Financial Statements of the Government of New Zealand for the Year Ended 30 June 2014

Contents#

A Snapshot of the 2014 Financial Statements of the Government (Part 1)#

The economy continued to grow#

Real gross domestic product growth accelerated to an annual average rate of 3.5%, with strong growth in construction, primary industries and some services. Nominal activity strengthened 7.8%, as export prices increased.

Annual average % change in GDP

Facts and figures – June Year

• $229.1 billion nominal GDP (up 7.8%)
• $154.0 billion real GDP (up 3.5%)
• $68.5 billion export receipts (up 9.8%)
• 1,399,200 average full-time employees (38,500 more)
• $28.11 average hourly rate (up 2.6%)
• 5.9% average unemployment (0.8% lower)
• 1.5% annual average inflation (0.8% in 2013)

Where does the Government's money come from?#

• 68% of revenue was from collection of tax ($2.7 billion more than last year)
• 83% of sales of goods and services were from SOEs (eg, NZ Post, electricity companies, Air New Zealand)
• 14% was from other sources (eg, ACC, EQC, and fire service levies)

Who pays income tax, and how much?

• Next March tax year 3.5 million New Zealanders are expected to pay tax of $28.6 billion – an average of $8,171 each

Your tax dollar - where was it spent?#

• $71.5 billion core Crown expenses
• 55% of all spending on welfare, education and health
• 22% of all spending by SOEs and Crown entities

Crown expenses

Total Crown expenses were $1.2 billion more than last year with Health and New Zealand Superannuation expenditure having increased.

Your dollar provided...#

$50.5 billion on welfare, health, education

Social welfare

$10.9 billion to provide 640,000 super-annuitants with income support and $4.5 billion to 312,000 people receiving Jobseeker Support and Emergency Benefit, Sole Parent Support and Supported Living Payment.

Health

$11.2 billion of funding to District Health Boards, which contributed to a range of hospital- and community-based services, including almost 162,000 elective surgeries and 92% of eight-month-olds being immunised.

Education

$12.3 billion helped to fund over 200,000 enrolments in early childhood education, over 750,000 school students and 350,000 tertiary students.

Rebuilding Canterbury

• $12.4 billion total cost so far, $9.1 billion of that was recorded in 2011, $1.9 billion in 2012, $0.5 billion last year and $0.9 billion this year
• Nearly 63% are the costs of EQC, with 424,651 building claims, with $1.9 billion paid this year
• 7,687 red zone properties with only 6% yet to be settled

A Snapshot of the 2014 Financial Statements of the Government (Part 2)#

Gap between spending and income narrows#

Operating balance before gains and losses (OBEGAL)

$2.9 billion deficit

• Third year of reduced deficit
• Largest deficit was $18.4 billion in 2011
• Economic growth and continued spending are the key drivers

Core Crown net debt

$59.9 billion core Crown net debt

• $4.1 billion increase from last year due to continuing cash deficits
• 0.1% decrease as a percentage of GDP

What does the Government owe?#

• $103.4 billion
  of borrowings, $7.7 billion issued with $2.2 billion used to repurchase debt and $0.9 billion to reduce Treasury bills outstanding. Overall net cash from borrowing was $4.6 billion
• $35.8 billion
  of insurance liabilities, $1.8 billion less than last year, as earthquake claims continue to be settled

Liabilities trend

Total Crown liabilities increased by $0.9 billion as the Government borrowed money to meet the cash deficit. This was offset somewhat by lower insurance and retirement plan liabilities.

In addition to the Crown liabilities, the Crown is exposed to a number of contingent liabilities and implicit risks. These contingent liabilities may, if crystalised, increase the Crown's liabilities.

What does the Government own?#

Total Crown assets

• $132.4 billion
  of social assets (eg, schools, hospitals and social housing) have increased by $8.1 billion from last year
• $74.6 billion
  of financial assets with a $2.3 billion increase from last year
• $49.0 billion
  of commercial assets (mainly SOEs) with a $1.3 billion increase from last year

Ministerial Statement#

The New Zealand economy continues to grow, with real GDP increasing by 3.9 per cent in the year ended 30 June 2014 - the highest growth rate for the last decade. The Government's programme to build a more competitive and productive economy remains on track with the Crown’s finances continuing to strengthen in the year under review.

The Government's operating deficit excluding gains and losses (OBEGAL) reduced for the third consecutive year to $2.9 billion, equal to 1.3 per cent of GDP in the year to 30 June 2014. The Government remains focussed on returning to surplus so we can start repaying debt.

That compares with deficits of $4.4 billion (2.1 per cent of GDP) in the June 2013 year, $9.2 billion (4.4 per cent of GDP) in the June 2012 year and $18.4 billion (9.2 per cent of GDP) in the June 2011 year.

In the year to June 2014, core Crown tax revenue continued to recover, reaching $61.5 billion, as forecast in the Treasury's Pre-election Economic and Fiscal Update and up $2.8 billion from the previous year.

The Government has continued to restrain growth in spending while focussing on getting better results from existing spending, particularly for the most vulnerable New Zealanders. Overall, while core Crown expenses grew by $1.2 billion (1.7 per cent) to $71.5 billion in the year to June 2014, the increase in spending was lower than the pace of growth in the nominal economy, resulting in expenses declining to 31.2 per cent of GDP (33.1 per cent of GDP 30 June 2013).

Returns from the Crown's financial institutions such as the New Zealand Superannuation Fund (NZSF) contributed to net gains of $5.4 billion, leading to an operating surplus of $2.8 billion (1.2 per cent of GDP). While these gains remain healthy (NZSF return was 19.4 per cent for the year ended 30 June 2014) they did not repeat the previous year's strong gains of $11.3 billion.

The size of the Crown's balance sheet grew over the year, with assets reaching $256.1 billion at 30 June, up $11.7 billion. The Crown's investment portfolios and value of property, plant and equipment all increased. The Government will work hard to improve the processes for investment in property, plant and equipment, investing only where it is required and where there are demonstrated benefits. The $1 billion increase in liabilities was more muted, with increases in borrowings and the ACC outstanding claims liability offset by a fall in a number of the Canterbury earthquake liabilities as claims and obligations are settled.

The Government's successful share offer programme was completed during the financial year taking the Future Investment Fund to $4.7 billion, which is earmarked for new capital spending in priority areas including health, education, and the Canterbury rebuild. $2.3 billion of those funds were received in the year under review, while the second instalment of the Meridian Energy share offer ($627.5 million) is due in May 2015.

Those proceeds, along with the stronger operating result, drove a fall in the residual cash deficit from $5.7 billion to $4.1 billion in the June 2014 year. Continuing cash deficits mean the core Crown's net debt continued to widen, reaching $59.9 billion (26.2 per cent of GDP) at 30 June.

The Government's fiscal strategy is to run growing operating surpluses in the years ahead so we can start repaying debt.

Hon Bill English
Minister of Finance

30 September 2014

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 2014

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 2014 and its operations for the year ended on that date.

Hon Bill English
Minister of Finance

30 September 2014

Commentary#

Fiscal Overview#

Fiscal Overview

 

Introduction#

These financial statements[1] contain the audited results for the financial year ended 30 June 2014. The results are compared against previous years and against two sets of forecasts[2]for the 2013/14 year:

• Budget 13 refers to the 2013 Budget Economic and Fiscal Update, and
• Budget 14 refers to the 2014 Budget Economic and Fiscal Update.

This commentary should be read in conjunction with the financial statements on pages 28 to 167.

At a Glance#

Headlines: #

• Tax revenue up $2.8 billion from a year earlier, although lower than forecast (page 10).
• Core Crown expenses were $1.2 billion higher than the year before, also lower than forecast (page 12).
• OBEGAL deficit significantly reduced from 2013 to just over $2.9 billion (page 14).
• The Government share offer programme raised proceeds of $2.3 billion in the fiscal year (page 20).
• Core Crown net debt increased by $4.1 billion (to 26.2% of GDP) to fund residual cash deficits (page 16).
• Crown assets increased by $11.7 billion to reach $256.1 billion (page 19).
• Net worth attributable to the Crown continued to strengthen (page 18).

Summary#

Overall the Crown's operating performance continued to improve...#

The operating balance before gains and losses (OBEGAL) deficit decreased from $4.4 billion, to $2.9 billion.

The continued narrowing of the OBEGAL deficit was a result of further growth in the nominal economy (leading to a higher tax take).

Excluding the impact of the Canterbury rebuild, the adjusted OBEGAL deficit was $2.6 billion this year; which was around half the comparative figure for the previous year.

Figure 1 - OBEGAL (excluding minority interests)

Source:  The Treasury

... as the New Zealand economy continued to grow leading to an increase in the tax take... #

Real gross domestic product expanded at an annual average rate of 3.5% in the June 2014 year, with strong growth in construction, primary industries and some services. In current dollar or nominal terms, the value of output increased 7.8%, largely as a result of a 15.8% increase in the goods terms of trade. Weekly paid hours were up 3.2% from the previous year and average hourly wages were up 2.6%, giving an increase in total weekly gross earnings of 5.8%.

The increase in economic activity and growth in employment led to core Crown tax revenue being $2.8 billion higher than a year earlier, with all major tax types improving to reach $61.5 billion. As a share of the economy, core Crown tax revenue was 26.8% of GDP - that compares, for example, with a peak in the past decade of 31.2% of GDP in the year to June 2006.

Figure 2 - Core Crown revenue and expenses

Source:  The Treasury

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

In nominal terms, core Crown expenses increased $1.2 billion (1.7%) to $71.5 billion for the year to 30 June. As a share of the nominal economy, core Crown expenses were equal in value to 31.2% of GDP (33.1% of GDP in 2013).

The largest drivers of growth in nominal core Crown expenditure were New Zealand Superannuation expenditure as a result of indexation and an increase in the number of recipients, along with spending decisions in Budget 2013, primarily relating to health and education.

...and investment gains led to an operating balance surplus...  #

The total Crown operating balance, inclusive of gains and losses, was a surplus of $2.8 billion, as net gains of $5.4 billion more than offset the OBEGAL deficit.

Figure 3 - Operating balance (excluding minority interests)

Source:  The Treasury

...strengthening the Crown's net worth#

With an operating surplus, the Crown's net worth increased for the second consecutive year. Total assets increased by $11.7 billion, while liabilities increased by $0.9 billion.

The higher asset values were largely the result of revaluations to Crown assets contributing to the increase in value of property, plant and equipment ($6.5 billion) and strong equity markets which contributed to an uplift in financial assets ($4.4 billion).

The increase in liabilities was due mainly to an increase in borrowings, partly offset by lower earthquake liabilities as claims were settled.

Figure 4 - Net worth attributable to the Crown

Source:  The Treasury

...however cash deficits continued, causing net debt to rise#

With the Crown recording an OBEGAL deficit, and maintaining capital spending, the resulting residual cash deficit meant that net debt continued to rise in nominal terms. Net debt reached $59.9 billion (26.2% of GDP) at 30 June 2014, up from $55.8 billion (26.3% of GDP) a year earlier. The rate of growth, however, has slowed in recent years as cash deficits have become smaller. At $4.1 billion, the residual cash deficit was $1.6 billion less than the year before as tax receipts grew faster than operating payments. In addition, this year included proceeds of $2.3 billion from the Government share offer programme ($0.7 billion higher than last year).

Figure 5 - Net debt

Source:  The Treasury

Revenue#

Total Crown revenue was $89.4 billion, an increase of $2.7 billion from a year earlier mostly due to higher core Crown tax revenue ($2.8 billion higher).

Core Crown Tax Revenue #

All major tax types contributed to the nominal increase in tax over the year, with three tax types making up most of the increase (Table 4):

• Source deductions: $1.4 billion (6%) higher than the previous year owing to a stronger labour market. More people were employed, and salaries and wages were higher, which added an estimated $0.8 billion and $0.6 billion respectively to source deductions, compared with the June 2013 year.
• GST: $0.8 billion stronger than 2013 largely owing to growth in domestic consumption.
• Corporate tax: $0.3 billion higher than the year before, mainly owing to growth in current-year taxable profits of companies, somewhat offset by a decline in 2013 terminal tax.

Source: The Treasury

Although core Crown tax increased by $2.8 billion in nominal terms, it declined by 0.8% of GDP (figure 6). The two main reasons for this decline were:

• Some of the principal drivers of tax revenue, (eg, compensation of employees and private consumption), grew at a slower rate than overall GDP, causing the related tax-to-GDP ratio to decrease by approximately 0.3%, and
• A decline in terminal tax in 2014 reduced the tax-to-GDP ratio by approximately 0.4%.
• Compared to forecasts in Budget 2014, core Crown tax revenue was $0.4 billion less than expected, with the largest difference being in GST. GST was $0.3 billion lower than forecast due mainly to weakness in nominal domestic consumption relative to forecast.

Figure 6 - Core Crown tax revenue

Source:  The Treasury

Figure 7 - Core Crown tax revenue variance comparison

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, at $5.8 billion was $0.3 billion higher than the previous year, while the SOE and CE sectors (including eliminations) recorded revenue of $22.1 billion, $0.4 billion lower than a year earlier (Table 3 and Figure 8).

Most of the reduction in revenue ($0.4 billion) was attributable to a fall in SOE electricity company revenue; which was more than offset by an equivalent fall in their expenses.

Figure 8 - Other revenue

Source:  The Treasury

Expenses#

Total Crown expenses were $92.2 billion in the latest year, $1.2 billion more than the year earlier. The increase reflected higher core Crown expenses of $1.2 billion.

Core Crown Expenses#

Despite the nominal expenditure increase of $1.2 billion, core Crown expenses fell as a share of the economy to 31.2% of GDP (Figure 9) - the lowest ratio level since 2008.

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 the following key areas contributing to the increase:

• New Zealand Superannuation expenditure increased $0.7 billion, mostly a result of indexation and an increase in recipients of New Zealand Superannuation, from around 612,000 to 640,000.
• Health and Ministry of Education expenses were higher ($0.4 billion and $0.2 billion respectively) than the previous year as a result of allocations in Budget 2013.

Source: The Treasury

When compared to Budget 2014, core Crown expenses were $0.1 billion lower than expected.

The lower than forecast result was largely due to lower impairment expenses mainly relating to tax, KiwiSaver and Working for Families' debt. The impairment was $1.3 billion, which was $0.2 billion lower than forecast ($1.5 billion).

Figure 10 - Core Crown expenses variance comparison

Source:  The Treasury

Other Expenses#

While the SOE and CE sectors recorded expenses close to forecast, there were some overs and unders within this result.

• Insurance expenses increased $0.5 billion, reflecting additional claims expenses for ACC and Southern Response.
• DHB expenses were $0.3 billion higher than the previous year as a result of allocations to Health in Budget 2013.

These higher expenses were partly offset by $0.8 billion lower SOE electricity company expenses.

Operating Balance#

^* Other gains and losses includes the net surplus from associates and joint ventures and operating balances from minority interests

OBEGAL

The OBEGAL deficit narrowed significantly in the latest June year (Table 7). The improved result was mainly owing to higher tax revenue at the total Crown level (as discussed earlier). However, when compared to Budget 2014, the OBEGAL deficit was $0.5 billion bigger than expected largely owing to lower tax revenue than forecast.

Figure 11 - Components of OBEGAL by segment

Source:  The Treasury

Operating Balance

Adding the Crown's net gains of $5.7 billion to the OBEGAL deficit, the operating balance was a surplus of $2.8 billion ($4.1 billion lower than 2013).

While the Crown recorded net gains in the current year it was less than the previous year, when discount rates increased and equity markets were stronger, resulting in gains of $11.3 billion in that year. These large movements highlight the volatile nature of the operating balance (Figure 12).

Figure 12 - Operating balance

Source:  The Treasury

The NZS Fund recorded $3.7 billion of the total Crown net gains. Their investment portfolio earned strong returns as global equity markets rose. Overall, the Fund returned 19.36% for the year to June (25.83% last year) and now has pre-tax assets of approximately $26.5 billion ($23 billion in 2013).

Changes in the inflation rate and experience adjustments resulted in actuarial gains on the long-term liabilities for ACC insurance and Government Superannuation Fund (GSF) pensions. A decrease in assumed inflation rates resulted in gains of $1.2 billion ($0.8 billion for ACC and $0.4 billion for GSF).

Compared to Budget 2014, the total Crown operating balance was close to forecast.

Debt#

Net Debt#

Net debt increased by $4.1 billion this June year, as the Crown continued to run a residual cash deficit, but didn't increase as fast as the nominal economy. As a share of the economy, net debt was 26.2% of GDP (versus 26.3% of GDP a year earlier).

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

Figure 13 - Net debt

Source:  The Treasury

Residual Cash#

The residual cash deficit was $4.1 billion, $1.6 billion less than last year. Table 10 summarises the contributors to the reduction in the residual cash deficit over the year.

• Tax receipts were $3.5 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 $2.3 billion from the remaining companies in the Government's share offer programme (compared with $1.6 billion received for Mighty River Power last year). Refer to the box on page 20 for further discussion about the share programme.
• Operating and interest payments were $2.2 billion higher than last year, in line with the increase to core Crown expenses and timing of cash payments being made.

Source: The Treasury

In addition to the operating cash deficits recorded during the year, the core Crown spent the following on capital:

• Net purchases of physical assets of $1.9 billion, including $0.5 billion for the Ministry of Education, $0.4 billion for Defence and $0.3 billion for the Canterbury Earthquake Recovery Authority.
• Net investments of $0.9 billion, the largest of which is the Crown's investment in the New Zealand Transport Agency of $0.8 billion.
• Net increase in advances of $0.7 billion, which includes $0.5 billion for student loans.

This capital expenditure was partly offset by the Government share offer proceeds of $2.3 billion.

Compared with Budget 2014, the residual cash deficit was $0.2 billion higher mostly due to tax receipts coming in lower than forecast.

Gross Debt#

Gross debt, which reflects the borrowings of the core Crown, was $4.0 billion higher than a year earlier at $82.0 billion (Figure 14). As a percentage of a growing nominal economy, gross debt eased to 35.8% of GDP.

Figure 14 - Gross debt

Source:  The Treasury

The increase in nominal gross debt was predominantly the result of an increase in the issuance of government bonds more than offsetting the Crown's bond and bill repurchasing programme.

Crown's Borrowing Programme#

The debt programme (Table 11) during 2013/14 returned net cash proceeds from the market of $4.6 billion. While the Crown continued to undertake a large bond programme ($8 billion face value), some proceeds were used to repurchase debt ($2.2 billion) and reduce Treasury Bills outstanding ($0.9 billion); both activities were signalled in Budget 2014.

Net Worth Attributable to the Crown#

Total net worth was $10.8 billion higher than last year. However, $3.3 billion of this increase is reflected as net worth attributable to minority interests following the Government's share offer programme. Net worth attributable to the Crown was $75.6 billion as at 30 June 2014, an increase of $7.5 billion from a year earlier, continuing the upward trend from last year. As a share of the economy net worth attributable to the Crown was 33.0% of GDP, which was 1.0% higher than a year earlier.

Figure 15 - Net worth attributable to the Crown

Source:  The Treasury

The main reasons for the improvement in the Crown's net worth were the revaluation uplifts of the Crown's property, plant and equipment (details on the next page) and the operating balance surplus. The operating balance surplus was driven by gains on financial assets and reductions in long-term liabilities (as discussed on page 14).

Compared to Budget 2014, the net worth attributable to the Crown was $5.5 billion stronger than expected due to revaluation uplifts of the Crown's property, plant and equipment (that were not forecast).

The composition of the balance sheet remains largely similar to previous years (Table 13), except for the increase in minority interests, following the Government share offer programme over the last two years. For further information on this programme, refer to the box on page 20, and note 35 in the financial statements (pages 156 to 158).

Table 13 -Composition of the statement of financial position

Assets#

Total Crown assets were valued at $256.1 billion at 30 June 2014 (Figure 15), an $11.7 billion increase over the year with the growth largely in social assets ($8.1 billion), as well as financial assets ($2.3 billion).

Revaluations of property, plant and equipment had a significant impact on values of social assets, with the largest uplifts related to:

• The state housing portfolio ($2.1 billion of which $1.8 billion relates to land), reflecting the strength of the property market (primarily in Auckland).
• The value of state highways increased by $1.6 billion, mainly due to revaluation changes for the corridor land and increase in held properties. The corridor land was revalued in four regions and Auckland accounted for the largest portion of the increase. The held properties have increased since 2013 due to acquisition of properties in advance of future road developments in Auckland and Wellington.

Figure 16 - Total Crown assets

Source:  The Treasury

The increase in financial assetswas driven by strong returns in equity markets, which increased fair values of investment assets. Refer to page 14 for discussion about the investment gains this year (largely from the NZS Fund).

Liabilities#

Total Crown liabilities were $175.3 billion at 30 June 2014, an increase of $0.9 billion (0.5%) from the previous year (Figure 17).

Figure 17 - Total Crown liabilities

Source:  The Treasury

Total Crown borrowings increased by $3.3 billion to reach $103.4 billion. Core Crown borrowings made up a significant portion of this ($89.1 billion) and is generally the key driver for growth in total Crown borrowing (refer to page 17 for a discussion of the Crown's gross debt and the borrowing programme). Outside of the core Crown, the most significant borrowings were the deposits held by Kiwibank ($12.8 billion). These increased this year by $0.6 billion, underpinning an increase in its lending.

Other liabilities were $71.9 billion at 30 June 2014, compared to $74.3 billion at the end of last year. The decrease of $2.4 billion reflected the following items:

• ACC's insurance liability increased this year by $0.5 billion from $29.4 billion to $29.9 billion. The increase is due to an expected increase from new claims entering the ACC scheme during the year, the impact of legislative and policy changes, and partly offset by changes in inflation rates (as discussed on page 14).
• Earthquake-related insurance liabilities of EQC and Southern Response were $2.1 billion and $0.3 billion lower respectively as claims were paid out. EQC's claims liability movement includes an actuarial reduction reflecting greater certainty about the expected cost of claims still to be paid.
• Estimated retirement plan obligations for former state servants' Government Superannuation Fund were $1.0 billion lower than the year earlier largely owing to a decrease in the expected future inflation rate and favourable experience adjustments (as discussed on page 14). In addition, the assets (which are held by the Fund to offset the future obligations) increased this year with global equity markets providing 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 2014

I have audited the financial statements of the Government of New Zealand (the Government) for the year ended 30 June 2014 using my staff, resources and appointed auditors and their staff.

The financial statements of the Government on pages 28 to 167 comprise:

• the annual financial statements that include the statement of financial position as at 30 June 2014, 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 28 to 167:

• comply with generally accepted accounting practice in New Zealand; and
• fairly reflect the Government's:
• financial position as at 30 June 2014;
• financial performance and cash flows for the year ended on that date; and
• borrowings as at 30 June 2014, 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 2014. 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;
• 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#

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Statement of Financial Performance for the year ended 30 June 2014#

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Statement of Financial Performance for the year ended 30 June 2014

Forecast			Note	Actual
Budget 2013 $m	Budget 2014 $m			30 June 2014 $m	30 June 2013 $m
		Revenue
61,773	61,380	Taxation revenue	2	60,879	58,134
5,296	5,383	Other sovereign revenue	2	5,450	5,172
67,069	66,763	Total sovereign revenue		66,329	63,306
17,080	16,432	Sales of goods and services	3	16,472	16,713
3,588	3,160	Interest revenue and dividends	4	3,175	2,939
3,867	3,622	Other revenue	5	3,420	3,697
24,535	23,214	Total revenue earned through operations		23,067	23,349
91,604	89,977	Total revenue (excluding gains)		89,396	86,655
		Expenses
23,485	23,394	Transfer payments and subsidies	6	23,360	22,708
20,172	20,488	Personnel expenses	7	20,484	19,935
4,640	4,644	Depreciation and amortisation	8	4,872	4,812
37,608	36,527	Other operating expenses	9	35,553	36,163
4,516	4,461	Interest expenses	10	4,400	4,358
3,215	3,283	Insurance expenses	11	3,501	3,031
461	77	Forecast new operating spending		-	-
(600)	(660)	Top-down expense adjustment		-	-
93,497	92,214	Total expenses (excluding losses)		92,170	91,007
(140)	(210)	Minority interests share of operating balance before gains and losses		(159)	(62)
(2,033)	(2,447)	Operating balance before gains and losses (excluding minority interests)		(2,933)	(4,414)
1,748	3,604	Net gains/(losses) on financial instruments	12	4,820	7,270
443	1,590	Net gains/(losses) on non-financial instruments	13	540	3,706
2,191	5,194	Total gains/(losses)		5,360	10,976
200	259	Net surplus from associates and joint ventures		360	395
-	(33)	Minority interests share of net gains/losses		21	(32)
358	2,973	Operating balance (excluding minority interests)		2,808	6,925
		Operating balance allocated between:
358	2,973	Operating balance (excluding minority interests)		2,808	6,925
140	243	Minority interests share of operating balance	28	138	94
498	3,216	Operating balance (including minority interests)		2,946	7,019

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 2014#

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Total Crown expenses by functional classification

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Total Crown expenses
27,510	27,373	Social security and welfare	27,266	26,268
283	300	GSF pension expenses	295	311
14,433	14,382	Health	14,344	13,856
13,180	13,180	Education	13,064	13,366
4,201	4,351	Core government services	4,104	3,935
3,804	3,811	Law and order	3,730	3,670
1,893	1,818	Defence	1,776	1,766
9,036	9,212	Transport and communications	9,137	9,052
8,098	7,538	Economic and industrial services	7,767	8,375
2,532	2,360	Heritage, culture and recreation	2,372	2,351
1,892	1,759	Primary services	1,703	1,579
1,057	1,109	Housing and community development	1,095	989
473	536	Environmental Protection	538	528
728	607	Other	579	603
4,516	4,461	Finance costs	4,400	4,358
461	77	Forecast new operating spending	-	-
(600)	(660)	Top-down expense adjustment	-	-
93,497	92,214	Total Crown expenses (excluding losses)	92,170	91,007

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.

Core Crown expenses by functional classification

Forecast 30 June 2014			Actual
2013 $m	2014 $m		30 June 2014 $m	30 June 2013 $m
		Core Crown expenses
23,595	23,329	Social security and welfare	23,281	22,741
274	282	GSF pension expenses	282	303
14,950	14,889	Health	14,898	14,498
12,389	12,411	Education	12,300	12,504
4,637	4,792	Core government services	4,502	4,269
3,561	3,575	Law and order	3,501	3,456
1,933	1,867	Defence	1,811	1,804
2,162	2,241	Transport and communications	2,237	2,255
2,152	2,100	Economic and industrial services	2,058	1,978
854	838	Heritage, culture and recreation	842	804
818	716	Primary services	676	659
335	377	Housing and community development	347	283
496	534	Environmental Protection	533	530
728	607	Other	579	603
3,622	3,641	Finance costs	3,620	3,619
461	77	Forecast new operating spending	-	-
(600)	(660)	Top-down expense adjustment	-	-
72,367	71,616	Total core Crown expenses (excluding losses)	71,467	70,306

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

Statement of Comprehensive Income for the year ended 30 June 2014#

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Statement of Comprehensive Income for the year ended 30 June 2014

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
498	3,216	Operating balance (including minority interest)	2,946	7,019
		Other comprehensive income
-	(351)	Revaluation of physical assets	5,395	1,367
(21)	(102)	Net change in hedging instruments entered into for cash flow hedges	(34)	280
39	(7)	Foreign currency translation differences for foreign operations	(51)	-
8	(13)	Valuation gains/(losses) on investments available for sale taken  to reserves	(36)	36
(38)	3	Other movements	1	7
(12)	(470)	Total other comprehensive income	5,275	1,690
486	2,746	Total comprehensive income	8,221	8,709
		Attributable to:
140	243	- minority interests	147	153
346	2,503	- the Crown	8,074	8,556
486	2,746	Total comprehensive income	8,221	8,709

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

Statement of Cash Flows for the year ended 30 June 2014#

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Statement of Cash Flows for the year ended 30 June 2014

Forecast			Note	Actual
Budget 2013 $m	Budget 2014 $m			30 June 2014 $m	30 June 2013 $m
		Cash Flows From Operations
		Cash was provided from
60,695	60,442	Taxation receipts	2	59,853	56,413
4,747	4,969	Other sovereign receipts	2	4,974	4,806
17,175	16,460	Sales of goods and services		16,608	16,651
3,175	2,888	Interest and dividend receipts		2,945	2,694
5,443	6,168	Other operating receipts		5,737	5,933
91,235	90,927	Total cash provided from operations		90,117	86,497
		Cash was disbursed to
23,877	23,800	Transfer payments and subsidies		23,447	22,780
62,622	60,717	Personnel and operating payments		59,891	58,450
4,629	4,412	Interest payments		4,312	4,369
461	77	Forecast new operating spending		-	-
(600)	(660)	Top-down expense adjustment		-	-
90,989	88,346	Total cash disbursed to operations		87,650	85,599
246	2,581	Net cash flows from operations		2,467	898
		Cash Flows From Investing Activities
		Cash was provided from
553	591	Sale of physical assets		651	525
73,154	72,893	Sale of shares and other securities		77,916	75,722
-	-	Sale of intangible assets		-	7
1,279	1,574	Repayment of advances		1,953	1,603
47	132	Sale of investments in associates		140	287
75,033	75,190	Total cash provided from investing activities		80,660	78,144
		Cash was disbursed to
7,787	7,378	Purchase of physical assets		6,154	5,694
78,375	78,229	Purchase of shares and other securities		83,641	69,380
516	568	Purchase of intangible assets		658	588
3,308	3,740	Advances made		3,482	3,008
(18)	98	Acquisition of investments in associates		67	7
503	13	Forecast for new capital spending		-	-
(50)	(395)	Top-down capital adjustment		-	-
90,421	89,631	Total cash disbursed to investing activities		94,002	78,677
(15,388)	(14,441)	Net cash flows from investing activities		(13,342)	(533)
(15,142)	(11,860)	Net cash flows from operating and investing activities		(10,875)	365

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

Statement of Cash Flows for the year ended 30 June 2014 (continued)

Forecast			Note	Actual
Budget 2013 $m	Budget 2014 $m			30 June 2014 $m	30 June 2013 $m
(15,142)	(11,860)	Net cash flows from operating and investing activities		(10,875)	365
		Cash Flows From Financing Activities
		Cash was provided from
141	382	Issue of circulating currency		274	234
1,500	2,216	Government share offer programme	35	2,186	1,547
10,245	7,769	Issue of Government bonds		7,716	15,458
51	621	Issue of foreign currency borrowings		1,524	447
6,010	6,536	Issue of other New Zealand dollar borrowings		6,315	10,278
17,947	17,524	Total cash provided from financing activities		18,015	27,964
		Cash was disbursed to
-	2,046	Repayment of Government bonds		2,196	9,982
570	673	Repayment of foreign currency borrowings		82	3,373
3,363	6,285	Repayment of other New Zealand dollar borrowings		7,147	10,912
120	246	Dividends paid to minority interests		166	20
4,053	9,250	Total cash disbursed to financing activities		9,591	24,287
13,894	8,274	Net cash flows from financing activities		8,424	3,677
(1,248)	(3,586)	Net movement in cash		(2,451)	4,042
16,492	14,924	Opening cash balance		14,924	10,686
-	(230)	Foreign-exchange gains/(losses) on opening cash		(585)	196
15,244	11,108	Closing cash balance		11,888	14,924

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

Statement of Cash Flows for the year ended 30 June 2014 (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Reconciliation Between the Net Cash Flows from Operations and the Operating Balance
246	2,581	Net Cash Flows from Operations	2,467	898
		Items included in the operating balance but not in net cash flows from operations
		Gains/(losses)
1,748	3,604	Net gains/(losses) on financial instruments	4,820	7,270
443	1,590	Net gains/(losses) on non-financial instruments	540	3,706
2,191	5,194	Total gains/(losses)	5,360	10,976
		Other Non-cash Items in Operating Balance
(4,640)	(4,644)	Depreciation and amortisation	(4,872)	(4,812)
(723)	(843)	Write-down on initial recognition of financial assets	(789)	(684)
23	(18)	Impairment of financial assets (excl receivables)	(47)	(497)
461	458	Non-cash movement in defined benefit retirement plan liabilities	442	385
2,517	1,730	Non-cash movement in insurance liabilities	1,409	1,106
201	14	Other	223	299
(2,161)	(3,303)	Total other non-cash items in operating balance	(3,634)	(4,203)
		Movements in Working Capital
(1,119)	(1,346)	Increase/(decrease) in receivables	(1,553)	(1,302)
526	222	Increase/(decrease) in accrued interest	143	257
73	18	Increase/(decrease) in inventories	(41)	(94)
(29)	(24)	Increase/(decrease) in prepayments	39	32
26	(87)	Decrease/(increase) in deferred revenue	(248)	(2)
605	(282)	Decrease/(increase) in payables/provisions	275	363
82	(1,499)	Total movements in working capital	(1,385)	(746)
358	2,973	Operating balance	2,808	6,925

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 2014#

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Statement of Changes in Net Worth for the year ended 30 June 2014

Total Net Worth			Note	Actual
Budget 2013 $m	Budget 2014 $m			Taxpayer funds $m	Reserves $m	Minority interest $m	Total net worth $m
59,780	59,780	Net worth at 30 June 2012		3,520	55,828	432	59,780
1,918	7,019	Operating balance		6,925	-	94	7,019
(29)	1,367	Net revaluations		-	1,335	32	1,367
55	260	Transfers to/(from) reserves		250	(17)	27	260
(4)	(10)	(Gains)/losses transferred to the statement of financial performance		-	(10)	-	(10)
13	73	Other movements		-	73	-	73
1,953	8,709	Total comprehensive income		7,175	1,381	153	8,709
175	167	Gain on Government share offers		167	-		167
1,325	1,371	Increase in minority interest from Government share offers		-	-	1,371	1,371
37	(16)	Transactions with minority interests		-	-	(16)	(16)
63,270	70,011	Net worth at 30 June 2013		10,862	57,209	1,940	70,011
498	3,216	Operating Balance		2,808	-	138	2,946
-	(351)	Net revaluations		-	5,386	9	5,395
(59)	(119)	Transfers to/(from) reserves		229	(229)	(2)	(2)
-	(3)	(Gains)/losses transferred to the statement of financial performance		-	(43)	-	(43)
47	3	Other movements		(22)	(55)	2	(75)
486	2,746	Total comprehensive income		3,015	5,059	147	8,221
175	(542)	Gain/(loss) on Government share offers		(577)	-	-	(577)
1,325	3,300	Increase in minority interest from Government share offers		-	-	3,308	3,308
(74)	(48)	Transactions with minority interests		-	-	(184)	(184)
65,182	75,467	Net worth at 30 June 2014	28	13,300	62,268	5,211	80,779

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

Statement of Financial Position as at 30 June 2014#

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Statement of Financial Position as at 30 June 2014

Forecast			Note	Actual
Budget 2013 $m	Budget 2014 $m			30 June 2014 $m	30 June 2013 $m
		Assets
15,244	11,108	Cash and cash equivalents		11,888	14,924
18,070	17,873	Receivables	14	17,480	19,883
44,713	47,870	Marketable securities, deposits and derivatives in gain	15	48,457	44,000
18,176	19,672	Share investments	16	20,596	17,359
25,312	24,611	Advances	17	24,756	22,613
1,321	1,158	Inventory	18	1,099	1,140
2,061	2,267	Other assets	19	2,510	2,295
112,627	112,264	Property, plant & equipment	20	116,306	109,833
9,642	10,021	Equity accounted investments	21	10,071	9,593
2,837	2,841	Intangible assets and goodwill	22	2,920	2,776
505	13	Forecast for new capital spending		-	-
(330)	(395)	Top-down capital adjustment		-	-
250,178	249,303	Total assets		256,083	244,416
		Liabilities
4,897	5,072	Issued currency		4,964	4,691
12,360	11,952	Payables	23	11,294	11,160
1,553	1,802	Deferred revenue		1,962	1,714
112,201	103,058	Borrowings	24	103,419	100,087
35,902	34,900	Insurance liabilities	25	35,825	37,712
11,766	10,732	Retirement plan liabilities	26	10,885	11,903
6,317	6,320	Provisions	27	6,955	7,138
184,996	173,836	Total liabilities		175,304	174,405
65,182	75,467	Total assets less total liabilities		80,779	70,011
		Net Worth
6,230	13,344	Taxpayer funds		13,300	10,862
55,831	56,648	Property, plant and equipment revaluation reserve		62,225	57,068
(64)	40	Other reserves		43	141
61,997	70,032	Total net worth attributable to the Crown		75,568	68,071
3,185	5,435	Net worth attributable to minority interests		5,211	1,940
65,182	75,467	Total net worth	28	80,779	70,011

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

Statement of Segments #

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Current Year Actual vs Estimated Actuals#

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Current Year Actual vs Estimated Actuals

	Core Crown		Crown entities		State-owned enterprises		Inter-segment eliminations		Total Crown
	Actual 2014 $m	Forecast Budget 2014 $m	Actual 2014 $m	Forecast Budget 2014 $m	Actual 2014 $m	Forecast Budget 2014 $m	Actual 2014 $m	Forecast Budget 2014 $m	Actual 2014 $m	Forecast Budget 2014 $m
Revenue
Taxation revenue	61,474	61,896	-	-	-	-	(595)	(516)	60,879	61,380
Other sovereign revenue	1,201	1,153	5,409	5,319	-	-	(1,160)	(1,089)	5,450	5,383
Revenue from core Crown funding	-	-	24,782	24,812	187	207	(24,969)	(25,019)	-	-
Sales of goods and services	1,488	1,513	1,868	1,904	13,650	13,596	(534)	(581)	16,472	16,432
Interest revenue and dividends	2,295	2,304	1,249	1,156	879	885	(1,248)	(1,185)	3,175	3,160
Other revenue	839	909	2,090	2,284	772	964	(281)	(535)	3,420	3,622
Total Revenue (excluding gains)	67,297	67,775	35,398	35,475	15,488	15,652	(28,787)	(28,925)	89,396	89,977
Expenses
Transfer payments and subsidies	23,360	23,394	-	-	-	-	-	-	23,360	23,394
Personnel expenses	6,232	6,253	11,315	11,302	2,956	2,940	(19)	(7)	20,484	20,488
Other operating expenses	38,255	38,911	22,422	22,510	10,791	10,715	(27,542)	(27,682)	43,926	44,454
Interest expenses	3,620	3,641	219	224	1,161	1,173	(600)	(577)	4,400	4,461
Forecast new operating spending and top down adjustment	-	(583)	-	-	-	-	-	-	-	(583)
Total Expenses (excluding losses)	71,467	71,616	33,956	34,036	14,908	14,828	(28,161)	(28,266)	92,170	92,214
Minority interest share of operating balance before gains/losses	-	-	18	16	(173)	(226)	(4)	-	(159)	(210)
Operating Balance before gains and losses (excluding minority interests)	(4,170)	(3,841)	1,460	1,455	407	598	(630)	(659)	(2,933)	(2,447)
Gains/(losses) and other items	4,373	3,950	1,414	1,538	21	56	(67)	(124)	5,741	5,420
Operating Balance	203	109	2,874	2,993	428	654	(697)	(783)	2,808	2,973
Assets
Financial assets	80,083	78,270	41,844	40,827	21,151	21,541	(19,901)	(19,504)	123,177	121,134
Property, plant and equipment	30,963	29,971	56,802	53,043	28,541	29,250	-	-	116,306	112,264
Investments in associates, CEs and SOEs	32,543	32,764	8,627	8,479	192	348	(31,291)	(31,570)	10,071	10,021
Other assets	2,816	2,833	1,149	1,100	2,598	2,371	(34)	(38)	6,529	6,266
Forecast adjustments	-	(382)	-	-	-	-	-	-	-	(382)
Total Assets	146,405	143,456	108,422	103,449	52,482	53,510	(51,226)	(51,112)	256,083	249,303
Liabilities
Borrowings	89,090	88,438	5,155	5,107	26,185	26,916	(17,011)	(17,403)	103,419	103,058
Other liabilities	28,442	27,585	43,836	42,651	7,245	7,332	(7,638)	(6,790)	71,885	70,778
Total Liabilities	117,532	116,023	48,991	47,758	33,430	34,248	(24,649)	(24,193)	175,304	173,836
Net Worth	28,873	27,433	59,431	55,691	19,052	19,262	(26,577)	(26,919)	80,779	75,467
Cost of Acquisition of Physical Assets	1,664	2,198	2,535	2,880	1,958	2,319	(3)	(19)	6,154	7,378

Current Year Actual vs Prior Year Actual#

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Current Year Actual vs Prior Year Actual

	Core Crown		Crown entities		State-owned enterprises		Inter-segment eliminations		Total Crown
	Actual 2014 $m	Actual 2013 $m	Actual 2014 $m	Actual 2013 $m	Actual 2014 $m	Actual 2013 $m	Actual 2014 $m	Actual 2013 $m	Actual 2014 $m	Actual 2013 $m
Revenue
Taxation revenue	61,474	58,651	-	-	-	-	(595)	(517)	60,879	58,134
Other sovereign revenue	1,201	1,133	5,409	5,295	-	-	(1,160)	(1,256)	5,450	5,172
Revenue from core Crown funding	-	-	24,782	24,096	187	268	(24,969)	(24,364)	-	-
Sales of goods and services	1,488	1,461	1,868	1,856	13,650	14,002	(534)	(606)	16,472	16,713
Interest revenue and dividends	2,295	2,104	1,249	1,270	879	856	(1,248)	(1,291)	3,175	2,939
Other revenue	839	800	2,090	2,547	772	810	(281)	(460)	3,420	3,697
Total Revenue (excluding gains)	67,297	64,149	35,398	35,064	15,488	15,936	(28,787)	(28,494)	89,396	86,655
Expenses
Transfer payments and subsidies	23,360	22,709	-	-	-	-	-	(1)	23,360	22,708
Personnel expenses	6,232	6,037	11,315	10,966	2,956	2,949	(19)	(17)	20,484	19,935
Other operating expenses	38,255	37,940	22,422	21,660	10,791	11,555	(27,542)	(27,149)	43,926	44,006
Interest expenses	3,620	3,620	219	235	1,161	1,248	(600)	(745)	4,400	4,358
Total Expenses (excluding losses)	71,467	70,306	33,956	32,861	14,908	15,752	(28,161)	(27,912)	92,170	91,007
Minority interest share of operating balance before gains/losses	-	-	18	10	(173)	(75)	(4)	3	(159)	(62)
Operating Balance before gains and losses (excluding minority interests)	(4,170)	(6,157)	1,460	2,213	407	109	(630)	(579)	(2,933)	(4,414)
Gains/(losses) and other items	4,373	6,528	1,414	3,664	21	505	(67)	642	5,741	11,339
Operating Balance	203	371	2,874	5,877	428	614	(697)	63	2,808	6,925
Assets
Financial assets	80,083	75,111	41,844	41,297	21,151	20,058	(19,901)	(17,687)	123,177	118,779
Property, plant and equipment	30,963	29,507	56,802	51,823	28,541	28,503	-	-	116,306	109,833
Investments in associates, CEs and SOEs	32,543	32,611	8,627	8,151	192	187	(31,291)	(31,356)	10,071	9,593
Other assets	2,816	2,646	1,149	1,133	2,598	2,463	(34)	(31)	6,529	6,211
Total Assets	146,405	139,875	108,422	102,404	52,482	51,211	(51,226)	(49,074)	256,083	244,416
Liabilities
Borrowings	89,090	84,873	5,155	5,251	26,185	24,839	(17,011)	(14,876)	103,419	100,087
Other liabilities	28,442	29,339	43,836	45,261	7,245	7,226	(7,638)	(7,508)	71,885	74,318
Total Liabilities	117,532	114,212	48,991	50,512	33,430	32,065	(24,649)	(22,384)	175,304	174,405
Net Worth	28,873	25,663	59,431	51,892	19,052	19,146	(26,577)	(26,690)	80,779	70,011
Cost of Acquisition of Physical Assets	1,664	1,112	2,535	2,314	1,958	2,281	(3)	(13)	6,154	5,694

Notes to the Financial Statements#

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Note 1: Summary of Accounting Policies#

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Statement of compliance

These financial statements have been prepared in accordance with the Public Finance Act 1989 and with New Zealand Generally Accepted Accounting Practice (NZ GAAP) as defined in the Financial Reporting Act 2013.

These financial statements have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for public benefit entities.

For the purposes of these financial statements, the government reporting entity has been designated as a public benefit entity (PBE). PBEs are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.

These financial statements were authorised for issue by the Minister of Finance on 30 September 2014.

Reporting entity

The Government reporting entity as defined in section 2(1) of the Public Finance Act 1989 means:

• the Sovereign in right of New Zealand, and
• the legislative, executive, and judicial branches of the Government of New Zealand.

The description “consolidated financial statements for the Government reporting entity” and the description “financial statements of the Government of New Zealand” 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, and prepared on an accrual basis, unless otherwise specified (for example, the statement of cash flows).

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

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.

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 of standards and interpretations

From 1 July 2011 no NZ IFRS or amendments to existing NZ IFRS applicable to PBEs have been issued as a consequence of the decision to move to the new Accounting Standards Framework. The Government has adopted all NZ IFRSs and Interpretations applicable to PBEs 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 Accounting 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 (PBE) and the proposed Public Sector PBE Accounting Standards.

Reporting period

The reporting period for these financial statements is the financial year ended 30 June 2014.

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.

Note 1: Summary of Accounting Policies (continued)#

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Significant Accounting Policies #

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Basis of combination

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

Core Crown entities

• Ministers of the Crown
• Government departments
• Offices of Parliament
• the Reserve Bank of New Zealand
• New Zealand Superannuation Fund

Other entities

• State-owned enterprises
• Crown entities (excluding Tertiary Education Institutions)
• Air New Zealand Limited
• Organisations listed in Schedule 4 and 4A of the Public Finance Act 1989
• Organisations listed in Schedule 5 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 the notes to the Government's financial statements. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

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

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:

Tax events

Revenue type	Revenue recognition point
Source deductions	When an individual earns income that is subject to PAYE
Resident withholding tax (RWT)	When an individual is paid interest or dividends subject to deduction at source
Fringe benefit tax (FBT)	When benefits are provided that give rise to FBT
Provisional tax	When assessed income is earned during the taxation period
Terminal tax	When the assessment is filed
Goods and services tax (GST)	When the purchase or sale of taxable goods and services occurs during the taxation period
Customs and excise duty	When goods become subject to duty
Road user charges and motor vehicle fees	When payment of the fee or charge is made
Stamp, cheque and credit card duties	When the liability to the Crown is incurred
Exhaustible resources levy	When the resource is extracted
Other indirect taxes	When the debt to the Crown arises
Levies (eg, ACC levies)	When the obligation to pay the levy is incurred

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 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 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 have been 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 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 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.

Note 1: Summary of Accounting Policies (continued)#

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Financial instruments#

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Financial assets

Financial assets are designated into the following categories: loans and receivables at amortised cost, financial assets available-for-sale, financial assets held-for-trading and financial assets 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.

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

Financial assets

Major financial asset type	Designation
Trade and other receivables	All designated as loans and receivables at amortised cost
Student loans	All designated as loans and receivables at amortised cost
Kiwibank mortgages	All designated as loans and receivables at amortised cost
Other advances	Generally designated as loans and receivables at amortised cost
IMF financial assets	All designated as loans and receivables at amortised cost
Share investments	Generally designated as fair value through profit and loss
Marketable securities	Generally designated as fair value through profit and loss
Long-term deposits	Generally designated as loans and receivables at amortised cost

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest method (refer interest income policy). Loans and receivables issued with durations of less than 12 months are recognised at their nominal value. 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 at 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 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 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 market prices. Regular way purchases and sales of all financial assets are accounted for at trade date. If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques, as set out in the notes to the financial statements. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Financial liabilities

Financial liabilities are designated into the following categories: amortised cost, financial liabilities held-for-trading and financial liabilities 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.

Financial liabilities

Major financial liability type	Designation
Accounts payable	All designated at amortised cost
Government stock	Generally designated at amortised cost
Treasury bills	All designated at amortised cost
Government retail stock	All designated at amortised cost
Other borrowings	Generally designated at amortised cost
Settlement deposits with Reserve Bank	All designated at amortised cost
Issued currency	Not designated: Recognised at face value

Financial liabilities held-for-trading and financial liabilities designated at 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 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 are subsequently measured at amortised cost using the effective interest method (refer interest expense policy). 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.

Derivative Financial Instruments

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

Note 1: Summary of Accounting Policies (continued)#

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Property, plant and equipment#

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Measurement on initial recognition

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

Capitalisation of borrowing costs

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

Subsequent measurement

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

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

Class of PPE	Accounting policy
Land and buildings	Land and buildings are recorded at fair value less impairment losses and, for buildings, less depreciation accumulated since the assets were last revalued. Land associated with the rail network and state highways is valued using an estimate based on adjacent use, as an approximation to fair value. Valuations undertaken in accordance with standards issued by the New Zealand Property Institute are used where applicable. Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998, may be used if they have been confirmed as appropriate by an independent valuer. When revaluing buildings, there must be componentisation to the level required to ensure adequate representation of the material components of the buildings.  At a minimum, this requires componentisation to three levels: structure, building services and fit-out.
Specialist military equipment	Specialist military equipment is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued. Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the basis for the valuation is confirmed as appropriate by an independent valuer.
State highways	State highways are recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.
Rail network	Rail infrastructure used for freight services (freight only and dual use lines required for freight operations) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued. Rail infrastructure not required for freight operations and used for metro services is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.
Aircraft	Aircraft (excluding specialised military equipment) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Electricity distribution	Electricity distribution network assets are recorded at cost, less depreciation and impairment losses accumulated since the assets were purchased.
Electricity generation	Electricity generation assets are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
Specified cultural and heritage assets	Specified cultural and heritage assets comprise national parks, conservation areas and related recreational facilities, as well as National Archives holdings and the collections of the National Library, Parliamentary Library and Te Papa.  Of these, non-land assets are recorded at fair value less subsequent impairment losses and, for non-land assets, less subsequent accumulated depreciation.  Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, and where no market exists to provide a valuation.
Other plant and equipment	Other plant and equipment, which includes motor vehicles and office equipment, are recorded at cost less depreciation and impairment losses accumulated since the assets were purchased.

Revaluation

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 recognised in the statement of comprehensive income and 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 on an asset of that class is recognised in the statement of comprehensive income and offset against that reserve. Otherwise, losses are reported in the statement of financial performance.

Depreciation

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:

Class of PPE	Estimated useful lives
Buildings	25 to 60 years
Specialist military equipment (SME)	5 to 55 years
State highways:
Pavement (surfacing)	7 years
Pavement (other)	50 years
Bridges	70 to 105 years
Rail Network:
Track and ballast	25 to 40 years
Tunnels and bridges	60 to 100 years
Overhead traction and signalling	10 to 40 years
Aircraft (excluding SME)	10 to 20 years
Electricity distribution network	2 to 80 years
Electricity generation assets	25 to 100 years
Other plant and equipment	3 to 30 years

Specified heritage and cultural assets are generally not depreciated.

Impairment

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.

Note 1: Summary of Accounting Policies (continued) #

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Disposal#

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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.

Public private partnerships#

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A public private partnership (also known as a service concession arrangement) is an arrangement between the Government and a private sector partner in which the private sector partner uses specified assets to supply a public service on behalf of the Government for a specified period of time and is compensated for its services over the period of the arrangement. The costs of the specified assets are financed by the private sector partner, except where existing assets of the Government (generally land) are allocated to the arrangement. Payments made by the Government to a private sector partner over the period of a service concession arrangement cover the costs of the provision of services, interest expenses and repayment of the liability incurred to acquire the specified assets.

The assets in a public private partnership are recognised as assets of the Government. If the assets are progressively constructed, the Government progressively recognises work-in-progress at cost and a financial liability of the same value is also recognised. When the assets are fully constructed, the total asset cost and the matching financial liability reflect the value of the future compensation to be provided to the private-sector partner for the assets.

Subsequent to initial recognition:

• the assets are accounted for in accordance with Government accounting policy applicable to the classes of property, plant and equipment that the specified assets comprise, and
• the financial liabilities are measured at amortised cost.

Equity accounted investments#

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

However, generally accepted accounting practice is not clear about how the definitions of control and significant influence should be applied in some circumstances in the public sector, for example, 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#

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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 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#

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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#

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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 held for sale, or disposal groups, are recorded at the lower of their carrying amount and fair value less costs to sell.

Investment property#

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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.

Note 1: Summary of Accounting Policies (continued) #

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Employee benefits#

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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 estimate of the value of expected future pension benefits arising from employee service up to the reporting date. All movements in the liability, including actuarial gains and losses, are recognised 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 outstanding insurance claims liabilities are valued 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 and loss.

Reinsurance

Premiums paid to reinsurers are recognised as reinsurance expense 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 and outstanding claims, 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.

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

Commitments are classified as:

• capital commitments: aggregate amount of capital expenditure contracted for but not recognised as paid or provided for at balance date, and
• lease commitments: non-cancellable operating leases with a lease term exceeding one year.
• Cancellable commitments that have penalty or exit costs explicit in the agreement on exercising the option to cancel are reported at the value of those penalty or exit costs (ie, the minimum future payments).

Interest commitments on debts, commitments for funding, 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 Budget 13 were forecasts published in the 2013 Budget Economic and Fiscal Update, while Budget 14 were forecasts published in the 2014 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.
• Crown entities: This group includes entities governed by the Crown Entities Act 2004. These entities have separate legal form and specified governance frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy).
• State-owned enterprises: This group includes entities governed by the State-Owned Enterprises Act 1986, and (for the purposes of these statements) also includes Air New Zealand, Mighty River Power, Meridian Energy and Genesis Energy. This group represents entities that undertake commercial activity.

Functional analysis is also provided of a number of financial statements items. This functional analysis is drawn from the Classification of the Functions of Government as developed by the Organisation for Economic Co-operation and Development (OECD).

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) and Sovereign Receipts (Cash)#

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Note 2: Sovereign Revenue (Accrual)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Direct Income Tax Revenue (accrual)
		Individuals
23,709	23,811	Source deductions	23,738	22,330
5,083	5,161	Other persons	5,216	5,210
(1,488)	(1,531)	Refunds	(1,573)	(1,644)
477	487	Fringe benefit tax	489	480
27,781	27,928	Total individuals	27,870	26,376
		Corporate Tax
9,240	9,195	Gross companies tax	9,020	8,747
(197)	(195)	Refunds	(192)	(151)
447	421	Non-resident withholding tax	428	420
-	2	Foreign-source dividend withholding payments	8	2
9,490	9,423	Total corporate tax	9,264	9,018
		Other Direct Income Tax
1,671	1,642	Resident withholding tax on interest income	1,644	1,631
607	472	Resident withholding tax on dividend income	446	516
2,278	2,114	Total other direct income tax	2,090	2,147
39,549	39,465	Total direct income tax	39,224	37,541
		Indirect Income Tax Revenue (accrual)
		Goods and Services Tax
27,220	27,364	Gross goods and services tax	27,208	25,125
(10,695)	(11,079)	Refunds	(11,191)	(9,920)
16,525	16,285	Total goods and services tax	16,017	15,205
		Other Indirect Taxation
1,164	1,162	Road user charges	1,205	1,066
931	848	Petroleum fuels excise - domestic production	865	855
678	655	Alcohol excise - domestic production	650	663
277	274	Tobacco excise - domestic production	273	281
659	746	Petroleum fuels excise - imports[6]	747	674
267	246	Alcohol excise - imports6	242	250
1,043	1,029	Tobacco excise - imports6	999	954
172	169	Other customs duty	172	178
223	211	Gaming duties	211	214
187	186	Motor vehicle fees	187	174
62	68	Approved issuer levy and cheque duty	52	45
36	36	Energy resources levies	35	34
5,699	5,630	Total other indirect taxation	5,638	5,388
22,224	21,915	Total indirect taxation	21,655	20,593
61,773	61,380	Total taxation revenue	60,879	58,134
		Other Sovereign Revenue (accrual)
3,465	3,546	ACC levies	3,600	3,437
338	338	Fire service levies	339	331
269	275	EQC levies	274	242
729	604	Child support	545	590
173	173	Court fines	179	168
322	447	Other miscellaneous items	513	404
5,296	5,383	Total other sovereign revenue	5,450	5,172
67,069	66,763	Total sovereign revenue	66,329	63,306

Note 2: Sovereign Receipts (Cash)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Direct Income Tax Receipts (cash)
		Individuals
23,584	23,665	Source deductions	23,621	22,188
5,549	5,655	Other persons	5,466	5,194
(2,222)	(2,149)	Refunds	(2,276)	(2,251)
476	485	Fringe benefit tax	482	465
27,387	27,656	Total individuals	27,293	25,596
		Corporate Tax
9,495	9,390	Gross companies tax	9,374	8,665
(766)	(652)	Refunds	(563)	(597)
446	399	Non-resident withholding tax	405	451
-	2	Foreign-source dividend withholding payments	-	1
9,175	9,139	Total corporate tax	9,216	8,520
		Other Direct Income Tax
1,670	1,641	Resident withholding tax on interest income	1,629	1,635
607	471	Resident withholding tax on dividend income	449	516
2,277	2,112	Total direct other income tax	2,078	2,151
38,839	38,907	Total direct income tax	38,587	36,267
		Indirect Tax Receipts (cash)
		Goods and Services Tax
26,352	26,537	Gross goods and services tax	26,596	24,539
(10,195)	(10,629)	Refunds	(10,948)	(9,783)
16,157	15,908	Total goods and services tax	15,648	14,756
		Other Indirect Taxation
1,164	1,162	Road user charges	1,187	1,064
931	848	Petroleum fuels excise - domestic production	861	865
678	655	Alcohol excise - domestic production	651	666
277	274	Tobacco excise - domestic production	268	287
2,141	2,190	Customs duty	2,179	2,035
223	208	Gaming duties	208	216
187	186	Motor vehicle fees	178	179
62	68	Approved issuer levy and cheque duty	51	44
36	36	Energy resources levies	35	34
5,699	5,627	Total other indirect taxation	5,618	5,390
21,856	21,535	Total indirect taxation	21,266	20,146
60,695	60,442	Total tax receipts collected	59,853	56,413
		Other Sovereign Receipts (cash)
3,438	3,550	ACC levies	3,579	3,524
338	338	Fire service levies	340	331
267	278	EQC levies	273	274
237	227	Child support	219	230
148	148	Court fines	149	159
319	428	Other miscellaneous items	414	288
4,747	4,969	Total other sovereign receipts	4,974	4,806
65,442	65,411	Total sovereign receipts	64,827	61,219

Notes

• [6]Customs excise-equivalent duty.

Note 3:  Sales of Goods and Services#

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Note 3: Sales of Goods and Services

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
9,021	8,236	Sales of goods	8,153	8,536
8,059	8,196	Rendering of services	8,319	8,177
17,080	16,432	Total sales of goods and services	16,472	16,713
		By source
1,397	1,513	Core Crown	1,488	1,461
15,431	15,459	Crown entities	15,539	15,102
14,394	13,699	State-owned enterprises	13,752	14,102
(14,142)	(14,239)	Inter-segment eliminations	(14,307)	(13,952)
17,080	16,432	Total sales of goods and services	16,472	16,713

Note 4:  Interest Revenue and Dividends#

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Note 4: Interest Revenue and Dividends

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
600	572	Student loans (interest unwind)[7]	579	590
1,076	1,132	Other financial assets classified as amortised cost or available for sale	1,190	1,073
17	6	Financial assets classified as held for trading	13	48
1,313	845	Financial assets classified as fair value through profit and loss	734	671
3,006	2,555	Total interest revenue	2,516	2,382
582	605	Dividends	659	557
3,588	3,160	Total interest revenue and dividends	3,175	2,939
		By source
2,639	2,304	Core Crown	2,295	2,104
1,242	1,156	Crown entities	1,249	1,270
878	885	State-owned enterprises	879	856
(1,171)	(1,185)	Inter-segment eliminations	(1,248)	(1,291)
3,588	3,160	Total interest revenue and dividends	3,175	2,939

Notes

• [7]Because student loans are advanced on an interest-free basis, they are discounted to reflect their impaired value. The interest unwind reflects the increase in value as the period to repayment reduces.

Note 5:  Other Revenue#

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Note 5: Other Revenue

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
1,225	1,232	Rental income	1,230	1,175
385	372	Sale of royalties	383	421
29	(155)	EQC insurance claim on reinsurers	(123)	(127)
2,228	2,173	Other revenue	1,930	2,228
3,867	3,622	Total other revenue	3,420	3,697

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). Actuarial valuations of the reinsurance recoverable resulted in a reversal of income in both the current and previous years. Further information on insurance expenses and underwriting results can be found in note 11.

Note 6:  Transfer Payments and Subsidies#

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Note 6: Transfer Payments and Subsidies

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Social Assistance Grants
10,894	10,903	New Zealand superannuation	10,913	10,235
1,773	1,693	Jobseeker support and emergency benefit	1,691	-
1,392	1,422	Supported living payment	1,422	-
1,288	1,225	Sole parent support	1,222	-
67	63	Domestic purposes benefit	63	1,738
53	52	Invalid's benefit	52	1,330
32	29	Sickness benefit	29	782
29	29	Unemployment benefit	29	812
2,038	1,976	Family tax credit	1,965	2,018
539	556	Other working for families tax credits	462	544
1,191	1,149	Accommodation assistance	1,146	1,177
662	670	Income related rents	726	611
380	379	Disability allowances	379	384
574	542	Student allowances	539	596
1,316	1,354	Other social assistance benefits	1,288	1,321
22,228	22,042	Total social assistance grants	21,926	21,548
		Subsidies
748	822	KiwiSaver subsidies	901	723
		Other transfer payments
509	530	Official development assistance	533	437
23,485	23,394	Total transfer payments and subsidies	23,360	22,708

From 15 July 2013 the benefit categories domestic purposes benefit, invalid's benefit, unemployment and emergency benefit and sickness benefit, as well as widow's benefit, were replaced by new benefit categories. These categories are jobseeker support and emergency benefit, supported living payment and sole parent support.

Note 7:  Personnel Expenses#

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Note 7: Personnel Expenses

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
18,921	19,064	Salaries and wages	19,108	18,921
296	319	Costs incurred on GSF and other defined benefit plans	310	290
281	339	Costs incurred on defined contribution plans (eg, KiwiSaver)	424	386
674	766	Other personnel expenses	642	338
20,172	20,488	Total personnel expenses	20,484	19,935
		By source
6,066	6,253	Core Crown	6,232	6,037
11,198	11,302	Crown entities	11,315	10,966
2,919	2,940	State-owned enterprises	2,956	2,949
(11)	(7)	Inter-segment eliminations	(19)	(17)
20,172	20,488	Total personnel expenses	20,484	19,935
		Key management personnel compensation
		Salaries and other short-term employee benefits	9	9
		Post-employment benefits	-	-
		Other long-term benefits	-	-
		Termination benefits	-	-
			9	9

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 Council. 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 (eg, travel discounts) can be found on the New Zealand Parliament website (www.parliament.nz).

Note 8:  Depreciation and Amortisation#

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Note 8: Depreciation and Amortisation

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Depreciation expense
1,195	1,193	Buildings	1,213	1,150
420	457	State highways	460	449
439	416	Electricity generation assets	404	431
208	205	Electricity distribution network	175	152
346	295	Specialist military equipment	282	272
166	226	Aircraft (excluding military)	260	213
177	184	Rail network	20	14
18	20	Specified cultural and heritage assets	25	24
1,043	1,029	Other plant and equipment	966	992
4,012	4,025	Total depreciation expense	3,805	3,697
628	619	Amortisation and impairment of non-financial assets	1,067	1,115
4,640	4,644	Total depreciation and amortisation	4,872	4,812

Note 9:  Other Operating Expenses#

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Note 9: Other Operating Expenses

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
4,755	4,809	Donations and ex-gratia payments	4,982	4,451
1,122	1,126	Rental and leasing costs	1,122	1,117
1,783	1,567	Impairment of financial assets	1,396	1,755
723	843	Write-down on initial recognition of financial assets	789	684
542	537	Lottery prize payments	526	515
246	215	Inventory expenses	542	565
-	-	Impairment of inventory	8	12
-	40	Bonus share offer expense (refer to note 35)	22	25
5	4	Fees paid to audit firms (refer below)	2	1
28,432	27,386	Other operating expenses	26,164	27,038
37,608	36,527	Total other operating expenses	35,553	36,163
		By source
37,811	37,474	Core Crown	36,777	36,565
17,458	17,580	Crown entities	17,297	17,065
9,743	9,154	State-owned enterprises	9,042	9,689
(27,404)	(27,681)	Inter-segment eliminations	(27,563)	(27,156)
37,608	36,527	Total other operating expenses	35,553	36,163

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.

Note 9: Other Operating Expenses (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Audit and related expenses
Auditor-General fees for the audit of financial statements[8]	39	38
Auditor-General fees for assurance and related services	1	1
Fees for other services	-	-
	40	39
Inter-segment eliminations	(40)	(39)
Total audit and related expenses	-	-
Fees for other work [9]
Fees for assurance and related services	1	1
Fees for tax services	-	-
Fees for other services	1	-
Fees paid to audit firms	2	1

Notes

• [8]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.
• [9]External auditing firms carry out other work for entities that they audit on behalf of the Auditor-General.

Note 10:  Interest Expenses#

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Note 10: Interest Expenses

Forecast

Actual

Budget 2013 $m

Budget 2014 $m

30 June 2014 $m

30 June 2013 $m

By type

3,611

4,129

Financial liabilities classified as amortised cost

4,100

4,014

8

-

Financial liabilities classified as held for trading

-

5

846

287

Financial liabilities classified as fair value through profit and loss

260

293

51

45

Interest unwind on provisions

40

46

4,516

4,461

Total interest expenses

4,400

4,358

By source

3,622

3,641

Core Crown

3,620

3,620

239

224

Crown entities

219

235

1,279

1,173

State-owned enterprises

1,161

1,248

(624)

(577)

Inter-segment eliminations

(600)

(745)

4,516

4,461

Total interest expenses

4,400

4,358

Note 11:  Insurance Expenses#

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Note 11: Insurance Expenses

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By entity
3,315	3,461	Accident Compensation Corporation (ACC)	3,484	3,133
(19)	(252)	Earthquake Commission (EQC)	(111)	(103)
(95)	61	Southern Response	87	(22)
14	13	Other	17	19
-	-	Inter-segment eliminations	24	4
3,215	3,283	Total insurance expenses	3,501	3,031
		By type
		Property damage claims in relation to Canterbury earthquakes	(281)	(227)
		Personal accident and injury claims	3,484	3,133
		Other insurance expenses	298	125
		Total insurance expenses	3,501	3,031

Insurance expenses include costs associated with insurance claims arising from the Canterbury earthquakes. Note 30 contains further discussion on total costs of the earthquakes to the Crown.

At 30 June 2014 the total amount paid or payable for damage incurred in relation to Canterbury earthquakes was reassessed and is now expected to be lower than previously expected. This reduction is recognised as a credit in the claims expense. The discount on prior year claims payable was also recalculated to take into account changes in interest rates, payment patterns, and the reduced period to settlement.

The remainder of note 11 provides additional information on the insurance expenses for ACC, EQC, and Southern Response.

An analysis of the insurance liabilities is provided in note 25. Given the uncertainty over insurance claims, it is likely that the final cost will be different from the original liability established.

Analysis of ACC insurance expense

	Actual
	30 June 2014 $m	30 June 2013 $m
By type
Claims expense	3,223	1,122
Movement in unexpired risk liability	159	(27)
Other underwriting expenses	99	86
Total ACC claims and other expenses	3,481	1,181
Less expenses reported elsewhere in the statement of financial performance
Actuarial gain/(loss)	479	2,369
Operating costs relating to claims	(476)	(417)
Total ACC insurance expenses (excluding gains/(losses) and operations)	3,484	3,133

Net claims incurred in the table below refers to the adjustment in the liability arising from claims incurred in the current financial year and reassessment of claims incurred in previous years. This reassessment results from new information on these claims (including new claims relating to incidents incurred in previous years) and changes in assumptions.

ACC Claims Incurred

	Actual
	30 June 2014 $m	30 June 2013 $m
ACC Claims Incurred
Current year net ACC claims incurred
Gross claims incurred and related expenses - undiscounted	7,578	7,071
Discount and discount movement	(4,418)	(4,149)
Total current year net claims incurred	3,160	2,922
Previous years' net ACC claims incurred
Reassessment of gross claims and expenses - undiscounted	(4,490)	(2,817)
Discount and discount movement	4,553	1,017
Total previous years' net claims incurred	63	(1,800)
ACC claims expense	3,223	1,122

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 surplus/(deficit)

	Actual
	30 June 2014 $m	30 June 2013 $m
Net ACC Underwriting Result
Premium revenue (refer to note 2)	3,600	3,437
Recoveries revenue (including reinsurance recovery)	-	-
ACC underwriting revenue	3,600	3,437
Less claims and other expenses	(3,481)	(1,181)
Net ACC underwriting surplus/(deficit)	119	2,256
ACC operating cash flows associated with the underwriting result are:
Cash receipts	3,579	3,524
Cash payments	(3,435)	(3,072)
Net ACC operating cash flows	144	452

Analysis of EQC insurance expense

	Actual
	30 June 2014 $m	30 June 2013 $m
Analysis of EQC insurance expense
By type
Claims expense	(271)	(167)
Movement in unexpired risk liability	9	(68)
Other underwriting expenses	151	132
Total EQC claims and other expenses	(111)	(103)
EQC Claims Incurred
Current year net EQC claims incurred
Gross claims incurred and related expenses - undiscounted	112	37
Discount and discount movement	(2)	-
Total current year net claims incurred	110	37
Previous years' net EQC claims incurred
Reassessment of gross claims and expenses - undiscounted	(446)	(349)
Discount and discount movement	65	145
Total previous years' net claims incurred	(381)	(204)
EQC claims expense	(271)	(167)
Net EQC Underwriting Result
Premium revenue	274	242
Recoveries revenue (including reinsurance recovery)	(123)	(127)
EQC underwriting revenue	151	115
Less claims and other expenses	(111)	(103)
Net EQC underwriting surplus/(deficit)	262	218
EQC operating cash flows associated with the underwriting result are:
Cash receipts	1,549	1,590
Cash payments	(2,020)	(1,923)
Net EQC operating cash flows	(471)	(333)
Analysis of Southern Response insurance expense
By type
Claims expense	111	2
Movement in unexpired risk liability	-	-
Total Southern Response claims and other expenses	111	2
less operating costs relating to claims	(24)	(24)
Total Southern Response insurance expenses (excluding operations)	87	(22)
Net Southern Response Underwriting Result
Premium revenue	-	-
Recoveries revenue (including reinsurance recovery)	(37)	27
Southern Response underwriting revenue	(37)	27
Less claims and other expenses	111	2
Net Southern Response underwriting surplus/(deficit)	(148)	25
Southern Response operating cash flows associated with the underwriting result are:
Cash receipts	291	452
Cash payments	(386)	(294)
Net Southern Response operating cash flows	(95)	158

Southern Response Earthquake Services ("Southern Response") manages claims related to the Canterbury earthquakes incurred by AMI Insurance.

Note 12:  Gains and Losses on Financial Instruments#

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Note 12: Gains and Losses on Financial Instruments

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
-	29	Foreign exchange gains on financial assets measured at amortised cost	12	448
(10)	(205)	Foreign exchange losses on financial assets measured at amortised cost	(496)	(13)
1	1	Change in fair value of financial assets classified as held for trading	9	38
(10)	51	Gains/(losses) on disposal of financial assets measured at amortised cost	17	224
488	241	Change in fair value of financial assets classified as fair value through profit and loss	(1,044)	2,651
469	117	Net gains/(losses) on financial assets	(1,502)	3,348
3	115	Foreign exchange gain on financial liabilities measured at amortised cost	188	8
-	(18)	Foreign exchange losses on financial liabilities measured at amortised cost	(4)	(14)
-	-	Change in fair value of financial liabilities classified as held for trading	-	-
(5)	(28)	Gains/(losses) on disposal of financial liabilities measured at amortised cost	(30)	55
80	129	Change in fair value of financial liabilities classified as fair value through profit and loss	339	175
78	198	Net gains/(losses) on financial liabilities	493	224
1,201	3,289	Net gain/(loss) on derivatives	5,829	3,698
1,748	3,604	Net gains/(losses) on financial instruments	4,820	7,270
		By source
1,663	3,301	Core Crown	4,045	5,081
252	342	Crown entities	702	1,192
11	88	State-owned enterprises	161	354
(178)	(127)	Inter-segment eliminations	(88)	643
1,748	3,604	Net gains/(losses) on financial instruments	4,820	7,270

Note 13:  Gains and Losses on Non-Financial Instruments#

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Note 13: Gains and Losses on Non-Financial Instruments

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
498	1,082	Actuarial gains/(losses) on ACC outstanding claims	479	2,369
-	713	Actuarial gains/(losses) on GSF liability	577	1,251
-	(171)	Foreign exchange gains/(losses)	(328)	101
-	24	Other gains/(losses) on non-financial liabilities	14	1
(53)	(61)	Gains/(losses) on disposal or revaluation of property, plant and equipment	(210)	(24)
-	(8)	Gains/(losses) on agricultural assets	(7)	(46)
(2)	11	Other gains/(losses) on non-financial assets	15	54
443	1,590	Net gains/(losses) on non-financial instruments	540	3,706
		By source
(2)	557	Core Crown	220	1,298
446	1,034	Crown entities	477	2,309
(1)	(6)	State-owned enterprises	(156)	100
-	5	Inter-segment eliminations	(1)	(1)
443	1,590	Net gains/(losses) on non-financial instruments	540	3,706

The GSF and ACC liabilities are valued by an independent actuary (refer notes 25 and 26). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when previously calculating the liability (experience adjustments) and the effect of changes in actuarial assumptions.

Note 14:  Receivables#

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Note 14: Receivables

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
7,831	8,555	Tax receivables	8,112	8,184
3,953	2,998	Levies, fines and penalty receivables	3,265	3,183
478	501	Social benefit receivables	530	515
12,262	12,054	Sovereign receivables	11,907	11,882
1,485	1,366	Reinsurance receivables	1,409	3,135
4,323	4,453	Trade and other receivables	4,164	4,866
18,070	17,873	Total receivables	17,480	19,883
		By maturity
15,334	14,730	Expected to be realised within one year	15,024	15,742
2,736	3,143	Expected to be outstanding for more than one year	2,456	4,141
18,070	17,873	Total receivables	17,480	19,883
		By source
10,260	11,507	Core Crown	11,819	11,924
7,099	6,035	Crown entities	6,379	8,369
2,358	2,077	State-owned enterprises	1,762	2,037
(1,647)	(1,746)	Inter-segment eliminations	(2,480)	(2,447)
18,070	17,873	Total receivables	17,480	19,883

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.

All sovereign receivables are denominated in New Zealand dollars.

Sovereign receivables

	Actual
	30 June 2014 $m	30 June 2013 $m
Tax Receivables
Gross tax receivable	12,589	12,565
Impairment of tax receivables	(4,477)	(4,381)
Total tax receivables	8,112	8,184
Gross Tax Receivable
Current	7,118	7,223
Past due	5,471	5,342
Total gross tax receivable	12,589	12,565
% past due	43%	43%
Impairment of Tax Receivables
Opening balance	4,381	4,409
Impairment losses recognised during the year	1,030	897
Amounts written off as uncollectible	(934)	(925)
Closing balance	4,477	4,381

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

Recoverable amounts

	Actual
	30 June 2014 $m	30 June 2013 $m
The estimated recoverable amount of this portfolio and key assumptions underpinning the valuation are:
Net recoverable amount of tax receivables (current)	6,989	7,185
Net recoverable amount of tax receivables (past due)	1,047	999
Discount rate	6.00%	5.10%
Impact on recoverable amount of a 2% increase in discount rate	(21)	(20)
Impact on recoverable amount of a 2% decrease in discount rate	22	21

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 (eg, 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.

Ageing of Tax Receivables Past Due (Gross)

	Actual
	30 June 2014 $m	30 June 2013 $m
Ageing of Tax Receivables Past Due (Gross)
Less than six months	931	904
Between six months and one year	390	363
Between one year and two years	719	788
Greater than two years	3,431	3,287
Tax receivables past due	5,471	5,342

The carrying amount of tax receivables provides a reasonable approximation of their fair value.

Note 14: Receivables (continued)#

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	Actual
	30 June 2014 $m	30 June 2013 $m
Levies, Fines and Penalty Receivables
Gross ACC levy receivables	3,063	3,027
Gross other levies, fines and penalty receivables	2,781	2,515
Total gross levies, fines and penalty receivables	5,844	5,542
Impairment of ACC levy receivables	(84)	(118)
Impairment of other levies, fines and penalty receivables	(2,495)	(2,241)
Total impairment of receivables	(2,579)	(2,359)
Total levies, fines and penalty receivables	3,265	3,183
Impairment of ACC Levy Receivables
Opening balance	118	122
Impairment losses recognised during the year	-	(2)
Amounts written off as uncollectible	1	(2)
Impairment losses reversed	(35)	-
Closing balance	84	118
Collective impairment allowance	84	118
Individual impairment allowance	-	-
Impairment of ACC Levy Receivables	84	118
Impairment of other Levies, Fines and Penalty Receivables
Opening balance	2,241	1,969
Impairment losses recognised during the year	341	363
Amounts written off as uncollectible	-	-
Impairment losses reversed	(87)	(91)
Closing balance	2,495	2,241
Collective impairment allowance	2,495	2,241
Individual impairment allowance	-	-
Impairment of other Levies, Fines and Penalty Receivables	2,495	2,241
Ageing of Levies, Fines and Penalty Receivables Past Due But Not Impaired
Less than six months	-	-
Between six months and one year	-	-
Greater than one year	-	-
Total levies, fines and penalty receivables past due but not impaired	-	-

The ACC levy receivables are short term, so their carrying amount provides a reasonable approximation of their fair value. Of the other levies, fines and penalty 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 net book value of $168 million (2013: $175 million). Their carrying amount provides a reasonable approximation of their fair value. The recoverable amount of these Ministry of Justice receivables is calculated using discounted cash flows (net of estimated service costs).

	Actual
	30 June 2014 $m	30 June 2013 $m
Social Benefit Receivables
Gross social benefit receivables	1,239	1,178
Impairment of social benefit receivables	(709)	(663)
Total social benefit receivables	530	515
Impairment of Social Benefit Receivables
Opening balance	663	628
Impairment losses recognised during the year	68	79
Amounts written off as uncollectible	(22)	(44)
Closing balance	709	663
Collective impairment allowance	709	663
Individual impairment allowance	-	-
Impairment of Social Benefit Receivables	709	663
Ageing of Social Benefit Receivables Past Due But Not Impaired
Less than six months	31	30
Between six months and one year	61	67
Greater than one year	-	-
Total social benefit receivables past due but not impaired	92	97

Social benefit receivables comprise benefit overpayments, advances on benefits and recoverable special needs grants primarily administered by the Ministry of Social Development with a carrying value of $527 million (2013: $502 million). The recoverable amount of social benefit receivables is determined by discounting the expected future cash flows (net of estimated service costs). Their carrying amount provides a reasonable approximation of their fair value.

	Actual
	30 June 2014 $m	30 June 2013 $m
Reinsurance receivables
Opening balance	3,135	5,003
Reinsurance recognised/reassessed during the year	(160)	(100)
Reinsurance acquired through business combination	-	-
Reinsurance received during the year	(1,566)	(1,768)
Closing balance	1,409	3,135

Credit risk associated with reinsurance receivables is managed by ensuring the risk is spread across a number of different reinsurers with appropriate credit ratings.

	Actual
	30 June 2014 $m	30 June 2013 $m
Trade and Other Receivables
Gross trade and other receivables	4,256	4,954
Impairment of trade and other receivables	(92)	(88)
Total trade and other receivables	4,164	4,866
Impairment of Trade and Other Receivables
Opening balance	88	93
Impairment losses recognised during the year	10	7
Amounts written off as uncollectible	(12)	(14)
Impairment losses reversed	6	2
Closing balance	92	88
Collective impairment allowance	65	64
Individual impairment allowance	27	24
Impairment of Trade and Other Receivables	92	88
Ageing of Trade and Other Receivables Past Due But Not Impaired
Less than six months	170	180
Between six months and one year	11	17
Greater than one year	1	2
Total trade and other receivables past due but not impaired	182	199

The rest of the trade and other receivables are short term, with $3,974 million (2013: $2,214 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

Note 15: Marketable Securities, Deposits and Derivatives in Gain#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
36,314	39,762	Marketable securities	38,307	34,346
2,089	2,407	Long term deposits	3,844	3,588
3,906	3,194	Derivatives in gain	4,164	3,775
2,404	2,507	IMF financial assets	2,142	2,291
44,713	47,870	Total marketable securities, deposits and derivatives in gain	48,457	44,000
		By maturity
30,197	30,316	Expected to be realised within one year	30,433	26,833
14,516	17,554	Expected to be held for more than one year	18,024	17,167
44,713	47,870	Total marketable securities, deposits and derivatives in gain	48,457	44,000
		By source
32,224	34,355	Core Crown	34,178	31,056
19,950	22,712	Crown entities	23,500	20,045
3,167	2,813	State-owned enterprises	2,472	2,586
(10,628)	(12,010)	Inter-segment eliminations	(11,693)	(9,687)
44,713	47,870	Total marketable securities, deposits and derivatives in gain	48,457	44,000

Marketable securities comprise bonds, commercial paper, debentures and similar tradable financial assets held by the Government for the purposes of realising capital gains or interest revenue. Marketable securities and derivatives in gain are reported at their fair value. Fair value is either based on quoted market price or using a valuation model if there is no active market. The valuation models used generally calculate the expected cash flows under the terms of each specific contract and then discount these values back to present value.

Long-term deposits are instruments with maturities greater than three months that are not traded in an active market. Long-term deposits are measured at amortised cost. Their carrying amount provides a reasonable approximation of their fair value.

Further information on the management of risks associated with these financial assets is provided in note 33.

Note 16: Share Investments#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By maturity
7,250	10,695	Expected to be realised within one year	11,428	7,651
10,926	8,977	Expected to be held for more than one year	9,168	9,708
18,176	19,672	Total share investments	20,596	17,359
		By source
7,199	10,778	Core Crown	11,579	7,665
10,664	8,851	Crown entities	8,896	9,496
340	316	State-owned enterprises	483	342
(27)	(273)	Inter-segment eliminations	(362)	(144)
18,176	19,672	Total share investments	20,596	17,359

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

Further information on the management of risks associated with these financial assets is provided in note 33.

Note 17: Advances#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
8,989	8,752	Student loans	8,716	8,288
14,544	14,784	Kiwibank mortgages	14,630	13,202
1,779	1,075	Other advances	1,410	1,123
25,312	24,611	Total advances	24,756	22,613
		By source
14,633	13,883	Core Crown	14,280	13,419
130	226	Crown entities	209	248
15,491	15,106	State-owned enterprises	14,860	13,499
(4,942)	(4,604)	Inter-segment eliminations	(4,593)	(4,553)
25,312	24,611	Total advances	24,756	22,613

Further information on the management of risks associated with these financial assets is provided in note 33.

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Student Loans
14,144	14,209	Nominal value	14,235	13,562
(5,155)	(5,457)	Write-down on initial recognition and impairment	(5,519)	(5,274)
8,989	8,752	Total student loans	8,716	8,288
		Gross carrying value	10,163	9,723
		Impairment of student loans	(1,447)	(1,435)
		Total student loans	8,716	8,288
		By maturity
		Expected to be repaid within one year	1,193	1,049
		Expected to be outstanding for more than one year	7,523	7,239
		Total student loans	8,716	8,288
		Movement During the Year
8,528	8,288	Opening balance	8,288	8,291
1,632	1,545	Net new lending (excluding fees)	1,512	1,470
11	11	New lending - establishment fee	11	11
(537)	(644)	Initial write-down to fair value	(630)	(536)
(1,135)	(1,050)	Repayments made during the year	(1,032)	(1,054)
600	572	Interest unwind	579	590
(110)	30	Impairment losses (recognised)/reversed during the year	(12)	(484)
-	-	Other movements	-	-
8,989	8,752	Closing balance student loans	8,716	8,288
		Impairment of Student Loans
		Opening balance	1,435	951
		Impairment losses recognised during the year	12	484
		Amounts written off as uncollectible	-	-
		Impairment losses reversed	-	-
		Closing balance	1,447	1,435

Student loans are recognised initially by writing the amount lent down to fair value plus transaction costs, and subsequently measured at amortised cost using the effective interest method, and including the annual impairment figure.

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.

	Actual
	30 June 2014	30 June 2013
Significant assumptions behind the carrying value are:
Effective interest rate - weighted average	7.1%	7.1%
Interest rate applied to loans for overseas borrowers	5.1%-6.2%	5.1%-6.2%
CPI	1.8%-2.5%	1.4%-2.5%
Future salary inflation	2.8%-3.5%	2.2%-3.5%

In contrast with the amortised cost approach described above, fair value is the amount for which the loans could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2014. It is determined by discounting the cash flows at an appropriate discount rate.

	Actual
	30 June 2014 $m	30 June 2013 $m
Fair value of the student loan portfolio	8,924	8,298
Impact on fair value of a 1% increase in discount rate	(448)	(423)
Impact on fair value of a 1% decrease in discount rate	501	471

The fair value differs from the carrying value due to changes in market interest rates at reporting date. The carrying value is not adjusted for such changes as it is valued using the effective interest rate determined when the loan was initially drawn. However, the fair value was calculated on a discount rate that was current at 30 June 2014. At that date the fair value was calculated on a discount rate (including expenses) of 6.6% (2013: 7.1%) whereas a weighted average effective interest rate of 7.1% (2013: 7.1%) was used for the carrying value.

Through the everyday operations of the student loan scheme the Government is exposed to the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid. The student loan scheme does not require borrowers to provide any collateral or security to support their borrowings. As the total sum advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk. The credit risk is reduced by collection of repayments through the tax system.

The Student Loan Scheme Annual Report contains more information on the student loan scheme.

Note 17: Advances (continued)#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Kiwibank Mortgages
		By maturity
1,209	1,199	Expected to be repaid within one year	1,102	1,071
13,335	13,585	Expected to be outstanding for more than one year	13,528	12,131
14,544	14,784	Total Kiwibank mortgages	14,630	13,202
		Impairment of Kiwibank Mortgages
		Opening balance	72	91
		Impairment losses recognised on mortgages	3	18
		Amounts written off as uncollectible	(9)	(26)
		Impairment losses reversed	(7)	(11)
		Closing balance	59	72
		Collective impairment allowance	37	44
		Individual impairment allowance	22	28
		Impairment of Kiwibank Mortgages	59	72
		Ageing of Kiwibank Mortgages Past Due But Not Impaired
		Less than six months	142	183
		Between six months and one year	-	-
		Greater than one year	-	-
		Total Kiwibank mortgages past due but not impaired	142	183

Kiwibank mortgages are measured at amortised cost. This fair value is based on a discounted cash flow model with reference to market interest rates, prepayment rates and estimated credit losses. The fair value of Kiwibank mortgages is $14,613 million (2013: $13,210 million).

The maximum loss due to default on Kiwibank mortgages is the carrying value reported in the statement of financial position. Collateral is obtained to mitigate any risk of loss, which in the case of Kiwibank mortgages are primarily in the form of properties. The fair value of the collateral provided is sufficient to ensure that the Crown will recover the entire amount owing over the life of the mortgage and there is reasonable assurance that collection efforts will result in payment of the amounts due in a timely manner.

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Other Advances
		By maturity
689	526	Expected to be repaid within one year	140	391
1,090	549	Expected to be outstanding for more than one year	1,270	732
1,779	1,075	Total other advances	1,410	1,123
		Impairment of Other Advances
		Opening balance	150	148
		Impairment losses recognised during the year	3	10
		Amounts written off as uncollectible	(2)	(6)
		Impairment losses reversed	(2)	(2)
		Closing balance	149	150
		Collective impairment allowance	146	146
		Individual impairment allowance	3	4
		Impairment of Other Advances	149	150
		Ageing of Other Advances Past Due But Not Impaired
		Less than six months	3	9
		Between six months and one year	9	-
		Greater than one year	-	2
		Total other advances past due but not impaired	12	11
		Measurement Basis for Other Advances
622	598	Other advances measured at amortised cost	921	791
1,157	477	Other advances measured at fair value	489	332
1,779	1,075	Total other advances	1,410	1,123

The NZS Fund, NZDMO, Public Trust and a number of SOEs manage the majority of these advances.

Other advances measured at fair value are those that are managed and performance is evaluated on a fair value basis. As they are designated at fair value through profit and loss, the value of these instruments will be affected by changes in interest rates. Changes to interest rates may arise from features specific to these assets (ie, changes to credit risk on these assets) and broader market sentiment changes.

In addition to these advances, the Government has entered into commitments to provide advances through two facilities. The Crown has agreed to make available to the Auckland Council, a loan facility to enable the Council to develop the Auckland metro rail network. The loan facility amount is $500 million of which $192 million is undrawn as at 30 June 2014.

The Crown has also agreed to make available to the New Zealand Local Government Funding Agency (NZLGFA) a New Zealand dollar revolving credit facility for 10 years (to February 2022). This facility is only to be utilised to meet exceptional and temporary liquidity shortfalls affecting the NZLGFA. The facility is for $400 million with the possibility for this to be increased to $1 billion by February 2015. As at 30 June 2014 the facility had not been utilised.

Note 18: Inventory#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
		Inventories held for sale	104	105
		Military inventories	308	311
		Other consumables	687	724
1,321	1,158	Total inventory	1,099	1,140
		By maturity
1,036	862	Expected to be sold or consumed within one year	733	783
285	296	Expected to be sold or consumed after one year	366	357
1,321	1,158	Total inventory	1,099	1,140
		By source
393	380	Core Crown	370	382
188	167	Crown entities	174	165
740	611	State-owned enterprises	555	593
-	-	Inter-segment eliminations	-	-
1,321	1,158	Total inventory	1,099	1,140

Note 19: Other Assets#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
533	506	Prepayments	570	531
50	264	Investment property	301	201
614	518	Biological assets	587	583
361	361	Investment in supranational organisations	333	368
503	618	Other	719	612
2,061	2,267	Total other assets	2,510	2,295
		By maturity
1,087	1,134	Expected to be realised within one year	1,269	1,188
974	1,133	Expected to be held for more than one year	1,241	1,107
2,061	2,267	Total other assets	2,510	2,295
		By source
1,299	1,317	Core Crown	1,263	1,222
216	435	Crown entities	434	394
579	553	State-owned enterprises	848	708
(33)	(38)	Inter-segment eliminations	(35)	(29)
2,061	2,267	Total other assets	2,510	2,295

Note 20: Property, Plant and Equipment#

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Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Net Carrying Value
		By class of asset
34,759	34,934	Land	37,138	34,453
25,312	25,969	Buildings	27,396	25,784
18,918	18,875	State highways	19,709	17,930
14,104	13,660	Electricity generation assets	13,941	13,555
4,273	4,167	Electricity distribution network	3,992	3,865
3,330	2,854	Specialist military equipment	2,891	3,094
2,502	2,677	Specified cultural and heritage assets	2,975	2,617
2,498	2,639	Aircraft (excluding military)	2,287	2,296
1,012	1,134	Rail network	936	1,035
5,919	5,355	Other plant and equipment	5,041	5,204
112,627	112,264	Total property, plant and equipment	116,306	109,833
		By source
30,565	29,971	Core Crown	30,963	29,507
52,207	53,043	Crown entities	56,802	51,823
29,855	29,250	State-owned enterprises	28,541	28,503
-	-	Inter-segment eliminations	-	-
112,627	112,264	Total property, plant and equipment	116,306	109,833
		By holding
		Leasehold	1,970	1,858
		Public Private Partnerships	313	110
		Freehold (excluding PPP)	114,023	107,865
112,627	112,264	Total property, plant and equipment	116,306	109,833
		Property, plant and equipment pledged to secure borrowing	1,836	1,743

Property, plant and equipment pledged to secure borrowing is owned by State-owned enterprises. Under Section 55 of the Public Finance Act 1989, borrowing by the Crown is a charge on the revenue of the Crown equally and rateably. Therefore, no property, plant and equipment owned by the core Crown has been pledged as security for liabilities. Government-owned property, plant and equipment is, however, subject to a significant number of legislative and policy restrictions with respect to its use and disposal.

These carrying values critically depend on judgements of useful lives to determine depreciation and the assumptions used in revaluations. Depreciation rates are affirmed to be appropriate each year by those responsible for managing the assets, whereas assurance on the assumptions used in valuations is provided by the use of independent valuers as noted below.

The value of the land underneath state highways and the rail network, as well as land set aside for cultural and heritage purposes (ie, national parks, forest parks, conservation areas and recreational facilities) is included in the Land category.

Note 20: Property, Plant and Equipment (continued)#

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	Total	Land	Buildings	State highways	Electricity generation assets	Electricity distribution network	Specialist military equipment	Specified cultural and heritage assets	Aircraft (excluding military)	Rail network	Other plant and equipment
For the year ended 30 June 2014	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Gross carrying amount
Opening balance 1 July 2013	122,796	34,453	28,277	17,930	13,611	4,930	3,094	3,073	2,312	1,275	13,841
Additions	6,672	286	1,669	1,599	839	320	350	65	431	136	977
Disposals	(1,432)	(320)	(176)	(83)	(3)	(100)	(4)	(11)	(27)	-	(708)
Net revaluations	3,038	3,340	(11)	257	(89)	-	(417)	344	(367)	(20)	1
Other[10]	(732)	(621)	86	(1)	(83)	33	6	-	(45)	(27)	(80)
Total gross carrying amount	130,342	37,138	29,845	19,702	14,275	5,183	3,029	3,471	2,304	1,364	14,031
Accumulated Depreciation and Impairment
Opening balance 1 July 2013	12,963	-	2,493	-	56	1,065	-	456	16	240	8,637
Eliminated on disposal	(813)	-	(83)	-	(2)	(49)	-	(9)	(20)	-	(650)
Eliminated on revaluation	(2,133)	-	(1,207)	(466)	(129)	-	(144)	24	(211)	-	-
Impairment losses charged to operating balance	346	-	4	-	-	-	-	-	-	185	157
Depreciation expense	3,805	-	1,213	460	404	175	282	25	260	20	966
Other10	(132)	-	29	(1)	5	-	-	-	(28)	(17)	(120)
Total accumulated depreciation	14,036	-	2,449	(7)	334	1,191	138	496	17	428	8,990
Carrying value as at 30 June 2014	116,306	37,138	27,396	19,709	13,941	3,992	2,891	2,975	2,287	936	5,041
By holding
Leasehold	1,970	-	227	-	2	-	-	-	1,704	-	37
Public Private Partnerships	313	13	300	-	-	-	-	-	-	-	-
Freehold (excluding PPP)	114,023	37,125	26,869	19,709	13,939	3,992	2,891	2,975	583	936	5,004
	116,306	37,138	27,396	19,709	13,941	3,992	2,891	2,975	2,287	936	5,041

	Total	Land	Buildings	State highways	Electricity generation assets	Electricity distribution network	Specialist military equipment	Specified cultural and heritage assets	Aircraft (excluding military)	Rail network	Other plant and equipment
For the year ended 30 June 2013	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Gross carrying amount
Opening balance 1 July 2012	121,717	33,626	27,551	17,546	14,714	4,453	4,153	3,036	2,266	860	13,512
Additions	5,779	465	1,220	1,010	609	657	201	128	175	434	880
Disposals	(1,471)	(420)	(228)	-	(17)	(180)	(20)	(9)	(20)	(1)	(576)
Net revaluations	(2,047)	942	(204)	(626)	(893)	-	(1,241)	43	(72)	-	4
Other[11]	(1,182)	(160)	(62)	-	(802)	-	1	(125)	(37)	(18)	21
Total gross carrying amount	122,796	34,453	28,277	17,930	13,611	4,930	3,094	3,073	2,312	1,275	13,841
Accumulated Depreciation and Impairment
Opening balance 1 July 2012	13,133	-	2,505	-	314	977	933	398	16	4	7,986
Eliminated on disposal	(659)	-	(101)	-	(3)	(48)	(30)	(6)	(14)	-	(457)
Eliminated on revaluation	(3,587)	-	(1,125)	(449)	(650)	-	(1,203)	9	(169)	-	-
Impairment losses charged to operating balance	473	-	-	-	19	-	-	-	-	222	232
Depreciation expense	3,697	-	1,150	449	431	152	272	24	213	14	992
Other	(94)	-	64	-	(55)	(16)	28	31	(30)	-	(116)
Total accumulated depreciation	12,963	-	2,493	-	56	1,065	-	456	16	240	8,637
Carrying value as at 30 June 2013	109,833	34,453	25,784	17,930	13,555	3,865	3,094	2,617	2,296	1,035	5,204
By holding
Leasehold	1,858	-	228	-	2	-	-	-	1,590	-	38
Public Private Partnerships	110	9	101	-	-	-	-	-	-	-	-
Freehold (excluding PPP)	107,865	34,444	25,455	17,930	13,553	3,865	3,094	2,617	706	1,035	5,166
	109,833	34,453	25,784	17,930	13,555	3,865	3,094	2,617	2,296	1,035	5,204

Notes

• [10]“Other” mainly includes transfers to/from other asset categories.
• [11]“Other” gross carrying value movements include $623 million reduction in electricity generation assets, relating to costs associated with a wind farm in Macarthur (Australia). The reduction arose from construction costs that were previously capitalised being converted to a finance lease. Subsequently, on 28 June 2013, Meridian disposed of its entire interest in the wind farm.

Revaluation details #

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Revaluations are carried out for a number of classes of property, plant and equipment as detailed in the accounting policies on page 45. Information about the significant valuations within each of the revalued classes of assets is provided below.

Land and buildings#

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Independent valuations of the Government's land and buildings have been performed by a number of valuers to determine their fair value. The valuations, which conform to International Valuation Standards, were determined by reference to prices for similar properties and in some cases by reference to discounted cash flows or optimised depreciated replacement cost (ODRC).

Breakdown of land and buildings (total valuation over $500m)	Land		Buildings		Total
	30 June 2014 $m	30 June 2013 $m	30 June 2014 $m	30 June 2013 $m	30 June 2014 $m	30 June 2013 $m
Housing stock	11,361	9,580	7,307	6,778	18,668	16,358
School property	3,167	2,887	8,385	7,941	11,552	10,828
State highway corridor land	8,853	8,003	10	11	8,863	8,014
Conservation estate	5,432	5,364	59	60	5,491	5,424
Hospitals	782	707	4,093	4,135	4,875	4,842
Rail network corridor land	3,256	3,256	-	-	3,256	3,256
Defence Force land and buildings	621	631	1,227	1,287	1,848	1,918
Prisons and Department of Corrections office buildings	167	207	1,947	1,681	2,114	1,888
Landcorp farmland and buildings	1,109	1,047	121	125	1,230	1,172
Ministry of Justice land and buildings	423	418	495	461	918	879
Police stations	150	168	522	537	672	705
Other	1,817	2,185	3,230	2,768	5,047	4,953
Land and buildings	37,138	34,453	27,396	25,784	64,534	60,237

Description	Valuer/Reviewer	Approach	Timing
Housing stock	Quotable Value NZ Limited	Valuations based on market evidence or adjusted current rating valuations.	Annual valuation with the latest completed as at 30 June 2014.
School property	Quotable Value Limited or experienced staff (reviewed by Quotable Value Limited)	Valuations based on market evidence where possible, or ODRC.	Annual valuation with the latest completed as at 30 June 2014.
State highway corridor land and held properties	Darroch Ltd, a registered property valuation company, peer reviewed by Opus International Consultants Ltd with NZTA.	Valued using opportunity cost based on adjacent use as an approximation to fair value, or where fair value is not able to be reliably determined using market based evidence, DRC is used to determine fair value. Held properties are valued using opportunity cost based on adjacent use as an approximation to fair value, or a discounted cash flow calculation. Where fair value is not able to be reliably determined using market based evidence the cost approach is used to determine fair value.	A full valuation is completed on a rolling regional basis, with each region fully valued at least once every 3-5 years. The latest valuation and indexation was completed as at 30 June 2014. A full valuation is completed on all held properties every second year. The alternate years valuation uses an indexation method. The latest valuation was completed on 30 June 2013.
Conservation estate (national parks, forest parks, conservation areas, reserves)	PropertyIQ rateable valuations reviewed by Logan Stone Limited	Valued based on rateable valuations where possible.  Land not matched to a rateable valuation was assessed using a calculated average per hectare rate.	Annual valuation with the latest completed as at 30 June 2014.
Hospitals	Each District Health Board uses an independent valuer	Land values were based on market evidence while buildings were valued at ODRC.	Three to five year cycle with varying valuation dates depending on each DHB.
New Zealand Rail Corporation rail corridor land	Darroch Limited	Land associated with the rail corridor was valued using an opportunity cost based on adjacent use, as an approximation to fair value.	Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2012.
NZ Defence Force Land and Buildings	Beca Valuations Limited and updated internally by NZ Defence Force for buildings	Valued using a market based approach unless reliable market evidence was unavailable, in which case ODRC was used to calculate fair value.	Valuations completed at least once every five years with the latest independent land and buildings valuation completed as at 30 June 2013 and buildings internally updated valuation completed as at 31 December 2013.
Prisons and Department of Corrections office buildings	Beca Valuations Limited	Valued based on market evidence, except for prison buildings, which were valued at ODRC.	Three-year valuation cycle with the latest full valuation completed as at 30 June 2014.
Landcorp farmland and associated buildings	Rural Value Limited	The valuations based on observed market evidence take into account general factors that influence farm land prices, recent farm sales in the relevant regions and specific encumbrances over the land.	Annual valuation with the latest completed as at 30 June 2014.
Ministry of Justice locations (including courtrooms)	Beca Valuations Limited	Based on market evidence where possible, or ODRC.	The valuations are performed on a rolling basis over three years.  The full valuation cycle was completed on 30 June 2013.
Police stations and national headquarters	Valuations undertaken by NZ Police and certified by independent valuers.	The internal valuation performed based on market evidence where possible, or ODRC.	Valuations completed at least once every five years with the latest being as at 30 June 2012.

Specified cultural and heritage assets#

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There are difficulties associated with obtaining an objective valuation for the specified cultural and heritage assets of the Government. Details of the valuations of the most significant assets within this class are discussed in the following table:

Carrying value of specified cultural and heritage assets

	Actual
	30 June 2014 $m	30 June 2013 $m
National Library	1,005	849
Te Papa	833	830
National Archives	623	449
Conservation	459	442
Parliamentary Library	27	28
Other	28	19
	2,975	2,617

Description	Valuer/Reviewer	Approach	Timing
National Library collections	Webb's	The collection was divided into categories by format to associate records that could be said to have a broad commonality of value.  Items were then valued based on market assessments and comparisons with other items of a similar nature.	Three-year valuation cycle with the latest full valuation completed as at 30 June 2014.
Te Papa collections	History, Photography, Library, Collections: Webbs Auckland Natural History Collection: Webbs Auckland & internal experts	Photography, History and Library Collections are valued based on market value by independent valuers. The Natural History Collection is valued at replacement cost value.	Valuations completed cyclically with all collections valued at least once every three years with the latest valuations completed as at 30 June 2014.
National Archives	Dunbar Sloane	The collection was divided into categories by format and age to associate records that could be said to have a broad commonality of value.  Items were then valued based on market assessments and comparisons with other items of a similar nature.  Documents of exceptional value (including Treaty of Waitangi) are valued independently based on overseas market research.	Three year cycle with the latest full valuation completed as at 30 June 2014.
Conservation estate assets including visitor buildings, tracks, roads, fences and infrastructure	Internal valuations reviewed by Logan Stone Limited	Revaluations use the movement in the appropriate capital goods index as supplied by Statistics New Zealand to estimate the change in asset values.	Assets are revalued at least once every five years.  Buildings, structures, campsites and signs were valued at fair value effective as at 30 June 2014.
Parliament Library collection including research (reference) collection and heritage collection.	Internal valuation	A standard unit price is assigned to books, which is used for the valuation. Library reference collections are held at historic standard unit cost and depreciated over the assigned useful economic life.  Library heritage collection additions are recorded at their standard unit price as determined at the last valuation and is not depreciated.	Assets are revalued at least once every three years with the latest completed as at 30 June 2013.

Note 20: Property, Plant and Equipment (continued)#

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Other asset classes subject to revaluation #

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The details of valuations for each class of property, plant and equipment are in the table below:

Carrying value of other asset classes subject to revaluation

	Actual
	30 June 2014 $m	30 June 2013 $m
State highways	19,709	17,930
Electricity generation assets	13,941	13,555
Specialist military equipment	2,891	3,094
Aircraft (excluding military)	2,287	2,296
Rail network	936	1,035
	39,764	37,910

Description	Valuer/Reviewer	Approach	Timing
State highways[12] Roads, bridges, culverts, tunnels, underpasses including the formation works, road structure, drainage works and traffic facilities.	Opus International Consultants Limited	State Highways are valued using the DRC of the existing asset database.  (See below for further comments).	A full valuation is completed yearly where the majority of assets are indexed. The latest valuation completed as at 30 June 2014.
Electricity generation assets [13]
Meridian Energy: Hydro stations, wind and solar farms	Pricewaterhouse Coopers (PwC)	Based on an income approach assessing both the capitalisation of earnings and the discounted cash flow methodology.	A review of the carrying values of Meridian's assets is completed annually. If this indicates the carrying value is a fair representation of fair value a full revaluation is not completed.
Mighty River Power: Hydro and Geothermal stations and gas-fired generation plants	PwC	Based on net present value of future earnings of the assets on an existing use basis excluding disposal and restoration costs.	Annual valuation with the latest completed as at 30 June 2014.
Genesis Energy: Thermal and Hydro stations and Wind farms	Internal valuation independently reviewed by PwC	Based on the present value of estimated future cash flows of the assets.	Valuation completed at least once every five years with the latest valuation being as at 30 June 2013.
Specialist military equipment	Internal valuations by subject matter experts	Valuations use a market based approach unless reliable market evidence is not available, in which case ODRC is used to calculate fair value.	Valuation completed at least once every five years with the latest valuation being as at 31 December 2013.
Aircraft Aircraft and spare engines and flight simulators	The Aircraft Value Analysis Company	An external valuation is obtained to ascertain indicative market values of each aircraft on a stand-alone basis.	Annual valuation with the latest completed as at 30 June 2014.
Rail network [14] Buildings, bridges, tunnels, tracks, level crossings signals and electrification.  All these assets are held on freehold basis.	Buildings - Darroch Limited	Non-specialised building assets not on the rail corridor were valued based on market evidence using comparable sales.  Specialised building assets and buildings on rail corridor land were valued using ODRC.	Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2014.
	Other Rail Network Assets ­ Ernst and Young	Railway infrastructure used for freight services (freight only and dual use lines required for freight operations) has been valued using the recoverable amount, being scrap value less costs to sell. Railway infrastructure not required for freight operations and used for metro has been valued using ODRC reflecting the public benefit nature of these assets.

Additional information regarding state highways asset valuation#

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There are some uncertainties about the values assigned to different components (land, formation, bridges, etc) of the state highway network. These uncertainties include whether the New Zealand Transport Agency's (NZTA) databases have accurate quantities of remaining life and complete capture for some cost components. Some uncertainties are inherent, but those for both the quantity and costs of components can be reduced by improvements in the accuracy of the underlying databases.

The NZTA has identified a few instances where some of the quantities have been understated and some actual costs have not been included in the underlying databases, which have been relied upon by the valuer.

Additional costs associated with urban development are assessed as being the most significant part of the potential undervaluation with the remaining due to incomplete records. The additional costs associated with urban development for the current year have been included, however historic costs are not currently able to be reliably measured.

NZTA has commenced improving the accuracy of the asset databases and identifying all costs able to be capitalised. This is reducing the understatement of the value of the state highway network.

Any adjustments affect the Statement of Financial Position only. There is no impact on the operating balance.

Additional information regarding electricity generation assets#

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

The following tables provide information on each of the entities key assumptions as disclosed in the individual annual reports of the individual electricity generation companies (part of the State owned enterprises segment). The electricity price path assumptions, stated below, for each electricity generation company are substantially the same. However, the Meridian Energy and Mighty River Power assumption is conveyed in real terms while Genesis Energy's assumption is in nominal terms. For further information on the valuation of electricity generations assets, refer to the individual annual reports of each entity.

Meridian Energy Limited

Assumption		Sensitivity range	Valuation Impact on fair value of generation assets
Future NZ electricity price estimates	$69/MWh to $98/MWh by 2033 (in real terms)	+/- $3/MWh	$365 million / ($365 million)
Generation volume	13,052 GWh	+/- 250 GWh	$261 million / ($261 million)
Operating expenditure	$258 million p.a.	+/- $10 million p.a.	($127 million) / $127 million

Genesis Energy Limited

Assumption		Sensitivity range	Valuation Impact on fair value of generation assets
Wholesale electricity price path	$76/MWh to $137/MWh by 2025 (in nominal terms)	+/- 10%	$527 million / ($440 million)
Generation volume	3320 GWh to 6112 GWh	+/- 10%	$527 million / ($440 million)
Discount rate	11.3% to 12.8%	+/- 1%	$466 million / ($284 million)

Mighty River Power Limited

Assumption		Sensitivity range	Valuation Impact on fair value of generation assets
Future wholesale electricity price path	$70/MWh to $95/MWh (in real terms)	+/- 10%	$684 million / ($687 million)
Discount rate	Not publicly available	+/- 0.5%	$489 million / ($645 million)
Operational expenditure	$188 million p.a.	+/- 10%	($230 million) / $230 million

Notes

• [12]Additional information regarding state highways assets is provided on page 80.
• [13]Additional information regarding electricity generation assets is provided on page 81.
• [14]Additional information regarding the rail network assets is provided on page 82.

Note 20: Property, Plant and Equipment (continued)#

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Additional information regarding rail network #

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Carrying value of rail network

	Recoverable amount $m	ODRC $m	30 June 2014 Carrying value $m
Network required for freight	107	4,128	107
Network not required for freight (including metro)	14	719	719
Total rail infrastructure	121	4,847	826
Buildings			78
Capital work in progress			32
Rail network			936

Carrying value of rail network

	Recoverable amount $m	ODRC   $m	30 June 2013 Carrying value $m
Network required for freight	118	4,151	118
Network not required for freight (including metro)	14	654	654
Total rail infrastructure	132	4,805	772
Buildings			115
Capital work in progress			148
Rail network			1,035

The rail network comprises around 4,000 kilometres of track (excluding yards and sidings) and is used primarily for freight transport. In addition to freight, the network is used by KiwiRail for long distance passenger transport and access is provided to two regional authorities, Greater Wellington Regional Council and Auckland Transport for metro passenger services. Some tracks are dual purpose (ie, used for both freight and metro), however there are a number of tracks which serve metro transport only (eg, the Johnsonville line). The rail infrastructure earns revenue from freight and long distance passenger charges. In addition, network access charges are collected from the two regional authorities in relation to the metro services.

The rail network infrastructure used for freight services (including dual use assets required for freight operations) is measured at fair value, reflecting the amount that could be expected to be received from a third party in an orderly transaction. The portion of dual use assets not required for freight operations and metro only assets are reported in these financial statements at an optimised depreciated replacement cost basis, as the community benefits enabled by this investment do not provide a return at the whole-of-Government level.

Prior to the restructuring of KiwiRail as a profit-oriented entity, the total rail network infrastructure was measured on an optimised depreciated replacement cost basis reflecting the previous focus on it as a non-cash generating asset. If the value of the rail network was still measured using that approach, then a notional depreciation amount of $204 million (2013: $194 million) could be calculated, representing an estimate of the amount of “wear-and-tear” or consumption of the network asset over the year. This estimated “wear-and-tear” compares to the total maintenance and renewal expenditure of $224 million (2013: $213 million) on the rail network during the year.

All valuations have been undertaken in accordance with the standards issued by the New Zealand Property Institute.

Additional information regarding Public Private Partnerships#

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A public private partnership (also known as a service concession arrangement) is an arrangement between the Government and a private sector partner. The assets in a public private partnership are recognised as assets of the Government. As the assets are progressively constructed, the Government recognises work-in-progress at cost. At the same time a financial liability of the same value is also recognised. When the assets are fully constructed, the total asset cost and the matching financial liability reflect the value of the future compensation to be provided to the private-sector partner for the assets. The Crown's obligation to pay for these assets is included in other borrowings.

Carrying value of assets by arrangement

	Actual
	30 June 2014 $m	30 June 2013 $m
Auckland South Corrections Facility	239	62
Other	74	48
	313	110
Carrying value of assets by source
Provided by private sector partner	300	101
Existing government assets	13	9
	313	110

Auckland South Corrections Facility#

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The Department of Corrections has entered into a Project Agreement with Secure Future Wiri Limited for the delivery of a new men's prison at Wiri through a Public Private Partnership. Secure Future will design, build, finance, operate and maintain the prison. Under the agreement, the Department has provided existing Department owned land, adjacent to the Auckland Region Women's Corrections Facility, to the contractor on which to build the prison. As the facility is currently under construction, no depreciation on the asset has been incurred to date.

Responsibility for on-going operation and maintenance will revert to the Government at the end of the 25 year contract period.

Movements in carrying value for Auckland South Corrections Facility

Gross carrying amount	Actual
	30 June 2014 $m	30 June 2013 $m
Opening balance 1 July	62	-
Assets provided by private sector partner(s)	174	57
Existing Government assets	-	5
Disposals	-	-
Net revaluations	3	-
Other	-	-
Total Gross Carrying Amount	239	62

Note 21: Equity Accounted Investments#

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Note 21: Equity Accounted Investments

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
8,179	8,358	Tertiary Education Institutions	8,508	8,060
1,463	1,663	Other	1,563	1,533
9,642	10,021	Total equity accounted investments	10,071	9,593

Tertiary Education Institutions (TEIs)#

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TEIs are Crown entities, and the Government has a number of legislative powers with respect to them in the interests of public accountability and has some significant reserve controls in the event of an institution facing financial risk. However, the Government does not determine the operating and financing policies of TEIs, if they are not at financial risk, but rather is committed to safeguarding their academic freedom and autonomy. By so doing, the Government obtains the benefits of an effective tertiary education sector. Their relationship to the Crown is managed by a plan agreed between them and the Tertiary Education Commission.

The applicability of the test for consolidation in accounting standards as it applies to TEIs and the Government is unclear, and is still under consideration by the relevant accounting authorities. In the interim the TEIs have been included in the accounts as a 100% equity accounted investment.

Summarised financial information in respect of TEIs is set out below:

Note 21: Equity Accounted Investments

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Operating Results
2,154	2,251	Revenue from Crown	2,238	2,221
2,290	2,383	Other revenue	2,533	2,388
(4,313)	(4,464)	Expenses	(4,528)	(4,440)
131	170	Net surplus	243	169
		Net worth
		Assets
1,355	1,392	Financial assets	1,364	1,392
8,288	8,400	Property, plant and equipment	8,535	8,102
307	343	Other assets	480	343
9,950	10,135	Total assets	10,379	9,837
		Liabilities
238	193	Borrowings	222	193
1,533	1,584	Other liabilities	1,649	1,584
1,771	1,777	Total liabilities	1,871	1,777
8,179	8,358	Net worth	8,508	8,060

New Zealand Local Government Funding Agency (NZLGFA)#

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The Government holds $5 million of the $25 million paid-up capital of NZLGFA. The investment has been classified as an equity accounted investment as, although the Government does not have direct representation on the NZLGFA Board of Directors, it may solely appoint, remove and replace one member of the Shareholders' Council, which, in turn makes recommendations to Shareholders as to the appointment, removal, re-election, replacement and remuneration of Directors. The investment value has therefore been adjusted to reflect the Crown's share of any changes in the net assets of the NZLGFA. The Government is not a guarantor of the NZLGFA and has no share of any contingent liabilities of the NZLGFA.

For the year ended 30 June 2014, NZLGFA recognised revenue of $149 million (2013: $6 million) and a surplus of $7 million (2013: $1 million). NZLGFA's assets and liabilities were $3,918 million (2013: $2,688 million) and $3,889 million (2013: $2,665 million) respectively. The Crown's share of the net assets is $6 million (2013: $5 million).

Note 22: Intangible Assets and Goodwill#

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Note 22: Intangible Assets and Goodwill

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
		Computer software	1,736	1,517
		Goodwill	628	655
		Other intangible assets	556	604
2,837	2,841	Total intangible assets and goodwill	2,920	2,776
		By maturity
		Expected to be sold or consumed within one year	425	406
		Expected to be sold or consumed after one year	2,495	2,370
		Total intangible assets and goodwill	2,920	2,776
		By source
1,175	1,136	Core Crown	1,184	1,041
534	498	Crown entities	542	573
1,128	1,207	State-owned enterprises	1,194	1,162
-	-	Inter-segment eliminations	-	-
2,837	2,841	Total intangible assets and goodwill	2,920	2,776

Note 22: Intangible Assets and Goodwill

	Actual
	30 June 2014 $m	30 June 2013 $m
Computer Software
Internally-Generated Computer Software
Cost
Opening balance	2,820	2,558
Additions	399	387
Disposals	(47)	(148)
Other movements	9	23
Total cost	3,181	2,820
Accumulated Amortisation
Opening balance	1,816	1,696
Eliminated on disposal	(31)	(100)
Impairment losses charged to operating balance	17	22
Amortisation	248	229
Other movements	41	(31)
Total accumulated amortisation	2,091	1,816
Carrying value of internally-generated computer software	1,090	1,004
Purchased Computer Software
Cost
Opening balance	1,807	1,645
Additions	287	223
Disposals	(53)	(50)
Other movements	(9)	(11)
Total cost	2,032	1,807
Accumulated Amortisation
Opening balance	1,294	1,132
Eliminated on disposal	(46)	(41)
Impairment losses charged to operating balance	-	-
Amortisation	177	177
Other movements	(39)	26
Total accumulated amortisation	1,386	1,294
Carrying value of purchased computer software	646	513
Total computer software	1,736	1,517

Note 22: Intangible Assets and Goodwill

	Actual
	30 June 2014 $m	30 June 2013 $m
Goodwill
Cost
Opening balance	891	985
Additions	16	7
Disposals	(2)	(66)
Other movements	(41)	(35)
Total cost	864	891
Accumulated Impairment
Opening balance	236	239
Eliminated on disposal	-	(2)
Impairment losses charged to operating balance	-	2
Reversals of impairment losses charged to operating balance	-	-
Amortisation charge	-	-
Other movements	-	(3)
Total accumulated impairment	236	236
Carrying value of goodwill	628	655

Goodwill in relation to Air New Zealand of $258 million (2012: $258 million) has been tested for impairment at 30 June 2014 based on a value in use discounted cash flow valuation. Cash flow forecasts were prepared for five years using Air New Zealand board reviewed business plans. Key assumptions include exchange rates, jet fuel costs, passenger load factors and route yields. These assumptions have been based on historical data and current market information. The cash flow forecasts are particularly sensitive to fluctuations in fuel prices and exchange rates are extrapolated using an average growth rate of approximately 1.5%. The cash flow projections are discounted using post-tax discount rate scenarios of 10.0-11.0%. The 2014 valuation confirmed that there was no impairment to the goodwill asset required.

Note 23: Payables#

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Note 23: Payables

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
8,403	7,756	Accounts payable	7,626	7,616
3,957	4,196	Taxes repayable	3,668	3,544
12,360	11,952	Total payables	11,294	11,160
		By maturity
11,747	11,332	Expected to be settled within one year	10,411	10,688
613	620	Expected to be outstanding for more than one year	883	472
12,360	11,952	Total payables	11,294	11,160
		By source
6,860	7,682	Core Crown	7,800	7,873
5,929	5,584	Crown entities	5,382	4,996
5,663	5,003	State-owned enterprises	4,832	4,877
(6,092)	(6,317)	Inter-segment eliminations	(6,720)	(6,586)
12,360	11,952	Total payables	11,294	11,160

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

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

Note 24: Borrowings#

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Note 24: Borrowings

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
68,469	60,499	Government bonds	60,337	57,377
3,541	3,087	Treasury bills	3,147	4,084
204	190	Government retail stock	183	199
7,183	6,849	Settlement deposits with Reserve Bank	7,758	7,575
1,854	2,099	Derivatives in loss[15]	2,245	3,188
1,475	1,574	Finance lease liabilities	1,501	1,454
29,475	28,760	Other borrowings	28,248	26,210
112,201	103,058	Total borrowings [16]	103,419	100,087
		By source
94,504	88,438	Core Crown	89,086	84,870
5,416	5,107	Crown entities	5,155	5,251
27,733	26,916	State-owned enterprises	26,185	24,839
(15,452)	(17,403)	Inter-segment eliminations	(17,007)	(14,873)
112,201	103,058	Total borrowings	103,419	100,087
		By maturity
42,962	37,299	Expected to be settled within one year	39,072	30,517
69,239	65,759	Expected to be outstanding for more than one year	64,347	69,570
112,201	103,058	Total borrowings	103,419	100,087
		By guarantee
84,580	76,653	Sovereign-guaranteed debt[17]	77,461	75,684
27,621	26,405	Non-sovereign debt	25,958	24,403
112,201	103,058	Total borrowings	103,419	100,087

This note constitutes a Statement of Borrowings as required by the Public Finance Act 1989.

All principal, interest and other money payable in relation to money borrowed by the core Crown is a charge on, and payable out of, the revenues of the core Crown equally and rateably with all other general borrowing obligations of the core Crown.

The Government is not liable to contribute towards the payments of debts of Government entities, their subsidiaries or any entity in which the Government has an interest or that is controlled or wholly owned by the Government. Exceptions to this rule only occur for items the Government is liable for under any Act, any guarantee given by the Government, by virtue of an action a creditor has against the Government, or liability the Government has to a creditor of the Reserve Bank (refer note 32).

Further information on the management of risks associated with these financial liabilities is provided in note 33.

Other borrowings includes $3,958 million (2013: $4,115 million) of sovereign-issued debt administered by the Reserve Bank and NZDMO. The remaining borrowings of $24,290 million (2013: $22,095 million) comprise non-sovereign-issued debt of Crown entities and State-owned enterprises.

Government Bonds#

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Note 24: Borrowings

	Actual
	30 June 2014 $m	30 June 2013 $m
Government bonds measured at amortised cost	57,554	55,005
Government bonds measured at fair value	2,783	2,372
Total Government bonds	60,337	57,377

Government bonds are measured at amortised cost, unless they are managed and their performance is evaluated on a fair value basis. Where a bond is evaluated on a fair value basis it is reported at fair value with movements in fair value reported in the statement of financial performance.

The fair value of government bonds measured at amortised cost is $58,523 million (2013: $57,513 million). This valuation is based on observable market prices. The reduction in interest rates since the government bonds were issued results in a fair value greater than amortised cost.

The valuation of government bonds reported at fair value is also based on observable market prices. New Zealand's domestic currency bonds are rated Aaa by Moody's and AA+ by S&P and Fitch. The rating outlook is stable with Moody's and S&P, and positive with Fitch.

Note 24: Borrowings

	Actual
	30 June 2014 $m	30 June 2013 $m
Government bonds measured at fair value
Carrying value	2,783	2,372
Amount payable on maturity	2,630	2,113
Fair value impact from changes in credit risk for the year	-	-
Cumulative fair value impact from changes in credit risk	-	-

Treasury Bills#

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

Notes

• [15]Derivatives are included in either assets or liabilities depending on their gain or loss position at balance date. This treatment leads to fluctuations in individual items primarily due to exchange rate movements.
• [16]Total borrowings are the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown. This equates to the amount in the total Crown statement of financial position and represents the complete picture of whole-of-Crown debt obligations to external parties.
• [17]Total borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by State-owned enterprises and Crown entities are not explicitly guaranteed by the Crown.

Note 24: Borrowings (continued)#

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Settlement Deposits with Reserve Bank#

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Settlement deposits with the Reserve Bank represent the level of money deposited with the Reserve Bank by commercial banks. They act as a liquidity mechanism used to settle wholesale obligations amongst the banks and provide the basis for settling most of the retail transactions that occur every working day between corporates and individuals.

Settlement deposits with the Reserve Bank are technically a form of borrowing by the Reserve Bank, where the liability is matched by a corresponding financial asset (reported as an element of marketable securities and deposits - refer note 15). Settlement deposits are reported at amortised cost, which is equivalent to the amount payable to depositors given the short term (ie, overnight) nature of these liabilities.

Settlement accounts are administered through the Exchange Settlement Account System (ESAS). ESAS account holders generally receive interest at the Official Cash Rate on their end-of-day balances. The Reserve Bank provides collateralised overnight borrowing facilities for banks, at an interest rate set at a margin over the Official Cash Rate.

Finance Lease Liabilities#

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Note 24: Borrowings (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By source
6	8	Core Crown	7	12
48	44	Crown entities	45	39
1,425	1,522	State-owned enterprises	1,449	1,403
(4)	-	Inter-segment eliminations	-	-
1,475	1,574	Total finance lease liabilities	1,501	1,454
		Undiscounted Minimum Lease Payments
		No later than one year	217	193
		Later than one year and not later than five years	805	774
		Later than five years	646	643
		Total undiscounted minimum lease payments	1,668	1,610
		Present Value of Minimum Lease Payments
		No later than one year	188	172
		Later than one year and not later than five years	697	691
		Later than five years	616	591
		Total present value of minimum lease payments	1,501	1,454
		Future finance charges	167	156

Finance leases are mainly in relation to aircraft. The Government entities entering into finance leases generally have options to purchase the equipment for a nominal amount at the conclusion of the lease agreements. The Government's obligations under finance leases are secured by the lessors' title to the leased assets.

The fair value of finance lease liabilities is approximately equal to their carrying value.

Other Borrowings#

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Note 24: Borrowings (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
21,373	23,670	Other borrowings measured at amortised cost	22,943	21,534
8,102	5,090	Other borrowings measured at fair value	5,305	4,676
29,475	28,760	Total other borrowings	28,248	26,210

Other borrowings are reported at fair value with movements in fair value reported in the statement of financial performance when they are held for trading or they are managed and their performance is evaluated on a fair value basis.

The fair value of other borrowings measured at amortised cost is $22,944 million (2013: $21,458 million). The fair value of financial liabilities with standard terms and conditions traded on active liquid markets are determined by reference to quoted market prices. Where such prices are not available use is made of estimated discounted cash flow models with reference to market interest rates.

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

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

Note 24: Borrowings (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Other borrowings measured at fair value
Carrying value	5,305	4,676
Amount payable on maturity	5,226	4,196
Fair value impact from changes in credit risk for the year	160	(42)
Cumulative fair value impact from changes in credit risk	22	165

Note 25: Insurance Liabilities#

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Note 25: Insurance Liabilities

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By entity
31,423	29,209	ACC liability	29,948	29,446
3,743	4,308	EQC property damage liability	4,747	6,869
698	1,327	Southern Response liability	1,434	1,744
38	56	Other insurance liabilities	63	67
-	-	Inter-segment eliminations	(367)	(414)
35,902	34,900	Total insurance liabilities	35,825	37,712
		By component
		Outstanding claims liability	33,358	35,225
		Unearned premium liability	2,196	2,384
		Unearned premium liability deficiency	271	103
		Other	-	-
		Total insurance liabilities	35,825	37,712
		By maturity
7,306	8,883	Expected to be settled within one year	9,706	10,103
28,596	26,017	Expected to be outstanding for more than one year	26,119	27,609
35,902	34,900	Total insurance liabilities	35,825	37,712
		Assets arising from insurance obligations are:
		Receivables for premiums	2,689	2,917
		Reinsurance claim recoveries	1,409	3,135

Information on insurance expenses and underwriting results can be found in note 11. Additional information on the risks and uncertainties in relation to the Canterbury earthquakes can be found in note 30.

The objectives, policies and procedures for managing these risks are set out in the governing statutes and policy documents of each entity.

All assets held by the three insurance entities are considered available to back present and future claims obligations. There are no deferred acquisition costs (e.g. marketing costs) in respect of insurance obligations at the reporting date.

Analysis of insurance liabilities#

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The remainder of the note provides a detailed analysis of the ACC, EQC and Southern Response insurance liabilities. Further information on these liabilities may also be found in the annual reports of each of these entities and on their respective websites. The analysis includes a breakdown of the outstanding claims liability, unearned premium liability, and the unearned premium liability deficiency.

The outstanding claims liability is the present value of the central estimate of expected payments for claims incurred plus a risk margin.

The unearned premium liability represents premiums received to provide insurance cover after 30 June 2014.

The unearned premium liability deficiency is the extent that the unearned premium liability is insufficient to cover expected future claims (ie, payments for future accidents within the period covered by the premiums received).

Analysis of ACC insurance liability

ACC's insurance obligations arise primarily from the accident compensation scheme provision of no fault personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.

An independent actuarial estimate by PricewaterhouseCoopers, consulting actuaries, has been made of the future expenditure relating to accidents which occurred prior to balance date, whether or not the claims have been reported to, or accepted by, ACC. The PricewaterhouseCoopers actuarial report was signed by Mr Paul Rhodes, Fellow of the Institute and Faculty of Actuaries (UK), Mr Michael Playford and Mr Darryl Frank, Fellows of the Institute of Actuaries of Australia. Mr Rhodes and Mr Playford are also Fellows of the New Zealand Society of Actuaries.

The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Note 25: Insurance Liabilities

	Actual
	30 June 2014 $m	30 June 2013 $m
ACC outstanding claims liability	27,696	27,162
ACC unearned premium liability	2,050	2,242
ACC unearned premium liability deficiency	202	42
Total ACC liability	29,948	29,446
Analysis of Outstanding ACC Claims Liability
Undiscounted outstanding claims liability	76,628	74,809
Discount adjustment	(52,104)	(50,754)
Risk margin	3,172	3,107
Total outstanding ACC claims liability	27,696	27,162
Discounted central estimate of future payments for outstanding claims	22,898	22,384
Claims handling expenses	1,626	1,671
Outstanding claims liability before risk margin	24,524	24,055
Risk margin	3,172	3,107
Total outstanding ACC claims liability	27,696	27,162
Movement in Outstanding ACC Claims Liability
Opening balance	27,162	28,396
Claims incurred for the year	3,642	3,421
Claims paid out in the year	(3,335)	(2,970)
Discount rate unwind	706	684
Experience adjustments (actuarial gains and losses):
- actual and assumed claim experience	443	(1,195)
- change in discount rate	(93)	(939)
- change in inflation rate	(829)	(235)
Other movements	-	-
Closing outstanding ACC claims liability	27,696	27,162
Movement in ACC Unearned Premium Liability
Opening balance	2,242	2,183
Earning of premiums previously deferred	(2,242)	(2,183)
Deferral of premiums on current year contracts	2,050	2,242
Other	-	-
Closing ACC unearned premium liability	2,050	2,242

Claims development historical analysis#

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

Note 25: Insurance Liabilities

	2008 $m	2009 $m	2010 $m	2011 $m	2012 $m	2013 $m	2014 $m	30 June 2014 $m
Estimate of ultimate claims costs:
At the end of the accident year	5,502	7,103	7,035	7,517	6,877	6,794	7,264
One year later	6,709	6,733	6,739	6,288	6,118	6,608
Two years later	6,470	6,714	5,939	5,890	5,546
Three years later	6,412	6,045	5,722	5,310
Four years later	5,736	5,583	5,274
Five years later	5,483	5,540
Six years later	5,332
Current estimate of cumulative claim costs	5,332	5,540	5,274	5,310	5,546	6,608	7,264	40,874
Cumulative payments	(1,841)	(1,718)	(1,414)	(1,311)	(1,267)	(1,212)	(810)	(9,573)
Outstanding claims undiscounted	3,491	3,822	3,860	3,999	4,279	5,396	6,454	31,301
Discount								(22,196)
Claims handling costs								1,833
2007 and prior claims (net present value)								16,742
Short tail outstanding claims								16
Total outstanding ACC claims liability								27,696

Note 25: Insurance Liabilities

	Actual
	30 June 2014 $m	30 June 2013 $m
Analysis of ACC unearned premium liability deficiency
Unearned premium liability	2,050	2,242
Adjusted for unearned premium relating to claims arising from medical misadventure premium liabilities without deficiency	(114)	-
Adjusted ACC unearned premium liability	1,936	2,242
Discounted central estimate of payments for insured future claims	1,952	1,997
Central estimate of discounted future reinsurance recoveries	-	-
Risk margin	186	287
Present value of expected cash flows for future accident claims	2,138	2,284
Total ACC unearned premium liability deficiency	202	42

Key Assumptions#

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The key assumptions and the methodology applied in the valuation of the outstanding ACC claims obligation are as follows:

(i) Risk-free discount rates#

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The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 5.01% (2013: 4.86%) and a long term discount rate of 5.50% beyond 19 years (2013: 5.50% beyond 21 years).

(ii) Risk margin#

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The outstanding claims liability includes a risk margin that relates to the inherent uncertainty in the central estimate of the present value of expected future payments. The overall risk margin is intended to achieve a 75% probability of sufficiency in meeting the actual amount of liability to which it relates.

(iii) Inflation and indexation#

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ACC claims and costs are subject to inflation. Some costs are assumed to increase faster than the general rate of inflation (referred to as superimposed inflation) due to factors such as innovation in medical treatment.

(iv) Rehabilitation Rate#

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Assumptions for rehabilitation rate were set with reference to past observed experience with allowance for expectations of the future that is believed to be reasonable under the circumstances.

(v) Liability adequacy test#

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An unearned premium liability deficiency is recognised when the amount of the present value of expected future claim cash outflows, plus a risk margin, exceeds the unearned premium liability.

Key Assumptions

	30 June 2014 Next Year	30 June 2014 Beyond Next Year	30 June 2013 Next Year	30 June 2013 Beyond Next Year
Summary of assumptions
Average weighted term to settlement from reporting date	15 years		15 years
	8 months		11 months
Weighted average risk margin	12.9%		12.9%
Probability of adequacy of liability	75.0%		75.0%
Weighted average risk margin for liability adequacy test	12.9%		18.2%
Probability of adequacy of liability to cover unearned premiums	75.0%		75.0%
Risk-free discount rate[18]	3.7%	4.0% to 5.50%	2.7%	3.1% to 5.5%
Inflation rates (excluding superimposed inflation):
Weekly compensation	3.1%	3.1% to 3.5%	3.0%	3.3% to 3.5%
Impairment benefits	1.9%	1.9% to 2.5%	1.1%	2.0% to 2.5%
Social rehabilitation benefits (serious and non serious injury)	2.3%	2.3% to 2.7%	2.2%	2.5% to 2.7%
Hospital rehabilitation benefits	2.3%	2.3% to 2.7%	2.2%	2.5% to 2.7%
Medical costs	2.3%	2.3% to 2.7%	2.2%	2.5% to 2.7%
Superimposed inflation:
Social rehabilitation benefits (serious injury)	1.8%	2.3% to 5.7%	2.1%	2.3% to 5.4%
Social rehabilitation benefits (non-serious injury)	1.0%	2.0% to 4.3%	0.0%	2.0% to 3.8%
Hospital rehabilitation benefits	5.0%	4.0% to 5.0%	5.0%	4.0% to 5.0%
Medical costs (GP's)	4.0%	3.0% to 4.0%	2.0%	3.0% to 4.0%
Medical costs (Radiology)	5.8%	5.0% to 5.8%	4.3%	5.0% to 5.8%
Medical costs (Physiotherapists)	2.3%	2.0% to 2.3%	1.7%	2.0% to 2.3%
Medical costs others (specialists)	3.3%	2.5% to 3.3%	1.8%	2.5% to 3.3%

Notes

• [18]The risk-free discount rate beyond 19 years is 5.5% (2013: the rate beyond 21 years was 5.5%).

Note 25: Insurance Liabilities (continued)#

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Sensitivity Analysis#

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

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

Note 25: Insurance Liabilities (continued)

	Change	Impact on liability Actual
		30 June 2014 $m	30 June 2013 $m
Sensitivity of assumptions
Average weighted term to settlement from reporting date	+1 year	(826)	(820)
	-1 year	852	846
Risk-free discount rate	+1%	(3,585)	(3,628)
	-1%	4,759	4,823
Inflation rates (including superimposed inflation)	+1%	4,917	4,966
	-1%	(3,754)	(3,788)
Social rehabilitation benefits - superimposed inflation for non-serious injury claims	+1%	1,053	1,028
	-1%	(792)	(774)
Social rehabilitation benefits - superimposed inflation after two years for serious injury claims	+1%	2,433	2,564
	-1%	(1,792)	(1,875)

Undiscounted outstanding claims liability#

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The reported outstanding claims liability (before risk margin) of $24,524 million (2013: $24,055 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for claims to 30 June 2014. These estimated cash flows include the effects of assumed future inflation.

Note 25: Insurance Liabilities (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
No later than 1 year	1,966	1,834
Later than 1 year and no later than 2 years	1,482	1,364
Later than 2 years and no later than 5 years	3,990	3,628
Later than 5 years and no later than 10 years	6,247	5,769
Later than 10 years and no later than 15 years	5,861	5,693
Later than 15 years and no later than 20 years	5,839	5,767
Later than 20 years and no later than 25 years	5,965	5,898
Later than 25 years and no later than 30 years	6,031	5,981
Later than 30 years and no later than 35 years	6,014	5,967
Later than 35 years and no later than 40 years	5,878	5,829
Later than 40 years and no later than 45 years	5,608	5,556
Later than 45 years and no later than 50 years	5,199	5,142
Later than 50 years	16,548	16,381
Undiscounted outstanding claims liability	76,628	74,809

Analysis of EQC insurance liability#

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EQC covers the following types of natural disaster: earthquake, natural landslip, volcanic eruption, hydrothermal activity and tsunami, as well as fire caused by any of the above.

The actuarial valuation report as at 30 June 2014 was prepared by Craig Lough of Melville Jessup Weaver. Craig Lough is a Fellow of the New Zealand Society of Actuaries. Craig Lough considered that overall the information and data supplied to Melville Jessup Weaver was adequate and appropriate for the purposes of his valuation.

EQC recognises a liability in respect of outstanding claims and assesses the adequacy of its unearned premium liability. A risk margin is applied to a central estimate to increase to 85% the likelihood that claims will be settled within this amount.

	Actual
	30 June 2014 $m	30 June 2013 $m
The EQC liability comprises:
EQC outstanding claims liability	4,532	6,666
EQC unearned premium liability	146	142
EQC unearned premium liability deficiency	69	61
Total EQC liability	4,747	6,869
By type
Property damage claims in relation to Canterbury earthquakes	4,441	6,634
Other insurance liabilities	306	235
Total EQC liability	4,747	6,869
Analysis of Outstanding EQC Insurance Liability
Undiscounted outstanding claims liability	4,302	6,340
Discount adjustment	(62)	(125)
Risk margin	292	451
Total outstanding EQC insurance liability	4,532	6,666
Discounted central estimate of future payments for outstanding claims	3,998	5,754
Claims handling expenses	242	461
Outstanding claims liability before risk margin	4,240	6,215
Risk margin	292	451
Total outstanding EQC insurance liability	4,532	6,666
Movement in Outstanding EQC Insurance Liability
Opening balance	6,666	8,638
Net claims incurred/reassessed for the year - Canterbury earthquakes	(368)	(205)
Claims incurred for the year - other	96	38
Claims paid out in the year	(1,868)	(1,787)
Other movements	6	(18)
Closing outstanding EQC insurance liability	4,532	6,666

	Actual
	30 June 2014 $m	30 June 2013 $m
Movement in EQC Unearned Premium Liability
Opening balance	142	110
Earning of premiums previously deferred	(142)	(110)
Deferral of premiums on current year contracts	146	142
Other	-	-
Closing EQC unearned premium liability	146	142
Analysis of EQC unearned premium liability deficiency
Unearned premium liability	146	142
Discounted central estimate of payments for insured future claims	228	221
Central estimate of discounted future reinsurance recoveries	(16)	(18)
Risk margin	3	-
Present value of expected cash flows for future claims	215	203
Total EQC unearned premium liability deficiency	69	61

Note 25: Insurance Liabilities (continued)#

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Key Assumptions#

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The key assumptions and the methodology applied in the valuation of the outstanding EQC claims obligation are as follows:

(i) Weighted average term to settlement

The weighted average term to settlement varies by valuation groupings having regard to the estimated future patterns of gross claim payments for these groupings.

(ii) Claims inflation rate

The claims inflation rates have made some allowance for higher levels of claims inflation for the building and land claims due to a demand surge in the Canterbury construction industry. In addition, the risk margin implicitly allows for somewhat higher levels of claims inflation.

(iii) Risk-free discount rate

Where applicable, claims and recoveries have been discounted using a risk-free rate based on New Zealand government bonds and the payment profile of the underlying recovery payments.

(iv) Risk margin

The risk margins are derived directly from the claims distributions produced by the net (of reinsurance) incurred claims models. The risk margin is expressed as a percentage of the net (of reinsurance) discounted outstanding claims liability and is intended to achieve a 85% probability of adequacy in meeting the actual amount of liability to which it relates.

(v) Claims handling expenses ratio

Claims handling expenses are subdivided into event groups and estimated on a per-claim basis using per-claim assumptions derived from an analysis of expenses. Risk margins are also applied to claims handling expenses. The claims handling expenses ratio is expressed as a percentage of the gross undiscounted outstanding claims liability.

Note 25: Insurance Liabilities (continued)

	30 June 2014	30 June 2013
Summary of assumptions
Weighted average term to settlement	0.45 years	0.72 years
Claims inflation rate - base	2.5%	2.5%
Claims inflation rate - demand surge	16.0%	3.6% to 7.0%
Risk-free discount rate	3.7% to 4.4%	2.7% to 3.6%
Weighted average risk margin - net (of reinsurance) claims	9.2%	11.3%
Weighted average risk margin - gross outstanding claims	6.9%	7.3%
Claims handling expense ratio	7.3%	7.2%

Sensitivity Analysis#

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The value of the EQC claims liability is sensitive to underlying assumptions such as the construction inflation, nil claim rate and reinstatement percentage.

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

Note 25: Insurance Liabilities (continued)

	Change	Impact on liability Actual
		30 June 2014 $m	30 June 2013 $m
Sensitivity of assumptions
Weighted average term to settlement	+ 0.5 years	62	90
	- 0.5 years	(8)	(18)
Claims inflation rate	+1%	6	19
	-1%	(9)	(43)
Risk-free discount rate	+1%	(13)	(33)
	-1%	13	33
Risk margin	+1%	31	40
	-1%	(32)	(40)
Claims handling expense ratio	+1%	24	35
	-1%	(25)	(34)

Analysis of Southern Response liability#

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Southern Response Earthquake Services Limited (Southern Response) holds Canterbury earthquake related claims.

Colin Brigstock and Ashish Ahluwalia of Finity Consulting Pty Limited (the Appointed Actuary) have prepared the independent actuarial estimate of the Southern Response claims liability as at 30 June 2014. Mr Brigstock and Mr Ahluwalia are Fellows of the Institute of Actuaries of Australia and the New Zealand Society of Actuaries.

The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Note 25: Insurance Liabilities (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Analysis of Outstanding Southern Response Claims Liability
Undiscounted outstanding claims liability	1,361	1,659
Discount adjustment	(54)	(65)
Risk margin	127	150
Total outstanding Southern Response claims liability	1,434	1,744
Expected future claims payments - central estimate	1,244	1,521
Claims handling expenses	63	73
Outstanding claims liability before risk margin	1,307	1,594
Risk margin	127	150
Total outstanding Southern Response claims liability	1,434	1,744
Movement in Outstanding Southern Response Claims Liability
Opening balance	1,744	2,062
Net claims incurred/reassessed for the year - Canterbury earthquakes	87	(22)
Claims paid out in the year	(397)	(296)
Closing outstanding Southern Response claims liability	1,434	1,744

Note 25: Insurance Liabilities (continued)#

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Key Assumptions#

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The valuation of the outstanding claims liability is based on detailed assumptions about the number of properties damaged, the mix and cost of rebuilds, repairs, and cash settlements, and the amount of damage which will be covered by EQC. In addition, the key assumptions made regarding future economic conditions are as follows:

(i) Average weighted term to settlement

Expected payment patterns have been used to determine the outstanding claims liability. The payment patterns adopted have been set based on the Actuary's best estimate of when the payments are likely to be made.

(ii) Inflation

The actuarial models adopted allows for any inflationary impact which is likely to affect future claims payments. An 5.8% inflation assumption (2013: 8.6%) has been made relating to building costs in Canterbury.

(iii) Discount rate

Where applicable, claims and recoveries have been discounted using a risk-free rate based on New Zealand government bonds and the payment profile of the underlying recovery payments.

(iv) Risk margin

The risk margin is expressed as a percentage of the gross (of reinsurance) discounted outstanding claims liability and intended to achieve a 75% probability of adequacy for the outstanding claims. There continues to be uncertainty attaching to many elements of the likely ultimate cost of the Company's earthquake related outstanding claim liabilities. In particular, there remains uncertainty around the ultimate cost of enhanced foundations for properties with damaged land and the level of future escalation on building costs.

Note 25: Insurance Liabilities (continued)

	30 June 2014	30 June 2013
Summary of assumptions
Average weighted term to settlement from reporting date
Earthquake related claims	1.2 years	1.8 years
Inflation
Building costs	5.8%	8.6%
Other cover types	3.0%	3.0%
Risk-free discount rate	3.6%	2.9%
Weighted average risk margin - gross outstanding claims	10.0%	10.0%
Probability of adequacy of liability	75.0%	75.0%

Key Assumptions#

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The key assumptions and the methodology applied in the valuation of the outstanding ACC claims obligation are as follows:

(i) Risk-free discount rates

The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 5.01% (2013: 4.86%) and a long term discount rate of 5.50% beyond 19 years (2013: 5.50% beyond 21 years).

(ii) Risk margin

The outstanding claims liability includes a risk margin that relates to the inherent uncertainty in the central estimate of the present value of expected future payments. The overall risk margin is intended to achieve a 75% probability of sufficiency in meeting the actual amount of liability to which it relates.

(iii) Inflation and indexation

ACC claims and costs are subject to inflation. Some costs are assumed to increase faster than the general rate of inflation (referred to as superimposed inflation) due to factors such as innovation in medical treatment.

(iv) Rehabilitation Rate#

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Assumptions for rehabilitation rate were set with reference to past observed experience with allowance for expectations of the future that is believed to be reasonable under the circumstances.

(v) Liability adequacy test

An unearned premium liability deficiency is recognised when the amount of the present value of expected future claim cash outflows, plus a risk margin, exceeds the unearned premium liability.

Sensitivity Analysis#

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The value of the Southern Response claims liability is sensitive to underlying assumptions such as the discount rate, claims handling expense rate, and the risk margin.

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

Note 25: Insurance Liabilities (continued)

	Change	Impact on liability Actual
		30 June 2014 $m	30 June 2013 $m
Sensitivity of assumptions
Inflation	+1%	19	29
	-1%	(19)	(28)
Risk-free discount rate	+1%	(14)	(19)
	-1%	14	19
Weighted average risk margin	+1%	13	15
	-1%	(13)	(15)

Note 26: Retirement Plan Liabilities#

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Note 26: Retirement Plan Liabilities

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
11,767	10,738	Government Superannuation Fund (GSF)	10,886	11,908
(1)	(6)	Other funds	(1)	(5)
11,766	10,732	Total retirement plan liabilities	10,885	11,903
		By source
11,774	10,744	Core Crown	10,889	11,915
2	1	Crown entities	2	1
(10)	(13)	State-owned enterprises	(6)	(13)
-	-	Inter-segment eliminations	-	-
11,766	10,732	Total retirement plan liabilities	10,885	11,903

The Government operates a defined benefit superannuation plan for qualifying employees who are members of the Government Superannuation Fund (GSF). The members' entitlements are defined in the Government Superannuation Fund Act 1956. Contributing members make regular payments to GSF and in return, on retirement, receive a defined level of income. GSF is closed to employees who were not members at 1 July 1992.

The GSF obligation has been calculated by GSF's actuary as at 30 June 2014. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

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

Note 26: Retirement Plan Liabilities (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Net GSF Obligation
Present value of defined benefit obligation	14,560	15,290
Fair value of plan assets	(3,674)	(3,382)
Present value of unfunded defined benefit obligation	10,886	11,908
Present value of defined benefit obligation
Opening defined benefit obligation	15,290	16,557
Expected current service cost	92	112
Expected unwind of discount rate	404	394
Actuarial losses/(gains)	(365)	(920)
Benefits paid	(861)	(853)
Closing defined benefit obligation	14,560	15,290
Fair value of plan assets
Opening fair value of plan assets	3,382	3,018
Expected return on plan assets	183	162
Actuarial gains/(losses)	212	331
Funding of benefits paid by Government	727	683
Contributions from other entities	22	19
Contributions from members	41	47
Benefits paid	(861)	(853)
Other	(32)	(25)
Closing fair value of plan assets	3,674	3,382

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

Note 26: Retirement Plan Liabilities (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Personnel Expenses
		Expected current service cost	92	112
		Expected unwind of discount rate on GSF obligation	404	394
		Expected return on plan assets	(183)	(162)
		Contributions from members and funding employers	(63)	(66)
		Other expenses[19]	32	25
		Past service cost	-	-
274	282	Total included in personnel expenses	282	303
		Net (Gains)/Losses on Non-Financial Instruments
-	(713)	Actuarial (gains)/losses recognised in the year	(577)	(1,251)
274	(431)	Total GSF expense	(295)	(948)

The Government expects to make a contribution of $758 million to GSF in the year ending 30 June 2015.

In addition to its obligations to past and present employees, because GSF is liable for income tax, the Crown will be required to make additional contributions equivalent to the tax on future investment income.

The principal assumptions used for the purposes of the GSF actuarial valuations are as follows:

Note 26: Retirement Plan Liabilities (continued)

	Actual
	30 June 2014 %	30 June 2013 %
Summary of assumptions
For following year
Discount rate	3.7%	2.7%
Expected return on plan assets	6.0%	5.5%
Expected rate of salary increases	3.0%	3.0%
Expected rate of inflation	2.1%	1.9%
Beyond next year
Discount rates between 2 and 20 years	4.0% to 5.5%	3.1% to 5.5%
Discount rate from 21 years onwards	5.5%	5.5%
Expected return on plan assets	6.0%	5.5%
Expected rate of salary increases	3.0%	3.0%
Expected rate of inflation from years 2 to 9	2.1%	2.3% to 2.5%

Assumed inflation increases by 0.04% each year from year 10 to year 19, reaching 2.5% in year 19.

The defined benefit obligation decreased in the year to 30 June 2014 by $730 million, mainly due to an increase in the short and medium term discount rates over the year, a reduction in the assumed rate of increase in the Consumer Price Index in the short-term and medium-term.

Notes

• [19]The comparative figure for 2013 personnel expenses includes an adjustment of $25 million to align with a change in accounting treatment of the reimbursement of expenses received by GSF from the Crown and funding employers.

Note 26: Retirement Plan Liabilities (continued)#

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

Note 26: Retirement Plan Liabilities (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Equity instruments	2,228	1,944
Other debt instruments	640	569
Cash and short term investments	282	215
Property	15	14
Other	509	640
Fair value of plan assets	3,674	3,382

The expected rate of return on the plan assets of 6.0% (2013: 5.50%) has been calculated by taking the expected long term returns from each asset class, reduced by tax and investment expenses (using the current rates of tax and investment expenses).

The actual return on plan assets for the year ended 30 June 2014 was 11.86%, or $395 million (2013: 16.71% or $493 million).

Sensitivity Analysis#

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

If the discount rate was to change in isolation, this would impact the measurement of GSF obligation as per the table below.

The plan's assets are exposed to share price risks arising from its holding of equity instruments. Equity instruments are reported at fair value. Movements in share prices therefore directly translate into movements in the value of the share investment portfolio.

The sensitivity analysis below has been determined based on GSF's exposure to share price risks at the reporting date.

Note 26: Retirement Plan Liabilities (continued)

	Impact on net GSF obligation
	Change	Actual
		30 June 2014 $m	30 June 2013 $m
Sensitivity of assumptions
Discount rate (Present value of the obligation)	+ 1%	(1,485)	(1,587)
	- 1%	1,800	1,927
Share price (Fair value of planned assets)	+ 10%	(223)	(194)
	- 10%	223	194

Historical Analysis#

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Actual gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred in the year) and the effects of changes in actuarial assumptions on valuation date. The history of the present value of the unfunded defined benefit obligation and experience adjustments is as follows:

Note 26: Retirement Plan Liabilities (continued)

		Actual
	30 June 2014 $m	30 June 2013 $m	30 June 2012 $m	30 June 2011 $m	30 June 2010 $m
Present value of defined benefit obligation	14,560	15,290	16,557	13,311	12,881
Fair value of plan assets	(3,674)	(3,382)	(3,018)	(3,159)	(2,945)
Present value of unfunded defined benefit obligation	10,886	11,908	13,539	10,152	9,936
Experience adjustment - increase/(decrease) in plan assets	212	331	(210)	159	117
Less experience adjustment - increase/(decrease) in plan  liabilities	68	(90)	28	388	286
Total experience adjustments - (losses)/gains	144	421	(238)	(229)	(169)
Changes in actuarial assumptions	433	830	(3,658)	(345)	(1,062)
Actuarial (losses)/gains recognised in the year	577	1,251	(3,896)	(574)	(1,231)

Undiscounted defined benefit obligation#

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The reported GSF defined benefit obligation of $14,560 million (2013: $15,290 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for entitlements to 30 June 2014. These estimated cash flows include the effects of assumed future inflation.

Note 26: Retirement Plan Liabilities (continued)

	30 June 2014 $m	30 June 2013 $m
No later than 1 year	918	922
Later than 1 year and no later than 2 years	914	915
Later than 2 years and no later than 5 years	2,806	2,819
Later than 5 years and no later than 10 years	4,780	4,863
Later than 10 years and no later than 15 years	4,642	4,811
Later than 15 years and no later than 20 years	4,287	4,490
Later than 20 years and no later than 25 years	3,724	3,928
Later than 25 years and no later than 30 years	3,005	3,188
Later than 30 years and no later than 35 years	2,235	2,383
Later than 35 years and no later than 40 years	1,511	1,619
Later than 40 years and no later than 45 years	917	992
Later than 45 years and no later than 50 years	481	534
Later than 50 years	290	349
Undiscounted defined benefit obligation	30,510	31,813

Note 27: Provisions #

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Note 27: Provisions

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		By type
3,233	3,181	Provision for employee entitlements	3,444	3,374
-	351	Provision for ETS credits	521	179
987	987	Provision for National Provident Fund guarantee	910	977
-	-	Provision for Canterbury Red Zone support package	66	222
837	391	Provision for Water Infrastructure costs	394	769
62	123	Provision for weathertight services financial assistance package	112	123
1,198	1,287	Other provisions	1,508	1,494
6,317	6,320	Total provisions	6,955	7,138
		By source
3,905	3,776	Core Crown	4,208	4,492
1,907	1,988	Crown entities	2,076	1,979
963	1,013	State-owned enterprises	1,177	1,151
(458)	(457)	Inter-segment eliminations	(506)	(484)
6,317	6,320	Total provisions	6,955	7,138
		By maturity
3,078	3,079	Expected to be settled within one year	3,487	3,355
3,239	3,241	Expected to be outstanding for more than one year	3,468	3,783
6,317	6,320	Total provisions	6,955	7,138

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for employee entitlements
Opening provision	3,374	3,253
Additional provisions recognised	1,769	1,714
Provision used during the period	(1,543)	(1,469)
Reversal of previous provision	(160)	(122)
Unwind of discount rate	4	(2)
Closing provision	3,444	3,374

The provision for employee entitlements represents annual leave, accrued long service leave and retiring leave, and sick leave entitlements accrued by employees. Probability assumptions about continued future service affecting entitlements accrued as at reporting date have been made using previous employment data. For entitlements that vest over a period exceeding one year discount rates applied rise from 3.7% next year to 5.5% in later years.

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for ETS credits
Opening provision	179	375
New provision recognised during the period (ETS expenses)	46	55
Provision used during the period (ETS revenue)	(13)	(40)
Transfer of units to Kyoto provision	24	24
(Gains)/losses on NZ Units	285	(235)
Closing provision	521	179

The Emissions Trading Scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The ETS creates a limited number of tradable units (the NZ Unit) which the Government can allocate freely. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrendered to the Crown by emitters.

The carbon price used to calculate the ETS provision is $NZ4.17 (30 June 2013: $NZ1.80).

The carbon price has been determined by the Ministry for the Environment based on the lower of the quoted NZU spot price at 30 June, and the monthly average NZU spot price as published by Point Carbon. The price methodology will continue to be reviewed as the market for NZ Units develops.

The transfer of 65.3m units equating to NZ$24 million to the Kyoto Provision relates to international units surrendered by participants.

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for National Provident Fund guarantee
Opening provision	977	1,076
Additional provisions recognised	-	-
Provision used during the period	(73)	(73)
Reversal of previous provision	26	(16)
Unwind of discount rate and effect of changes in discount rate	(20)	(10)
Closing provision	910	977

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF) Included in the provision is the NPF's DBP Annuitants Scheme unfunded liability position of $910 million (2013: $977 million), represented by a gross estimated pension obligation of $943 million (2013: $1,011 million) with net investment assets valued at $33 million (2013: $34 million).

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for Canterbury Red Zone support package
Opening provision	222	745
Additional provisions recognised	1	37
Provision used during the period	(164)	(500)
Reversal of previous provision	6	(66)
Unwind of discount rate and effect of changes in discount rate	1	6
Closing provision	66	222
Net provision
Provision for Red Zone properties	66	222
Estimated insurance proceeds from Red Zone Properties	(403)	(517)
Net (recoverable)/provision for Red Zone properties	(337)	(295)

Melville Jessup Weaver has prepared an independent actuarial valuation of both the estimated cost of purchasing the red zone properties and the estimated insurance proceeds from those properties as at 30 June 2014. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine these valuations. The remaining provision represents:

• the estimated value of settlements that have been agreed but not yet paid; and
• the estimated value where the offer has not been accepted and therefore an estimate is required.

Note 27: Provisions (continued)#

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Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for Water Infrastructure costs
Opening provision	769	530
Additional provisions recognised	-	437
Provision used during the period	(391)	(156)
Reversal of previous provision	-	-
Unwind of discount rate and effect of changes in discount rate	16	(42)
Closing provision	394	769

The provision represents the Crown's contribution for recovery costs relating to essential three waters infrastructure (waste water, storm water and fresh water) and river management systems. The provision includes recovery costs for Christchurch City Council (CCC), Waimakariri District Council, Selwyn District Council and Environment Canterbury.

The provision has been estimated based on information provided by the Councils. For the Waimakariri District Council, Selwyn District Council and Environment Canterbury the costs are based on estimates of the work programmes provided by these Councils.

In the case of CCC, the Crown has entered into a cost sharing agreement which provides for an active management regime to be implemented and a comprehensive independent assessment (by December 2014) of the work programme to ensure service and rebuild standards are met. This assessment may result in changes to the overall estimate of the cost of the infrastructure rebuild.

The Crown is continuing to work through a process to validate claims and to agree the timing of payments to all councils for these costs. A discount rate of 4.0% has been used to determine the present value of the cash flows over the next three years.

The key risks to the estimate are that the damages to the infrastructure may be more substantial than currently estimated and work scheduling may lead to extended repair timeframes which could result in costs in addition to those covered by the cost sharing agreement.

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Provision for weathertight services financial assistance package
Opening provision	123	189
Additional provisions recognised	-	-
Provision used during the period	(7)	(7)
Reversal of previous provision	(6)	(60)
Unwind of discount rate and effect of changes in discount rate	2	1
Closing provision	112	123

This provision represents the Government's obligation to contribute 25% of agreed repair costs to eligible owners of leaky homes under the weathertight services financial assistance package (FAP).

Melville Jessup Weaver has prepared an independent actuarial valuation of the obligation as at 30 June 2014.

The provision assumes that the package will be taken up for 2,867 (2013: 2,619) dwellings.

Note 27: Provisions (continued)

	Actual
	30 June 2014 $m	30 June 2013 $m
Other provisions
Opening provision	1,494	1,338
Additional provisions recognised	380	446
Provision used during the period	(241)	(245)
Reversal of previous provision	(91)	(38)
Unwind of discount rate and effect of changes in discount rate	(34)	(7)
Closing provision	1,508	1,494

Other provisions are recognised when there is a present obligation, as a result of a past event, where it is probable that this obligation will be settled. Other provisions include rehabilitation and restoration provisions and aircraft lease return obligations.

Note 28: Net Worth#

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Note 28: Net Worth

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
6,230	13,344	Taxpayer funds	13,300	10,862
55,831	56,648	Property, plant and equipment revaluation reserve	62,225	57,068
84	94	Investment revaluation reserve	58	107
(142)	(44)	Cash flow hedge reserve	33	58
(6)	(56)	Foreign currency translation reserve	(92)	(49)
-	46	Share based payment reserve	44	25
3,185	5,435	Net worth attributable to minority interests	5,211	1,940
65,182	75,467	Total net worth	80,779	70,011
		Taxpayer Funds
5,601	10,862	Opening taxpayers funds	10,862	3,520
358	2,973	Operating balance (excluding minority interests)	2,808	6,925
175	(542)	Gain/(loss) on Government share offers in SOEs	(577)	167
133	69	Transfers from/(to) property, plant and equipment revaluation  reserve	229	268
(37)	(18)	Other movements	(22)	(18)
6,230	13,344	Closing taxpayer funds	13,300	10,862
		Property, Plant and Equipment Revaluation Reserve
55,965	57,068	Opening revaluation reserve	57,068	56,001
-	(351)	Net revaluations	5,386	1,335
(134)	(69)	Transfers from/(to) taxpayer funds	(229)	(268)
55,831	56,648	Closing revaluation reserve	62,225	57,068

The property, plant and equipment revaluation reserve arises on the revaluation of physical assets. Where revalued property, plant or equipment is sold, the portion of the property, plant and equipment revaluation reserve that relates to that asset, and is effectively realised, is transferred to taxpayer funds.

Note 28: Net Worth

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Investment Revaluation Reserve
76	107	Opening investment revaluation reserve	107	71
8	(12)	Increase arising on revaluation of available-for-sale financial   assets	(42)	39
-	(1)	Cumulative (gain)/loss transferred to the statement of financial  performance on sale of available-for-sale financial assets	(7)	(3)
84	94	Closing investment revaluation reserve	58	107

The investment revaluation reserve arises on the revaluation of available-for-sale financial assets. Where a revalued financial asset is sold, the portion of the reserve that relates to that financial asset, and is effectively realised, is recognised in the statement of financial performance. Where a revalued financial asset is impaired, the portion of the reserve that relates to that financial asset is recognised in the statement of financial performance.

Note 28: Net Worth (continued)#

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Note 28: Net Worth (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Cash Flow Hedge Reserve
(121)	58	Opening cash flow hedge reserve	58	(195)
(21)	(101)	Transfer into reserve	30	278
-	(4)	Transfer to the statement of financial performance	(36)	(7)
-	3	Transfer to initial carrying value of hedged item	(19)	(18)
(142)	(44)	Closing cash flow hedge reserve	33	58

The cash flow hedge reserve reports gains and losses in the value of derivatives entered into to reduce volatility in future cash flows. These gains and losses will either be used to adjust the cash flows as they occur, impacting either on the statement of financial performance if the cash flows relate to revenue or expenses, or the statement of financial position if the cash flows relate to assets or liabilities.

Note 28: Net Worth (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Foreign currency translation reserve
(45)	(49)	Opening foreign currency translation reserve	(49)	(49)
39	(7)	Arising from translation of foreign operations	(43)	-
(6)	(56)	Closing foreign currency translation reserve	(92)	(49)

The foreign currency translation reserve holds foreign exchange gains and losses arising from translating monetary items that form part of the net investment in a foreign operation into New Zealand dollars. It also includes foreign exchange gains and losses associated with translating non-monetary assets into New Zealand dollars if revaluations of those assets are reflected in another reserve rather than in the statement of financial performance.

Note 28: Net Worth (continued)

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Share based payment reserve
-	25	Opening share based payment reserve	25	-
-	21	Partial share sales	22	25
-	-	Lapses/Forfeitures	(4)	-
-	-	Other movements	1	-
-	46	Closing share based payment reserve	44	25

New Zealand retail investors in the Mighty River Power share offer will receive one loyalty bonus share for every 25 shares they hold for two years from the offer, up to a maximum of 200 bonus shares.

New Zealand retail investors in the Genesis Energy share offer will receive one loyalty bonus share for every 15 shares they hold for one year from the offer, up to a maximum of 2,000 bonus shares.

Lapses/Forfeitures relate to shareholders who were eligible to receive bonus shares having forfeited this right by selling the shares before the eligibility period has expired.

Forecast			Actual
Budget 2013 $m	Budget 2014 $m		30 June 2014 $m	30 June 2013 $m
		Net Worth Attributable to Minority Interests
1,794	1,940	Opening minority interest	1,940	432
140	210	Operating balance attributable to minority interests	138	94
1,325	3,393	Increase in minority interest from Government   share offers (refer to note 35)	3,305	1,371
(120)	(48)	Transactions with minority interests	(209)	(16)
		Movement in reserves attributable to minority interests	5	59
46	(60)	Other movements	32	-
3,185	5,435	Closing minority interest	5,211	1,940
		Consisting of interests in:
		Mighty River Power	1,430	1,431
		Meridian Energy	2,031	-
		Genesis Energy	847	-
		Air New Zealand	830	468
		Solid Energy1	13	-
		Crown Fibre Holdings Limited subsidiaries1	60	41
		Other	-	-
		Closing minority interest	5,211	1,940
		Minority share of Operating Balance
		Mighty River Power	94	10
		Meridian Energy	69	-
		Genesis Energy	15	-
		Air New Zealand	40	93
		Solid Energy	(62)	-
		Crown Fibre Holdings Limited subsidiaries	(18)	(9)
		Other	-	-
		Operating balance attributable to minority interests	138	94

Transactions with minority interests include dividend payments and dividend reinvestments.

1 Solid Energy minority interest relates to the redeemable preference shares issued to third parties as part of the recent restructure. The minority interests in Crown Fibre Holdings Limited relates to investments in some local fibre companies involved in the roll-out of ultra-fast broadband.

Note 29: Capital Objectives and Fiscal Policy#

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The Government's fiscal policy is pursued in accordance with the principles of responsible fiscal management set out in the Public Finance Act 1989:

• reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year
• once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
• achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
• managing prudently the fiscal risks facing the Government
• when formulating revenue strategy, having regard to efficiency and fairness, including predictability and stability of tax rates
• when formulating fiscal strategy, having regard to its interaction with the interaction between fiscal policy and monetary policy
• when formulating fiscal strategy, having regard to its likely impact on present and future generations, and
• ensuring that the Crown's resources are managed effectively and efficiently.

Consistent with these principles, the Government seeks to strengthen its fiscal position to help manage future spending demands, particularly those arising from an ageing population by maintaining debt at prudent levels and accumulating assets through the New Zealand Superannuation Fund.

Further information on the Government's fiscal strategy can be found in the Fiscal Strategy Report published with the Government's budget.

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

Long Term Fiscal Objectives - Fiscal Strategy Report 2014[20]#

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Debt

Manage total debt at prudent levels. We will reduce net debt to a level no higher than 20 percent of GDP by 2020. We will work towards achieving this earlier as conditions permit. Beyond 2020, we intend to maintain net debt within a range of around 10% to 20% of GDP over the economic cycle.

Operating balance

Return to an operating surplus sufficient to meet the Government's net capital requirements, including contributions to the New Zealand Superannuation Fund, and ensure consistency with the debt objective.

Operating expenses

To meet the operating balance objective, the Government will control the growth in government spending so that, over time, core Crown expenses are reduced to below 30% of GDP.

Operating revenues#

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Ensure sufficient operating revenue to meet the operating balance objective.

Net worth#

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Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. Consistent with the debt and operating balance objectives, we will start building up net worth ahead of the full fiscal impact of the demographic change expected in the mid-2020s.

Short Term Fiscal Intentions

Fiscal Strategy Report 2013	Fiscal Strategy Report 2014	Fiscal Position 2014[21]
Debt Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 38.8% of GDP in 2016/17. Net core Crown debt (excluding NZS Fund and advances) is forecast to be 27.3% of GDP in 2016/17.	Debt Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 34% of GDP in 2017/18. Net core Crown debt (excluding NZS Fund and advances) is forecast to be 23.8% in 2017/18 and to be 20.0% of GDP in 2019/20.	Debt Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2014 was 38.6% of GDP (2013: 39.7%). Core Crown net debt (excluding NZS Fund and advances) at 30 June 2014 was 26.2% of GDP (2013: 26.3%).
Operating balance Our intention is to return the operating balance (before gains and losses) to surplus as soon as practical and no later than 2014/15, subject to any significant shocks. Based on the operating allowance for the 2013 Budget, the operating balance (before gains and losses) is forecast to be -0.9% of GDP in 2013/14. The operating balance (before gains and losses) is forecast to be 0.0% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance. The operating balance is forecast to be 0.2% of GDP in 2013/14.	Operating balance Our intention is to return the operating balance (before gains and losses) to surplus as soon as practical and no later than 2014/15, subject to any significant shocks. The operating balance (before gains and losses) is forecast to be -1.1% of GDP in 2013/14. The operating balance (before gains and losses) is forecast to be 0.2% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance. The operating balance is forecast to be 1.3% of GDP in 2014/15.	Operating balance The operating (before gains and losses) deficit for the year ended 30 June 2014 was 1.3% of GDP (2013: 2.1%). The operating surplus for the year ended 30 June 2014 was 1.2% of GDP (2013: 3.3%).
Expenses Our intention is to support a return to fiscal surplus by restraining the growth in core Crown expenses - so that they are reduced to around 30% of GDP by 2015/16. Core Crown expenses are forecast to be 30.0% of GDP in 2016/17. Total Crown expenses are forecast to be 39.5% of GDP in 2016/17. This assumes a new operating allowance of $1 billion in Budget 2014, growing at 2% for Budgets thereafter (GST exclusive).	Expenses Our intention is to support a return to fiscal surplus by restraining the growth in core Crown expenses - so that they are reduced to around 30% of GDP by 2015/16. Core Crown expenses are forecast to be 29.9% of GDP in 2017/18. Total Crown expenses are forecast to be 38.8% of GDP in 2017/18. This assumes a new operating allowance of $1.5 billion in Budget 2015, growing at 2% for Budgets thereafter (GST exclusive).	Expenses Core Crown expenses for the year ended 30 June 2014 were 31.2% GDP (2013: 33.1%). Total Crown expenses for the year ended 30 June 2014 were 40.2% of GDP (2013: 42.8%).
Revenues Total Crown revenues are forecast to be 40.6% of GDP in 2016/17. Core Crown revenues are forecast to be 30.9% of GDP in 2016/17. Core Crown tax revenues are forecast to be 28.3% of GDP in 2016/17.	Revenues Total Crown revenues are forecast to be 40.3% of GDP in 2017/18. Core Crown revenues are forecast to be 31.1% of GDP in 2017/18. Core Crown tax revenues are forecast to be 28.5% of GDP in 2017/18.	Revenues Total Crown revenues for the year ended 30 June 2014 were 39.0% of GDP (2013: 40.8%). Core Crown revenues for the year ended 30 June 2014 were 29.4% of GDP (2012: 30.2%). Core Crown tax revenues for the year ended 30 June 2014 were 26.8% of GDP (2013: 27.6%).
Net worth Total net worth attributable to the Crown is forecast to be 28.7% of GDP in 2016/17. Core Crown net worth is forecast to be 12.1% of GDP in 2016/17.	Net worth Total Crown net worth is forecast to be 34.9% of GDP in 2017/18. Total net worth attributable to the Crown is forecast to be 32.8% of GDP in 2017/18.	Net worth Total net worth attributable to the Crown as at 30 June 2014 was 33.0% of GDP (2013: 32.0%). Core Crown net worth as at 30 June 2014 was 12.6% of GDP (2013: 12.1%).

Notes

• [20]The long-term fiscal intentions are stated in the Fiscal Strategy Report 2014.
• [21]GDP for the year ended 30 June 2014 was $229,145 million (2013: $212,521 million). Comparative GDP percentages have been updated to reflect restated Statistics New Zealand nominal GDP.

Note 30: Canterbury Earthquakes#

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These consolidated financial statements include both revenue and expenses for the Government as well as the best estimate of the Government‘s assets and liabilities in relation to the earthquakes and aftershocks that have occurred in the Canterbury region. While there has been another year's experience in earthquake claims development, inherent uncertainties in estimating the amount of earthquake related assets and liabilities remain. Some of these inherent uncertainties are described in this note.

Note 30: Canterbury Earthquakes

	Note	30 June 2014 $m	30 June 2013 $m
Canterbury earthquake-related obligations
EQC property damage liability	25	4,441	6,634
Southern Response property damage liability	25	1,434	1,744
Total insurance liabilities		5,875	8,378
Provision for Canterbury Red Zone support package	27	66	222
Provision for water infrastructure costs	27	394	769
Other provisions		35	-
Total provisions		495	991
Total Canterbury earthquake-related obligations		6,370	9,369
Canterbury earthquake-related receivables
EQC reinsurance receivables		1,225	2,623
Southern Response reinsurance receivables		184	512
Total reinsurance receivables	14	1,409	3,135
Red Zone insurance recoveries	27	403	517
Other receivables		11	295
Total other receivables		414	812
Total Canterbury earthquake-related receivables		1,823	3,947
Net Canterbury earthquake-related obligations		4,547	5,422

Included within the estimates of the Government's obligations are uncertainties with regard to both the gross liabilities and the estimated insurance recoveries. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs and income to be settled in the future. Such complex valuations need actuaries and other independent experts to make a number of assessments such as the number of outstanding claims, the amount of claims, the time expected to rebuild or repair damage property or infrastructure and making judgements over the escalation of costs due to building inflation in the Canterbury construction industry.

In particular, significant uncertainty exists for EQC land claims where here has been severe land damage, because of a very complex land claims environment and the fact that relatively few land claims have been settled to date. As claims are settled and the reasonableness of assumptions is tested against emerging experience over time, the level of this uncertainty will reduce.

The final costs of the Canterbury earthquakes will not be known for some time and the actual, ultimate costs may differ from these estimates. As a result, information on key assumptions (along with the sensitivity of those assumptions) has been included in the relevant notes to these financial statements (eg, insurance liabilities).

Amounts recognised in the statement of financial performance (operating expenditure) as well as capital expenditure incurred to date in respect of the earthquakes were:

Note 30: Canterbury Earthquakes (continued)

		Actual
	Note	30 June 2014 $m	30 June 2013 $m	30 June 2012 $m	30 June 2011 $m	Total to date $m
EQC insurance claims	a	(242)	(107)	662	7,471	7,784
Local Infrastructure	b	109	483	729	195	1,516
Land zoning	c	97	(8)	258	653	1,000
Southern Response support package	d	124	(53)	156	355	582
Christchurch central city rebuild	e	473	115	-	-	588
Other earthquake costs	f	345	45	108	413	911
Net earthquake costs		906	475	1,913	9,087	12,381
Gross earthquake expenses		918	815	2,823	13,601	18,157
Earthquake related revenue (e.g. reinsurance)		(12)	(340)	(910)	(4,514)	(5,776)
Net earthquake costs		906	475	1,913	9,087	12,381
Operating expenses		326	266	1,900	9,087	11,579
Capital expenditure		580	209	13	-	802
Net earthquake costs		906	475	1,913	9,087	12,381

In addition to these net earthquake costs, the Government's assets have suffered damage. In total, approximately $375 million was impaired against the asset revaluation reserve.

These results do not represent the total fiscal impact to the Government of the earthquakes, as some costs will not be determined until further decisions and actions on the recovery from the earthquakes are still to be made.

The costs outlined in this note do not include the secondary impact on tax or other revenues as a result of the earthquakes.

Note 30: Canterbury Earthquakes (continued)#

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a) Earthquake Commission (EQC) Insurance Claims#

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EQC covers damage to residential property caused by earthquake, landslip, tsunami, volcanic eruption, hydrothermal activity, storm or flood (land only), and fire following any of these events.

Residential property cover generally consists of dwellings (up to $100,000 + GST), contents (up to $20,000 + GST), the land under and immediately around the dwelling, main access-ways, and retaining walls (within certain limits).

EQC's obligation (and reinsurance recoveries) in relation to the earthquakes has been valued by an independent actuary (Melville Jessup Weaver). The key sources of uncertainty in estimating the obligation are:

• the impact of multiple events on the allocation of damage, EQC coverage and EQC's reinsurance coverage
• severe land damage and a very complex land claims environment from both engineering and legal perspectives, and
• the potential for construction cost inflation (“demand surge inflation”) to differ from expectations.

Consequently there is a degree of unavoidable uncertainty regarding the future claims costs at this stage. Over time, as further assessments are completed and claims are settled, the reasonableness of the valuation and its assumptions can be tested against the emerging claims experience and the level of uncertainty will reduce.

The key areas of estimation risk relate to claims that have been incurred but not reported or claims where the estimates are considered insufficient. The volatility of these claims is partially mitigated by the maximum settlement amounts for dwellings and contents. However, claims in relation to residential land are not subject to a monetary limit and are therefore subject to greater volatility.

Under the Earthquake Commission Act, if the assets of the EQC are not sufficient to meet its liabilities, the Crown is responsible for funding the deficiency by way of a grant or advance. EQC expects the National Disaster Fund (NDF) will be depleted during the 30 June 2015 financial year. The Crown funding of the deficiency will have no bearing on the overall costs to the total Crown because that funding will represent a transfer within the Government reporting group.

These financial statements include a net EQC recovery of $242 million for the year ended 30 June 2014 relating to the Canterbury earthquakes (2013: $107 million net recovery). This net recovery represents a decrease in EQC's expected cost of settling its outstanding Canterbury earthquake claims. This decrease is due to an actuarial reassessment of previous years' outstanding claims taking into account better information regarding these claims.

During the year, $1.9 billion was paid out taking the total to $7.5 billion for settling approved claims, leaving an outstanding insurance liability estimate of $4.4 billion, some of which is expected to be offset by reinsurance proceeds.

Details of the calculation of EQC's claims obligation (including discussion on the sensitivity of assumptions) are provided in note 25 of these financial statements.

b) Local Infrastructure#

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Under the current government policy settings, as outlined in the National Civil Defence Emergency Management Plan (‘the Plan') and Guide to the National Civil Defence Emergency Management Plan (‘the Guide'), the Government is committed to a standard financial support package for the four local authorities in Canterbury (Christchurch City Council, Waimakariri District Council, Selwyn District Council and Environment Canterbury) that were adversely affected by the earthquakes. This support package covers certain types of response and recovery costs incurred as a result of the earthquakes.

Last financial year, the Government entered into a cost sharing agreement with the Christchurch City Council (CCC) covering various items including the Crown contribution to three water infrastructure response and rebuild costs and local roading. The agreement set out that the Government will contribute up to $1.8 billion to CCC for response costs and the recovery of Christchurch's essential infrastructure (water and roading).

The cost sharing agreement allows for an independent review of CCC's infrastructure recovery costs and programme (to be carried out by December 2014) with any costs of the rebuild work as the basis of any final discussions on horizontal infrastructure cost sharing. The agreement also acknowledges there is the possibility of unforeseen circumstances, so both parties can review the agreement in the future.

During this financial year, the costs of infrastructure recovery in the Waimakariri and Selwyn districts have been finalised. The Government indemnities that were previously in place for these areas have been removed or are now redund