Financial Statements of the Government of New Zealand for the Year Ended 30 June 2005

Ministerial Statement#

Over the past six years the New Zealand economy has performed strongly. Together with careful fiscal management this has resulted in a steady strengthening of the fiscal position. Operating surpluses have continued and gross and net debt levels have reduced. This has been our goal.

The financial statements for the year ended 30 June 2005 show an operating balance surplus result of $6.2 billion and a net worth of $50.0 billion.

The OBERAC (operating balance excluding revaluations and accounting policy changes) was $8.9 billion compared with $6.6 billion last year. Both net worth and the OBERAC have improved from last year reflecting continued economic growth.

The OBERAC surplus was sufficient to fund capital needs and set aside $2.1 billion for the New Zealand Superannuation Fund.

Gross sovereign-issued debt has tracked down to 23.5% (25.3% 30 June 2004), which is consistent with the Government’s long-term fiscal objective of gross debt as a percentage of GDP slowly reducing over the longer term and passing through 20% of GDP by 2015.

The government’s objective is to manage the Crown’s overall finances in a prudent and responsible manner. It will continue with the overall fiscal strategy of maintaining a cautious fiscal stance with sufficient headroom to provide a buffer against forecast changes or unanticipated events.

Hon Dr Michael Cullen
Minister of Finance

16 September 2005

Commentary on the Financial Statements#

Overview#

The Crown financial statements show:

• an operating balance of $6.2 billion (4.2% of GDP) and an OBERAC of $8.9 billion (5.9% of GDP)
• the OBERAC was higher than last year’s $6.6 billion (4.7% of GDP), reflecting:
  • growth in taxation revenue of 9.6%, which has been driven by growth in wages, employment, corporate profits and consumption, giving total tax revenue of 31.3% of GDP (30.3% of GDP in 2004)
  • offset by growth in core Crown expenses (excluding liability valuation movements) of 6.9% (30.0% of GDP, compared to 29.9% of GDP in 2004), largely reflecting the additional policy spending introduced in the 2004 Budget (consistent with the Government’s spending intentions), benefit indexation and some increases to demand-driven spending in areas such as education
• the core Crown cash equivalent of the OBERAC was $8.6 billion, which has been applied to the Government’s investment strategy (such as contributions to the New Zealand Superannuation Fund and purchasing physical assets) leaving cash available for debt repayment of $3.1 billion
• gross sovereign-issued debt was $35 billion, which has decreased by around $0.5 billion from last year
• net worth was $50 billion, which was an increase of around $14.5 billion from last year, reflecting the operating balance of $6.2 billion and physical asset revaluations of $8.2 billion.

Financial Performance#

This section compares the actual 2004/05 financial performance with actual 2003/04 financial performance.

The operating balance was $6,247 million for the year ended 30 June 2005. The following table provides a breakdown of the operating balance at a total Crown level (eg, revenues and expenses include those of all entities, including SOEs and Crown entities (except Tertiary Education Institutions - TEIs)).

These results can be broken down into three institutional segments. The following table is a summary of the information shown in the Statement of Segments.

The following section discusses revenue and expenses of the Crown by segment of reported government activity (ie, core Crown, SOEs and Crown entities).

Core Crown#

Core Crown revenue was $52.1 billion for the year ended 30 June 2005, compared to $46.9 billion in 2004. The major source of core Crown revenue was tax revenue of $47.1 billion.

The above table provides a breakdown of the main tax types and the growth in those tax types since 2004 including:

• source deductions increased by around $1.4 billion reflecting the current strength in the labour market
• companies tax increased by around $1.4 billion mainly driven by strong corporate returns, and
• goods and services tax increased by around $0.5 billion mainly due to increased consumer spending.

The remainder of core Crown revenue comprises:

• investment income of $2.8 billion ($2 billion in 2004). The increase in investment income is due to increased asset holdings by the NZS Fund and a strong equity market in 2005. In addition dividend income has increased reflecting the growth in operating surplus of SOEs in 2005
• other sovereign levied income of $0.6 billion ($0.6 billion in 2004)
• other revenue (including sale of goods and services) of $1.5 billion ($1.3 billion in 2004).

Core Crown expenses were $46.2 billion for the year ended 30 June 2005, compared to $41.6 billion in 2004. Once the movement in the GSF unfunded liability is removed, core Crown expenses were $44.8 billion (30.0% of GDP) compared to $41.9 billion in 2004 (29.9% of GDP).

The above table compares the main functional core Crown expenses between the 2004 and 2005 financial years including:

• social security and welfare expenses increasing by $0.4 billion reflecting the annual benefit indexation, which has been partially offset by lower spending on unemployment benefits due to the lower rate of unemployment during 2005
• health expenses increased by $0.7 billion, driven primarily by increased funding to maintain and improve existing service levels
• education expenses increased by $0.3 billion largely due to increased funding provided in the 2004 Budget and change in student loan provisioning
• core government service expenses increased by $0.5 billion reflecting new spending allocated in the 2004 Budget, increase in debt provisioning for taxes receivable and an increase in the National Provident Fund liability valuation
• heritage, culture and recreation expenses increased by around $0.4 billion mainly due to the recognition of the estimated liability of the Kyoto Protocol.

Crown entities#

The primary source of revenue for Crown entities is funding from core Crown departments. The main Crown entities that generate operating surpluses are Accident Compensation Corporation (ACC), Earthquake Commission (EQC) and Transit New Zealand. These entities usually retain their surpluses for their long-term purposes. For example, ACC will retain its surplus in order to build up its asset portfolio to help meet its outstanding claims liability, while EQC will use its operating surplus to build up assets to cover claims in the event of any future natural disaster, and Transit New Zealand will usually utilise its surplus for capital spending on roads.

For the year ended 30 June 2005, the Crown entities’ operating balance deficit was $0.1 billion, removing the revaluation movement of the ACC unfunded liability the operating balance was $1.9 billion ($1.9 billion in 2004). This comprises:

• revenue of $22.8 billion, compared to $21.1 billion in 2004. The increase was driven by increased funding revenue Crown entities have received from departments and increased investment returns on the asset portfolios held by ACC and EQC
• expenses (excluding valuation movements) of $21 billion, compared to $19.4 billion in 2004, reflecting the higher level of services provided due to the increase in funding.

State-Owned Enterprises (SOEs)#

The SOE operating balance for the year ended 30 June 2005 was $1 billion ($0.7 billion in 2004). This comprises:

• revenue of $10.3 billion, compared to $9.0 billion in 2004. The increase was mainly driven by an increase in sale of goods and services in the electricity sector due to an increase in spot prices. The increase was somewhat offset by an increase in expenses as these entities also purchased electricity at a higher spot rate
• expenses of $9.3 billion, compared to $8.2 billion in 2004.

Core Crown Cash Flows#

The OBERAC cannot be fully used by the Government to fund its capital programme. This is because some components of the OBERAC are non-cash (ie, depreciation) or retained by entities within the Crown (ie, SOE/Crown entities surpluses and NZS Fund returns) for the purposes of achieving their long term objectives.

Adjusting for these items gives the core Crown operating cash flow, which was $8.6 billion for the year ended 30 June 2005. The core Crown cash flow from operations has been used to fund the capital expenditure, which included:

• contributions to the NZS Fund of $2.1 billion
• net purchases of physical assets of $1.4 billion (eg, land and buildings for prisons and schools)
• capital injections of $0.6 billion (including District Health Boards, HNZC and Air NZ) and purchase of Reserve Bank reserves of $0.8 billion, and
• advances of $0.6 billion (primarily student loans).

The core Crown cash flow generated from operations has been more than sufficient to meet the government’s capital programme, leaving a $3.1 billion cash available for debt repayment from the current year’s operating and investing activities.

Use of the Operating Surplus#

The following table explains how the operating surplus/OBERAC was calculated for the 2004/05 actual results and compared to the 2003/04 actual results, and then how it was applied. Any extra spending or reduced tax revenue would add to the bottom-line cash shortfall (and add to the need to borrow).

Financial Position#

The Statement of Financial Position recording the Crown’s assets, liabilities and net worth for the year ended 30 June 2005 was:

These results can be broken down into three institutional segments. The following table is a summary of the information shown in the Statement of Segments.

Net worth has increased from $35.5 billion in 2004 to $50 billion in 2005. The growth in net worth was largely due to the impact of revaluations on some of the Crown’s physical asset portfolios ($8.2 billion) and the use of the operating balance to accumulated assets ($6.2 billion).

The following section discusses net worth of the Crown by segment of reported government activity (ie, core Crown, SOEs and Crown entities).

Core Crown#

Core Crown assets have increased by $9.8 billion, largely due to the use of the cash generated from operations being used to fund assets (including financial assets such as NZS Fund and student loans) and the impact of revaluation of physical assets ($2.6 billion).

Within the financial asset portfolio of the core Crown there has been an increase of $6.3 billion since 2004, which includes:

• the NZS Fund increased by around $2.2 billion, largely reflecting the contributions to the Fund by the government
• the Reserve Bank’s and New Zealand Debt Management Office’s (NZDMO’s) finance asset portfolio has increased by around $3.5 billion, largely due to the current years cash available for debt repayment
• GSF holdings increased by $0.2 billion, reflecting the gains on investments for the current year. The assets held by the GSF are built up from employee contributions and are used to partially offset the GSF unfunded liability, which was $11.4 billion as at 30 June 2005.

The below graph provides a breakdown of the financial assets portfolio held by the core Crown.

Figure 1 – Comparison of core Crown financial asset portfolios

Within the physical asset portfolio of the core Crown there has been an increase of $3.3 billion, which was largely due to the revaluation of the school property portfolio of $1.2 billion, the Conservation estate of $1.1 billion and Defence force land and buildings of $0.3 billion. The main drivers of the revaluation increases were underlying property prices during the 2005 financial year.

The major component of core Crown liabilities is gross sovereign-issued debt, which was $35 billion as at 30 June 2005 (23.5% of GDP). Gross sovereign-issued debt has decreased by around $0.5 billion since 2004 primarily due to the repayment of debt as a result of the government’s fiscal position over the past few years.

Figure 2 – Core Crown debt

Source: The Treasury

Net core Crown debt was $10.8 billion, which was 7.2% of GDP. Net core Crown debt decreased from last year by around $4.4 billion, largely reflecting in part the $3.1 billion of cash available for debt repayment and decisions to invest in financial assets (advances and the Reserve Bank reserves).

Crown entities#

Crown entities assets have increased by $6.4 billion, similar to the core Crown the increase was due to the utilisation of the operating balance to build up assets and the impact of revaluations of physical assets.

Financial assets have increased by $2.5 billion, due to the growth in the ACC and EQC investment portfolios resulting from investment returns.

Physical assets have increased by $3.4 billion, which was largely due to the revaluation of

• state highways of $1.4 billion primarily driven by revaluations and additional investment in state highways, and
• revaluation of housing stock of $1.2 billion which is held by Housing New Zealand Corporation.

The major component of Crown entities’ total liabilities is the ACC claims liability of $11.4 billion. The ACC liability has increased by around $2.0 billion since 2004, which is discussed in more detail in note 17.

SOEs#

SOEs’ net worth have increased by $3.1 billion, largely reflecting:

• increases in physical assets of $2.9 billion, reflecting the expansion of assets in line with individual entities’ asset strategies and the revaluation of electricity generation assets of around $2.0 billion
• financial assets ($1.2 billion) and borrowing ($1.2 billion) have increased, which is largely due to a gross up issue.

Comparison with 2005 Pre-Election Update and 2004 Budget Update#

The following table provides a breakdown of the movements from the budgeted results:

Compared to the Pre-Election Update (PREFU) the operating balance was around $0.5 billion higher than forecast. This was due to

• higher SOE/Crown entities surpluses of $0.3 billion (mainly resulting from improved investment income earned by EQC and the recognition of a vested asset by Transit New Zealand)
• higher than forecast tax revenue of $0.1 billion, and
• delays in spending of $0.1 billion.

Compared to the 2004 Budget Update the operating balance was around $0.6 billion higher than forecast. All of the items outlined above contributed to the variance against the 2004 Budget forecasts. There were a number of other significant influences driving the change in the operating balance since the 2004 Budget Update. Significant influences include tax revenue which was higher than forecast by around $2.4 billion. The increase was mainly due to:

• source deductions, which were higher than forecast by $0.6 billion, largely reflecting higher-than-expected growth in wages and employment
• corporate tax, which was higher than forecast by $1.3 billion reflecting stronger-than-expected corporate profitability throughout 2005
• goods and services tax, which was higher than forecast by $0.2 billion due to slightly stronger-than-forecast consumer spending.

Investment income was higher than forecast by $0.6 billion due to stronger investment returns by NZDMO, NZS Fund and GSF.

SOE/Crown entities surpluses were higher than forecast by $0.6 billion, which was spread over a number of entities.

This has been partially offset by an increase in the GSF and ACC unfunded liabilities of $2.9 billion and the recognition of the Kyoto Protocol liability of $0.3 billion.

Gross sovereign issued debt and net debt were in line with the Pre-Election Update.

When compared to the 2004 Budget Update, gross sovereign issued debt was $2.4 billion higher. This is mainly due to the higher starting position from 2003/04 (net debt neutral as the value of financial assets had a corresponding increase).

The net core Crown debt was $4.6 billion lower than the 2004 Budget Update, largely driven by the higher cash available for debt repayment and investment in assets during 2005.

Historical Information#

Report of the Auditor-General#

To the Readers of the Government of New Zealand’s Financial Statements for the year ended 30 June 2005#

I have audited the financial statements of the Government of New Zealand for the year ended 30 June 2005, using my staff, resources and appointed auditors and their staff.

Unqualified opinion

In our opinion the following financial statements of the Government of New Zealand:

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect:
  • the Government of New Zealand’s financial position as at 30 June 2005; and
  • the results of its operations and cash flows for the year ended on that date.

The audit was completed on 16 September 2005, and is the date at which our opinion is expressed.

The basis of the opinion is explained below. In addition, we outline the responsibilities of the Government and the Auditor, and explain our independence.

Basis of opinion

We carried out the audit in accordance with the Auditing Standards published by the Auditor-General, which incorporate the Auditing Standards issued by the Institute of Chartered Accountants of New Zealand.

We planned and performed the audit to obtain all the information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements did not have material misstatements, whether caused by fraud or error.

Material misstatements are differences or omissions of amounts and disclosures that would affect a reader’s overall understanding of the financial statements. If we had found material misstatements that were not corrected, we would have referred to them in the opinion.

The audit involved performing procedures to test the information presented in the financial statements. We assessed the results of those procedures in forming our opinion.

Audit procedures generally include:

• determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data;
• verifying samples of transactions and account balances;
• performing analysis to identify anomalies in the reported data;
• reviewing significant estimates and judgements made;
• confirming year-end balances;
• determining whether accounting policies are appropriate and consistently applied; and
• determining whether all financial statement disclosures are adequate.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements.

We evaluated the overall adequacy of the presentation of information in the financial statements. We obtained all the information and explanations we required to support our opinion above.

Responsibilities of the Government and the Auditor

The Treasury is responsible for preparing financial statements on behalf of the Government in accordance with generally accepted accounting practice in New Zealand. Those financial statements must fairly reflect the financial position of the Government of New Zealand as at 30 June 2005. They must also fairly reflect the results of its operations and cash flows for the year ended on that date. The Minister of Finance is responsible for forming an opinion that those financial statements fairly reflect the financial position and operations of the Government of New Zealand for that year. The responsibilities of the Treasury and the Minister of Finance arise from the Public Finance Act 1989.

We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 30 of the Public Finance Act 1989.

Independence

The Auditor-General, as an Officer of Parliament, is constitutionally and operationally independent of the Government of New Zealand. Other than in exercising functions and powers under the Public Audit Act 2001 as the auditor of public entities, the Auditor-General has no relationship with or interest in the Government of New Zealand.

K B Brady
Controller and Auditor-General
Wellington
New Zealand

Financial Statements#

Statement of Financial Performance (for the year ended 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

Below is an analysis of total Crown expenses and core Crown expenses by functional classification. This information reconciles with the segment information within the Statement of Segments.

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Cash Flows (for the year ended 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Financial Position (as at 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

Following is an analysis of the New Zealand Superannuation (NZS) Fund and Gross and Net Debt information. The notes to the accounts provide a breakdown of other key balance sheet items.

New Zealand Superannuation Fund (NZS Fund)#

Within marketable securities, deposits and equity investments is the NZS Fund (except for cross holdings of investments with other parts of the Crown, for example the NZS Fund may hold NZ Government Stock). The following information includes all investments and income, including cross-holdings of NZ Government Stock and accrued interest on such stock.

Gross and Net Debt information#

Definitions of debt:

Total Crown gross debt is the total borrowings (both sovereign guaranteed and non-sovereign guaranteed) of the total Crown. This equates to the amount in the total Crown balance sheet and represents the complete picture of whole-of-Crown debt obligations to external parties (ie, after eliminations of internal cross-holdings). The balance sheet splits total Crown debt into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that debt held by SOEs and Crown entities is not explicitly guaranteed by the Crown. Any such debt that may be guaranteed is included in the sovereign-guaranteed total. No debt of SOEs and Crown entities is currently guaranteed by the Crown. Gross sovereign-issued debt is debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, GSF, ACC or EQC for example. In other words, the gross sovereign-issued debt does not eliminate any internal cross-holdings of entities listed above. The Government’s debt objective uses this measure of debt. Net core Crown debt is borrowings (financial liabilities) less cash and bank balances, marketable securities and deposits, and advances (financial assets). Net core Crown debt excludes the assets of the NZS Fund and GSF. It is a measure of the core Crown.

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Movements in Equity (for the year ended 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Borrowings (as at 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Commitments (as at 30 June 2005)#

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Contingent Liabilities and Contingent Assets (as at 30 June 2005)#

Note 21 contains a breakdown of the material contingent liabilities and a description of non-quantified contingent liabilities and contingent assets.

The accompanying notes and accounting policies are an integral part of these statements.

Statement of Segments#

Statement of Segments (continued)#

Statement of Segments (continued)#

Statement of Segments (continued)#

Statement of Segments (continued)#

Statement of Accounting Policies#

Reporting Entity#

The Crown financial statements have been prepared in accordance with the requirements of the Public Finance Act 1989[1].

The Crown reporting entity as specified in Part III of the Public Finance Act 1989 comprises:

• Ministers of the Crown
• Departments
• Reserve Bank of New Zealand
• Government Superannuation Fund
• State owned enterprises
• New Zealand Superannuation Fund
• Crown entities
• Air New Zealand Limited

A more detailed listing of the components of the Crown reporting entity is set out in the Supplementary Information.

Accounting Policies#

These financial statements comply with generally accepted accounting practice. The measurement base applied is historical cost adjusted for revaluations of certain property, plant and equipment, state highways, commercial forests and marketable securities held for trading purposes. The accrual basis of accounting has been used unless otherwise stated.

Reporting and forecast period

The reporting and forecast period for these financial statements is the year ended 30 June 2005.

The Budget forecast is the original forecast for the financial year, as presented in the 2004 Budget on 27 May 2004. The estimated actual forecast, as presented in the 2005 Pre-Election Economic and Fiscal Update on 18 August 2005, has been prepared using actual data which was available at the time of the finalisation of the Pre-EFU forecasts (8 August 2005).

Basis of combination

Ministers of the Crown, departments, the Reserve Bank of New Zealand, the GSF, the NZS Fund, SOEs (including Air New Zealand Limited) and Crown entities (excluding TEIs) are combined using the purchase method of combination. Corresponding assets, liabilities, revenues and expenses are added together line by line. Transactions and balances between these sub-entities are eliminated on combination. Offices of Parliament are not included in the Crown financial statements.

TEIs are equity accounted, which recognises these entities’ net assets, including asset revaluation movements and surpluses and deficits.

Note 13 outlines in more detail why there is a difference in the accounting treatment of TEIs from other Crown entities and why the Offices of Parliament are excluded.

Revenue#

Revenue levied through the Crown’s sovereign power#

The Crown provides many services and benefits that do not give rise to revenue. Further, payment of tax does not, of itself, entitle a taxpayer to an equivalent value of services or benefits, as there is no direct relationship between paying tax and receiving Crown services and transfers.

Such revenue is received through the exercise of the Crown’s sovereign power. Where possible, revenue is recognised at the time the debt to the Crown arises.

Revenue earned through operations#

If revenue has been earned by the Crown in exchange for the provision of outputs (products or services) to third parties, the Crown receives its revenue through operations. Such revenue is recognised when it is earned.

Investment income#

Investment income is recognised in the period in which it is earned.

Premiums and discounts#

Premiums arising on the issue of a debt instrument are treated as a reduction in the cost of borrowing. Discounts arising on the purchase of a monetary asset are treated as an increase in investment income.

Premiums and discounts are recognised in the Statement of Financial Position on issue, and are amortised over the period of the instrument on a yield-to-maturity basis.

For floating rate debt instruments, the amortisation is over the first interest period. Discounts on monetary assets deemed short-term securities are amortised on a straight-line basis.

The forward margin associated with forward foreign-exchange contracts is amortised over the period of the contract on a straight-line basis.

Gains#

Realised gains arising from sales of assets or the early repurchase of liabilities are recognised in the Statement of Financial Performance in the period in which the transaction occurs.

Unrealised foreign-exchange gains on monetary assets and liabilities, and unrealised gains on marketable securities held for trading purposes and listed equity investments, are recognised in the Statement of Financial Performance.

Unrealised and realised gains related to hedging activity are recognised in the Statement of Financial Performance in the same period in which losses on the underlying hedged position are recognised.

Unrealised gains arising from changes in the value of property, plant and equipment (including state highways) are recognised as at balance date. To the extent that a gain reverses a loss previously charged to the Statement of Financial Performance, the gain is credited to the Statement of Financial Performance. Otherwise, gains are credited to an asset revaluation reserve for that class of asset.

Unrealised gains arising from changes in the value of commercial forests are credited to the Statement of Financial Performance.

Unrealised gains (excluding foreign-exchange gains) arising from changes in the value of investments and marketable securities held for investment and unlisted equity investments are recognised as at balance date only to the extent that they reverse a loss previously charged to the Statement of Financial Performance. Gains effecting such a reversal are credited to the Statement of Financial Performance.

Expenses#

General#

Expenses are recognised in the period to which they relate.

Welfare benefits#

Welfare benefits are recognised in the period when an application for a benefit has been received and the eligibility criteria met.

Grants and subsidies#

Where grants and subsidies are discretionary until payment, the expense is recognised when the payment is made. Otherwise, the expense is recognised when the specified criteria have been fulfilled and notice has been given to the Crown.

Discounts and premiums#

Discounts arising on the issue of a debt instrument are treated as an increase in the cost of borrowing. Premiums arising on the purchase of a monetary asset are treated as a reduction in investment income.

Discounts and premiums are recognised in the Statement of Financial Position on issue, and are amortised over the period of the instrument on a yield-to-maturity basis.

For floating rate debt instruments, the amortisation is over the first interest period. Premiums on monetary assets deemed short-term securities are amortised on a straight-line basis.

The forward margin associated with forward foreign-exchange contracts is amortised over the period of the contract on a straight-line basis.

Losses#

Realised losses arising from sales of assets or the early repurchase of liabilities are recognised in the Statement of Financial Performance in the period in which the transaction occurs.

Unrealised foreign-exchange losses on monetary assets and liabilities, and unrealised losses on marketable securities held for trading purposes and listed equity investments, are recognised in the Statement of Financial Performance.

Unrealised and realised losses related to hedging activity are recognised in the Statement of Financial Performance in the same period in which gains on the underlying hedged position are recognised.

Unrealised losses (excluding foreign-exchange losses) arising from changes in the value of property, plant and equipment (including state highways), and investments and marketable securities held for investment and unlisted equity investments are recognised at balance date. Unrealised losses are first applied against any revaluation reserve for that class of asset. The balance, if any, is charged to the Statement of Financial Performance.

Unrealised losses arising from changes in the value of commercial forests are charged to the Statement of Financial Performance.

Foreign-currency transactions#

Short-term transactions covered by forward exchange contracts are translated into New Zealand dollars using the forward rates specified in those contracts.

Other transactions in foreign currencies are translated into New Zealand dollars using the exchange rate on the date of the transaction. Exchange differences arising on settlement of these transactions are recognised in the Statement of Financial Performance.

Outstanding foreign-exchange contracts are translated at the closing exchange rate. Exchange gains and losses are included in the Statement of Financial Performance in the period in which they arise.

Depreciation#

Depreciation is charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of property, plant and equipment, less any estimated residual value, over its estimated useful life. Typically, the estimated useful lives of different classes of property, plant and equipment are as follows:

Assets#

Foreign monetary assets#

Where short-term foreign monetary assets are subject to forward exchange contracts, they are translated into New Zealand dollars at the contract rate. Otherwise, foreign monetary assets are translated at the closing exchange rate.

Exchange gains and losses are included in the Statement of Financial Performance in the period in which they arise.

Receivables and advances#

Receivables and advances are recorded at the amounts expected to be ultimately collected in cash.

Inventories#

Inventories are recorded at the lower of cost and net realisable value. Where inventories acquired are recorded at cost, the weighted average cost method is used. Appropriate allowance has been made for obsolescence.

Investments#

Marketable securities held for trading purposes

Marketable securities held for trading purposes are recorded at fair value.

Equity investments

Listed equity investments (other than those forming part of the reporting entity) are recorded at fair value.

Other equity investments (other than those forming part of the reporting entity) are recorded at lower of cost and fair value.

Other investments and marketable securities held for investment purposes

Other investments, including marketable securities held for investment purposes, are recorded at the lower of cost and fair value.

Investments held for hedging purposes are recorded on the same basis as the item being hedged.

Items of property, plant and equipment#

Items of property, plant and equipment are initially recorded at cost.

Revaluations are carried out for most classes of property, plant and equipment to reflect the service potential or economic benefit obtained through control of the asset. Revaluation is based on the fair value of the asset. Where an asset is recorded using depreciated replacement cost, depreciated replacement cost is based on the estimated present cost of construction, reduced by factors for age and deterioration of the asset.

Classes of property, plant and equipment assets that are revalued, are revalued at least every five years.

Classes of property, plant and equipment assets that are revalued are regularly reviewed to ensure the carrying value is not materially different from fair value.

For each property, plant and equipment asset project, borrowing costs incurred during the period required to complete and prepare the asset for its intended use are expensed.

Land and buildings

Land and buildings are recorded at fair value less accumulated depreciation on buildings. In cases where valuations conducted in accordance with the New Zealand Property Institute’s standards are not available, valuations conducted in accordance with the Rating Valuation Act 1998, which have been confirmed as appropriate by an independent valuer, have been used.

Specialist military equipment

Specialist military equipment is recorded at depreciated replacement cost (fair value) less accumulated depreciation. Valuations have been obtained through specialist assessment by New Zealand Defence Force advisers, and the basis of these valuations have been confirmed as appropriate by an independent valuer.

State highways

State highways are recorded at depreciated replacement cost based on the estimated present cost of constructing the existing asset by the most appropriate method of construction. Land associated with the state highways is valued using an opportunity cost based on adjacent use, as an approximation of fair value.

Aircraft (excluding specialist military equipment)

Aircraft (excluding SME) are recorded at fair value less any accumulated depreciation.

Electricity distribution network

Electricity distribution network assets are recorded at cost less accumulated depreciation.

Electricity generation assets

Electricity generation assets are recorded at fair value less any accumulated depreciation.

Other items of property, plant and equipment – at cost

Other property, plant and equipment, which include motor vehicles and office equipment, are recorded at cost less accumulated depreciation.

Other physical assets for which an objective estimate of market value is difficult to obtain

Such physical assets (national parks, for example) are recorded at fair value less any accumulated depreciation.

Commercial forests#

Commercial forests are recorded at fair value less estimated point-of-sale costs. This takes into account age, quality of timber and the forest management plan.

Goodwill and intangible assets#

The excess of cost over the fair value of the net assets of entities acquired (subsidiaries) at the date of acquisition is recognised as goodwill. The balance of goodwill is assessed annually for evidence of impairment in excess of annual amortisation.

Identifiable intangible assets which have been purchased are initially recorded at cost and thereafter either at cost less accumulated amortisation and any accumulated impairment losses or, where in the rare case where an active market exists, at a revalued amount being fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.

Goodwill and identifiable intangible assets are amortised on a systematic basis to the Statement of Financial Performance over their period of expected benefit. The maximum period of amortisation is 20 years.

Liabilities#

Borrowings#

In the Statement of Financial Position, borrowings (including currency swaps) are recorded at nominal value adjusted for the unamortised portion of the premium or discount on issue.

Foreign monetary liabilities#

Where short-term foreign monetary liabilities are subject to forward exchange contracts, they are translated into New Zealand dollars at the contract rate. Otherwise, foreign monetary liabilities are translated at the closing exchange rate.

Exchange gains and losses are recognised in the Statement of Financial Performance in the period in which they arise.

Pension liabilities#

Pension liabilities in respect of the contributory service of superannuation scheme members are recorded at the latest actuarial value of the Crown's liability for pension payments. Movements of the liability are reflected in the Statement of Financial Performance.

ACC claims liabilities#

The future cost of ACC claims liabilities is revalued annually based on the latest actuarial information. Movements of the liability are reflected in the Statement of Financial Performance.

Currency issued#

Currency issued represents a liability in favour of the holder. Currency issued for circulation, including an amount to cover expected future redemption of demonetised currency, is recognised at face value.

Leases#

Finance leases transfer to the Crown as lessee substantially all the risks and rewards incident on the ownership of a leased asset. The obligations under such leases are capitalised at the present value of the minimum lease payments. The capitalised values are amortised over the period in which the Crown expects to receive benefits from their use.

Operating leases, where the lessors substantially retain the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease.

Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter.

Employee entitlements#

Employee entitlements to salaries and wages, annual leave, long service leave, retiring leave and other similar benefits are recognised when they accrue to employees. The liability for employee entitlements is carried as the present value of the estimated future cash outflows.

Other liabilities#

All other liabilities are recorded at the estimated obligation to pay.

Commitments#

Commitments are future expenses and liabilities to be incurred on contracts that have been entered into at balance date. Commitments include those operating and capital commitments arising from non-cancellable contractual or statutory obligations. Interest commitments on debts and commitments relating to employment contracts are not included in the Statement of Commitments.

Contingent liabilities and contingent assets#

Contingent liabilities and contingent assets are recorded in the Statement of Contingent Liabilities and Contingent Assets at the point at which the contingency is evident.

Changes in Accounting Policies#

The measurement basis of valuing electricity generation assets has changed from historical cost to fair value. The financial impact of this change increases property, plant and equipment by $1,986 million and increases net worth by the same amount.

In addition the measurement basis of electricity distribution network assets has changed from fair value to historical cost. The change in accounting policy in electricity distribution network assets has been adopted on the basis that these revaluations have not been material relative to the asset base. Over the period of 1999 to 2004 the total revaluation has been $45 million on an asset base of $1.9 billion and therefore the costs incurred in undertaking a revaluation exceed the benefits.

There have been no other changes in accounting policies. All other policies have been applied on a basis consistent with the previous year.

Comparatives#

To ensure consistency with the current period, comparative figures have been restated where appropriate.

Notes to the Financial Statements#

Note 1:  Tax and Levies Collected through the Crown’s Sovereign Power (Accrual)#

Note 1:  Tax and Levies Collected through the Crown’s Sovereign Power (Cash)#

Note 2:  Sale of Goods and Services#

The Statement of Segments shows the sale of goods and services as a total for each area of the Crown (ie, total sales for core Crown, Crown entities and SOEs). The total for Crown entities includes such items as lottery sales, housing rental and Crown research institutes (CRI) sales. The total sales of SOEs (including Air NZ) represents the majority of their income from electricity generation and distribution services, postal services, advertising and air travel sales.

Note 3:  Investment Income#

Note 4:  Other Revenue#

Note 5:  Subsidies and Transfer Payments#

Note 6:  Personnel Expenses#

The Statement of Segments shows the personnel expenses as a total for each area of total Crown (ie, total personnel expenses for core Crown, Crown entities and SOEs).

Personnel expenses include salaries and allowances to Ministers of the Crown totalling $6 million (30 June 2004: $5.7 million). In addition, Ministers are provided with ministerial accommodation in Wellington and receive allowances when travelling in New Zealand.

Note 7:  Operating Expenses#

Operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of entities included in the Crown financial statements, excluding those expenses separately identified in the Statement of Financial Performance and other notes. Items disclosed separately below are those required by accounting standards.

Other operating costs is the large residual item. Most of these costs represent payments made for services provided by third parties (roading maintenance for example) or for raw materials (fuel, medicines or inventory for example). They also include other day-to-day operating costs.

Note 8:  Cash and Marketable Securities, Deposits and Equity Investments#

The asset values above are net of any cross-holdings. For example, the asset portfolios of the NZS Fund, GSF, EQC and ACC currently all hold amounts of New Zealand Government stock. For financial reporting purposes these amounts are eliminated within the combined financial statements. The total portfolios, including cross-holdings of New Zealand Government stock, are shown below, along with commentary on the restricted nature of some of the assets (for example the GSF assets are only available for the payment of GSF benefits – because of the restricted nature of these assets they are excluded from the definition of net core Crown debt).

Nature of financial assets – some are restricted in their purpose#

Within the financial assets above, several portfolios are restricted in their nature in that they are only available to meet very specified purposes and are not available (by statute or other reasons) for general use by the Crown. It is for this reason that such assets are excluded from the definition of net core Crown debt – one of the Crown’s key fiscal policy indicators.

New Zealand Superannuation Fund#

The assets of the NZS Fund is the Government’s means of building up assets to partially pre-fund future New Zealand superannuation expenses and may only be used for New Zealand Superannuation. The assets in this fund total $6.6 billion. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure superannuation entitlements over the next 40 years can be met.

Government Superannuation Fund#

The GSF Authority administers the portfolio of the GSF totalling $3.5 billion. These assets result from contributions by beneficiaries built up through time and can only be applied to the ongoing payment of GSF benefits (as provided by the GSF Act). Also refer Note 16.

EQC – Natural Disaster Fund (NDF)#

The EQC is New Zealand’s primary provider of seismic disaster insurance to residential property owners. The EQC administers the NDF, comprising capital and reserves. The EQC draws on the NDF money to pay out claims for damage caused by natural disasters.

ACC portfolio#

ACC manages the ACC scheme. At present there is a substantial outstanding claims liability associated with past claims of around $11.4 billion. To manage the payment of these claims in the future, ACC is building up a matching portfolio of assets. The target is to have the residual claims fully funded by 2014. Also refer Note 17.

Note 9:  Advances#

Provision for student loans#

The book value of student loans represents outstanding loan balances as at 30 June 2005 after provision for expected doubtful debts. The book value does not discount the repayments.

The methodology used to provide for student loans contains a capital and an interest component. These provisions are periodically reviewed for appropriateness and the methodologies updated where necessary.

Capital provision

The provision on the outstanding capital issued is 12.8% (2004:11.4%). The key variables that impact on the expected level of write-off relate to death and bankruptcy write-offs as well as debt that will not be collected because of retirement, child-rearing or disability because these borrowers do not meet the repayment threshold obligation. The underlying assumptions regarding the borrowing characteristics and income growth profiles of borrowers and the expected level of defaulters are based on the most current information. The provision is sensitive to the assumptions on borrowing characteristics and income growth profiles, and so is regularly reassessed as new information becomes available. A 1% shift will impact on the provision level by around $75 million.

Interest write-off provision

The provision for interest write-offs on interest accrued after 31 December 1999 was reviewed in light of changes to Government policy, resulting in a substantial increase in the provision level to 70% (from 17%). This reflected changes to the student loan scheme allowing the full write-off of interest while students continue to study along with the increased income thresholds used to determine repayments through the income tax system. The effective provision for interest write-offs from 1 January 2004 was around 50% and from 1 January 2005 it was approximately 55%. The interest rate provision is reviewed annually.

Estimated fair value#

The estimated fair value of the student loan debt as at 30 June 2005 has been determined to be approximately $5,994 million ($5,734 million at 30 June 2004). The fair value is less than the book value by $471 million, but this is not considered to indicate the need to impair the book value, largely as the two approaches to determining a value are not directly comparable. The fair value has been determined by projecting forward the expected cash flows from the Student Loan Scheme and discounting them back at an appropriate after-tax discount rate. The fair value has been calculated using a model constructed for the Ministry of Education in 2003 which integrates students’ educational and demographic information with data on loans and income that is held securely by Statistics New Zealand. The model is dependent on a number of assumptions on future income levels, repayment behaviour, in addition to economic assumptions (the discount rate, inflation and so on). As such the estimated fair value is sensitive to changes in those underlying assumptions. For example a 1% shift in the discount rate alters the value by approximately $350 million, whereas a 1% shift in salary inflation alters the value by approximately $120 million. The accuracy of the fair value determination is expected to continue to improve as the fair value model is further developed. The 2005 Student Loan Annual Report will contain more information on the student loan scheme.

Note 10:  Receivables#

Included in accounts receivable at nominal value less provision for doubtful debts are the debtor portfolios held by the Ministries of Social Development and Justice. Due to the nature of these portfolios the collectability of outstanding amounts can take place over a significant period of time.

The debtor portfolio held by the Ministry of Justice largely relates to outstanding court costs, fines and enforcement fees. The gross value of the debtor portfolio was $498 million, $116 million has been provided for as a provision reflecting the nature of the collectability of the debtors.

The debtor portfolio held by the Ministry of Social Development largely relates to benefit overpayments, advances on benefits and recoverable special needs grants. The gross value of the debtor portfolio was $791 million, $395 million has been provided for as a provision reflecting the collectability of the debtors.

Note 11:  Other Investments#

Note 12:  Property, Plant and Equipment#