Financial Statements of the Government of New Zealand for the Year Ended 30 June 2008

Contents

Fiscal Summary for the year ended 30 June 2008

Summary Statement of Financial Performance for the year ended 30 June 2008

Summary Statement of Cash Flows for the year ended 30 June 2008

Summary Statement of Financial Position as at 30 June 2008

These summary financial statements comply with generally accepted accounting practice as it relates to summary financial statements.

The information in these summary statements is drawn from and is consistent with information presented in the full financial statements of the Government for the year ended 30 June 2008, which were the first NZ IFRS full financial statements. These were authorised for issue on 30 September 2008.

The Government is a public benefit entity and the full financial statements of the Government have been prepared in accordance with generally accepted accounting practice as it applies to such entities. The recognition and measurement disclosure changes resulting from the change to NZ IFRS were not significant in the context of this summary information. The full financial statements received an unqualified audit opinion.

These summary financial statements cannot be expected to provide as complete an understanding as provided by the full financial statements, which can be obtained from www.treasury.govt.nz/government/financialstatements/.

Ministerial Statement

Since 2000, New Zealand has enjoyed the longest uninterrupted period of economic expansion since World War II.

That growth, accompanied by a dramatic rise in employment, big fall in unemployment, strong increases in workers' wages and firms' profits, all assisted Crown revenue growth which in turn assisted the government to dramatically lift public investment in health, education, infrastructure and other public goods.

But just as important, the government has been utilising favourable economic conditions to position the Crown in a strong financial position to better withstand any future external shocks to our economy and society.

Since 1999, the government has driven gross sovereign-issued debt down, from over 35 percent of GDP to be nearer the government's long-term target of 20 percent of GDP, while simultaneously building up the financial assets of the New Zealand Superannuation Fund to part pre-fund future pension liabilities.

In 2006, the New Zealand Government's net financial asset position moved into positive territory for the first time in the nation's history, a position maintained in the 2007/08 financial statements for the year ended 30 June.

These statements are the first prepared under New Zealand International Financial Reporting Standards (NZ IFRS). The statements show an operating profit before gains and losses (OBEGAL) of $5,637 million, $410 million higher than forecast in the 2008 Budget Economic and Fiscal Update. The operating balance was on target at $2,384 million. This result compares with the previous year's operating balance of $8,022 million which included some large actuarial gains on the Government's long term liabilities while this year's result has been impacted by the decline in overseas equity markets.

Core Crown residual cash was $736 million less than in the previous year but $1,149 million higher than forecast. The delay in the $690 million KiwiRail purchase to 1 July drove most of this surplus with operating cash flows $274 million higher than forecast.

Gross sovereign-issued debt (excluding Reserve Bank settlement cash) continued to fall as a percentage of GDP at 17.4 percent in 2008 compared with 18.2 percent last year. This continues to be consistent with the Government's long term debt objective to keep gross sovereign-issued debt broadly stable at 20 percent of GDP over the next ten years.

As at 30 June 2008 the financial statements show that the Crown's net financial asset position inclusive of the assets of the New Zealand Superannuation Fund was equivalent to a positive 7.9 percent of GDP, compared with a positive 5.3 percent of GDP a year earlier.

The New Zealand Superannuation Fund grew by $1,239 million over the year to a net worth of $14,212 million. The Fund was adversely impacted by the downturn in overseas equity markets, making an $881 million operating loss for the year ended 30 June 2008. The Fund's annualised return since inception remains positive at 10.34% (over 3% above the risk free rate of return for the same period).

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

Statement of Responsibility

These financial statements have been prepared by the Treasury in accordance with the provisions of the Public Finance Act 1989. The financial statements comply with generally accepted accounting practice.

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.

John Whitehead
Secretary to the Treasury

30 September 2008

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

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2008 and its operations for the year ended on that date.

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

Commentary

Introduction

This commentary outlines the key trends for each of the fiscal indicators along with a comparison to the forecasts provided in the 2008 Budget Economic and Fiscal Update. It should be read in conjunction with the financial statements on pages 24 to 157.

These are the first set of annual audited financial statements of the Government prepared in accordance with NZ IFRS. Comparative figures have been restated to align with NZ IFRS. Restated data prior to 30 June 2007 has not been subject to audit.

Each section in the commentary follows the components of the Government's fiscal strategy (outlined in the 2008 Fiscal Strategy Report - which is summarised on page 5):

• Revenue (including taxes)
• Expenses
• Surpluses
• Cash Position
• Debt, and
• The New Zealand Superannuation Fund (NZS Fund).

The financial statements of the Government of New Zealand refer to both core Crown and total Crown results. Core Crown includes Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand but excludes state-owned enterprises (SOEs) and Crown entities (CEs). Total Crown includes the core Crown, SOEs and CEs.

Summary

The key results were:

• both the operating balance and OBEGAL for the year were in line with the 2008 Budget forecasts (after taking into account a reclassification of the ACC actuarial loss)
• residual cash was $1,149 million higher than forecast for the year although this was essentially timing in nature (eg, the $690 million purchase of KiwiRail expected on 30 June took place on 1 July)
• debt was also lower than forecast at year end, primarily driven by the higher than expected residual cash surplus and, as such, is also considered to be timing in nature, and
• the NZS Fund recorded an operating deficit of $881 million for the year ended 30 June 2008 as a result of the downturn in equity markets (particularly the United States). The Fund's net worth at 30 June 2008 was $14,212 million.

Commentary (continued)

Fiscal Strategy

The Government's fiscal strategy (outlined in more detail in the 2008 Fiscal Strategy Report) is to strengthen its fiscal position so that it is well placed to respond to future challenges such as those associated with population ageing. The strategy is summarised in Figure 1.

The Government is implementing this strategy primarily by building up financial assets in the New Zealand Superannuation Fund (NZS Fund) and maintaining gross sovereign-issued debt at around 20% of GDP. In order to keep debt at around 20% of GDP, the Government has said it intends to run its cash flow position so that borrowing tracks in line with GDP over time. In practice, this means running operating surpluses, on average, that are sufficient to cover the contributions to the NZS Fund and some capital spending needs.

The Financial Statements of the Government provide a record of the Government's financial performance over financial year ended 30 June 2008 and its financial position as at 30 June 2008. They provide a comparison with the fiscal forecasts in the 2008 Budget Economic and Fiscal Update. They also provide the public with a snapshot of the progress the Government has made in implementing its fiscal strategy as set out in the Fiscal Strategy Report.

Figure 1 - Fiscal strategy at a glance

Fiscal Indicators for the Year Ended to 30 June 2008

1. GDP for the year ended 30 June 2008 is the forecast GDP published in the 2008 Pre-election Economic and Fiscal Update (Source: Treasury).

Fiscal Strategy Perspective on the Financial Results to June

The following table shows how the fiscal strategy is represented in the financial results.

Revenue

Revenue consists mainly of tax revenue. Other revenue includes interest, dividends, and sales of goods and services.

Core crown revenue excluding the NZS Fund represents the revenue available to meet the Government's spending needs and treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue excluding the NZS Fund was $143 million (0.2%) lower than forecast at $61,671 million. While interest revenue was $219 million (8.5%) lower than forecast due to changes in interest rates and investment levels, this was partially offset by core Crown tax revenue being $74 million (0.1%) higher than forecast. While core Crown tax revenue was largely on target, there were two compensating variances within this result.

• source deduction revenue was $613 million (2.7%) higher than forecast largely due to higher than forecast wage growth, offset by
• GST revenue was $662 million (5.6%) lower than forecast due in the main to weaker-than-expected domestic consumption. In addition the forecast assumed the gap would close between GST revenue and receipts but this did not eventuate.

Figure 2 - Core Crown revenue excluding the NZS Fund

Source: The Treasury

Figure 3 - Core Crown tax revenue

Source: The Treasury

Compared to last year, core Crown revenue excluding the NZS Fund increased by $3,189 million (5.5%). This increase was mainly in source deductions tax revenue, caused by high wage and employment growth.

Core Crown tax revenue has increased as a percentage of GDP since 1999 as a result of the progressive nature of the personal tax scale (coupled with the introduction of the 39% personal income tax rate), growth in taxable corporate profits ahead of GDP growth, and increases in interest rates which have led to increases in withholding taxes on interest-bearing deposits.

Expenses

Figure 4 - Core Crown expenses

Source: The Treasury

Figure 5 - Core Crown expenses by sector

Source: The Treasury

Core Crown expenses represent the day-to-day operating spending of the Government (ie, it does not include purchases of physical assets or capital spending).

Core Crown expenses were $367 million (0.6%) lower than forecast at $56,997 million. The main variances were:

• social security and welfare expenses were $194 million (1.1%) lower than forecast mainly relating to lower than forecast family assistance expenditure
• education expenses were $495 million (4.9%) lower than forecast as the impairment of student loans was $491 million lower than expected
• core government expenses were $149 million (4.6%) higher then forecast. Impairment of tax receivables was $265 million higher than expected reflecting an increase in the underlying overdue debt. This variance was partially offset by underspends across a number of departments (none of which was individually significant), and
• other core Crown expenses were $219 million (1.5%) higher than forecast due in the main to treaty settlements being earlier than forecast.

In comparison to the previous year, Core Crown expenses were $2,993 million (5.5%) higher. Significant expenditure increases were:

• annual indexation of welfare benefits
• expense initiatives introduced in the 2007 Budget (including the introduction of KiwiSaver), and
• higher demand-driven education expenses.

This increase was partially offset by a decrease in sovereign receivable impairment expenses resulting from a large one-off tax receivable impairment in the year ended 30 June 2007.

Core Crown expenses have increased as a percentage of GDP by 1.6% since 2003 (30.1% in 2003 to 31.7% in 2008) with the introduction of major Government policies such as Working for Families and KiwiSaver.

Surpluses

OBEGAL

OBEGAL is the operating balance before gains and losses for the total Crown. By excluding gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government.

Figure 6 - OBEGAL

Source: The Treasury

OBEGAL was $410 million (7.8%) higher than forecast for the year ended 30 June 2008 primarily as a result of a forecasting error included in the Budget. A portion of ACC's actuarial loss was forecast as an insurance expense. This error does not impact on the operating balance as it was a reclassification between expenses and losses.

Within this result, the electricity generating SOEs reported large, equal, and opposite variances in both revenue and expenses of approximately $1,400 million. These variances resulted from higher than expected electricity spot prices.

The OBEGAL (excluding the NZS Fund retained revenue) is a measure of the operating balance that recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements. OBEGAL (excluding the NZS Fund retained revenue) was $5,586 million for the year; $367 million lower than forecast.

Operating Balance

Figure 7 - Operating balance

Source: The Treasury

The operating balance shows whether the government sector has generated enough revenues (including gains) to cover its expenses (including losses) in any given year.

The operating balance for the total Crown was $175 million (6.8%) lower than forecast at $2,384 million.

Losses of $3,253 million resulted in a decline in the operating balance for the year ended 30 June 2008 and were $585 million (21.9%) more than forecast. These losses compare to gains of $2,162 million for the previous year. The difference is a reflection of the recent decline in overseas equity markets and increases in the ACC claims and GSF liabilities.

The total Crown operating balance is not drawn upon to fund core Crown operations, as current policy is for the NZS Fund, SOEs and CEs to retain a portion of their surpluses for the purpose of achieving their long-term objectives. For the year ended 30 June 2008 SOEs and CEs recorded an overall deficit of $803 million. This deficit includes an operating deficit of $2,408 million in ACC due to equity market and ACC claims liability losses mentioned above. When ACC is excluded the SOE and CE surpluses totalled $1,605 million (refer pages 164 to 166 for a breakdown by individual entity).

During the year $575 million was returned to the Crown as dividends.

Cash Position

Core Crown residual cash represents the core Crown cash surplus (or deficit) after operating and investing cash requirements (including contributions to the NZS Fund) are met. It represents the money available to the Government to invest, repay debt or, alternatively, the money the Government needs to fund in any given year.

Figure 8 - Residual cash

Source: The Treasury

Residual cash was $1,149 million higher than forecast for the year ended 30 June 2008 at $2,057 million. Increases in the cash surplus were mainly due to:

• the delay in the $690 million KiwiRail purchase from 30 June to 1 July
• KiwiSaver payments being $210 million lower than forecast with regards to kick-start payments and employer tax credits, and
• department cash requirements being $545 million less than expected.

These surpluses were partially offset by tax receipts which were $417 million (0.7%) lower than forecast. In particular, the following tax types were lower than forecast:

• corporate tax receipts were $419 million (4.0%) lower than forecast due in the main to lower-than-expected provisional tax receipts through May and June from large corporate entities
• GST receipts were $148 million (1.3%) lower than forecast reflecting the effects of recent economic activity, and
• net other individuals tax receipts were $130 million (3.3%) lower than forecast due to lower than expected provisional tax payments from the agricultural sector.

In contrast, stronger than expected wage growth contributed to source deduction tax receipts being $124 million (0.5%) higher than forecast.

Over recent years residual cash surpluses have reflected strong economic growth coupled with some departmental underspending.

Table 7 - Application of core Crown residual cash for the year ended 30 June 2008 ($ billion)

The residual cash of $2,057 million has resulted in an increase in core Crown financial assets as discussed on page 15.

Capital Investment

Core Crown purchases of physical assets ($1,433 million) and advances and capital injections ($1,698 million) represent the capital investment of the core Crown (refer Table 6).

Advances and capital injections are often used by CEs and SOEs to purchase physical assets (such as roading and rail assets). Therefore, to obtain a complete picture of the Government's capital investment it is necessary to “look through” core Crown advances and capital injections and consider total Crown physical asset purchases.

Figures 9 to 11, therefore, show the purchase of physical assets (referred to as “PPE”) of the total Crown, offset by asset disposals.

Figure 9 - Total Crown net purchases of PPE ($ million)

Source: The Treasury

Figure 10 - Total Crown net purchases of PPE by sector ($m and % of total) for year ended 30 June 2008

Source: The Treasury

Figure 11 - Total Crown net purchases of PPE by asset type ($m and % of total) for year ended 30 June 2008

Source: The Treasury

Total Crown net PPE purchases for the current financial year included:

• $986 million on state highway roading
• $571 million on electricity generation assets
• $509 million on education facilities such as schools
• $446 million by district health boards
• $320 million on specialist military equipment, and
• $234 million on rail assets (excluding KiwiRail).

The $690 million purchase of KiwiRail occurred on 1 July and is therefore not included in this capital investment analysis.

Debt

Table 8 - Gross sovereign-issued debt (GSID) and net core Crown debt

Year ended 30 June $ million	Actual 2003	Actual 2004	Actual 2005	Actual 2006	Actual 2007	Forecast Original Budget	Forecast Est Actuals	Actual 2008
Gross sovereign-issued debt	36,617	36,017	35,478	35,867	36,805	40,400	37,673	37,745
Less Reserve Bank settlement cash  (incl. Kiwibank)	-	-	-	(1,964)	(7,758)	(7,523)	(7,510)	(7,955)
Add back changes to DMO borrowing due to settlement cash	-	-	-	-	1,600	1,600	1,600	1,600
Gross sovereign-issued debt excluding settlement cash	36,617	36,017	35,478	33,903	30,647	34,477	31,763	31,390
Gross sovereign-issued debt	36,617	36,017	35,478	35,867	36,805	40,400	37,673	37,745
Less core Crown financial assets	(20,524)	(24,404)	(30,940)	(37,684)	(44,272)	(51,184)	(48,927)	(50,698)
Net core Crown debt (incl NZS Fund)	16,093	11,613	4,538	(1,817)	(7,467)	(10,784)	(11,254)	(12,953)
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets	1,884	3,956	6,555	9,861	11,576	15,439	13,100	12,934
Net core Crown debt	17,977	15,569	11,093	8,044	4,109	4,655	1,846	(19)

Gross Sovereign-issued Debt (GSID)

GSID (excluding settlement cash) represents the debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, ACC and EQC but excludes money deposited with the Reserve Bank by banks (settlement cash).

GSID (excluding settlement cash) was lower than forecast by $373 million (1.2%) at $31,390 million (17.4% of GDP). This result reflected lower than forecast levels of domestic bonds issuance (refer table 9) partially offset by higher than forecast derivative liabilities.

Figure 12 - GSID (excluding settlement cash)

Source: The Treasury

One of the key components of GSID is the domestic bond programme. Table 9 sets out the historical net issuances and repayments.

Table 9 - Net bond issuance

Year ended 30 June $ million	Actual 2003	Actual 2004	Actual 2005	Actual 2006	Actual 2007	Forecast Original Budget	Forecast Est Actuals	Actual 2008
Domestic bonds (market)	2,551	2,212	2,146	2,375	2,294	2,520	2,415	1,757
Repayment of domestic bonds (market)	(2,823)	(3,044)	(2,797)	(2,574)	(2,777)	-	-	-
Net increase/(decrease) in market domestic bonds	(272)	(832)	(651)	(199)	(483)	2,520	2,415	1,757
Domestic bonds (non-market)	279	478	459	740	570	208	189	130
Repayment of domestic bonds (non-market)	(737)	(357)	(338)	(375)	(421)	-	-	-
Net increase/(decrease) in non-market domestic bonds	(458)	121	121	365	149	208	189	130
Net total bond issuance/(repayment)	(730)	(711)	(530)	166	(334)	2,728	2,604	1,887

Net Core Crown Debt

Figure 13 - Net core Crown debt

Source: The Treasury

Figure 14 - Core Crown financial assets (excluding NZS Fund)

Source: The Treasury

Net core Crown debt equates to core Crown borrowings (gross sovereign-issued debt) less core Crown financial assets (excluding the financial assets of the NZS Fund).

By deducting financial assets (excluding the NZS Fund), net debt can provide additional information about the sustainability of the Government's accounts. However, it is important to view net debt alongside GSID (excluding settlement cash) as some financial assets are not very easily converted to cash (eg, student loans) in the short term.

Net core Crown debt was lower than forecast by $1,865 million (101%) which resulted in a net asset position of $19 million at 30 June 2008. This position is a result of the higher than forecast residual cash surplus in addition to net valuation gains on financial assets and financial liabilities.

Net core Crown debt has decreased by $4,128 million since 30 June 2007. Table 10 provides a breakdown of core Crown net debt by portfolio.

The majority of the decrease in net core Crown debt was in the financial instruments administered by the New Zealand Debt Management Office (NZDMO) ($2,776 million).

NZDMO financial assets have increased by $3,594 million which has been primarily financed by:

• the current year's residual cash surplus of $2,057 million, and
• additional borrowings as NZDMO has continued its recent practice of maintaining a smooth bond issuance program year to year.

NZDMO borrowings have increased by around $818 million. As mentioned above the majority of the additional borrowings have been invested in financial assets, so are net debt neutral.

Table 10 - Net core Crown debt by portfolio

	Year ended 30 June 2008					Year ended 30 June 2007
$ million	NZDMO	Reserve Bank	Student loans	Other	Total	NZDMO	Reserve Bank	Student loans	Other	Total
Core Crown borrowings	28,861	8,689	-	195	37,745	28,043	8,508	-	254	36,805
Core Crown financial assets	17,001	13,735	6,741	287	37,764	13,407	13,023	6,011	255	32,696
Net core Crown debt	11,860	(5,046)	(6,741)	(92)	(19)	14,636	(4,515)	(6,011)	(1)	4,109

NZS Fund

Table 11 - NZS Fund net worth

Year ended 30 June $ million	Actual 2003	Actual 2004	Actual 2005	Actual 2006	Actual 2007	Forecast Original Budget	Forecast Est Actuals	Actual 2008
Opening net worth	615	1,884	3,956	6,555	9,855	12,910	12,973	12,973
Revenue	69	131	191	359	436	447	381	385
Less current tax expense	-	(77)	(234)	(468)	(707)	(349)	(259)	(237)
Less other expenses	-	(7)	(22)	(52)	52	-	(51)	(34)
Gains/(losses)	-	146	557	1,130	1,313	866	(686)	(995)
Operating balance	69	193	492	969	1,094	964	(615)	(881)
Gross contribution from the Crown	1,200	1,879	2,107	2,337	2,048	2,103	2,103	2,104
Other movements in reserves	-	-	-	(6)	(24)	-	-	16
Closing net worth	1,884	3,956	6,555	9,855	12,973	15,977	14,461	14,212

The NZS Fund (“the Fund”) is an important component of the Government's fiscal strategy. The Fund's assets provide the means for the Government to partially pre-fund future fiscal pressures, particularly those pressures arising from an ageing population.

The Government's contributions to the Fund are calculated over a 40 year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met.

The Fund made an operating loss of $881 million for the year ended 30 June 2008. This compares to an operating profit of $1,094 million in the previous year and a forecast loss of $615 million for the current year. This loss results from the downturn in equity markets (particularly the United States). The Fund's full year return was -4.92% bringing its annualised return since inception to 10.34%. This return compares to the risk-free rate of return for the same period of 6.73%.

The Fund's net worth at 30 June 2008 was $14,212 million, an increase of $1,239 million since 30 June 2007. $2,104 million of this increase is from Government contributions which were offset by the Fund's investment performance.

Figure 15 - NZS Fund net worth

Source: The Treasury

Historical Financial Information

Year ended 30 June $ million	1999 Actual	2000 Actual	2001 Actual	2002 Actual	2003 Actual	2004 Actual	2005 Actual	2006 Actual	2007 Actual	2008 Actual
Statement of financial performance
Core Crown tax revenue	30,875	32,598	35,345	36,809	40,518	43,358	47,468	50,973	53,477	56,747
Core Crown other revenue	2,005	2,348	2,497	3,136	2,922	2,861	3,577	4,762	4,734	5,072
Core Crown revenue	32,880	34,946	37,842	39,945	43,440	46,219	51,045	55,735	58,211	61,819
Crown entities, SOE revenue and eliminations	7,086	6,666	7,259	10,003	13,170	13,051	14,322	15,690	16,378	19,660
Total Crown revenue	39,966	41,612	45,101	49,948	56,611	59,271	65,367	71,425	74,589	81,479
Social security and welfare	12,889	12,883	13,207	13,485	13,907	14,252	14,682	15,598	16,768	17,877
Health	5,875	6,146	6,660	7,032	7,501	8,111	8,813	9,547	10,355	11,297
Education	5,337	5,712	6,136	6,473	7,016	7,585	7,930	9,914	9,269	9,551
Core government services	1,984	1,992	2,148	1,890	2,130	2,091	2,567	2,507	4,817	3,371
Other core Crown expenses	7,854	8,096	8,408	8,633	9,343	9,843	10,903	11,754	12,795	14,901
Core Crown expenses	33,939	34,829	36,559	37,513	39,897	41,882	44,895	49,320	54,004	56,997
Crown entities, SOE expenses and eliminations	5,899	6,189	7,120	9,964	12,347	11,816	13,397	15,015	14,725	18,845
Total Crown expenses	39,838	41,018	43,679	47,476	52,245	53,698	58,292	64,334	68,729	75,842
OBEGAL	128	594	1,422	2,471	4,366	5,573	7,075	7,091	5,860	5,637
Gains/(losses)	1,577	811	(214)	(185)	(2,745)	1,736	(1,144)	2,451	2,162	(3,253)
Operating balance	1,705	1,405	1,208	2,286	1,621	7,309	5,931	9,542	8,022	2,384
Statement of financial position
Property, plant and equipment	42,102	43,609	45,954	50,536	52,667	57,940	67,494	89,141	95,598	103,329
Financial assets	18,564	18,756	21,419	22,497	27,799	32,654	42,005	66,396	73,719	85,063
Other assets	11,305	11,459	11,467	14,846	18,461	18,756	19,714	9,503	11,031	12,443
Total assets	71,971	73,824	78,840	87,879	98,927	109,351	129,212	165,040	180,348	200,835
Borrowings	38,715	37,527	38,130	38,492	39,327	37,720	37,728	40,027	41,898	46,110
Other liabilities	23,134	23,692	25,260	26,562	31,588	32,036	37,243	41,042	41,623	49,211
Total liabilities	61,850	61,219	63,390	65,055	70,915	69,756	74,972	81,069	83,521	95,321
Net worth	10,121	12,605	15,450	22,825	28,012	39,595	54,240	83,971	96,827	105,514
Fiscal Indicators
Core Crown revenue (excl NZS Fund)	32,880	34,946	37,842	39,930	43,371	46,165	51,088	55,844	58,482	61,671
Core Crown expenses	33,939	34,829	36,559	37,513	39,897	41,882	44,895	49,320	54,004	56,997
OBEGAL	128	594	1,422	2,471	4,366	5,573	7,075	7,091	5,860	5,637
OBEGAL (excl NZS Fund)	128	594	1,422	2,456	4,297	5,526	7,140	7,252	6,250	5,586
Operating balance	1,705	1,405	1,208	2,286	1,621	7,309	5,931	9,542	8,022	2,384
Core Crown residual cash	2,048	(386)	349	216	1,217	520	3,104	2,985	2,793	2,057
GSID (excluding settlement cash)	37,307	36,580	37,194	36,650	36,617	36,017	35,478	33,903	30,647	31,390
Net core Crown debt	22,275	21,900	20,293	19,666	17,977	15,569	11,093	8,044	4,109	(19)
NZS Fund net worth	-	-	-	615	1,884	3,956	6,555	9,855	12,973	14,212

Historical Financial Information (continued)

Year ended 30 June $ million	1999 Actual	2000 Actual	2001 Actual	2002 Actual	2003 Actual	2004 Actual	2005 Actual	2006 Actual	2007 Actual	2008 Actual
GDP	104,651	111,039	118,357	125,808	132,738	143,170	151,993	158,321	168,672	180,077
Statement of financial performance
Core Crown tax revenue	29.5%	29.4%	29.9%	29.3%	30.5%	30.3%	31.2%	32.2%	31.7%	31.5%
Core Crown other revenue	1.9%	2.1%	2.1%	2.5%	2.2%	2.0%	2.4%	3.0%	2.8%	2.8%
Core Crown revenue	31.4%	31.5%	32.0%	31.8%	32.7%	32.3%	33.6%	35.2%	34.5%	34.3%
Crown entities, SOE and elimination revenue	6.8%	6.0%	6.1%	8.0%	9.9%	9.1%	9.4%	9.9%	9.7%	10.9%
Total Crown revenue	38.2%	37.5%	38.1%	39.7%	42.6%	41.4%	43.0%	45.1%	44.2%	45.2%
Social security and welfare	12.3%	11.6%	11.2%	10.7%	10.5%	10.0%	9.7%	9.9%	9.9%	9.9%
Health	5.6%	5.5%	5.6%	5.6%	5.7%	5.7%	5.8%	6.0%	6.1%	6.3%
Education	5.1%	5.1%	5.2%	5.1%	5.3%	5.3%	5.2%	6.3%	5.5%	5.3%
Core government services	1.9%	1.8%	1.8%	1.5%	1.6%	1.5%	1.7%	1.6%	2.9%	1.9%
Other core Crown expenses	7.5%	7.3%	7.1%	6.9%	7.0%	6.9%	7.2%	7.4%	7.6%	8.3%
Core Crown expenses	32.4%	31.4%	30.9%	29.8%	30.1%	29.3%	29.5%	31.2%	32.0%	31.7%
Crown entities, SOE and elimination expenses	5.6%	5.6%	6.0%	7.9%	9.3%	8.3%	8.8%	9.5%	8.7%	10.5%
Total Crown expenses	38.1%	36.9%	36.9%	37.7%	39.4%	37.5%	38.4%	40.6%	40.7%	42.1%
OBEGAL	0.1%	0.5%	1.2%	2.0%	3.3%	3.9%	4.7%	4.5%	3.5%	3.1%
Gains/(losses)	1.5%	0.7%	-0.2%	-0.1%	-2.1%	1.2%	-0.8%	1.5%	1.3%	-1.8%
Operating balance	1.6%	1.3%	1.0%	1.8%	1.2%	5.1%	3.9%	6.0%	4.8%	1.3%
Statement of financial position
Property, plant and equipment	40.2%	39.3%	38.8%	40.2%	39.7%	40.5%	44.4%	56.3%	56.7%	57.4%
Financial assets	17.7%	16.9%	18.1%	17.9%	20.9%	22.8%	27.6%	41.9%	43.7%	47.2%
Other assets	10.8%	10.3%	9.7%	11.8%	13.9%	13.1%	13.0%	6.0%	6.5%	6.9%
Total assets	68.8%	66.5%	66.6%	69.9%	74.5%	76.4%	85.0%	104.2%	106.9%	111.5%
Borrowings	37.0%	33.8%	32.2%	30.6%	29.6%	26.3%	24.8%	25.3%	24.8%	25.6%
Other liabilities	22.1%	21.3%	21.3%	21.1%	23.8%	22.4%	24.5%	25.9%	24.7%	27.3%
Total liabilities	59.1%	55.1%	53.6%	51.7%	53.4%	48.7%	49.3%	51.2%	49.5%	52.9%
Net worth	9.7%	11.4%	13.1%	18.1%	21.1%	27.7%	35.7%	53.0%	57.4%	58.6%
Fiscal Indicators
Core Crown revenue (excl NZS Fund)	31.4%	31.5%	32.0%	31.7%	32.7%	32.2%	33.6%	35.3%	34.7%	34.2%
Core Crown expenses	32.4%	31.4%	30.9%	29.8%	30.1%	29.3%	29.5%	31.2%	32.0%	31.7%
OBEGAL	0.1%	0.5%	1.2%	2.0%	3.3%	3.9%	4.7%	4.5%	3.5%	3.1%
OBEGAL (excl NZS Fund)	0.1%	0.5%	1.2%	2.0%	3.2%	3.9%	4.7%	4.6%	3.7%	3.1%
Operating balance	1.6%	1.3%	1.0%	1.8%	1.2%	5.1%	3.9%	6.0%	4.8%	1.3%
Core Crown residual cash	2.0%	-0.3%	0.3%	0.2%	0.9%	0.4%	2.0%	1.9%	1.7%	1.1%
GSID (excluding settlement cash)	35.6%	32.9%	31.4%	29.1%	27.6%	25.2%	23.3%	21.4%	18.2%	17.4%
Net core Crown debt	21.3%	19.7%	17.1%	15.6%	13.5%	10.9%	7.3%	5.1%	2.4%	0.0%
NZS Fund net worth	0.0%	0.0%	0.0%	0.5%	1.4%	2.8%	4.3%	6.2%	7.7%	7.9%

Report of the Auditor-General

To the Readers of the Financial Statements of the Government of New Zealand for the year ended 30 June 2008

I have audited the financial statements of the Government of New Zealand for the year ended 30 June 2008, using my staff, resources and appointed auditors and their staff.

Unqualified Opinion

In our opinion, the financial statements of the Government of New Zealand comprising the Statement of Financial Performance, Analysis of Expenses by functional Classification, Statement of Cash Flows, Statement of Recognised income and Expense, Statement of Financial Position, Notes 1 to 34, Statement of Borrowings, Statement of Unappropriated Expenditure, and the Statement of Trust Money.

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect:
  • the Government of New Zealand’s financial position as at 30 June 2008; and
  • the results of its operations and cash flows for the year ended on that date;

The audit was completed on 30 September 2008, and is the date at which our opinion is expressed.

The basis of our 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 Auditor-General’s Auditing Standards, which incorporate the New Zealand Auditing Standards.

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 our 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 analyses 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 for the Government in accordance with generally accepted accounting practice in New Zealand. Those financial statements must fairly reflect the financial position of the Government as at 30 June 2008.  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 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.  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.

K B Brady
Controller and Auditor-General
Wellington
New Zealand

Financial Statements

Statement of Financial Performance

for the year ended 30 June 2008

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Analysis of Expenses by Functional Classification

for the year ended 30 June 2008

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by the Crown, Departments and the Reserve Bank, but not Crown entities and SOEs.

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Cash Flows

for the year ended 30 June 2008

The accompanying Notes and Accounting Policies are an integral part of these Statements.

1 Net issues of Government stock and treasury bills is after elimination of holdings by entities such as NZS Fund, ACC and EQC. Further information on the proceeds and repayments of Government stock ("domestic bonds") is available on page 161.

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Recognised Income and Expense

for the year ended 30 June 2008

This statement reports changes in net worth due to the operating balance, items of income or expense that are recognised directly in net worth and the effect of certain accounting changes.

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Statement of Financial Position

as at 30 June 2008

The accompanying Notes and Accounting Policies are an integral part of these Statements.

Notes to the Financial Statements

Note 1: Summary of Accounting Policies

Statement of compliance

These financial statements are prepared in accordance with the Public Finance Act 1989 and with New Zealand generally accepted accounting practice (NZ GAAP). For this purpose, the Government Reporting entity is designated as a public benefit entity. The financial statements comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities. These are the first set of annual audited financial statements of the Government prepared in accordance with NZ IFRS.

The Financial Statements were authorised for issue by the Minister of Finance on 30 September 2008.

Reporting entity

The consolidated financial statements for the Government Reporting entity (financial statements of the Government of New Zealand), 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 for the Government Reporting entity” and the description “Financial statements of the Government” have the same meaning and can be used interchangeably.

Basis of preparation

The financial statements have been prepared on the basis of historic cost modified by the revaluation of certain assets and liabilities.

The financial statements are prepared on an accrual basis.

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

Judgements and estimations

The preparation of these financial statements requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Where these judgments significantly affect the amounts recognised in the financial statements they are described below and in the following notes.

Early adoption of standards and interpretations

The Government has elected to adopt the following Standards and Interpretations in advance of their effective dates:

• NZ IFRS 3 Business Combinations amendments with consequential amendments to other standards revising the application of the acquisition method (effective for reporting periods beginning on or after 1 January 2009)
• NZ IFRS 2 Share Based Payments amendment relating to vesting conditions and cancellations (effective for reporting periods beginning on or after 1 January 2009)
• NZ IAS 32 Financial Instruments: Presentation amendments relating to puttable instruments and obligations arising on liquidation (effective for reporting periods beginning on or after 1 January 2009)
• NZ IFRIC 12 Service Concession Arrangements (effective for reporting periods beginning on or after 1 January 2008)
• NZ IFRIC 13 Customer Loyalty Programmes (effective for reporting periods beginning on or after 1 July 2008), and
• NZ IFRIC 14/ IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for reporting periods beginning on or after 1 January 2008).

The adoption of these standards and interpretations has had no impact on these financial statements of the Government.

Standards and interpretations not yet adopted

At the date of authorisation of these financial statements, other than the Standards and Interpretations adopted by the Government in advance of their effective dates (as described above) the following amended standards and interpretations were issued but not yet effective:

• NZ IAS 1 (Amended) Presentation of Financial Statements requiring a statement of comprehensive income (effective from 1 January 2009)
• NZ IFRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009), and
• NZ IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after 1 January 2009).

NZ IAS 1 is a presentation Standard which will result in changes in presentation and a number of additional disclosures but which is not expected to impact on the operating balance, net worth or other key fiscal indicators of the Government.

Public benefit entities are not required to comply with the requirements of NZ IFRS 8 and therefore this standard will not impact on the financial statements. These financial statements continue to show segmental information as appropriate for a Government Reporting entity.

The revision to NZ IAS 23 requiresdirectly attributable borrowing costs relating to qualifying assets to be capitalised. Application of this revised standard will increase the depreciation expense, reduce the interest expense reported in the statement of financial performance and increase the reported carrying values of tangible assets and the net worth of the Government. The amounts involved depend on a variety of assumptions required to be made and therefore it is not possible to reasonably estimate the financial impact of this change.

Significant Accounting Policies

Reporting and forecast period

The reporting and forecast period for the financial statements of the Government of New Zealand is the financial year from 1 July to 30 June.

Where necessary the financial information for State-owned enterprises and Crown entities that have a balance date other than 30 June will be adjusted for any transactions or events that have occurred since their most recent balance date and that are significant for the Government's financial statements. Such entities are primarily in the education sector.

Basis of combination

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

Core 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 (excl. Tertiary Education Institutions)
• Air New Zealand Limited
• Organisations listed in Schedule 4 of the Public Finance Act 1989

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

Tertiary education institutions are equity accounted for the reasons explained in note 21. This recognises these entities' net assets, including asset revaluation movements and surpluses and deficits.

The basis of combination for joint ventures depends on the form of the joint venture.

• Jointly controlled operations: The Government reporting entity recognises the assets it controls, the liabilities and expenses that it incurs, and its share of the jointly controlled operations' income
• Jointly controlled assets: The Government reporting entity recognises its share of the jointly controlled assets, its share of any liabilities and expenses incurred jointly, any other liabilities and expenses it has incurred in respect of the jointly controlled asset, and income from the sale or use of its share of the output of the jointly controlled asset, and
• Jointly controlled entities: Jointly controlled entities are equity accounted, whereby the Government reporting entity initially recognises its share of interest in these entities' net assets at cost and subsequently adjusts the cost for changes in net assets. The Government reporting entity's share of the jointly controlled entity's surpluses and deficits are recognised in the statement of financial performance.

Business combinations that occurred prior to the transition to NZ IFRS are not restated retrospectively.

Income

Taxation revenue levied through the Crown's sovereign power

The Government provides many services and benefits that do not give rise to revenue. Further, payment of tax does not of itself entitle a taxpayer to an equivalent value of services or benefits, since there is no relationship between paying tax and receiving Crown services and transfers. Such revenue is received through the exercise of the sovereign power of the Crown in Parliament.

Where possible, taxation revenue is recognised at the time the debt to the Crown arises.

Revenue earned through operations

Revenue from the supply of goods and services to third parties is measured at the fair value of consideration received. Revenue from the supply of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from the supply of services is recognised on a straight-line basis over the specified period for the services unless an alternative method better represents the stage of completion of the transaction.

Interest income

Interest income is accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. The method applies this rate to the principal outstanding to determine interest income each period.

Dividend income

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

Rental income

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

Donated or Subsidised Assets

Where an asset is acquired for nil or nominal consideration, the fair value of the asset received is recognised as income in the statement of financial performance.

Expenses

General

Expenses are recognised in the period to which they relate.

Welfare benefits and entitlements

Welfare benefits and entitlements, including New Zealand Superannuation, 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.

Interest expense

Interest expense is accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash payments through the expected life of the financial liability to that liability's net carrying amount. The method applies this rate to the principal outstanding to determine interest expense each period.

Foreign-currency

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

Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value are translated into New Zealand dollars at the exchange rate applicable at the fair value date. The associated foreign exchange gains or losses follow the fair value gains or losses to either the statement of financial performance or directly to net worth.

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

Financial instruments

Financial assets

Financial assets are designated into the following categories: loans and receivables, financial instruments available-for-sale, financial assets held for trading, and financial instruments designated as fair value through profit and loss. This designation is made by reference to the purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation.

Although they do not arise out of a contract, receivables from taxes, levies and fines (and any penalties associated with these activities) as well as social benefit receivables are for ease of presentation purposes included as a financial instrument. These non-contract receivables, collectively referred to as sovereign receivables, are designated separately from other financial assets.

Sovereign receivables are initially assessed at nominal amount or face value; that is, the receivable reflects the amount of tax owed, levy, fine charged, or social benefit debt payable. These receivables are subsequently adjusted for penalties and interest as they are charged, and tested for impairment. Interest and penalties charged on tax receivables is presented as tax revenue in the statement of financial performance.

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest revenue policy). Loans and receivables issued with a duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Interest, impairment losses and foreign exchange gains and losses are recognised in the statement of financial performance.

In accordance with this general policy, student loans are recognised initially at fair value plus transaction costs, and subsequently measured at amortised cost using the effective interest rate method, less any impairment loss. Fair value on initial recognition of student loans is determined by projecting forward expected repayments required under the scheme and discounting them back at an appropriate discount rate. The difference between the amount lent and the fair value on initial recognition is expensed on initial recognition. The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition. This rate is used to spread the Crown's interest income across the life of the loan and determines the loan's carrying value at each reporting date.

The student loans valuation model has been adapted to reflect current student loans policy. As such, the carrying value is sensitive to changes on a number of underlying assumptions, including future income levels, repayment behaviour and macro economic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers.

The data for valuation of student loans has been integrated from files provided by Inland Revenue Department, Ministry of Social Development and the Ministry of Education. The current data is up to 31 March 2007, and contains information on borrowings, repayments, income, educational factors, and socio-economic factors amongst others and has been analysed and incorporated into the valuation model. This integrated data has been supplemented by less detailed, but more recent data to value student loans at balance date. Given the lead time required to compile and analyse the detailed, integrated data, it is expected that there is a lag between the availability of this data set and balance date.

Financial assets held for trading and financial assets designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance.

A financial asset is designated at fair value through profit and loss if acquired principally for the purpose of trading in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related liabilities or is part of a group of financial assets that is managed and evaluated on a fair value basis, such as with the NZ Superannuation Fund. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance. Transaction costs are expensed as they are incurred.

Available-for-sale financial assets are initially recorded at fair value plus transaction costs. They are subsequently recorded at fair value with any resultant fair value gains or losses recognised directly in net worth except for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (such as debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset. These latter items are recognised in the statement of financial performance. For non-monetary available-for-sale financial assets (eg, some unlisted equity instruments) the fair value movements recognised in net worth include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised directly in net worth is recognised in the statement of financial performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with a maturity of no more than three months from date of acquisition.

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

Financial liabilities

Financial liabilities held for trading and financial liabilities designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance. A financial liability is designated at fair value through profit and loss if acquired principally for the purpose of trading in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either eliminates or significantly reduces an accounting mismatch with related assets or is part of a group of financial liabilities that is managed and evaluated on a fair value basis. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance. Transaction costs are expensed as they are incurred.

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

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

Derivatives

Derivative financial instruments are recognised both initially and subsequently at fair value. They are reported as either assets or liabilities depending on whether the derivative is in a net gain or net loss position respectively. Recognition of the movements in the value of derivatives depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged (see Hedging section below).

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

Hedging

Individual entities consolidated within the Government reporting entity apply hedge accounting after considering the costs and benefits of adopting hedge accounting, including whether an economic hedge exists and the effectiveness of that hedge, whether the hedge accounting qualifications could be met, and the extent it would improve the relevance of reported results.

Transactions between entities within the Government reporting entity do not qualify for hedge accounting in the financial statements of the Government (although they may qualify for hedge accounting in the separate financial statements of the individual entities). Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, the effects of the hedge relationship are automatically reflected in the statement of financial performance so hedge accounting is not necessary.

(a) Cash flow hedge

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

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

(b) Fair value hedge

Where a derivative qualifies as a hedge of the exposure to changes in fair value of an asset or liability (fair value hedge) any gain or loss on the derivative is recognised in the statement of financial performance together with any changes in the fair value of the hedged asset or liability.

The carrying amount of the hedged item is adjusted by the fair value gain or loss on the hedged item in respect of the risk being hedged. Effective parts of the hedge are recognised in the same area of the statement of financial performance as the hedged item.

Note 1: Summary of Accounting Policies (continued)

Inventories

Inventories are recorded at the lower of cost (calculated using weighted average method) and net realisable value. Inventories held for distribution for public benefit purposes are recorded at cost adjusted where applicable for any loss of service potential. Where inventories are acquired at no cost, or for nominal consideration, the cost is deemed to be the current replacement cost at the date of acquisition.

Inventories include unissued currency and harvested agricultural produce (eg, logs, wool).

The cost of harvested agricultural produce is measured at fair value less estimated point-of-sale costs at the point of harvest.

Property, plant and equipment (“PPE”)

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

Revaluations are carried out for a number of 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, with changes reported by class of asset.

Subsequent to initial recognition, classes of property, plant and equipment are accounted for as set out below.

Classes of property, plant and equipment that are revalued, are revalued at least every five years or whenever the carrying amount differs materially to fair value.

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

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

Realised gains and losses arising from disposal of property, plant and equipment are recognised in the statement of financial performance in the period in which the transaction occurs. Any balance attributable to the disposed asset in the asset revaluation reserve is transferred to retained earnings.

Generally, Government borrowings are not directly attributable to individual assets. Therefore, any borrowing costs incurred during the period required to complete and prepare assets for their intended use are expensed rather than capitalised.

Where an asset's recoverable amount is less than its carrying amount, it is reported at its recoverable amount and an impairment loss is recognised. Losses resulting from impairment are reported in the statement of financial performance, unless the asset is carried at a revalued amount in which case any impairment loss is treated as a revaluation decrease.

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 remaining useful life.

Typically, the estimated useful lives of different classes of property, plant and equipment are as follows:

Specified heritage and cultural assets are generally not depreciated.

Note 1: Summary of Accounting Policies (continued)

Equity accounted investments

The applicable financial reporting standards that determine the basis of combination of entities that make up the Government reporting entity are NZ IAS 27: Consolidated and Separate Financial Statements and NZ IAS 28: Investments in Associates. NZ IAS 27 refers to guidance provided in IPSAS 6: Consolidated and Separate Financial Statements and FRS 37: Consolidating Investments in Subsidiaries which shall be used by public benefit entities in determining whether they control another entity.

These standards are, however, not clear about how the definitions of control and significant influence should be applied in some circumstances in the public sector, particularly where legislation provides public sector entities with statutory autonomy and independence, in particular with Tertiary Education Institutions. Treasury's view is that because the Government cannot determine their operating and financing policies, but does have a number of powers in relation to these entities, it is appropriate to treat them as associates.

Biological assets

Biological assets (eg, trees, sheep) managed for harvesting into agricultural produce (eg, logs, wool) or for transforming into additional biological assets are measured at fair value less estimated point-of-sale costs, with any realised and unrealised gains or losses reported in the statement of financial performance. Where fair value cannot be reliably determined, the asset is recorded at cost less accumulated depreciation and accumulated impairment losses. For commercial forests, fair value takes into account age, quality of timber and the forest management plan.

Biological assets not managed for harvesting into agricultural produce, or being transformed into additional biological assets are reported as property, plant and equipment in accordance with the policies for property, plant and equipment.

Intangible assets

Intangible assets are initially recorded at cost. Where an intangible asset is created for nil or nominal consideration it is still initially carried at cost, which by definition is nil/nominal.

The cost of an internally generated intangible asset represents expenditure incurred in the development phase of the asset only. The development phase occurs after the following can be demonstrated: technical feasibility; ability to complete the asset; intention and ability to sell or use; and development expenditure can be reliably measured. Research is “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding”. Expenditure incurred on the research phase of an internally generated intangible asset is expensed when it is incurred. Where the research phase cannot be distinguished from the development phase, the expenditure is expensed when it is incurred.

Intangible assets with finite lives are subsequently recorded at cost less any amortisation and impairment losses. Amortisation is charged to the statement of financial performance on a straight-line basis over the useful life of the asset. Typically, the estimated useful life of computer software is three to five years.

Intangible assets with indefinite useful lives are not amortised, but are tested annually for impairment.

Realised gains and losses arising from disposal of intangible assets are recognised in the statement of financial performance in the period in which the transaction occurs.

Intangible assets with finite lives are reviewed annually to determine if there is any indication of impairment. All intangible assets with an indefinite life are tested for impairment annually. Where an intangible asset's recoverable amount is less than its carrying amount, it is reported at its recoverable amount and an impairment loss is recognised. Losses resulting from impairment are reported in the statement of financial performance.

Goodwill in Air New Zealand is tested for impairment annually.

Non-current assets held for sale and discontinued operations

Non-current assets or disposal groups are separately classified where their carrying amount will be recovered through a sale transaction rather than continuing use; that is, where such assets are available for immediate sale and where sale is highly probable. Non-current assets or disposal groups are recorded at the lower of their carrying amount and fair value less costs to sell.

Investment property

Investment property is property held primarily to earn rentals or for capital appreciation or both. It does not include property held primarily for strategic purposes or to provide a social service (eg, affordable housing) even though such property may earn rentals or appreciate in value - such property is reported as property, plant and equipment.

Investment properties are measured at fair value. Gains or losses arising from fair value changes are included in the statement of financial performance. Valuations are undertaken in accordance with standards issued by the New Zealand Property Institute.

Employee benefits

Pension liabilities

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

Other employee entitlements

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

Termination benefits

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

Insurance contracts

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. Financial assets backing the liability are designated at fair value through profit and loss.

Note 1: Summary of Accounting Policies (continued)

Leases

Finance leases transfer to the Crown as lessee substantially all the risks and rewards incident on the ownership of a leased asset. Initial recognition of a finance lease results in an asset and liability being recognised at amounts equal to the lower of the fair value of the leased property or 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 lessor substantially retains the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter. Lease incentives received are recognised evenly over the term of the lease as a reduction in rental expense.

Other liabilities and provisions

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

Contingent assets and contingent liabilities

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident. Contingent liabilities are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised.

Commitments

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

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

Commitments are classified as:

• capital commitments: aggregate amount of capital expenditure contracted for but not recognised as paid or provided for at period end
• non-cancellable operating leases with a lease term of more than one year
• other non-cancellable commitments: these may include consulting contracts, cleaning contracts and ship charters.

Interest commitments on debts and commitments relating to employment contracts are not included in the Statement of Commitments.

Comparatives

When presentation or classification of items in the financial statements is 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 Original Budget were forecasts published in the 2007 Budget Economic and Fiscal Update while Estimated Actuals were forecasts published in the 2008 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

Segment analysis

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

• Core Crown: This group, which includes Ministers, government departments, offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund most closely represents the budget sector and provides information that is useful for fiscal analysis purposes.
• State-owned enterprises including entities governed by the State -owned Enterprises Act, and for the purposes of these statements also includes Air New Zealand, represents entities that undertake commercial activity.
• Crown entities: This group includes entities governed by the Crown Entities Act 2004. These entities have separate legal form and specified government frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy).

Functional analysis is also provided of a number of financial statements items. This functional analysis is drawn from the Classification of the Functions of Government produced by the International Monetary Fund.

Related parties

The Government comprises a large number of commonly controlled entities. These entities, and their key management personnel, transact among themselves and with the Government Reporting Entity on a regular basis, for example, for the purchase of postage stamps or the registration of vehicles. The Public Finance Act 1989 requires separate reporting by these individual entities and these entities will report transactions with the Crown and other related parties as appropriate in these individual financial statements.

With the exception of key management personnel, no other parties control the Government, are controlled by the Government without being consolidated, or are under common control of another entity with the government. Tertiary education institutions, joint ventures and the Government Superannuation Fund are however considered related parties due to government influence and transactions between the rest of the Government Reporting Entity and these entities are separately disclosed where material.

Key management personnel, defined as Ministers of the Crown that are in Cabinet, are also considered to be related parties.

Note 2: Tax and Levies Collected through the Crown's Sovereign Power (Accrual)

Notes to the Financial Statements (continued)

Notes to the Financial Statements (continued)

Key management personnel are Ministers of the Crown who are members of Cabinet.

The Cabinet Manual sets out guidance in respect of Ministers' conduct, public duty, and personal interests. Ministers are responsible for ensuring that no conflict exists or appears to exist between their personal interests and their public duty. Therefore, there is a clear expectation that Ministers will not influence or affect any transactions and outstanding balances between the Government and themselves or their family, whanau, and close associates.

Operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of entities included in the Government financial statements, excluding those expenses separately identified in the statement of financial performance and other notes. Items disclosed separately are those required by Financial Reporting 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.

1 The audit of financial statements are those of the Government reporting entity and its sub-entities.

Notes to the Financial Statements (continued)

Claims expense is the sum of claims settled and claims management expenses relating to claims incurred plus the movement in the outstanding claims liability.

Total claims and other expenses are those related to claims that have occurred prior to reporting date. Within these expenses are expenses relating to actuarial gains/(losses) and operating costs (e.g. costs for processing claims and injury prevention promotion) which due to their nature are reported elsewhere in the statement of financial performance eg. under gains/losses or personnel expenses.

Insurance expenses represents underwriting expenses less those expenses reported elsewhere i.e. insurance expenses largely comprise direct settlement of claims and expected movements in the outstanding liability and unexpired risk liability.

The underwriting surplus/(deficit) represents the net effect on the statement of financial performance from claims incurred prior to reporting date. It includes actuarial gains/(losses).

Underwriting revenue is reported separately in the financial statements under other sovereign revenue.

Notes to the Financial Statements (continued)

The GSF and ACC liabilities are valued by an independent actuary (refer notes 24 and 25). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when originally calculating the liability. They are also known as experience adjustments.

Notes to the Financial Statements (continued)

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

The Government does not hold any collateral or any other credit enhancements over receivables which are past due.

The Inland Revenue Department (IRD) administers the majority of the tax receivable portfolio. The recoverable amount of the portfolio administered by IRD is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting at the current use of money interest (UOMI) rate. If the recoverable amount of the IRD portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount.

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 tax outstanding (e.g. GST, income tax, PAYE) and the taxpayer's balance date. Past due debt includes debt collected under instalment, debt under dispute, default assessments and debts of taxpayers who are bankrupt, in receivership or in liquidation. IRD has debt management policies and procedures to actively manage the collection of past due debt.

The fair value of tax receivables is not materially different from the carrying value.

Notes to the Financial Statements (continued)

The ACC levy receivables are short term, so their carrying amount provides a reasonable approximation of their fair value. Of the other levy, fines and penalties receivables, the majority is in the debtor portfolio administered by the Ministry of Justice (ie, court fines, associated court fees and enforcement fees) with a carrying value of $206 million (2007: $195 million). Their carrying amount provides a reasonable approximation of their fair value. The carrying value of these Justice receivables is calculated using discounted cash flows (net of estimated service costs).