid within two years, otherwise the interest rate is 3% per annum on amounts outstanding for a maximum term of five years. Repayments are not required for the first two years, but voluntary payments can still be made over this period.

The valuation of SBCS loans is performed using actuarial and predictive models which reflect current policy and macroeconomic assumptions because there is limited repayment data available for this new scheme. As such, the carrying value is sensitive to changes in several underlying assumptions, including default levels, repayment behaviour and macroeconomic factors such as discount rates.

The SBCS creates an exposure to the risk that borrowers will default on their obligation to repay their loans. The SBCS does not require borrowers to provide any collateral or security to support their borrowings. As the total sum advanced is widely dispersed over many 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.

Note 17: Property, Plant and Equipment

The total amount of property, plant and equipment under construction is $6,415 million (2020: $4,990 million).

1. The other movements in land, buildings and other plant and equipment mainly relates to the establishment of Te Pūkenga - New Zealand Institute of Skills and Technology.

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 Crown Entities has not been used as security for lending in 2021 (2020: $0). PPE owned by SOEs and mixed ownership companies has been pledged to secure borrowings and finance lease obligations of $2,792 million (2020: $2,914 million).

Net revaluations in the note above exclude movements attributable to minority interests and includes the share of associates revaluation of physical assets. It will therefore differ from the movements on pages 88 to 89.

Land and Buildings

Land and building valuation

Valuations are undertaken in accordance with standards issued by the NZ Property Institute or are based on the Rating Valuation Act 1988.

Valuation Information

Carrying value of other asset classes subject to revaluation

State Highways (excluding land)

1. Miscellaneous is made up of intelligent traffic systems (ITS), traffic management units, bailey bridges, sea and river protection structures.

Valuation information

The state highway net value increased by $3,370 million for the year ended 30 June 2021 mainly due to movement in the base unit rates reflecting the increased current costs of bridges, pavements and drainages construction and due to the capital expenditure of state highway projects.

WSP, an independent valuer, determined the valuation of the state highway as at 30 June 2021 by assigning replacement costs to the components of the state highway reported in the NZTA's databases as at 30 June 2020. The net capital expenditure for the year to 30 June 2021 was added to this data. The unit cost rates 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.

Significant estimates and assumptions have been applied to the valuation, which include assumptions on the 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 and estimates effecting the state highway valuation are:

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

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

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

WSP 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 has concluded that the overall valuation is between -7.5% to +10% of the current state highways (excluding land) value (-$3,043 million to +$4,058 million).

Electricity generation assets

Valuation and sensitivity information

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

The following tables provide information on each of the entities' key assumptions as disclosed in the 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, future of the Tiwai Point aluminium smelter load and varying risk factors. These assumptions interact dynamically with each other. For example, wholesale electricity prices can affect the amount of generation volumes and operating costs.

Meridian Energy

Genesis Energy

Mercury NZ

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

Rail network

Carrying value of the rail network

The ODRC approach recognises that the Rail Network will be maintained and replaced over time, given its purpose in a multi-modal transport system.

Valuation information

The rail network comprises approximately 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.

Specified cultural and heritage assets

Valuation information

Other significant classes of PPE

Specialist military equipment

Aircraft (excluding specialised military)

The COVID-19 pandemic has had a significant impact on the market values of aircraft. Aircraft assets were revalued to market value as at 30 June 2021 using independent external valuations on a stand-alone basis. The valuations are determined by reference to relevant market conditions, the specification of each aircraft and issues affecting specific aircraft types. The valuations assume that the aircraft were in the equivalent of half-life condition with respect to the airframe and engines other than for newer aircraft which had not yet reached the equivalent half-life condition.

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 borrowings (note 20).

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 18: Equity Accounted Investments

Universities and Wānanga

Universities and Wānanga 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 Universities and Wānanga, if they are not at financial risk, but rather is committed to safeguarding their academic freedom and autonomy. By doing so, 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 Universities and Wānanga is set out below:

The Universities and Wānanga net surplus declined in the year ended 30 June 2021 by $1,545 million from a $1,178 million surplus in 2019/20 to a $367 million deficit in 2020/21. This is due to Universities and Wānanga being provided with certainty of funding for the 2020 teaching calendar year regardless of domestic student numbers. This change resulted in the early recognition of the July to December 2020 funding of $581 million. In addition, the establishment of Te Pūkenga - New Zealand Institute of Skills and Technology (NZIST) on 1 April 2020 contributed to the variance as 16 former Institutes of Technology and Polytechnics (ITPs) are now line-by-line consolidated rather than equity accounted. ITPs contributed a surplus of $395 million in the 2019/20 financial year also due to the early recognition of funding.

City Rail Link Limited

City Rail Link Limited (CRLL) is a jointly controlled Crown Entity company, co-funded with the Auckland Council, for the purpose of designing and constructing the Auckland City Rail Link (an underground rail line between the city centre and the existing western line). The expected costs of the project are $4,419 million, which will be confirmed once all the contracts are finalised. The Government's share of expected costs is $2,210 million.

For the year ended 30 June 2021, CRLL recognised revenue of $3 million (2020: $2 million), a deficit of $80 million (2020: $113 million), assets of $1,878 million (2020 $1,158 million), liabilities of $71 million (2020: $61 million) and equity of $1,807 million (2020: $1,097 million).

The Government's share of CRLL commitments is $838 million (2020: $579 million). The increase in commitments 2020/21 is due to the finalisation of C5 Western Line works, including connection of tunnels to existing live rail corridor environment and line-wide systems, and C7 rail systems integration, testing, and commissioning from Britomart to Mt Eden Station.

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 2021, NZLGFA recognised revenue of $377 million (2020: $370 million) and a surplus of $12 million (2020: $11 million). NZLGFA's assets were $14,485 million (2020: $13,174 million) and liabilities were $14,390 million (2020: $13,091 million). The Crown's share of the net assets is $19 million (2020: $17 million). The Crown is not a guarantor of the NZLGFA and has no share of any contingent liabilities of the NZLGFA.

Note 19: Payables

Note 20: Borrowings

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 occur only 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.

In respect of the borrowings by maturity, borrowings that are expected to be settled within one year include settlement deposits and Kiwi Group Holdings customer deposits. While these liabilities are not necessarily expected to be settled in the next 12 months, there is no right for the Government to defer the settlement of these liabilities beyond 30 June 2022 and on this basis, are classified as “current”.

Government Bonds

The fair value of Government bonds measured at amortised cost is $74,374 million (2020: $76,830 million). This valuation is based on observable market prices at 30 June 2021. The difference in value is due to a reduction in market rates since the bonds were issued, increasing the value of the bonds.

New Zealand Government bonds are rated Aaa by Moody's, AAA by S&P and AA+ by Fitch. The rating outlook is stable with all three. In February 2021, the S&P Global Rating was upgraded to a AAA rating.

Where Government bonds are repurchased, which is primarily through the LSAP program, the first in, first out method for matching bonds is used to calculate the gain/loss on re-purchase.

Settlement deposits

Most transactions involve transferring money from one person's bank account to another. If the people involved in a transaction hold their accounts at different banks, it means that one bank owes money to another bank, on behalf of its customer. As well as such transactions, commercial banks also transact with the Government (eg, the purchase of notes and coins). In order to ‘settle' these transactions, banks hold settlement accounts at the Reserve Bank. The Government also holds an account at the Reserve Bank, called the Crown Settlement Account (CSA) that as at 30 June 2021 was $39,023 million (2020: $18,159 million). For the consolidation of the Government financial statements the CSA is eliminated, however the Reserve Bank can apply the funds received from CSA to implement alternative monetary tools such as LSAP and FLP.

The Exchange Settlement Account System (ESAS) is used to transfer funds between banks and the government at the end of each day. As with currency in circulation, settlement deposits are usually considered part of the supply of money and are administered through the ESAS. The Reserve Bank manages settlement deposits to meet the economic objectives specified in the Reserve Bank of New Zealand Act 1989 to achieve and maintain stability in the general level of prices over the medium term, and to support maximum sustainable employment.

Kiwi Group Holdings customer deposits

The fair value of Kiwi Group Holdings customer deposits measured at amortised cost is $21,712 million (2020: $20,346million). 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.

Treasury bills

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

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.

Public-private partnership liability

A public private partnership (also known as a service concession arrangement) is an arrangement between the Government and a private sector partner. While assets constructed in a public private partnership (PPP) are recognised as assets of the Government, at the same time, a matching financial liability, initially at the same value as the asset, is also recognised and forms part of the Government’s total borrowings. 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.

The Government has entered into a number of public-private partnership agreements either to construct and operate (eg, selected state highways and correction facilities) or to only construct (eg, selected school buildings) as listed in note 17. The operational agreements run generally for 25 years from the service commencement date. PPP liabilities are measured at amortised cost and their carrying value approximates the amount payable at maturity. At the time the PPP assets becomes operational, the Government will begin paying the private sector partner a regular unitary charge (eg, monthly or quarterly) over 25 years, subject to satisfactory performance against agreed service levels in some cases. The unitary charge typically has three components covering the reduction of the PPP financial liability, an amount for finance costs and if applicable, an amount for service costs.

Currency Issued

Currency issued represents a liability in favour of the holder. Currency issued for circulation, including demonetised currency after 1 July 2004, is recognised at face value. For currency demonetised before 1 July 2004, this is recognised as a contingent liability, except for a provision recognised in the Statement of Financial Position to cover expected redemptions.

Other borrowings

Other borrowings include $4,196 million (2020: $4,138 million) of sovereign-guaranteed debt administered by the Reserve Bank and the Treasury.

The fair value of other borrowings measured at amortised cost is $20,012 million (2020: $19,116 million). The fair value of financial liabilities with standard terms and conditions traded on active liquid markets was determined by reference to quoted market prices. Where such prices are not available, use is made of estimated discounted cash flow models with reference to market interest rates.

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

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

Of the other borrowings measured at fair value, $4,221 million (2020: $3,678 million) was designated as such to prevent a valuation mismatch between this debt and associated derivatives that are managed as one integrated portfolio.

Note 21: Retirement Plan Liabilities

There is 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. The 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 2021 and involves projecting the benefits payable in future to members and their dependants. Benefits are payable on retirement, death, leaving service, ill health or on withdrawal from the Fund and are calculated using membership data at the valuation date. The amount of the entitlement typically depends on the length of membership, the level of salary over time and subsequent pension increases (in the case of the pension entitlements). There are 4,032 (2020: 4,512) members and 46,042 (2020: 46,835) pensioners in the scheme. Amounts recognised in the statement of financial position in respect of GSF are as follows:

1. This is calculated at the risk-free rate of return.
2. The actual return on plan assets is made up of the sum of the expected interest on plan assets and the actuarial gains/(losses) on plan assets is calculated at the risk-free rate of return.
3. These amounts are recorded as personnel expenses in the statement of financial performance (refer Note 9).
4. These amounts are offset and recorded as interest expense in the statement of financial performance (refer Interest unwind on provisions and other interest in Note 6).

Amounts recognised in the other comprehensive revenue and expense in respect of GSF are as follows:

A contribution of $772 million (2020: $737 million) is expected to be made to the GSF in the year ended 30 June 2022.

The principal assumptions used to project the benefits payable in the future are financial assumptions (eg, inflation and salary growth) and demographic assumptions (eg, pensioner mortality). Pension increases are linked to expected increases in the Consumer Price Index. Projected benefit payments are discounted back to the valuation date using the market yield curve of New Zealand Government bonds as set out on the Treasury's central table of risk-free discount rates (refer to Note 2 Assumptions and Judgements for the relevant discount rates and CPI assumptions used). The salary growth assumption adopted is a flat salary increase of 2.5% p.a. (2020: 2.5% p.a.).

The defined benefit obligation decreased in the year to 30 June 2021 by $1,998 million, mainly due to an increase in the discount rates and strong investment returns. This was partially offset by an increase in the CPI assumptions.

The major categories of GSF plan assets at 30 June 2021 are as follows:

The expected rate of return on the plan assets is 5.0% (2020: 5.0%) and is based on 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 2021 was 27.5% (net of tax on investment income), or $1,146 million (2020: -1.1% or ‑$51 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. The plan's assets are exposed to share price risks arising from its holding of equity instruments. The sensitivity analysis below has been determined based on whether the discount rate or inflation assumption were to change in isolation and on GSF's exposure to share price risks at the reporting date.

Undiscounted defined benefit obligation 

The reported GSF defined benefit obligation of $16,240 million (2020: $18,238 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 post 30 June 2021. These estimated cash flows include the effects of assumed future inflation.

Note 22: Provisions

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 0.38% (2020: 0.22%) next year to 4.30% in 30 years' time (2020: 4.30% in 62 years' time) (note 2).

This balance also includes a provision for the review of calculations 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. 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. The health entities (District Health Boards) have recognised a Holidays Act 2003 provision; the indicative potential range for the liability is between $1,400 million and $1,500 million (2020: between $1,000 million and $1,100 million). To the extent that an obligation cannot reasonably be quantified at 30 June 2021, an unquantified contingent liability has been disclosed in note 26.

Veterans' disability entitlements

Veterans who have suffered a service-related injury or illness as defined in the Veterans' Support Act 2014 are eligible to receive financial support from the Crown. This is primarily provided through the payment of disablement pensions and allowances, covering the cost of rehabilitation and medical treatments and providing services to help veterans live independently.

The value placed on the liability for veterans' disability entitlements is an estimate, in that there is uncertainty as to the amount and timing of future payments. This uncertainty arises mainly from:

• possible deficiencies in the underlying data used to make the estimate
• the accuracy of the model in predicting future events, and
• imprecision in the assumptions used in the model.

As the incidents that result in a veterans' disability entitlement may have occurred many decades previously, the data used to make the estimate primarily relies on records of payments, rather than data on the eligible population and utilisation rates. This has the advantage that uncertainties in the assumptions for the numbers of veterans that are eligible to receive entitlements and the utilisation rate are less likely to impact the overall estimate.

The estimate recognises however that based on past experience not all eligible veterans who are entitled to benefits will apply for them. “Utilisation rate” is the term used to describe the ratio of eligible veterans who actually take up full entitlements and the New Zealand Defence Force (NZDF) has a continuous communication programme with the goal to increase this rate over time. As a result future changes in the utilisation rates could differ from previous experience that has been largely relied on in this estimate. However, as the data indicates a significant increase in the proportion of veterans receiving assessments, treatments and rehabilitation (ATR) and veterans' independence programme (VIP) payments in the last three years (with greater communication of the entitlements), the estimate already makes some allowance for continued future utilisation increases.

Payments to eligible veterans start when they submit an application to NZDF. This is not back-dated to the date of the service-related illness or injury, which can be many years prior to application. This means there can be a significant period of time between the illness or injury and the payment start date. The estimated liability reflects the future payments for veterans' long-term employee benefits under the Act, taking into account inflationary increases where applicable and discounting these payments to their present value in today's money. Therefore, the assumption of the discount rate used and the inflation rate is critical to the estimate of this liability. The risk-free discount rate and long-term inflation rate, also used for other long-term liabilities, has been applied.

Pension entitlements have been assumed to increase by the rate of CPI plus an additional 2.25% (2020: CPI + 2.25%). The additional 2.25% is to reflect the actual increase in Disablement Pensions over recent years.

Veterans will often continue to receive entitlements for their lifetime, which means the end date of payments depends on life expectancy assumptions. The mortality of veterans has been estimated using the cohort mortality tables and New Zealand life tables published by Stats NZ. The relevant data is only available up to 2014 and represents the entire New Zealand population. The only adjustment made for veteran mortality being different to population mortality is to adjust the mortality of veterans in the immediate post-World War II period. There is no evidence available to indicate any further adjustments are appropriate.

In 2021, $102 million (2020: $57 million) has been recognised in the statement of financial performance in relation to disability entitlements.

The sensitivity of the estimate to these assumptions and judgements is shown below.

Amounts recognised in the statement of comprehensive revenue and expense in respect of veterans' entitlements are as follows:

1. Changes in financial assumptions reflects both changes in discount rates and inflation rates.

Emissions Trading Scheme

The emissions trading scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The ETS provision represents the tradeable NZ units outstanding that will be accepted as emitters honour the emissions obligations under the ETS. Emitters can meet their emissions obligations by surrendering NZUs they hold, or by purchasing units from the Government directly at a fixed price of $35 per unit (known as the fixed price option, or FPO) before immediately surrendering them or through ETS auctions. NZUs purchased through Government auctions or FPO result in cash receipts for the Crown. The carbon price used to calculate the ETS provision at 30 June 2021 is $43.45 (2020: $32.10). The carbon price used is determined by the quoted NZU spot price at the end of the reporting date as published by Jarden Securities Limited (previously OM Financial Limited) on their website: https://commtrade.co.nz.

The ETS provision at 30 June 2021 has increased by $2,020 million compared to the previous year. This is primarily driven by the increase in the carbon price used to value the provision ($43.45 at 30 June 2021 compared to $32.10 at 30 June 2020). In addition, the 2020/21 financial year is the first in which Government auctions took place to sell NZUs to ETS market participants. These auctions result in cash inflow to the Crown and an increase to the ETS provision, as the number of NZUs in circulation increases. In addition, with the price of NZUs being above $35 for much of the year, emitters have chosen to utilise the FPO reducing the number of units surrendered to the Government.

National Provident Fund guarantee

A provision has been recognised for the guarantee of superannuation schemes managed by the National Provident Fund (NPF). Included in the provision is the NPF's defined benefit plan annuitants scheme unfunded liability position of $762 million (2020: $857 million), represented by a gross estimated pension obligation of $801 million (2020: $896 million) with net investment assets valued at $39 million (2020: $39 million).

Other Provisions

Other provisions include the impact of a Government policy announced on 15 August 2019 that allowed homeowners of on-sold over-cap properties in Canterbury to apply for an ex-gratia payment to enable them to complete agreed earthquake repairs. Subject to certain criteria, the Crown will contribute to the over-cap cost of repairs for these homes. The application period closed on 14 October 2020, with assessments and payments expected to continue until 2022. The calculation of the future cost of the policy is complex as it depends on the individual situation of many claimants. As the number and value of valid applications for on-sold over-cap repairs is highly uncertain, the provision of $305 million has been calculated based on the limited data available. The liability will be recalculated periodically, as information to estimate the forecast payments improves.

Other provisions also include $79 million (2020: $20 million) relating to the Business Finance Guarantee Scheme. The Crown has established a Business Finance Guarantee Scheme with a number of lenders to support New Zealand businesses facing hardship as a consequence of COVID-19 or to help businesses recover from the impact of COVID-19. Under this scheme, the Crown has indemnified approved lenders for an amount equal to 80% of the shortfall that arises in relation to a supported loan in default. As these indemnities are financial guarantee contracts, the fair value of the contract, and the expense arising, has been quantified and incorporated into these financial statements. The actual call on the indemnity is unquantifiable, as it will depend on the default rates actually incurred across the portfolio.

Note 23: Minority Interests

Transactions with minority interests include items such as dividend payments and dividend reinvestments. Other minority interests consist mainly of minority interests in Kiwi Group Holdings capital notes issued.

Information about the minority interest share of the entities above is included on page 161 and information about their financial position is included on page 163.

Note 24: 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 on 20 May 2021.

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

Note 25: Commitments

1. A restatement to the 2019/20 state highway network capital commitments of $1,809 million has been made to reflect the contracted work remaining.
2. Other capital commitments exclude commitments to provide loans and capital funding. This is included in note 27, Financial Instruments. A reclassification has been made to the prior year commitments note to reclassify $561 million of loan and capital funding commitments which is now included in note 27.

Note 26: Contingent Liabilities and Contingent Assets

Contingent liabilities are:

• costs that the Government 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 were realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and for contingencies within the core Crown, 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 are not able to be quantified; these unquantifiable contingent liabilities and contingent assets are disclosed as at 30 June 2021 where they are expected to be material but not remote. Where there is an obligation and a reliable estimate can be made, amounts have been recognised in the financial statements.

Contingent Liabilities

Uncalled capital

As part of the 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”.

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 the ADB.

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.

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.

IMF arrangements to borrow

Funds are 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.

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. Funds are available to the AIIB, the occurrence and amount of which will depend upon uncertain trigger events and AIIB calling the funds.

Guarantees and Indemnities

Guarantees are legally binding promises that have been made 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 there is an undertaking 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.

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.

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 OECD has increased its measurement of its obligation to €6.576 billion on the OECD Balance Sheet. ($54 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.

Screen Sector Indemnity Scheme - Ministry for Culture and Heritage

The Government has indemnified eight domestic screen productions to support the functioning of the domestic film industry during the COVID-19 pandemic. The indemnity can be called upon in agreed conditions where a COVID-19 event causes delay or abandonment of a production.

Air New Zealand letters of credit

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.

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 have an adverse outcome. 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.

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.

New Zealand Transport Agency - Contractual disputes

Legal proceedings and disputes represent the amounts claimed by plaintiffs relating to roading and other contract disputes. In addition, there is regular dialogue between the New Zealand Transport Agency and its contractors over technical and commercial matters that may result in dispute between the parties.

Other quantifiable contingent liabilities

Unclaimed monies

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

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 for Primary Industries has been notified that compensation will be sought following biosecurity responses for incursions including Bonamia ostraea, as well as claims for losses incurred following the destruction of bud-stock, known as the Post Entry Quarantine (PEQ) response. While these claims can be quantified, they do not meet the tests for recognising a provision.

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.

Transpower New Zealand Limited - Economic gains

Transpower operates its revenue-setting methodology within an economic value (EV) framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. Under Commerce Commission regulations, Transpower is required to pass onto, or claim from customers the customer balance at the end of Regulatory Control Period 2. Transpower's contingent liability includes the actual balance from the EV accounts at 30 June 2020. This balance will spread evenly over 5 years from 1 April 2020 to 31 March 2025.

Unquantifiable Contingent Liabilities

This part of the statement provides details of those contingent liabilities that 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 indemnifier 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 consolidated in these financial statements, to protect them against specified losses. If these indemnities were to crystallise, compensation to the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt. The total Operating Balance and Net Worth would not be impacted by the indemnity itself, but rather by the specified losses incurred by the indemnified organisations.

Legal claims and proceedings

There are numerous legal actions that have been brought against the Government. However, in the majority of these actions it is considered a remote possibility that the Government would lose the case, or if the Government 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.

Accident Compensation Corporation (ACC) litigations

Litigation involving ACC arises mainly from challenges to operational decisions made by ACC through the statutory review and appeal process, but also occasionally includes general civil proceedings such as judicial review applications. The majority of appeals are able to be managed on a case by case basis, depending on the merit of the issue in dispute, and without wider ACC Scheme management impact.

Aquaculture Settlements

Under the Māori Commercial Aquaculture Claims Settlement Act 2004 the Government is obligated to provide regional Iwi with 20% of future aquaculture growth. This settlement is unusual because it is an ongoing and prospective settlement. As aquaculture in New Zealand grows, settlement obligations arise. Iwi may choose to accept settlement as either cash, marine rights, or a combination following the negotiation process. The amount and timing of settlements are therefore uncertain, as they are dependent on sector growth, as well as the preferred nature of settlement, this results in challenges with regards to reliably estimating the Crown's potential obligations.

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 for Primary Industries has been notified that compensation will be sought for incursions including Mycoplasma Bovis. The contingent liability resulting from the Mycoplasma Bovis outbreak remains unquantified. This is due to the Ministry for Primary Industries being unable to reliably estimate the period of time losses will be incurred as a result of its actions under the Biosecurity Act 1993.

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 Government with respect to land that has been transferred by the Government to an SOE, Universities, Wānanga or Te Pūkenga - New Zealand Institute of Skills and Technology, or is subject to the Crown Forest Assets Act 1989.

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

Proprietors of 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 a fiduciary duty was owed 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

Accident Compensation Corporation (ACC) sensitive claims

ACC provides victims of sexual violence and abuse who suffer mental injury support (sensitive claims) in the form of counselling services, weekly compensation and other entitlements. Due to the nature of these injuries, many years may pass before the individual starts receiving treatment. Based on section 36 of the Accident Compensation Act 2001, the date of mental injury is generally recorded as the date the person first receives treatment for that injury. Once a client starts receiving treatment, a liability is recorded in ACC's Outstanding Claims Liability (OCL). With the information ACC holds for these claims, a reliable estimate of the mental injuries incurred but not yet reported as sensitive claims is unable to be made and therefore no liability is recorded in the OCL for these unreported claims.

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.

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.

Holidays Act compliance

A number of entities are undertaking or have recently completed a review of calculations in recent years 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 year or previous years. To the extent that an obligation cannot reasonably be quantified, 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).

Pay Equity Claims

A number of claims have been raised in relation to the Equal Pay Act 1972 providing for pay equity (equal pay for work of equal value) and further claims may be raised following the Equal Pay Amendment Act 2020 coming in to force in November 2020. As the costs cannot be reliably measured at this time, they are disclosed as an unquantified contingent liability.

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 $1,000 million 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 uncertainty on how various disputes, concerning the interpretation of the mechanism, will be resolved. Where costs cannot be reliably measured, they are disclosed as an unquantified contingent liability.

Contingent Assets

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.

Callaghan Innovation repayable grants

Incubator grants are repayable once the grant recipient's business produces commercial revenue. A percentage of the commercial revenue generated is payable to Callaghan Innovation as repayment of the outstanding loan each year until the loan is repaid. These grants commenced in 2014/15 and given the long-term nature of the investments being made, there is limited information available to date that would allow the Group to assess the timing, likelihood and quantum of any future repayments.

Note 27: 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 these entities are influenced by the purpose and associated governance framework for which the entity is established. The purposes of an entity 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. 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. 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 capital markets.
• Central bank purposes. Held for the Reserve Bank's foreign reserve management, market operations and monetary policy functions. The main financial risks to which the Reserve Bank is exposed includes foreign exchange risks, liquidity risks and financial stability risks.
• Commercial purposes. Held by entities that operate on a commercial basis, who will hold financial instruments arising from their normal business activity. The main examples are SOE's (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 each 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 and liabilities in Investment Statements.

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

• Non-derivative financial instrument policies (pages 128 to 130)
• Classification of financial assets and financial liabilities (pages 131 to 132)
• Fair value measurement (pages 132 to 133)
• Derivative disclosures (pages 134 to 135)
• Risk management (pages 135 to 139), and
• Sensitivity analysis (pages 139 to 140).

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

As at 30 June 2021, the carrying value of financial assets that had been pledged as collateral was $974 million (2020: $2,322 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 2021 and that require collateral to be posted as per the terms. The decrease in collateral pledged is largely as a result of securities pledged as collateral by the Reserve Bank and the New Zealand Superannuation Fund. For more information, refer to the individual entity's annual report.

Financial liabilities

Fair Value Measurement

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

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

Fair Value Financial Instruments by Measurement Hierarchy

Significant non observable inputs

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

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.

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

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. Recognit