Financial Statements of the Government of New Zealand for the Year Ended 30 June 2016

Ministerial Statement#

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The New Zealand economy continues to grow, with real GDP increasing by 3.6 per cent in the year ended 30 June 2016. Despite international turbulence and global uncertainty, New Zealand is in the unusual position of enjoying solid growth, rising employment and real wages at the same time as low inflation.

The Government's programme to build a more productive economy is also delivering dividends in terms of the Crown's finances which have turned around markedly in recent years.

In the wake of the global financial crisis and the Canterbury earthquakes, the total Crown's annual operating balance excluding gains and losses (OBEGAL) was a deficit of $18.4 billion in the year ended 30 June 2011, equivalent to 8.9 per cent of national income.

The Government's strategy has been to restrain growth in spending while focusing on getting better results from existing spending, particularly for the most vulnerable New Zealanders. This strategy has led to an OBEGAL surplus of $1.8 billion being recorded for the year ended 30 June 2016, building on the $414 million surplus achieved last year.

Core Crown tax revenue was $70.4 billion, up 5.7 per cent from the previous year with all major tax types increasing, reflecting the growth in the economy over the year.

Core Crown expenses grew at a somewhat slower pace, up 2.2 per cent to $73.9 billion bringing expenses to 29.4 per cent of GDP, below the Government's long-term fiscal objective of 30 per cent. This is the first time since 2006 that core Crown expenses have been below 30.0 per cent of GDP.

In line with the positive OBEGAL result, the residual cash position improved to a deficit of $1.3 billion, down from $1.8 billion last year. As a result, while net debt rose in dollar terms, it fell as a percentage of GDP to 24.6 per cent, down from 25.1 per cent last year and 25.5 per cent in 2014.

The size of the Crown's balance sheet grew over the year, with assets growing by $13.5 billion to $292.7 billion driven mainly by increases in social sector assets. Total Crown liabilities were $197.2 billion, an increase of $10.2 billion from the previous year. Net worth attributable to the Crown, which is a key measure of balance sheet strength, increased by $2.9 billion to $89.4 billion.

Changes in the Crown's balance sheet can also have a significant impact on operating results. For example, net losses of $5.7 billion in the year to 30 June 2012 were followed by net gains of $11.3 billion the following year. In year ended 30 June 2016 net losses were $7.2 billion which led to an operating deficit (including gains and losses) of $5.4 billion.

On the asset side, volatility of markets following the Brexit referendum and a strengthening New Zealand dollar adversely affected investment returns.

On the liability side, the Government's long term liabilities (ACC claims liability and Government Superannuation Fund retirement plan) are particularly sensitive to changes in the risk-free discount rate used to value long-dated cash flows in present day dollars. Reductions in the discount rate (reflecting persistently low interest rates) led to valuation losses of $7.1 billion.

The Government will continue to focus on responsible fiscal management and repaying debt while investing in public services to get better results for New Zealanders, meet its net capital requirements and improve infrastructure.

 

Hon Bill English
Minister of Finance

30 September 2016

Statement of Responsibility#

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

The Treasury is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance that the transactions recorded are within statutory authority and properly record the use of all public financial resources by the Crown. To the best of my knowledge, this system of internal control has operated adequately throughout the reporting period.

 

Gabriel Makhlouf
Secretary to the Treasury

30 September 2016

 

 

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 2016 and its operations for the year ended on that date.

 

Hon Bill English
Minister of Finance

30 September 2016

Commentary#

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Fiscal Overview#

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Introduction#

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These financial statements[1] contain the audited results for the financial year ended 30 June 2016. The results are compared against previous years and against two sets of forecastsfor the 2015/16 year:

• Budget 2015 refers to the 2015 Budget Economic and Fiscal Update, and
• Budget 2016 refers to the 2016 Budget Economic and Fiscal Update.

This commentary should be read in conjunction with the financial statements on pages 34 to 140.

At a Glance#

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1. Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
2. Net core Crown debt excluding the NZS Fund and advances.

Headlines:#

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• Tax revenue up $3.8 billion from a year earlier and higher than forecast (page 9).
• Core Crown expenses were $1.6 billion higher than the year before, but less than expected (page 11).
• The OBEGAL surplus of $1.8 billion continued its upwards trend, with an improvement of $1.4 billion from last year (page 13).
• However, revaluations of the Crown's liabilities led to actuarial losses (caused by a reduction in the discount rate) and losses on the revaluation of Emission Trading Scheme units (caused by an increase in the carbon price) resulted in an operating balance deficit for the year of $5.4 billion (page 13).
• While operating cash flows were positive, capital payments of $4.6 billion resulted in a residual cash deficit of $1.3 billion (page 15).
• To fund the residual cash deficit, core Crown net debt increased in nominal terms by $1.2 billion, although it fell as a percentage of GDP (to 24.6%) (page 15).
• Offsetting the operating balance deficit, revaluation uplifts on the Crown's property plant and equipment resulted in an increase in net worth attributable to the Crown of $2.9 billion (page 17).

A comparison of the year end results to Budget 2016 is included on page 20.

Summary#

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The Crown's OBEGAL surplus continued to grow...#

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The operating balance before gains and losses (OBEGAL) continued to increase. The improved result was due to further growth in nominal GDP (leading to a higher tax take) combined with lower expenditure growth.

The OBEGAL surplus was $1.8 billion this year (0.7% of GDP), compared to $0.4 billion for the previous year (0.2% of GDP).

Figure 1 - OBEGAL (excluding minority interests)

Source:  The Treasury

... as nominal GDP rose...#

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Nominal GDP grew by 4.2% in the year to June 2016 to $251.8 billion. Total wage and salary income grew strongly during the year, with average wages and employment both up by more than 2% on average over the year, and total hours worked increased by an estimated 3%. The robust GDP growth was reflected in private consumption growth of 3.5%, plus strong contributions to economic growth from residential construction and inbound tourist spending, up by 16% and 17% respectively. The total population grew by 2%, boosted by a net influx of nearly 70,000 migrants in the year to June.

Figure 2 - Core Crown revenue and expenses

Source:  The Treasury

... leading to an increase in tax revenue...#

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This nominal GDP growth contributed to core Crown tax revenue being $3.8 billion (5.7%) higher than a year earlier with most major tax types increasing to reach $70.4 billion. As a share of the economy, core Crown tax revenue was 28.0% of GDP (compared to 27.6% last year).

... which continued to outpace growth in core Crown expenses … #

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As a share of the nominal economy, core Crown expenses were equal in value to 29.4% of GDP (30.0% of GDP in 2015); in nominal terms however, core Crown expenses increased $1.6 billion (2.2%) to $73.9 billion.

The largest drivers of growth in nominal core Crown expenditure were New Zealand Superannuation benefits (as a result of indexation and an increase in the number of recipients), along with new spending allocated in Budget 2015, primarily in the areas of health and education.

Figure 3 - Operating balance (excluding minority interests)

Source:  The Treasury

… although liability valuations resulted in losses... #

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The Crown's operating balance is particularly sensitive to changes in some key assumptions used to value assets and liabilities. For example, a 1% decrease in discount rates can add $9.1 billion to the ACC and Government Superannuation Fund (GSF) liabilities. Note 2 of the financial statements (page 48) discusses the key assumptions and judgements underpinning these financial statements.

Actuarial losses in relation to updated long-term liability valuations for ACC and GSF liabilities resulted in a combined actuarial loss of $7.1 billion (page 59). In addition, a loss of $1.5 billion was recorded on the valuation of outstanding units in the Emissions Trading Scheme (page 14). Offsetting these valuation losses, ACC made gains of $1.4 billion on its investment portfolio.

When these results are combined with the OBEGAL surplus the operating balance (after gains and losses) was a deficit of $5.4 billion ($11.2 billion lower than the 2015 surplus of $5.8 billion).

... that partially offset positive revaluations of Crown assets ...#

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Although the Government recorded an operating balance deficit of $5.4 billion, the Crown's property, plant and equipment revaluation reserve increased by $8.5 billion (mostly attributable to revaluation uplifts), resulting in net worth attributable to the Crown increasing by $2.9 billion to reach $89.4 billion.

Total assets increased by $12.9 billion to $292.2 billion, while liabilities reached $197.2 billion (up $10.2 billion from last year).

Increases in property, plant and equipment and financial assets such as Kiwibank loans contributed to the growth in assets while the valuation increases to liabilities discussed above (ACC, GSF and Emissions Trading Scheme) contributed to the growth in liabilities.

Figure 4 - Net worth attributable to the Crown

Source:  The Treasury

...while core Crown cash deficits reduced and net debt flattens#

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While the operating cash flow continued to improve this year (in line with the OBEGAL result), capital spending of $4.6 billion resulted in a residual cash deficit of $1.3 billion. The capital spend consisted of the net purchase of physical and intangible (eg, software) assets ($2.0 billion), new capital investment in Crown entities ($2.1 billion) and net advances ($0.5 billion).

Core Crown net debt increased by $1.2 billion from last year to reach $61.9 billion, largely a result of the residual cash deficit. However, as a percentage of GDP, net debt has fallen from 25.1% to 24.6%.

Figure 5 - Net debt

Source:  The Treasury

Revenue#

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Total Crown revenue was $98.2 billion, an increase of $3.6 billion from a year earlier mostly due to higher core Crown tax revenue.

Core Crown Tax Revenue#

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Core Crown tax revenue was $70.4 billion, up $3.8 billion (5.7%) from the year before, mostly owing to an increase in the level of economic activity and the composition of that activity.

Total nominal GDP grew by 4.2% in the year to June 2016. However, not all components of GDP grew at the same rate. For example, total salaries and wages are estimated to have increased by 5%, owing to a mixture of employment growth and salary and wage rate growth, and the corporate tax result indicates that profit growth was also strong. On the other hand, growth in nominal domestic consumption was somewhat lower at around 3.5%.

Figure 6 - Core Crown tax revenue

Source:  The Treasury

As a result, all major tax types increased over the year, with three tax types making up most of the increase (Table 3):

• Source deductions increased by $1.7 billion (6.8%). Total employment and salary and wages rates both grew by more than 2% on average over the year, and average hours worked also increased.
• Goods and Services Tax (GST) increased by $1.0 billion (6.1%), largely owing to growth in domestic consumption of 3.5%, but boosted by strong growth in both residential investment (up 16%) and inbound tourist spending (up 17%).
• Corporate tax increased by $0.9 billion (8.7%), mostly in relation to growth in taxable profits from the 2016 tax year.

Source:  The Treasury

As a share of the economy, core Crown tax revenue was 28.0% of GDP, compared to 27.6% last year (Table 4). Approximately half of the total 0.4% of GDP increase was a result of corporate tax growing at more than double the rate of growth of nominal GDP. Fiscal drag, ie, additional PAYE tax generated by the progressive personal income tax scale (higher marginal tax rates applying to higher incomes), added an estimated 0.1% of GDP to tax revenue. A 50% decline in Portfolio Investment Entity (PIE) tax slowed the tax revenue growth rate.

Source:  The Treasury

Other Revenue#

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

Core Crown other revenue, at $5.7 billion increased by $0.1 billion, while the SOE and CE sectors (including eliminations) recorded revenue of $22.0 billion, $0.3 billion less than a year earlier (Table 2).

The decrease in the SOE sector was mostly attributable across multiple SOEs which recorded lower revenue which was largely offset by lower operating expenses. Within the CE sector, ACC had decreased revenue due to the reduction of ACC levies, but this was offset by increased revenue spread over the rest of the sector.

Figure 7 - Other revenue

Source:  The Treasury

Expenses#

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Total Crown expenses were $95.9 billion in the latest year, $2.1 billion more than the year earlier. SOE expenditure decreased in line with decreases in SOE revenue while the core Crown and CE segments recorded expenditure increases. The core Crown segment recorded the largest increase of $1.6 billion.

Core Crown Expenses#

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Despite the nominal expenditure increase of $1.6 billion, core Crown expenses fell as a share of the economy to 29.4% of GDP (Figure 8).

Figure 8 - Core Crown expenses

Source: 

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

• New Zealand Superannuation benefits increased $0.7 billion, mostly a result of indexation and an increase in recipients of New Zealand Superannuation, from around 665,100 to 690,600.
• Health expenses were $0.6 billion higher mainly as a result of additional funding going to District Health Boards for increased demand for services (both hospital and community based) and to help meet cost pressures and population changes.
• Education expenses were $0.3 billion higher than the previous year mainly as a result of new allocations in Budget 2015 for schools operations (teacher salaries and operating grants), special education and early childhood education funding.

Source:  The Treasury

Other Expenses#

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The SOE and CE sectors (including eliminations) also recorded expenses that were $0.5 billion (2.5%) higher than the previous year, this result was mainly attributable to higher insurance expenses in ACC and EQC, which together increased $0.8 billion, mostly reflecting additional claims.

Offsetting this, SOE expenditure was lower and matched with a reduction in income as mentioned above.

  Operating Balance#

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1. Other gains and losses includes the net surplus from associates and joint ventures

OBEGAL#

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The OBEGAL surplus continued to grow, increasing $1.4 billion from the previous year to $1.8 billion.

Figure 9 shows the composition of OBEGAL from the different segments of the Government. For the year ended 30 June 2016, the core Crown continued its upwards trend and was in surplus for the first time since 2008 (compared to a deficit of $0.1 billion last year), with higher tax revenue (5.7%) outpacing higher expenses (2.2%) compared to last year.

Figure 9 - Components of OBEGAL by segment

Source:  The Treasury

The SOE segment remained relatively stable, achieving a surplus of $0.7 billion, compared with a surplus of $0.6 billion last year.

Offsetting these results, the Crown entity segment reported a deficit of $0.3 billion which compares to the previous year's surplus of $0.7 billion. Within this result, EQC's OBEGAL decreased by $0.7 billion mainly due to increased claims following the 14 February 2016 earthquake in Christchurch, in comparison in 2015 there was a large decrease in insurance expense following a re-estimation of the outstanding claims liability that was not repeated this year.

In addition to EQC's result, ACC's surplus reduced by $0.4 billion, mainly due to decreased levy revenue and increased insurance expenses.

Source: The Treasury

Operating Balance#

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Net gains and losses were a loss of $7.2 billion for the year. These losses more than offset the OBEGAL surplus and resulted in the Crown's operating balance was a deficit of $5.4 billion, $11.2 billion lower than last year.

The current year saw significant volatility in financial markets and exchange rates. Gains on financial instruments were $1.1 billion ($5.1 billion less than the previous year). ACC's investment portfolio recorded a gain of $1.4 billion while NZS Fund recorded a small net loss on financial instruments and associates of $0.1 billion. Overall the NZSF Fund recorded an operating balance surplus of $26 million (Table 8). Investment performance was generally lower than the previous year across all markets and the Brexit referendum result on 23 June 2016 resulted in unstable markets right before the end of the year. Additionally, the strengthening New Zealand dollar led to foreign exchange losses on marketable securities and cash held.

While gains on investments were positive, the current year was adversely impacted by actuarial losses of $7.1 billion in relation to long-term liability valuations for ACC insurance claims and Government Superannuation Fund (GSF) pensions. A decrease in discount rates, partially offset by lower inflation rates resulted in actuarial losses of $5.1 billion for ACC and $2.0 billion for GSF. In addition to the actuarial losses, losses in relation to the Emissions Trading Scheme provision were $1.5 billion largely as a result of increased carbon prices from $6.80 to $17.75 over the course of the current year (refer below).

Figure 10 - Operating balance

Source:  The Treasury

The operating balance is particularly sensitive to balance sheet movements. Note 2 (page 48) of the financial statements discusses the key judgements and assumptions underpinning these financial statements.

Debt#

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Net Debt#

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After increasing over the past four years, net debt has flattened while falling as a share of the economy (24.6% of GDP versus 25.1% of GDP a year earlier). Net debt in nominal terms was similar to last year, with an increase of $1.2 billion this June year, as the core Crown continued to run a residual cash deficit albeit reduced from recent years.

Figure 11 - Net debt

Source:  The Treasury

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).

Residual Cash#

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The residual cash deficit was $1.3 billion, $0.5 billion less than last year. Table 11 summarises the contributors to the reduction in the residual cash deficit over the year.

Source: The Treasury

Tax receipts were $3.4 billion higher than last year, in line with the improvement in core Crown tax revenue as discussed on page 9.

Tax receipts grew faster than operating payments, leading to an operating cash surplus of $3.3 billion. Offsetting the operating cash surplus, capital spending totalled $4.6 billion, resulting in an overall cash deficit. Capital spending included:

• Net purchase of physical assets of $2.0 billion, including $0.6 billion for the Ministry of Education in relation to school property, $0.4 billion for defence equipment and $0.2 billion for both the Ministry of Justice and the Ministry of Health, mostly related to Canterbury rebuild projects.
• Net investments of $2.1 billion, the largest of which was the Crown's investment in state highways of $1.1 billion, with $0.4 billion also paid to Southern Response following a call on the Crown Support Deed (for more information refer to Note 28 on page 103).
• Net increase in advances of $0.5 billion, which included $0.3 billion for student loans.
• Last year's capital spend was reduced by the receipt of $0.6 billion from the Meridian Energy final instalment of the Government's share offer programme.

Gross Debt#

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Gross debt, which reflects the borrowings of the core Crown, was $0.8 billion higher than a year earlier at $86.9 billion (Figure 12). As a percentage of the economy, gross debt dropped 1.1% to 34.5% of GDP (35.6% of GDP a year earlier).

Figure 12 - Gross debt

Source:  The Treasury

The increase in nominal gross debt was predominantly the result of an increase in the issuance of Government Stock more than offsetting the Crown's bond and bill repurchasing programme, and a reduction in derivatives in loss and other financial liabilities.

Crown's Borrowing Programme#

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The debt programme (Table 12) during the current year raised cash from the market of $2.8 billion. The Crown continued to issue bonds ($7.9 billion face value) while Treasury Bill issuance has returned to normal levels after being increased in the previous year to fund the April 2015 bond maturity. The proceeds of the programme are used for working capital requirements.

Overall, once the non-market cash flows (debt issued directly to agencies within the Crown) were included, net cash proceeds from borrowing were $2.5 billion.

Net Worth Attributable to the Crown#

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Net worth attributable to the Crown was $89.4 billion as at 30 June 2016, an increase of $2.9 billion from a year earlier, continuing the upward trend. As a share of the economy, net worth attributable to the Crown was 35.5% of GDP, which was 0.3% lower than a year earlier.

While the Crown's operating balance was a deficit, revaluation uplifts of the Crown's property plant and equipment (details on the next page) resulted in an increase in the Crown's net worth.

Figure 13 - Net worth attributable to the Crown

Source: The Treasury

Total Crown Balance Sheet#

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Table 14 - Composition of the statement of financial position[5]

Total Crown assets were $292.7 billion as at 30 June 2016, a $13.5 billion increase since last year. This growth was largely in social sector assets ($9.7 billion), commercial assets grew by $2.8 billion and financial assets by $0.9 billion.

Figure 15 - Total Crown balance sheet

Source: The Treasury

Total Crown liabilities were $197.2 billion, an increase of $10.2 billion from the previous year. The growth was largely in relation to financial sector ($7.1 billion), social sector liabilities grew by $1.6 billion and commercial liabilities grew by $1.5 billion.

Social Balance Sheet#

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Social sector net worth at $130.2 billion was $8.1 billion higher than last year, driven largely by an increase in assets.

Figure 16 - Social balance sheet

Source: The Treasury

The Crown's social assets were valued at $149.4 billion, a $9.7 billion increase since last year, and made up just over 50% of the Crown's total assets. The largest uplifts related to the following:

• The state housing portfolio increased by $3.3 billion of which $2.7 billion relates to land. The land increase mostly related to Auckland stock reflecting the strength of this market.
• The value of state highways (including land) increased by $1.8 billion, mainly due to development of new and improvement of state highway assets.

Social liabilities were $19.2 billion, a $1.6 billion increase compared to last year mainly driven by an increase in the New Zealand ETS provision (refer page 14).

Financial Balance Sheet#

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Financial sector net worth at -$56.4 billion was $6.6 billion weaker than last year. The financial sector includes the Treasury's New Zealand Debt Management Office (NZDMO) which manages the Crown's bond programme and therefore holds the majority of the Crown's debt (while the assets funded by the debt are largely in the social sector).

Figure 17 - Financial balance sheet

Source: The Treasury

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices. Note 2, on pages 48 to 52, sets out some of the sensitivities of the key assumptions regarding these assets and liabilities.

The Crown's financial sector assets were valued at $87.9 billion, a $0.9 billion increase compared to last year. New Zealand equities held by the large investment portfolios (eg, NZSF and ACC) saw growth over the year while international equities held had poor results given concerns around weak global growth, continued effectiveness of quantitative easing programmes and geopolitical events such as Brexit.

Financial sector liabilities were $144.4 billion, an increase of $7.1 billion from the previous year. The main drivers of growth in financial liabilities were the following:

• ACC's insurance liability increased this year by $6.6 billion from $32.5 billion to $39.1 billion. The key drivers of this increase were the discount rate reduction, partly offset by various inflation rates being lower than expected. For further information on ACC's inflation assumptions see Note 22 insurance liabilities.
• Earthquake-related insurance liabilities of EQC and Southern Response were $0.5 billion and $0.4 billion lower respectively as insurance claims were paid out during the year.

Commercial Balance Sheet#

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Commercial sector net worth at $21.8 billion increased by $1.4 billion compared to last year.

Figure 18 - Commercial balance sheet

Source: The Treasury

The Crown's commercial assets were valued at $55.3 billion, a $2.9 billion increase over the year. A large component of this increase related to Kiwibank loans ($1.1 billion increase), along with increases due to property, plant and equipment valuation uplifts and additions across the sector.

Commercial liabilities valued at $33.6 billion were $1.5 billion higher than the previous year, primarily due to an increase in deposits held by Kiwibank ($1.1 billion), matched by an increase in its lending.

Year End Results Compared to Budget 2016#

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The Budget Economic and Fiscal Update 2016 (Budget 2016) was published on 26 May 2016 and is the most recent set of forecasts. Estimated Actuals refers to the latest forecasts published shortly before year end, for any given year.

The 2016 results were mostly favourable compared to Budget 2016, with the notable exception of operating balance.

Source: The Treasury

Core Crown Tax Revenue#

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Tax revenue was stronger than expected, as the economy grew in nominal terms by 0.7% more than forecast. In addition, net migration and labour force participation were slightly higher than expected.

Core Crown tax revenue was $0.8 billion (1.1%) higher than expected, with the largest differences being:

• Source deductions: $0.4 billion (1.7%) higher than forecast due mainly to higher than expected growth in total employment, and salaries and wages.
• Customs and excise duties: $0.2 billion (3.5%) higher than forecast due mainly to a temporary change in the monthly pattern of tobacco duty revenue, which has brought forward an estimated $0.1 billion of revenue from 2016/17 to 2015/16, and higher than forecast fuel duty, mainly from higher than expected petrol consumption.
• Corporate tax: $0.1 billion (1.0%) higher than forecast mainly owing to above forecast terminal tax revenue. This was partly offset by lower than forecast tax from Portfolio Investment Entities.

• Goods and services tax: $0.1 billion (0.4% higher than forecast, related to broad-based and above-forecast growth in private consumption, in-bound tourist spending and residential investment.

• Resident withholding tax was $0.1 billion (3.7%) lower than forecast, mainly owing to lower than forecast interest rates.

Overall the tax variance to forecast is not significantly larger than recent forecasts (Figure 19).

Figure 19 - Core Crown tax revenue variance to Estimated Actuals

Source: The Treasury

Core Crown Expenses#

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Core Crown expenses were $0.5 billion (0.6%) lower than expected. As with core Crown tax revenue, the forecast variance is reasonable, at a similar level to the previous year (Figure 20).

Figure 20 - Core Crown expenses variance to Estimated Actuals

Source: The Treasury

The lower than forecast result was largely due to lower than forecast impairment of tax receivables by Inland Revenue of $328 million partly offset by higher than forecast impairment on student loans of $91 million as well as lower than forecast Ministry of Social Development expenses of $174 million mainly due to a reversal of impairment of social benefit receivables.

OBEGAL#

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The OBEGAL surplus was $1.2 billion higher than expected. Both core Crown tax revenue and core Crown expenses were close to forecast but, when combined, had a significant impact on the OBEGAL result (increasing OBEGAL by $1.3 billion).

Operating Balance#

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The total Crown operating balance was $2.8 billion lower than expected. More than offsetting the favourable OBEGAL result ($1.2 billion), ACC and GSF incurred higher than forecast actuarial losses due to lower discount rates ($2.0 billion and $1.1 billion respectively) while losses on the Emissions Trading Scheme were $0.9 billion higher than forecast due to an increased carbon price.

Residual Cash#

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The residual cash deficit was $0.8 billion lower due in part to higher than forecast tax receipts ($0.7 billion). Operating payments were $0.4 billion lower than forecast, this was partly offset by higher than forecast capital payments ($0.3 billion).

Net Debt#

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Net debt at $61.9 billion (24.6% of GDP) was $0.4 billion below forecast mainly due to the more favourable residual cash mentioned above.

Gross Debt#

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Gross debt at $86.9 billion (34.5% of GDP) was close to forecast.

Net Worth Attributable to the Crown#

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The net worth attributable to the Crown was $5.8 billion stronger than expected mainly due to revaluation uplifts of the Crown's property, plant and equipment (that were not forecast) more than offsetting the operating

Historical Financial Information#

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Historical Financial Information (continued)#

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Independent Report of the Auditor-General#

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To the Readers of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2016#

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Opinion

I have audited the financial statements of the Government of New Zealand (the financial statements of the Government) for the year ended 30 June 2016 using my staff, resources and appointed auditors and their staff. The financial statements of the Government on pages 34 to 151 comprise:

• the annual financial statements that include the statement of financial position as at 30 June 2016, the statement of financial performance,analysis of expenses by functional classification,statement of comprehensive revenue and expense, statement of changes in net worth,and statement of cash flows for the year ended on that date, a statement of segments, and notes to the financial statements that include accounting policies, borrowings as at 30 June 2016, and other explanatory information;
• a statement of unappropriated expenditure for the year ended 30 June 2016;
• a statement of expenses or capital expenditure incurred in emergencies for the year ended 30 June 2016; and
• a statement of trust money, administered by departments, for the year ended 30 June 2016.

In my opinion, the financial statements of the Government on pages 34 to 151:

• present fairly, in all material respects the Government's:
  • financial position as at 30 June 2016;
  • financial performance and cash flows for the year ended on that date;
  • borrowings as at 30 June 2016;
  • unappropriated expenditure for the year ended 30 June 2016;
  • emergency expenses and capital expenditure for the year ended 30 June 2016; and
  • trust money administered by departments for the year ended 30 June 2016.
• comply with generally accepted accounting practice in New Zealand, in accordance with Public Sector Public Benefit Entity Accounting Standards.

Basis for Opinion

The audit has been carried out in accordance with the Auditor-General's Auditing Standards, which incorporate the International Standards on Auditing (New Zealand) (ISAs (NZ)). My responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements of the Government section of this report.

While carrying out this audit, my staff, and appointed auditors and their staff followed my independence requirements, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with my independence requirements.

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.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Independent Report of the Auditor-General (continued)#

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Key Audit Matters#

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Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the Government of the current period. In applying my professional judgement to determine key audit matters, I considered those matters that could be complex, have a high degree of uncertainty, or are important to the public.

Because of the nature of the Government's activities, I recognise that key audit matters may be long-standing, and therefore, may not change significantly from one year to the next. These matters were addressed in my audit of the financial statements of the Government as a whole, and in forming my opinion thereon.

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

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

• comply with generally accepted accounting practice in New Zealand in accordance with Public Sector Public Benefit Entity Accounting Standards;
• present fairly, in all material respects the Government's financial position, financial performance, and cash flows; and
• presents fairly, in all material respects the Government's:
  • borrowings;
  • unappropriated expenditure;
  • expenses or capital expenditure incurred in emergencies; and
  • trust money administered by departments.

The Minister of Finance is responsible for forming an opinion that the financial statements of the Government present fairly in all material respects 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.

The Treasury is also responsible for such internal control as it determines is necessary to enable the preparation of the financial statements of the Government 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.

In preparing the financial statements of the Government, the Treasury is responsible for assessing the Government's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

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

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

My objectives are to obtain reasonable assurance about whether the financial statements of the Government as a whole are free from material misstatement, whether due to fraud or error, and to issue an audit report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions users take on the basis of the financial statements of the Government. If material misstatements had been found that were not corrected, I would have referred to them in my opinion.

As part of an audit in accordance with ISAs (NZ), I exercised professional judgement and maintained professional scepticism throughout the audit. Also:

• I identified and assessed the risks of material misstatement of the financial statements of the Government, whether due to fraud or error, designed and performed audit procedures responsive to those risks, and obtained audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• I obtained an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control used by the Treasury to prepare the financial statements of the Government.
• I evaluated the appropriateness of accounting policies used, and the reasonableness of accounting estimates and related disclosures made by the Treasury.
• I concluded on the appropriateness of the use of the going concern basis of accounting that has been used by the Treasury to prepare the financial statements of the Government, up to the date of my auditor's report based on the audit evidence I have obtained.
• I evaluated the overall presentation, structure, and content of the financial statements of the Government, including the disclosures, and whether the financial statements of the Government represent the underlying transactions and events in a manner that achieves fair presentation.

For the budget information reported in the financial statements of the Government, my procedures were limited to checking that the amounts agree to the Government's most recent forecast.

As part of my audit, I obtained information from my staff, and appointed auditors of the organisations that are consolidated into the financial statements of the Government, including information about:

• eliminations of transactions between the organisations that are consolidated into the financial statements of the Government;
• application by those organisations of appropriate accounting policies and Treasury instructions to prepare the financial statements of the Government; and
• relevant risks of material misstatement of the financial statements of those organisations that may affect the financial statements of the Government.

I have communicated with the Treasury, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identified during my audit.

From the matters communicated with the Treasury, I determined those matters that were of most significance in the audit of the financial statements of the Government of the current period and are therefore the key audit matters described in this report.

I did not evaluate the security and controls over the publication, whether in printed or electronic form, of the financial statements of the Government.

Other information#

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In addition to preparing the financial statements of the Government, the Treasury is also responsible for preparing the other information on pages 3 to 24 and 153 to 162.

My opinion on the financial statements of the Government does not cover the other information. As a result, I do not express any form of audit opinion or assurance conclusion on that information.

In connection with my audit of the financial statements of the Government, my responsibility is to read the other information, and, in doing so, consider whether this information is materially inconsistent with the financial statements of the Government, or my knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work I have performed, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

Lyn Provost
Controller and Auditor-General
Wellington, New Zealand

30 September 2016

Audited Financial Statements of the Government of New Zealand#

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Statement of Financial Performance for the year ended 30 June 2016#

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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 2016#

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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. Details of unappropriated expenditure can be found on pages 141 to 146.

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

Statement of Comprehensive Revenue and Expense
for the year ended 30 June 2016#

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

Statement of Changes in Net Worth
for the year ended 30 June 2016#

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

Statement of Cash Flows
for the year ended 30 June 2016#

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

Statement of Cash Flows (continued)
for the year ended 30 June 2016#

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

Statement of Cash Flows (continued)
for the year ended 30 June 2016#

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

Statement of Financial Position
as at 30 June 2016#

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

Statement of Segments#

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Statement of Segments (continued)#

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Notes to the Financial Statements#

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Note 1: Basis of Reporting#

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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 Public Sector PBE Accounting Standards (PBE Standards) - Tier 1. These standards are based on International Public Sector Accounting Standards (IPSAS).

For the purposes of these financial statements, the Government reporting entity has been designated as a public benefit entity (PBE). Public benefit entities (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.

The use of public resources by the Government is primarily governed by the Public Finance Act 1989, the State Sector Act 1988, the Crown Entities Act 2004 and the State-owned Enterprises Act 1986.

These financial statements were authorised for issue by the Minister of Finance on 30 September 2016.

Reporting period

The reporting period for these financial statements is the year ended 30 June 2016.

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 Financial Statements of the Government. Such entities are primarily in the education sector.

Basis of preparation

These 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.

Accounting Standards issued and not yet effective and not early adopted

In 2015, the External Reporting Board issued Disclosure Initiative (Amendments to PBE IPSAS 1), 2015 Omnibus Amendments to PBE Standards, and Amendments to PBE Standards and Authoritative Notice as a Consequence of XRB A1 and Other Amendments. These amendments apply to PBEs with reporting periods beginning on or after 1 January 2016. The Government will apply these amendments in preparing its 30 June 2017 financial statements but expects there will be no material effect in applying them.

Government Reporting Entity as at 30 June 2016

Reporting entity

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

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

The description “Consolidated Financial Statements of the Government reporting entity” and the description “Financial Statements of the Government” have the same meaning and can be used interchangeably.

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
• Regenerate Christchurch
• Education Council of Aotearoa New Zealand
• Organisations listed in Schedule 4 and 4A (Non-listed companies in which the Crown is majority or sole shareholder) of the Public Finance Act 1989
• Organisations listed in Schedule 5 (Mixed ownership model companies) of the Public Finance Act 1989
• Legal entities listed in Schedule 6 (Legal entities created by Treaty of Waitangi settlement Acts) of the Public Finance Act 1989

The Crown has a full residual interest in all the above entities with the exception of Air New Zealand Limited, Tāmaki Redevelopment Company Limited (listed in Schedule 4A of the Public Finance Act 1989), Regenerate Christchurch and the entities listed in Schedule 5 of the Public Finance Act 1989 (Mixed Ownership Model Companies).

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

Tertiary education institutions are equity-accounted for the reasons explained in note 19 to the financial statements for the period ended 30 June 2016. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

Note 1: Basis of Reporting (continued)#

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These financial statements are for the Government Reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities (classified in the three institutional components used for segmental reporting):

Core Crown#

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Departments

Crown Law Office

Department of Conservation

Department of Corrections

Department of Internal Affairs

Department of the Prime Minister and Cabinet

Education Review Office

Government Communications Security Bureau

Inland Revenue Department

Land Information New Zealand

Ministry for Culture and Heritage

Ministry for Pacific Peoples

Ministry for Primary Industries

Ministry for the Environment

Ministry for Women

Ministry of Business, Innovation and Employment

Ministry of Defence

Ministry of Education

Ministry of Foreign Affairs and Trade

Ministry of Health

Ministry of Justice

Ministry of Māori Development

Ministry of Social Development

Ministry of Transport

New Zealand Customs Service

New Zealand Defence Force

New Zealand Police

New Zealand Security Intelligence Service

Office of the Clerk of the House of Representatives

Parliamentary Counsel Office

Parliamentary Service

Serious Fraud Office

State Services Commission

Statistics New Zealand

The Treasury

Offices of Parliament

Controller and Auditor-General

Office of the Ombudsmen

Parliamentary Commissioner for the Environment

Others

New Zealand Superannuation Fund

Reserve Bank of New Zealand

State-owned Enterprises#

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Airways Corporation of New Zealand Limited

Animal Control Products Limited

AsureQuality Limited

Electricity Corporation of New Zealand Limited

Kiwirail Holdings Limited

Kordia Group Limited

Landcorp Farming Limited

Meteorological Service of New Zealand Limited

New Zealand Post Limited

New Zealand Railways Corporation

Quotable Value Limited

Solid Energy New Zealand Limited

Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act schedule 5 companies) 

Genesis Energy Limited

Meridian Energy Limited

Mighty River Power Limited

Other

Air New Zealand Limited

Crown entities#

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Accident Compensation Corporation

Accreditation Council

Arts Council of New Zealand Toi Aotearoa

Broadcasting Commission

Broadcasting Standards Authority

Callaghan Innovation

Careers New Zealand

Children's Commissioner

Civil Aviation Authority of New Zealand

Commerce Commission

Crown Irrigation Investments Limited

Crown Research Institutes (7)

District Health Boards (20)

Drug Free Sport New Zealand

Earthquake Commission

Education New Zealand

Electoral Commission

Electricity Authority

Energy Efficiency and Conservation Authority

Environmental Protection Authority

External Reporting Board

Families Commission

Financial Markets Authority

Government Superannuation Fund Authority

Guardians of New Zealand Superannuation

Health and Disability Commissioner

Health Promotion Agency

Health Quality and Safety Commission

Health Research Council of New Zealand

Heritage New Zealand Pouhere Taonga

Housing New Zealand Corporation

Human Rights Commission

Independent Police Conduct Authority

Law Commission

Maritime New Zealand

Museum of New Zealand Te Papa Tongarewa Board

New Zealand Antarctic Institute

New Zealand Artificial Limb Service

New Zealand Blood Service

New Zealand Film Commission

New Zealand Fire Service Commission

New Zealand Lotteries Commission

New Zealand Productivity Commission

New Zealand Qualifications Authority

New Zealand Symphony Orchestra

New Zealand Tourism Board

New Zealand Trade and Enterprise

New Zealand Transport Agency

New Zealand Venture Investment Fund Limited

New Zealand Walking Access Commission

Office of Film and Literature Classification

Pharmaceutical Management Agency

Privacy Commissioner

Public Trust

Radio New Zealand Limited

Real Estate Agents Authority

Retirement Commissioner

School Boards of Trustees (2,418)

Social Workers Registration Board

Sport and Recreation New Zealand

Takeovers Panel

Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)

Te Taura Whiri i te Reo Māori (Māori Language Commission)

Television New Zealand Limited

Tertiary Education Commission

Tertiary Education institutions (28)

Transport Accident Investigation Commission

WorkSafe New Zealand

Crown entities#

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Organisations listed in schedule 4 of the Public Finance Act 1989

Agricultural and Marketing Research and Development Trust

Asia New Zealand Foundation

Fish and Game Councils (12)

Game Animal Council

Leadership Development Centre Trust

Māori Trustee

National Pacific Radio Trust

New Zealand Fish and Game Council

New Zealand Game Bird Habitat Trust Board

New Zealand Government Property Corporation

New Zealand Lottery Grants Board

Ngāi Tahu Ancillary Claims Trust

Pacific Co-operation Foundation

Pacific Island Business Development Trust

Reserves Boards (20)

Sentencing Council

Te Ariki Trust

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act schedule 4A companies)

Crown Asset Management Limited

Crown Fibre Holdings Limited

Education Payroll Limited

Fairway Resolution Limited

Health Benefits Limited (ceased operating)

Ōtākaro Limited

Research and Education Advanced Network New Zealand Limited

Southern Response Earthquake Services Limited

Tāmaki Redevelopment Company Limited

The Network for Learning Limited

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

Te Urewera

Others

Education Council of Aotearoa New Zealand

Regenerate Christchurch

Subsidiaries of SOEs, Crown entities and other government entities are consolidated by their parents and not listed separately in this table.

Note 2: Key Assumptions and Judgements#

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These financial statements reflect the financial position (service potential and financial capacity) as at 30 June 2016, and the financial results of operations and cash flows for the year ended on that date. Underpinning these financial statements are a number of judgements, estimations and assumptions. These include assumptions and judgements about the future, in particular, the service benefits and future cash flows in relation to existing assets and liabilities.

Key assumptions#

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The estimations in these financial statements are based on the best information available at the time of their preparation. Given the inherent uncertainty of predicting the future, actual events are likely to differ from these assumptions, which may have a material impact on the results reported in these financial statements. Some of the key assumptions are discussed below.

The valuation of many assets and liabilities are based on assumptions using market information. The most significant of these are:

A number of long-term assets and liabilities are valued by estimating future cash flows which are then discounted to present value. Some of the cash flows, in particular those relating to long-term liabilities (eg, ACC and GSF obligations) use assumptions to predict cash flows up as far as 80 years into the future. Therefore, changes in a number of economic assumptions can have a significant impact of the Government's financial position and performance. The most significant of these assumptions are:

Sensitivity of key assumptions

The tables below outline the sensitivity of the key assumptions discussed above on the significant valuations included in these financial statements.

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices and account for a significant portion of the financial position. At 30 June 2016 financial assets totalled $125.8 billion (2015: $123.3 billion) while financial liabilities totalled $127.2 billion (2015: $126.0 billion).

In relation to assumptions concerning property prices, land and buildings account for 57% of total property, plant and equipment and 65% of the asset revaluation reserve. A significant decline in property prices would not impact the operating balance but would reduce net worth.

Long term liabilities such as the ACC claims liability ($39.1 billion) and the GSF retirement plan ($12.4 billion) are particularly sensitive to the assumptions associated with estimating discounted cash flows. The table below outlines the sensitivity of those liabilities to key assumptions:

Note 2: Key Assumptions and Judgements (continued)#

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Areas of significant estimation#

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Along with the assumptions used above, these financial statements include estimations that include a number of uncertainties (discussed below).

Other uncertainties#

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In addition to those items on the statement of financial position there are a number of liabilities or assets that may arise in the future but are not recognised. This is because they are dependent on an uncertain future event occurring or the liability/asset cannot be measured reliably. If these contingencies crystallised, there will be an associated impact on the operating balance and net worth of the Crown. These contingencies are reported in note 28 of these financial statements.

Risk management#

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The Crown's financial position at balance date is exposed to risks through possible changes in the key assumptions and judgements described above that could materially impact on the value of the Crown's assets and liabilities.

The Crown's current risk management framework generally involves holding individual government reporting entities responsible for managing the risks that they individually face, subject to legislation and central guidance such as the Public Finance Act and Treasury Instructions. Resilience is supported through relatively low debt levels and a strong financial position.

The Crown is exposed to changes in market conditions (eg, interest rates). Further discussion on the risk management of financial instruments can be found in note 29.

Note 3: Sovereign Revenue#

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1. Includes customs excise-equivalent duty.

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

Note 4:  Sales of Goods and Services#

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1. Comparatives have been restated to reflect a change in electricity hedge settlements previously reported on a gross basis.

Note 5:  Interest Revenue and Dividends#

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Student loans are advanced on an interest-free basis, therefore they are discounted to reflect their fair value.

The interest unwind reflects the increase in value as the period to repayment reduces.

Note 6:  Other Revenue#

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Note 7: Transfer Payments and Subsidies#

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Note 8:  Personnel Expenses#

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Key management personnel compensation was $10 million (2015: $10 million). This reflects salaries, benefits and allowances. Key management personnel are the 28 Ministers of the Crown who are members of the Executive Council (including the Prime Minister).

The Ministers remuneration and other benefits are set out by the Remuneration Authority under the Members of Parliament (Remuneration and Services) Act 2013. Members of Parliament, including members of the Executive, have access to other non-cash entitlements as determined by the Speaker of the House of Representatives. Details of these entitlements (eg, travel discounts) can be found on the New Zealand Parliament website (www.parliament.govt.nz).

Note 9:  Other Operating Expenses#

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1. Comparatives have been restated to reflect a change in electricity hedge settlements previously reported on a gross basis.

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

Audit fees paid to the Controller and Auditor-General#

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Fees paid to the Controller and Auditor-General (including audit service providers) for the audit of the financial statements of the Government and its reporting entities were $40.8 million (2015: $40.0 million). Fees for assurance and related services paid to the Controller and Auditor-General were $0.4 million (2015: $0.6 million). As the Controller and Auditor-General is part of the Government reporting entity these fees are eliminated on consolidation.

Note 10: Interest Expenses#

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Note 11: Insurance Expenses#

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The remainder of note 11 provides additional information on the insurance expenses for ACC.

Note 31 contains further discussion on total costs of the earthquakes to the Crown.

An analysis of the insurance liabilities is provided in note 22. Given the uncertainty over the cost of outstanding insurance claims, it is likely that the final cost will be different from the original liability established.

Analysis of ACC Insurance Expense#

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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.

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

Note 12:  Gains and Losses on Financial Instruments#

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

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The ACC and GSF liabilities are valued by an independent actuary (refer notes 22 and 23). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when previously calculating the liability and the effect of changes in actuarial assumptions (experience adjustments).

Note 14: Receivables#

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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 actively managed.

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

Tax receivables, ACC levy receivables and social benefit receivables are considered to be short term, so their carrying value represents a reasonable approximation of their fair value.

Other levies, fines and penalty receivables comprise debtor portfolios administered by Ministry of Justice (ie, court fines) and Inland Revenue (ie, child support). These receivables are recorded at fair value, which on initial recognition represent the face value of the amount owed to the Crown, adjusted to reflect the amount expected to be recoverable. For the current year the initial adjustment from face value to fair value of these receivables was $312 million (2015: $293 million), with $252 million (2015: $226 million) of the adjustment relating to child support debt administered by Inland Revenue.

Social benefit receivables comprise benefit overpayments, advances on benefits and recoverable special needs grants primarily administered by the Ministry of Social Development.

Trade and other receivables are relatively short term, with $3,454 million (2015: $3,736 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

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 of 6.0% (2015: 6.0%). 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.

Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date. IRD has debt management policies and procedures to actively manage the collection of past due debt.