Financial Statements of the Government of New Zealand for the Year Ended 30 June 2013

Contents#

A Snapshot of the 2013 Financial Statements of the Government (Part 1)#

The economy continued to grow

The size of the nominal economy increased 2.1% over the year, driven by an increase in consumer spending and a large increase in investment, particularly residential building.

Annual average % change in GDP

Facts and figures – June Year

• $212.7 billion nominal GDP (up 2.1%)
• 1,360,700 average full time employees 22,275 more)
• $27.42 average hourly rate (up 2.4%)
• 6.7% average unemployment 0.1% higher)
• 0.8% inflation (2.2% in 2012)

Where does the Government's money come from?

• 67% of revenue was from collection of tax ($3.5 billion more than last year)
• 84% of sales of goods and services from SOEs (eg, NZ Post, Meridian Energy, KiwiRail)
• 14% was from other sources (eg, ACC, EQC, and fire service levies)

Who pays income tax, and how much?

• Next year 3.4 million New Zealanders are expected to pay tax of $26.4 billion – an average of $7,765 each

Your tax dollar - where was it spent?

• $70.3 billion core Crown expenses
• 55% of all spending on welfare, education and health
• 23% of all spending by SOEs and Crown entities

Crown expenses

Total Crown expenses were $1.7 billion less than last year as insurance expenses and one-off impairments were higher in 2012.

The peak in 2011 was a result of large Canterbury earthquake costs, which are detailed on the next page.

Your dollar provided...

$49.7 billion on welfare, health, education

Social welfare

$10.2 billion to provide 612,000 superannuitants with income support and $4.7 billion to 323,000 people receiving the unemployment, sickness, invalids, and domestic purpose benefits.

Health

$11.7 billion of funding to hospitals, which helped provide over 52,000 nurses, 14,000 doctors and 158,000 elective surgeries.

Education

$12.5 billion helped to fund over 200,000 enrolments in early childhood education and over 750,000 school students.

$11.5 billion so far to rebuild Canterbury

• $11.5 billion total cost so far, $9.1 billion of that was recorded in 2011, $1.9 billion last year and $0.5 billion this year
• 70% are the claims costs of EQC, with 423,273 building claims received and approximately $4.4 million paid out per da
• 7,493 red zone properties with over 85% now settled

A Snapshot of the 2013 Financial Statements of the Government (Part 2)#

Government spending exceeded income

Operating balance before gains and losses (OBEGAL)

$4.4 billion deficit

• Second successive year that the deficit halved
• Deficit was $18.4 billion in 2011 and $9.2 billion in 2012
• Recovery of OBEGAL reflects the recovery in the economy
• Next surplus forecast for 2014/15 (one more year in deficit)

Core Crown net debt

$55.8 billion core Crown net debt

• $5.1 billion increase from last year as the Crown continued to run a cash deficit

What does the Government owe?

• $100.1 billion
  of borrowings, the same as last year. While $15.5 billion of government bonds were issued (at a rate of $304 million per week) $15.4 billion of maturing debt was repaid. Overall net cash from borrowing was $0.1 billion
• $37.7 billion
  of insurance liabilities, $3.5 billion less than last year, with all the main insurers having lower amounts outstanding this year

Total Crown liabilities

• $6.1 billion less than last year
  Total Crown liabilities fell from last year, mostly due to falls in the estimated future cost of the long-term obligations for ACC claims and the Government Superannuation Fund (GSF)

What does the Government own?

Total Crown assets

• $109.8 billion
  of property, plant and equipment (PPE) 55%, or $60 billion, was land and buildings
• $106.8 billion
  of financial assets with 47% held in New Zealand and 16% in both the USA and Europe
• $27.8 billion
  of other assets, including inventory and intangible assets

Ministerial Statement#

The Crown's finances continued to strengthen in the year under review reflecting prudent management of the balance sheet and of operating expenses in a steadily expanding economy.

The total Crown's operating deficit before gains and losses (OBEGAL) halved for the second consecutive year to $4.4 billion, or to 2.1 per cent of GDP in the 12 months to June 30. This was considerably stronger result than the $7.9 billion deficit forecast by Treasury in Budget 2012 at the start of the financial year. It compares with deficits of $9.2 billion and $18.4 billion in the two preceding fiscal years.

Core Crown expenses were $3.4 billion lower than Budget 2012 forecasts, at $70.3 billion (33.1 per cent of GDP). This partly reflects the Government's focus on reducing costs while improving the services New Zealanders receive by consistently examining how public services are delivered. Careful management permitted the Government to target extra spending into areas of priority: Core Crown operating spending on social security was up 3.2 per cent to $22.7 billion; Health was up 2.4 per cent to $14.5 billion, education was up 7.3 per cent to $12.5 billion and law and order spending to make our communities safer were up 1.6 per cent to $3.5 billion.

Mirroring positive economic activity, tax revenue of $58.7 billion was 6.5 per cent higher than a year earlier and equal to 27.6 per cent of GDP. The corporate tax take was strong, indicating underlying strength in company profitability likely due, at least in part, to firms’ increased investment returns.

Crown expenses (net of reinsurance) relating to rebuilding Canterbury totalled $0.5 billion this year, building on $11 billion over the previous two years. The total expected cost to the Crown was this year revised up to $15 billion. Although it will be some time off before we will know the final costs of some rebuild projects, we have recently received increased assurance on final costs associated with repairing horizontal infrastructure after a cost-sharing agreement being reached with Christchurch City Council.

The New Zealand Superannuation Fund booked an annual return of over 25 per cent and that performance, together with those of other investment funds, contributed to the operating balance inclusive of gains and losses moving into surplus this year ($6.9 billion). This was $21.8 billion better than the previous year, and $12.6 billion better than Treasury forecast at the start of the year. This underscores how volatile investment returns can be, tracking swings in international market conditions beyond the control of New Zealand.

The surplus, along with a rise in the value of the Crown's property assets, strengthened the Crown's net worth position for the first time in five years. Net worth attributable to the Crown, at $68.1 billion, reflected assets of $244.4 billion (up 1.7 per cent) and liabilities of $174.4 billion (down 3.4 per cent). Milestones during the year included the sale of a minority shareholding in Mighty River Power, which freed up $1.7 billion for higher priority investments. The Government's share offer programme continues to be rolled out and will free up further capital from the balance sheet to spend on public assets, including schools and hospitals.

In the year to 30 June, the Crown's residual cash deficit nearly halved to $5.7 billion. Funding this deficit was reflected in an increase in net core Crown debt which stood at 26.3 per cent of GDP.

The Crown is on target to record an OBEGAL surplus in 2014/15. It will be another two years, when annual surpluses reach levels sufficient to meet all priority capital investments, before the Crown can begin to pay down debt. The Government is committed to easing the burden of debt-serving costs of future generations, which is why it is targeting net core Crown debt to stand no higher than 20 per cent of GDP in 2020.

Hon Bill English
Minister of Finance

30 September 2013

Statement of Responsibility#

These financial statements have been prepared by the Treasury in accordance with the provisions of the Public Finance Act 1989. The financial statements comply with New Zealand generally accepted accounting practice and with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities.

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.

Gabriel Makhlouf
Secretary to the Treasury

30 September 2013

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 2013 and its operations for the year ended on that date.

Hon Bill English
Minister of Finance

30 September 2013

Commentary#

Fiscal Overview

 

Introduction#

These financial statements[1] contain the audited results for the financial year ended 30 June 2013. The results are compared against previous years and against two sets of forecasts for the 2012/13 year:

• Budget 12 refers to the 2012 Budget Economic and Fiscal Update, and
• Budget 13 refers to the 2013 Budget Economic and Fiscal Update.

This commentary should be read in conjunction with the financial statements on pages 30 to 172.

At a Glance#

Headlines: #

• Tax revenue up $3.6 billion from a year earlier (page 10).
• Core Crown expenses were $1.2 billion higher than the year before (page 12).
• OBEGAL deficit more than halved from 2012 to be $4.4 billion (page 15).
• Partial sale of equity in Mighty River Power raised proceeds of $1.7 billion (page 9).
• Strong investment returns of $6.2 billion (page 16).
• Long-term liabilities for ACC and GSF decreased $2.8 billion (page 21).
• Net debt up $5.2 billion to 26.3% of GDP (page 17).
• Total net worth attributable to the Crown rose for the first time since the global financial crisis (page 19).

Summary#

The operating balance before gains and losses (OBEGAL) deficit more than halved from a year earlier, from $9.2 billion, to $4.4 billion #

The continued narrowing of the OBEGAL deficit was a result of further growth in the nominal economy (leading to a higher tax take) and lower expenditure (with Canterbury rebuild costs declining and last year's KiwiRail impairment not repeated).

Excluding the impact of the Canterbury rebuild, the adjusted OBEGAL deficit was $3.9 billion this year; which was $3.4 billion lower than the comparative figure for the previous year (a $7.3 billion deficit).

Figure 1 - OBEGAL

Source:  The Treasury

The New Zealand economy continued to grow and helped increase the tax take...#

The size of the nominal economy grew by 2.1% for the year, driven by an increase in consumer spending and a large increase in investment, particularly residential building. The labour market was fairly steady throughout the year, although employees worked more hours and earned higher wages.

The increase in economic activity, growth in employment, and the impacts of policy changes led to core Crown tax revenue being $3.6 billion higher than a year earlier, with all major tax types improving, and reach its highest level (at $58.7 billion). As a share of the economy, core Crown tax revenue was 27.6% of GDP compared with the peak of 31.2% of GDP in 2006.

Figure 2 - Core Crown revenue and expenses

Source:  The Treasury

...while core Crown expenses remained relatively flat...  #

As a share of the economy, core Crown expenses were steady at 33.1% of GDP (the same as in 2012).

In nominal terms, core Crown expenses increased $1.2 billion (or 1.8%) to be $70.3 billion for the year to 30 June, and were at relatively similar levels for the past two years.

The two largest drivers of growth in core Crown expenditure were higher costs related to student loans (as loan repayments are now expected to be recovered over a longer period) and an increase in the number of recipients of NZ Superannuation (as the New Zealand population ages).

These increases were partially offset by lower expenses in relation to the rebuild in Canterbury. It is important to note that while the Canterbury rebuild continues, a lot of the expected costs were recognised in previous years, so these naturally decrease over time. In addition, as the rebuild gains momentum the nature of costs change, capital costs (which are not included in core Crown expenses) will start to increase as building in Canterbury gets underway.

...and one-off expenses meant that total Crown expenses were less than last year #

Expenses outside the core Crown (predominantly those of SOEs and Crown entities) were $20.7 billion ($2.9 billion less than the year before). The fall in expenses was largely owing to lower earthquake related insurance expenses (in EQC and Southern Response) as claims costs were updated to reflect the latest information, and impairments being at more regular levels this year compared to the one-off large impairment of KiwiRail assets in 2012.

Net debt continues to grow...#

With the Crown recording an OBEGAL deficit, and continued capital spending, the resulting cash deficit meant that net debt continued to rise. With increases every year since 2008, the highest level of net debt was seen this year, at $55.8 billion (26.3% of GDP). However, the rate of growth of net debt has slowed in recent years as cash deficits have become smaller; at $5.7 billion, the residual cash deficit was $4.9 billion less than the year before. In addition, this year's cash deficit was smaller than prior years owing to the proceeds of $1.7 billion from the partial sale of shares in Mighty River Power.

Figure 3 - Net debt

Source:  The Treasury

...while investment gains led to an operating surplus...  #

The Crown recorded its first operating balance surplus since 2008, as net gains of $11.3 billion meant that once added to the OBEGAL deficit, the surplus was $6.9 billion.

Most of the gains this year were a result of strength in global equities, which meant that the NZS Fund and ACC recorded large gains on their investment portfolios ($4.4 billion and $1.8 billion respectively). In addition, favourable movements in the discount rate meant that actuarial gains totalling $3.6 billion were recorded on the valuations of the long-term liabilities for ACC claims and GSF pensions.

Figure 4 - Operating balance

Source:  The Treasury

...and an increase in the Crown's net worth#

With an operating surplus, the Crown's net worth increased for the first time since the global financial crisis. At $68.1 billion, the net worth attributable to the Crown was $8.7 billion higher than the previous year and stood equivalent to 32.0% of GDP (3.5% higher than last year).

Making up the change in net worth was an increase in total assets of $4.1 billion and a fall in liabilities of $6.1 billion. The higher asset values were largely the result of strong equity markets, which led to an uplift in financial assets, while the fall in liabilities was mostly made up of lower obligations for insurance (ACC, EQC and Southern Response) and superannuation (GSF). These liabilities fell as claims were paid out, latest valuations reduced estimated future costs and discount rates rose, which meant that the discounted value of the future cash flows was less.

Figure 5 - Net worth

Source:  The Treasury

What was sold?

The Crown owned 100% of the shares in MRP prior to the partial sale, with the value of MRPs net assets being $3,052 million at the time of sale.  In selling 48.2% of its shares, the Crown effectively sold that portion of its interest in MRP to other parties; equating to $1,471 million, but it did not relinquish control of the Company.  The portion of shares that are now owned outside the Crown is referred to as the non-controlling “minority interest” in MRP.

What did the Crown receive?

As shown in Table 2, the Crown received $1,685 million from the sale of these shares.  Once the cost of the sales ($22 million) and the estimated cost of the bonus share issue (explained further below) are deducted, the net proceeds from sale were $1,638 million.  When these proceeds are compared to the interest in the net assets sold, the Crown made a gain on the partial sale of $167 million. 

What is the cost of the loyalty bonus shares?

Those New Zealand investors who purchased shares in the initial float of MRP will be eligible to receive up to 200 shares (one for every 25 shares purchased) if they hold those shares for two years.  The bonus issue is a cost to the Crown because a portion of its assets are being given away for no compensation.  The maximum cost of issuing these bonus shares was estimated at approximately $25 million.

How is the Crown's interest in MRP reflected in the financial statements?

The Crown continues to own more than 50% of MRP and therefore retains control of the Company and must continue to report 100% of the assets, liabilities, revenue and expenses in its financial statements.  However, now that some of those net assets are owned by others, the Government needs to show the portion of MRP that can be attributed to the Crown and reflect that the residual is attributable to minority interests.  In the financial statements this is presented through separate lines (in each of the operating statement and balance sheet) to reduce from the total operating balance and net worth the amount that is attributable to minority interests. 

Why does the total Crown investment change?

As well as the Crown selling 48.2% of MRP, a number of Crown financial institutions (CFIs) have invested in the Company as part of their normal investment activity.  Once the holding of the CFIs (3.8%) was added to the shares retained by the Crown, the total Crown ownership at 30 June 2013 increased to 55.0%.  The Crown will continue to hold over 50% of shares, however, the CFIs shareholding will vary depending upon their investment strategies. 

At 30 June 2013 MRP's net assets were $3,182 million, which meant that the total Crown ownership (including CFIs) was $1,749 million and the minority interest was $1,431 million.

Revenue#

Total Crown revenue was $86.6 billion, an increase of $3.2 billion from a year earlier. While tax revenue was $3.6 billion higher than in 2012 this was partially offset by a fall in the earthquake related revenue of Crown entities.

Core Crown Tax Revenue #

In nominal terms, core Crown tax revenue increased $3.6 billion to reach its highest nominal level ever. As a share of the economy, tax revenue increased to 27.6% of GDP, but remains below the levels seen before the global financial crisis (Figure 6).

Figure 6 - Core Crown tax revenue

Source:  The Treasury

All major tax types contributed to the increase in tax over the year, as detailed in Table 4, with four tax types making up most of the increase:

• Source deductions: $1.1 billion higher than last year owing to a stronger labour market. More people were employed (0.7% higher than 2012), and wages were higher (2.1% above the same time a year earlier), which directly resulted in increased tax from source deductions. Also, as taxpayers' earnings increase, their average tax rate increases owing to the progressive nature of the personal income tax scale (often referred to as fiscal drag). In addition, the tax exemptions related to KiwiSaver contributions were removed during the year, increasing the tax take.
• Other individuals[2]: $1.1 billion (or 36.8%) higher than a year earlier, largely owing to growth in taxable income over the past year and boosted by the base broadening measures from Budget 2010 (eg, removing the depreciation exemption on buildings). While the tax policy changes took effect in the 2011/12 tax year, for many taxpayers the financial impact first occurred within the current financial year. In addition, strength in equity markets is likely to have led to higher income from investments.
• GST: $0.6 billion stronger as both private consumption and residential investment increased (up 2.8% and 23% respectively).
• Corporate tax: $0.5 billion higher than the year before, mainly owing to growth in current-year taxable profits of firms and an increase in investment returns.
• Compared to forecast in Budget 2013, core Crown tax revenue was $0.4 billion (0.6%) above, with the largest differences being in corporate tax and GST.
• Corporate tax was $0.5 billion above Budget 2013 forecast mainly owing to higher-than-expected current-year taxable profits, mostly concentrated within a few sectors of the economy.
• GST was $0.2 billion lower than forecast mainly because both private consumption and residential investment were slightly weaker than forecast.

Figure 7 - Core Crown tax revenue against Budget 2013

Source:  The Treasury

Other Revenue#

Other revenue includes other fees and levies (eg, ACC levies), revenue from operations of Crown entities (CEs) and State-owned enterprises (SOEs), interest income and dividend income.

Core Crown other revenue was steady at $5.5 billion while the SOE and CE sectors recorded revenue of $22.5 billion, $0.4 billion lower than a year earlier (Figure 8).

Figure 8 - Other revenue

Source:  The Treasury

Most of the reduction in revenue ($0.6 billion) was attributable to a fall in EQC's reinsurance revenue. The reduction was a result of a revised estimate in the outstanding receivable from reinsurers, taking into account the latest information at 30 June 2013. There were corresponding reductions in the insurance expense (detailed on the next page) that more than offset the reduction in revenue, meaning that overall the EQC operating balance was better than last year.

Expenses#

Total Crown expenses decreased for the second successive year, to be $91.0 billion this year, $1.7 billion less than the year earlier. The decreases were owing to a large one-off impairment of KiwiRail assets last year and a fall in earthquake costs.

Core Crown Expenses#

While total Crown expenses fell, core Crown expenses were $1.2 billion higher than a year earlier. Despite the nominal expenditure increase, as a share of the economy core Crown expenses were the same as last year at 33.1% of GDP (Figure 9).

Figure 9 - Core Crown expenses

Source:  The Treasury

Table 6 shows the largest contributors to the nominal increase in core Crown expenses over the year, with three key areas contributing to the increase:

• Education expenses made up most of the increase as they were $0.9 billion higher than in 2012, with the majority being related to impairments of the student loan receivables ($0.8 billion). The impairments were higher because of one-off improvements last year and updated assumptions about student incomes, which meant that repayments are now expected to be slightly slower than previously estimated. The remainder of the increase was a result of funding allocations to Education in the 2012 Budget.
• Spending on benefits increased $0.7 billion, mostly a result of an increase in recipients of New Zealand Superannuation, from 585,000 to 613,000, as the population ages.
• Expenses related to weathertight homes were impacted by a one-off $400 million decrease in 2012, which was not repeated this year. Overall, the remaining provision is $123 million (refer to note 27 of the financial statements for further details).

Source:    The Treasury

The increases in expenses were partially offset by reductions of $0.9 billion in earthquake expenses. While spending will continue for many years, a number of costs have already been estimated and included in previous years. Also, as time goes on the recovery moves towards rebuild, with the type of spending moving from operating to capital. Further details about the spending on the Canterbury earthquake recovery this year and analysis against budgeted figures is provided on the following page.

Compared to Budget #

When compared to Budget 2013, core Crown expenses were $1.3 billion lower than expected.

The largest area contributing to the lower than forecast result was spending on core Government services, which was largely associated with the earthquake costs. Explanations of these differences are detailed on the next page.

Welfare spending was the next largest difference to forecast, spread across a number of benefit types. The main driver for the difference was that the take-up of tax credits relating to working for families and KiwiSaver was less than expected ($42 million).

Figure 10 - Core Crown expenses compared to Budget 13

Source:  The Treasury

SOE and Crown Entity Expenses #

At $20.7 billion, expenses outside the core Crown were $2.9 billion lower than in 2012. There were two main reasons for the fall:

• The earthquake-related insurance expenses of EQC and Southern Response were $1.8 billion lower than in 2012 (at negative $0.1 billion). The reduction in the expenses reflect that two years from the Canterbury earthquakes the estimates for outstanding insurance claims are becoming more certain and have led to a reduction in the estimated outstanding claims cost.
• KiwiRail restructured its operations during 2012, which resulted in one-off impairments of the network assets, with $1.4 billion of that being an expense. In the latest year, the network assets were only impaired by a further $0.2 billion, a reduction of $1.2 billion.

Operating Balance#

OBEGAL#

The OBEGAL deficit more than halved compared to the year earlier, $4.4 billion compared to $9.2 billion in 2012 (Table 8). The improved result was owing to higher revenue and lower expenditure at the total Crown level (as discussed in earlier sections). When compared to Budget 2013 the OBEGAL deficit was $1.9 billion smaller than expected owing to the favourable variances in both revenue and expenses.

Operating Balance #

Adding the Crown's net gains of $11.3 billion to the OBEGAL deficit, the operating balance was a surplus of $6.9 billion ($21.8 billion higher than 2012).

Much of the improvement in the operating balance was owing to gains on the investment portfolios of the NZS Fund and ACC ($6.2 billion) and favourable changes in discount rates leading to actuarial gains ($3.6 billion). This contrasts to the year before when equity markets were more subdued and discounts rates decreased, resulting in losses of $5.7 billion.

The large change since last year highlights the volatile nature of the operating balance. For more details about the sensitivities to the operating balance, refer to the box on page 22.

Figure 11 - Operating balance

Source:  The Treasury

Investment gains of $6.2 billion: The NZS Fund recorded $4.4 billion of the total Crown net gains. Their investment portfolio earned strong returns as global equity markets rose, as did the value of their private market assets (notably Z Energy). Overall, the Fund returned a record 25.83% for the 12 months to June (1.21% last year) and now has pre-tax assets of approximately $23 billion ($19 billion in 2012).

Actuarial gains of $3.6 billion: Changes in the discount rate and improvements in experience resulted in large actuarial gains on the long-term liabilities for ACC insurance and GSF pensions. The short term discount rates increased, and offset the impact of a reduction in the long-term rate (from 6.0% to 5.5%) reflecting the low interest rate environment of recent years and the view that, on balance, it is expected that forward looking interest rates will continue this trend. Overall, changes in discount rates resulted in gains of $1.7 billion ($0.9 billion for ACC and $0.8 billion for GSF). In addition, recent data shows that actual claims costs are proving to be less expensive than previously thought, resulting in a $1.2 billion reduction in the ACC insurance liability.

Debt#

Net Debt#

Net debt increases when the Crown is running cash deficits and it declines when there are cash surpluses. It also fluctuates in line with valuation movements in the underlying financial assets and liabilities of the Crown and movements in the amounts of currency issued to New Zealand banks.

Net debt increased by $5.2 billion this year, as the Crown continued to run a residual cash deficit. As a share of the economy, net debt was 26.3% of GDP (a 2.0% increase from last year).

Figure 12 - Net debt

Source:  The Treasury

Residual Cash#

The residual cash deficit was $5.7 billion, $4.9 billion less than last year. Table 10 summarises the contributors to the reduction in the residual cash deficit over the year.

Source:   The Treasury

• Tax receipts were $3.6 billion higher than last year, which was in line with the improvement in core Crown tax revenue as discussed on page 10.
• The Crown received $1.7 billion from the partial sale of MRP, lowering the cash deficit. Refer to the box on page 9 for further discussion about the share sales.
• Advances were $0.7 billion lower than last year as more loans were issued in 2012.
• Operating and interest payments were $0.8 billion more than last year, which is largely in line with the increase in core Crown expenses ($1.2 billion) as mentioned on page 12. The increase in cash payments tends to be lower than the expenditure increase owing to the fact that some expenses do not result in cash payments at the same time, and some expenses do not have operating cash payments at all (eg, depreciation).

The fiscal overview, on pages 4 and 5, summarises the link from the operating balance (a total Crown measure of total revenue less total expenses, including gains and losses) to net debt (a core Crown measure of debt).

Gross Debt#

While net debt increased this year, gross debt, which reflects the total borrowings of the core Crown, was $1.7 billion lower than a year earlier at $78.0 billion (Figure 13). As a percentage of GDP gross debt fell from 38.2% to 36.7%.

This decline in gross debt was largely mirrored by a decrease in financial assets (mostly held by the Reserve Bank and NZDMO), which meant that overall there was minimal impact to net debt (as discussed on the previous page).

Figure 13 - Gross debt

Source:  The Treasury

The fall in gross debt was a result of movements in the following items:

• $1.1 billion fall in debt instruments issued by the Crown. While the Crown continued to issue government bonds, it also repaid maturing debt and reduced its treasury bills during the year.
• $0.9 billion decrease in other financial liabilities, which was largely due to a reduction in cash collateral deposits from trade counterparties. These deposits fluctuate with the level of derivative asset positions (the higher the asset, the more collateral that is required).

Partially offsetting these decreases was a $0.3 billion increase in the Reserve Bank's derivative liabilities. These liabilities are largely foreign exchange instrumentsused as a means of either investing funds overseas or funding a portion of the Bank’s foreign reserves portfolios. The decline in value was a result of the volatility in foreign exchange rates between the issue date and 30 June. However, the increase in these liabilities was largely offset by corresponding increases in foreign currency denominated assets.

Crown's Borrowing Programme#

The debt programme (Table 11) during 2012/13 returned net cash proceeds from the market of $0.1 billion. While the Crown continued to undertake a large ($14 billion face value) bond programme, the majority of proceeds were used to fund maturing debt. In total, debt issuance raised $15.5 billion, with $10.0 billion to fund maturing market government bonds and $5.4 billion to reduce outstanding Treasury Bills; a change in the programme that was signalled in Budget 2012.

Overall, once the non-market cash-flows (debt issued directly to agencies within the Crown) were included, net cash payments from borrowing were $0.3 billion.

Net Worth Attributable to the Crown#

Net worth attributable to the Crown was $68.1 billion as at 30 June 2013, an increase of $8.7 billion from a year earlier, and is the first time since 2008 that net worth has increased in nominal terms. As a share of the economy net worth was 32.0% of GDP, which was 3.5% higher than a year earlier. The growth in net worth helps to rebuild the Crown's buffer against future shocks; however, this level remains significantly below the peak of $105.1 billion in 2008 (or 56.6% of GDP).

Figure 14 - Net worth attributable to the Crown

Source:  The Treasury

The main reason for the improvement in the Crown's net worth, as shown in Table 12, was the operating balance surplus, with the gains on financial assets and reductions in long-term liabilities being the key drivers of the surplus (as discussed on pages 15 and 16). In addition, revaluation uplifts of the Crown's property, plant and equipment helped contribute to the higher net worth position.

Despite the increase in net worth, the composition of the balance sheet remains similar to previous years (Table 13). The most notable change is the decrease in “other liabilities”, largely being the fall in insurance and pension obligations. Later this year, the Treasury will publish the 2013 Investment Statement of the Government of New Zealand, which is a reporting requirement mandated by a recent amendment to thePublic Finance Act. The statement will delve into the composition of the assets and liabilities on the Crown's balance sheet, identifying risks and opportunities to further strengthen performance and manage risks.

The other notable change from last year is the increase in minority interests, which reflects the amount of the Crown's net worth that is attributable to external parties. In this past the minority interests largely related to external shareholders of Air New Zealand; however, minority interests have increased significantly with the partial sale of shares in Mighty River Power this year. For further information on the partial sale, refer to the box on page 9, and note 35 in the financial statements (pages 162 and 163).

Assets#

Total Crown assets were $244.4 billion as at 30 June 2013 (Figure 15), a $4.1 billion increase over the year with the growth largely in financial assets ($2.6 billion) and property, plant and equipment ($1.2 billion).

Figure 15 - Total Crown assets

Source:  The Treasury

The increase in financial assetswas driven by the strong equity market returns, which increased fair values of investment assets. Refer to page 16 for discussion about the investment gains this year (largely from the NZS Fund).

Values of property, plant and equipmentwere higher than last year as revaluations of the assets to market rates had positive impacts. While most assets are revalued, the largest uplift related to the state housing portfolio ($1.2 billion), largely reflecting the strength of the property market in Auckland.

Liabilities#

Total Crown liabilities were $174.4 billion as at 30 June 2013, a decrease of $6.1 billion (3.4%) from the previous year (Figure 16).

Figure 16 - Total Crown liabilities

Source:  The Treasury

Borrowings remained at a similar level to last year, at around $100 billion. Core Crown gross debt made up a significant portion of this ($78.0 billion) and are generally the key driver for growth in total Crown borrowing; refer to page 18 for a discussion of the Crown's gross debt and the borrowing programme. Outside of the core Crown, the most significant borrowings are the deposits held by Kiwibank ($12.1 billion). These increased this year by $0.6 billion, which allowed the bank to issue more lending to customers.

ACC's insurance liability decreased this year from $30.6 billion to $29.4 billion, related in part to favourable claims experience and changes in discount rates (as discussed on page 16).

Other liabilities were $45.0 billion at 30 June 2013, compared to $49.4 billion at the end of last year.

The decrease of $4.4 billion was largely owing to two items:

• earthquake related insurance liabilities of EQC and Southern Response were $2.0 billion and $0.3 billion lower respectively as claims were paid out. In addition, the estimated future costs were reduced to reflect greater certainty about the cost of future claims (as discussed on page 13).
• retirement plan obligations for the Government Superannuation Fund were $1.6 billion lower than the year earlier largely owing to the increase in the short-term discount rate (as discussed on page 16). In addition, the plan assets (which are held by the Fund to offset the future obligations) increased this year as global equity markets provided strong returns.

Historical Financial Information#

Independent Report of the Auditor-General#

To the Readers of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2013#

I have audited the financial statements of the Government of New Zealand (the Government) for the year ended 30 June 2013 using my staff, resources and appointed auditors and their staff.

The financial statements of the Government on pages 30 to 172 comprise:

• The annual financial statements that include the statement of financial position as at 30 June 2013, the statement of financial performance, analysis of expenses by functional classification, statement of comprehensive income, statement of changes in net worth and statement of cash flows for the year ended on that date, a statement of segments and the notes to the financial statements that include accounting policies, a statement of borrowings in note 24, and other explanatory information; and
• The statement of unappropriated expenditure, statement of expenses or capital expenditure incurred in emergencies and statement of trust money.

Opinion

In my opinion, the financial statements of the Government on pages 30 to 172:

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect the Government's:
  • financial position as at 30 June 2013;
  • financial performance and cash flows for the year ended on that date; and
  • borrowings as at 30 June 2013, and unappropriated expenditure, expenses or capital expenditure incurred in emergencies, and trust monies managed by the Government, for the year ended on that date.

My audit was completed on 30 September 2013. This is the date at which my opinion is expressed.

The basis of my opinion is explained below. In addition, I outline the responsibilities of the Treasury and the Minister of Finance, and my responsibilities, and I explain my independence.

Basis of opinion

Using my staff and appointed auditors and their staff, I have carried out the audit in accordance with the Auditor-General's Auditing Standards, which incorporate the International Standards on Auditing (New Zealand). Those standards require ethical requirements to be complied with. They also require me to plan and carry out the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

Material misstatements are differences or omissions of amounts and disclosures that in my judgement are likely to influence readers' overall understanding of the financial statements. If material misstatements had been found that were not corrected, I would have referred to them in my opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgements of my staff and appointed auditors and their staff. Also the procedures depend on my judgement, including my assessment of risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments I consider internal control relevant to the Treasury's preparation of the financial statements that fairly reflect the matters to which they relate. I consider internal control in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Treasury's internal control.

An audit also involves evaluating:

• the appropriateness of accounting policies used and whether they have been consistently applied;
• the reasonableness of the significant accounting estimates and judgements made;
• the adequacy of all disclosures in the financial statements; and
• the overall presentation of the financial statements.

My staff and appointed auditors and their staff did not examine every transaction. Therefore, I do not guarantee complete accuracy of the financial statements. Also, I did not evaluate the security and controls over electronic publication of the financial statements of the Government.

I have obtained all the information and explanations I have required and I believe I have obtained sufficient and appropriate audit evidence to provide a basis for my audit opinion.

Responsibilities of the Treasury and the Minister of Finance

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

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect the Government's financial position, financial performance and cash flows; and
• fairly reflect the Government’s borrowings, unappropriated expenditure, expenses or capital expenditure incurred in emergencies, and trust money.

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

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

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

Responsibilities of the Auditor

I am responsible for expressing an independent opinion on the financial statements and reporting that opinion to you based on my audit. My responsibility arises from section 15 of the Public Audit Act 2001 and section 30 of the Public Finance Act 1989.

Independence

While carrying out this audit, my appointed auditors and their staff followed my independence requirements, which incorporate the independence requirements of the External Reporting Board.

As an Officer of Parliament, I am constitutionally and operationally independent of the Government and in exercising my functions and powers under the Public Audit Act 2001 as the auditor of public entities, I have no relationship with or interests in the Government.

Lyn Provost
Controller and Auditor-General

Wellington, New Zealand

Audited Financial Statements#

Statement of Financial Performance for the year ended 30 June 2013#

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

Analysis of Expenses by Functional Classification for the year ended 30 June 2013#

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank, but not Crown entities and State-owned enterprises.

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

Statement of Comprehensive Income for the year ended 30 June 2013#

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

Statement of Cash Flows for the year ended 30 June 2013#

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

Statement of Cash Flows (continued) for the year ended 30 June 2013#

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

Statement of Cash Flows (continued) for the year ended 30 June 2013#

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

Statement of Changes in Net Worth for the year ended 30 June 2013#

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

Statement of Financial Position as at 30 June 2013#

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

Statement of Segments#

Current Year Actual vs Estimated Actuals

	Core Crown		Crown entities		State-owned enterprises		Inter-segment eliminations		Total Crown
	Actual 2013 $m	Estimated Actuals 2013 $m	Actual 2013 $m	Estimated Actuals 2013 $m	Actual 2013 $m	Estimated Actuals 2013 $m	Actual 2013 $m	Estimated Actuals 2013 $m	Actual 2013 $m	Estimated Actuals 2013 $m
Revenue
Taxation revenue	58,651	58,286	-	-	-	-	(517)	(447)	58,134	57,839
Other sovereign revenue	1,133	1,085	5,295	5,307	-	-	(1,256)	(1,266)	5,172	5,126
Revenue from core Crown funding	-	-	24,096	24,341	-	-	(24,096)	(24,341)	-	-
Sales of goods and services	1,461	1,456	1,856	1,873	14,102	14,170	(706)	(690)	16,713	16,809
Interest revenue and dividends	2,104	2,196	1,270	1,204	856	822	(1,291)	(1,171)	2,939	3,051
Other revenue	800	786	2,547	2,146	978	1,135	(628)	(429)	3,697	3,638
Total Revenue (excluding gains)	64,149	63,809	35,064	34,871	15,936	16,127	(28,494)	(28,344)	86,655	86,463
Expenses
Transfer payments and subsidies	22,709	22,917	-	-	-	-	(1)	1	22,708	22,918
Personnel expenses	6,037	6,071	10,966	11,148	2,949	2,947	(17)	(10)	19,935	20,156
Other operating expenses	37,940	39,392	21,660	21,806	11,555	11,674	(27,149)	(27,221)	44,006	45,651
Interest expenses	3,620	3,557	235	236	1,248	1,152	(745)	(644)	4,358	4,301
Forecast new operating spending and top down adjustment	-	(288)	-	-	-	-	-	-	-	(288)
Total Expenses (excluding losses)	70,306	71,649	32,861	33,190	15,752	15,773	(27,912)	(27,874)	91,007	92,738
Operating balance before gains/(losses)  attributable to minority interests	-	-	10	-	(75)	(10)	3	-	(62)	(10)
Operating Balance before gains/(losses)	(6,157)	(7,840)	2,213	1,681	109	344	(579)	(470)	(4,414)	(6,285)
Gains/(losses) and other items	6,528	5,140	3,664	2,626	505	112	642	325	11,339	8,203
Operating Balance	371	(2,700)	5,877	4,307	614	456	63	(145)	6,925	1,918
Assets
Financial assets	75,111	71,616	41,297	42,107	20,058	20,685	(17,687)	(18,287)	118,779	116,121
Property, plant and equipment	29,507	29,561	51,823	50,714	28,503	29,058	-	-	109,833	109,334
Investments in associates, CEs and SOEs	32,611	32,635	8,151	8,134	187	216	(31,356)	(31,476)	9,593	9,509
Other assets	2,646	2,627	1,133	913	2,463	2,499	(31)	(40)	6,211	5,999
Forecast adjustments	-	(278)	-	-	-	-	-	-	-	(278)
Total Assets	139,875	136,161	102,404	101,868	51,211	52,458	(49,074)	(49,803)	244,416	240,685
Liabilities
Borrowings	84,870	85,309	5,251	5,156	24,839	25,884	(14,873)	(15,569)	100,087	100,780
Other liabilities	29,392	28,882	45,261	47,351	7,226	7,556	(7,561)	(7,154)	74,318	76,635
Total Liabilities	114,262	114,191	50,512	52,507	32,065	33,440	(22,434)	(22,723)	174,405	177,415
Net Worth	25,613	21,970	51,892	49,361	19,146	19,018	(26,640)	(27,080)	70,011	63,270
Cost of Acquisition of Physical Assets	1,112	1,560	2,314	2,328	2,281	2,462	(13)	(1)	5,694	6,349

Notes to the Financial Statements#

Note 1: Summary of Accounting Policies#

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. These financial statements comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities.

These financial statements were authorised for issue by the Minister of Finance on 30 September 2013.

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. For example, the present value of large cash flows that are predicted to occur a long time into the future, as with the settlement of ACC outstanding claim obligations and Government Superannuation retirement benefits, depends critically on judgements regarding future cash flows, including inflation assumptions and the risk free discount rate used to calculate present values. 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. A second area of uncertainty relates to the estimation of the claims and provisions arising from the Canterbury earthquakes.

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

Early Adoption Standards and Interpretations

From 1 July 2011 no NZ IFRS or amendments to existing NZ IFRS applicable to public benefit entities have been issued as a consequence of recent decisions on the new Accounting Standards Framework. The Government has adopted all NZ IFRSs and Interpretations applicable to public benefit entities issued prior to that date, with the exception of NZ IFRS 9: Financial Instruments,approved in 2010.

NZ IFRS 9 becomes effective for annual reporting periods commencing on or after 1 January 2015. Under the proposed new accounting framework for public sector entities, the proposed accounting standard for recognition and measurement of financial instruments is based on IPSAS 29: Financial Instruments: Recognition and Disclosure. The Crown has not early adopted NZ IFRS 9 to reduce the risk of unnecessary accounting changes through this period.

The New Zealand Accounting Standards Board has issued a new suite of accounting standards (called Public Sector PBE Accounting Standards) that will apply to the Financial Statements of Government for the financial year beginning 1 July 2014. At the broad level the impact of moving from NZ IFRS to PBE Standards is not expected to be significant as there is a strong degree of convergence between IFRS and IPSAS, and therefore between the current NZ IFRS and the proposed Public Sector PBE Accounting Standards.

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 has been 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 acquisition method of combination:

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 the notes to the financial statements. This treatment recognises these entities' net assets, including asset revaluation movements, 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.
• 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 entities' surpluses and deficits are recognised in the statement of financial performance.

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.

Tax revenue is recognised when a taxable event has occurred and the tax revenue can be reliably measured. The taxable event is defined as follows:

The New Zealand tax system is predicated on self-assessment where taxpayers are expected to understand the tax laws and comply with them. Inland Revenue has implemented systems and controls (eg, performing audits of taxpayer records) in order to detect and correct situations where taxpayers are not complying with the various acts it administers.

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 of 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.

Note 1: Summary of Accounting Policies (continued)#

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 recognised in the statement of comprehensive income 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 the statement of comprehensive income.

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

Sovereign Receivables and Taxes Repayable#

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

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 are presented as tax revenue in the statement of financial performance.

Taxes repayable represent refunds due to taxpayers and are recognised at their nominal value. They are subsequently adjusted for interest once account and refund reviews are complete.

Financial Instruments#

Financial assets

Financial assets are designated into the following categories: loans and receivables, financial assets available-for-sale, financial assets held-for-trading, and financial assets designated as fair value through profit or 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.

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

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 expense policy). Loans and receivables issued with duration 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.

Financial assets held-for-trading and financial assets designated as 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 as fair value through profit or 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 in the statement of comprehensive income with some exceptions. Those exceptions are for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (such as debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset. These latter items are recognised in the statement of financial performance. For non-monetary available-for-sale financial assets (eg, some unlisted equity instruments) the fair value movements recognised in the statement of comprehensive income include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised in the statement of comprehensive income, is recognised in the statement of financial performance.

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

Fair values of quoted investments are based on 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 notes to the financial statements. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Financial liabilities

Financial liabilities held for trading and financial liabilities designated as fair value through profit and 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 as fair value through profit or 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 durations of less than 12 months are recognised at their nominal value. Amortisation and, in the case of monetary items, foreign exchange gains and losses, are recognised in the statement of financial performance as is any gain or loss when the liability is derecognised.

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

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 adoption, including:

• whether an economic hedge exists and the effectiveness of that hedge
• whether the hedge accounting qualifications could be met, and
• the extent to which 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 portion of any gain or loss on the derivative is recognised in the statement of comprehensive income and the ineffective portion is recognised in the statement of financial performance. Where the hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability (eg, where the hedge relates to the purchase of an asset in a foreign currency), the amount recognised in the statement of comprehensive income is included in the initial cost of the asset or liability. Otherwise, gains or losses recognised in the statement of comprehensive income transfer to the statement of financial performance in the same period as when the hedged item affects the statement of financial performance (eg, when the forecast sale occurs). Effective portions of the hedge are recognised in the same area of the statement of financial performance as the hedged item.

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

Inventories#

Inventories are recorded at the lower of cost (calculated using a 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 and wool). The cost of harvested agricultural produce is measured at fair value less estimated costs to sell at the point of harvest.

Note 1: Summary of Accounting Policies (continued)#

Property, Plant and Equipment (PPE)#

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

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

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

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

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

Unrealised gains and losses arising from changes in the value of PPE are recognised as at balance date. To the extent that a gain reverses a loss previously charged to the statement of financial performance for the asset class, the gain is credited to the statement of financial performance. Otherwise, gains are 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 PPE 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 taxpayer funds.

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. The major exception relates to service concession assets resulting from public private partnership arrangements where the liability incurred, and therefore the associated interest costs, are directly attributable to the service concession asset.

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. The main reason for holding some assets (for example, electricity generation assets) is to generate cash. For these assets the recoverable amount is the higher of the amount that could be recovered by sale (after deducting the costs of sale) or the amount that will be generated by using the asset through its useful life. Some assets do not generate cash (for example, state highways) and for those assets, depreciated replacement cost is used. 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 PPE, less any estimated residual value, over its remaining useful life.

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

Specified heritage and cultural assets are generally not depreciated.

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 its 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 and sheep) managed for harvesting into agricultural produce (eg, logs and wool) or for transforming into additional biological assets are measured at fair value less estimated costs to sell, 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 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 also 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 incurred.

The Government's holdings of assigned amount units arising from the Kyoto protocol are reported at fair value. Other 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 at least 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 at least annually to determine if there is any indication of impairment. 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 is tested for impairment annually.

Non-current Assets Held for Sale and Discontinued Operations#

Non-current assets held for sale, 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 held for sale, 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 PPE.

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.

Note 1: Summary of Accounting Policies (continued)#

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 these liabilities, 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 liabilities for long-term employee entitlements (those over 12 months) are 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 outstanding insurance claims liabilities are valued annually based on the latest actuarial information. The estimate includes estimated payments associated with claims reported and accepted, claims incurred but not reported, claims that may be re-opened, and the costs of managing these claims. Movements of the claims liabilities are reflected in the statement of financial performance. Financial assets backing these liabilities are designated at fair value through profit or loss.

Reinsurance

Premiums paid to reinsurers are recognised as reinsurance expenses in the statement of financial performance. Premiums are measured from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of risk. Prepaid reinsurance premiums are included in prepayments in the statement of financial position.

Reinsurance and other recoveries receivable

Reinsurance and other recoveries receivable on paid claims, reported claims not yet paid, and unexpired risk liabilities are recognised as income in the statement of financial performance.

Recoveries receivable are assessed in a manner similar to the assessment of outstanding claims and are measured as the present value of the expected future receipts.

Deferred acquisition costs

Accident compensation and earthquake commission levies are imposed through regulation and do not attract acquisition costs. Costs incurred in obtaining other insurance contracts are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the statement of comprehensive income in subsequent reporting periods.

Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue. Risks under general insurance contracts cover a period of up to 12 months, therefore, are amortised within one year.

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 are those where the lessor substantially retains the risks and rewards of ownership. Expenditure incurred in relation to these leases is 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 Liabilities and Contingent Assets#

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident or when a present liability is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liability). Contingent liabilities, including unquantifiable liabilities, are disclosed if the possibility that they will crystallise is not remote. Contingent assets are disclosed if it is probable that the benefits will be realised.

Commitments#

Commitments are future expenses to be incurred on contracts that have been entered into at balance date. The minimum future payments committed at balance date is disclosed in the notes to the financial statements.

Commitments are classified as

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

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

Interest commitments on debts, commitments for funding, and commitments relating to employment contracts are not disclosed.

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.

Last year accounting policies were changed to align with NZ GAAP requirements, and therefore exclude “other” operating commitments (including non-lease executor contracts (eg, cleaning) and funding commitments) from disclosure. Some operating commitments continued to be included in lease commitments and therefore comparatives have been restated accordingly.

There is a new functional classification for Environmental Protection expenditure included in this year's financial statements to better align with international comparisons for this expense categorisation. As a result, comparatives were restated.

Comparatives referred to as Budget 12 were forecasts published in the 2012 Budget Economic and Fiscal Update while Budget 13 were forecasts published in the 2013 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, 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: This group includes entities governed by the State-owned Enterprises Act 1986, Public Finance Act 1989 schedule 5 companies and for the purposes of these statements also includes Air New Zealand Limited. This group 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 governance 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 statement items. This functional analysis is drawn from the Classification of the Functions of Government as developed by the Organisation for Economic Co-operation and Development (OECD).

Related Parties#

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

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

There are no other related parties as no other parties control the Government, and no other parties are controlled by the Government, other than those that are consolidated into the Government's financial statements.

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

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

Note 2: Sovereign Revenue (Accrual)#

Note 2: Sovereign Receipts (Cash)

Note 3: Sales of Goods and Services#

Note 4: Interest Revenue and Dividends#

Note 5: Other Revenue#

EQC anticipates that a significant proportion of the cost of damage relating to the Canterbury earthquake sequence will be recovered from reinsurers (which is recorded as reinsurance receivables). At 30 June 2013, actuarial valuation of the reinsurance recoverable was reduced resulting in a reversal of income in the current year. Further information on insurance expenses and underwriting results can be found in note 11.

Note 6: Transfer Payments and Subsidies#

Note 7: Personnel Expenses#

Key management personnel are the 28 Ministers of the Crown who are members of the Executive Council (including the Prime Minister).

The Remuneration Authority sets remuneration levels for members of the Executive. The Authority takes into account other benefits available to members of the Executive as set out in the Executive Travel, Accommodation, Attendance, and Communication Services Determination (No 2) 2009 (the " Determination"). The Determination was determined by the Minister Responsible for Ministerial Services. Members of Parliament, including Members of the Executive, have access to other non-cash entitlements as determined by the Speaker of the House of Representatives. Details of these entitlements (e.g. travel discounts) can be found on the New Zealand Parliament website (www.parliament.nz).

Note 8: Depreciation and Amortisation#

1. The previous year comparator includes an impairment expense of $1.4 billion in relation to the Rail Network (refer note 20).

Note 9: Other Operating Expenses#

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

Other operating expenses is the large residual item. Most of these costs represent payments made for services provided by third parties (road 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. Audit fees are eliminated because the Office of the Auditor-General is consolidated into these financial statements.
2. External auditing firms carry out other work for entities that they audit on behalf of the Auditor-General.

Note 10: Interest Expenses#