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

Prepared, presented to the House of Representatives and published in accordance with Part 3 of the Public Finance Act 1989.

The Treasury has also prepared A Snapshot of the 2013 Financial Statements of the Government of New Zealand which is a high level presentation of key facts and figures of the financial year, intended to make the financial statements more user friendly and accessible.

Contents

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Ministerial Statement

Statement of Responsibility

Commentary

Independent Report of the Auditor-General

fsgnz-year-jun13.pdf (2,842 KB) pp. (2),ii,1–184

fsgnz-year-jun13-1.pdf (1,872 KB) pp. (2),ii,1–24

Audited Financial Statements

fsgnz-year-jun13-2.pdf (846 KB) pp. 29–164

Supplementary Statements

Additional Financial Information

Glossary of Terms

fsgnz-year-jun13-3.pdf (187 KB) pp. 165–184

Data and Charts - Commentary

  • Data and charts from Commentary section of the Financial Statements in MS Excel format.
fsgnz-year-jun13.xls (473 KB)

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

The New Zealand Government:

  • 2,500 entities
  • $86.6 billion revenue
  • $91.0 billion expenditure
  • $4.4 billion operating deficit
  • $244.4 billion assets
  • $174.4 billion liabilities.

The economy continued to grow

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

Annual average % change in GDP

Annual average % change in GDP.

Facts and figures – June Year

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

 

Where does the Government's money come from?

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

Total revenue $86.6 billion

  • $3.1 billion increase from last year
  • Represents 40.7% of GDP
  • Core Crown tax revenue was $58.7 billion

Who pays income tax, and how much?

Who pays income tax, and how much?.
  • Next year 3.4 million New Zealanders are expected to pay tax of $26.4 billion – an average of $7,765 each

 

Your tax dollar - where was it spent?

Your tax dollar – where was it spent?
  • $70.3 billion core Crown expenses
  • 55% of all spending on welfare, education and health
  • 23% of all spending by SOEs and Crown entities

Crown expenses

Expenses.

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

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

 

Your dollar provided...

$49.7 billion on welfare, health, education

Social welfare

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

Health

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

Education

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

 

$11.5 billion so far to rebuild Canterbury

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

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

Government spending exceeded income

Operating balance before gains and losses (OBEGAL)

Operating balance before gains and losses (OBEGAL).

$4.4 billion deficit

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

OBEGAL deficit → Capital Spending → Cash deficit → Net Debt

Core Crown net debt

Core Crown net debt.

$55.8 billion core Crown net debt

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

 

What does the Government owe?

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

Total Crown liabilities

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

 

What does the Government own?

What does the Government own?

Total Crown assets

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

Ministerial Statement

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

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

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

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

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

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

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

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

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

Hon Bill English
Minister of Finance

30 September 2013

Statement of Responsibility

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

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

Gabriel Makhlouf
Secretary to the Treasury

30 September 2013

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

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2013 and its operations for the year ended on that date.

Hon Bill English
Minister of Finance

30 September 2013

Commentary

Fiscal Overview
Fiscal Overview.
 

Introduction

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

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

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

Notes

  • [1]The financial statements of the Government of New Zealand refer to both core Crown and total Crown results. Core Crown is comprised of Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand. Total Crown is comprised of the core Crown, State-owned enterprises and Crown entities.

At a Glance

Table 1 - Financial results
Year ended 30 June

$million
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Forecast
30 June 2013
Budget 12 Budget 13
Core Crown tax revenue 54,681 50,744 51,557 55,081 58,651 58,251 58,286
Core Crown expenses 64,002 64,013 70,450 69,076 70,306 73,732 71,649
Operating balance before gains and losses (OBEGAL) (3,893) (6,315) (18,396) (9,240) (4,414) (7,897) (6,285)
Operating balance (10,505) (4,509) (13,360) (14,897) 6,925 (5,699) 1,918
Residual cash (8,639) (9,000) (13,343) (10,644) (5,742) (9,671) (7,750)
Gross debt 43,356 53,591 72,420 79,635 77,984 79,972 78,636
Net debt 17,119 26,738 40,128 50,671 55,835 61,265 57,945
Net worth attributable to the Crown 99,068 94,586 80,579 59,348 68,071 64,560 61,476

Headlines:

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

Summary

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

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

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

Figure 1 - OBEGAL
Figure 1 - OBEGAL .
Source:  The Treasury

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

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

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

Figure 2 - Core Crown revenue and expenses
Figure 2 - Core Crown revenue and expenses   .
Source:  The Treasury

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

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

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

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

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

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

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

Net debt continues to grow...

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

Figure 3 - Net debt
Figure 3 - Net debt   .
Source:  The Treasury

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

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

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

Figure 4 - Operating balance
Figure 4 - Operating balance   .
Source:  The Treasury

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

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

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

Figure 5 - Net worth
Figure 5 - Net worth   .
Source:  The Treasury

Partial Sale of Shares in Mighty River Power  

The Crown sold part of its shareholding in Mighty River Power (MRP) in May.  MRP was the first SOE to be floated as part of the partial share sales programme announced by the Government in Budget 2012.  Overall, the Crown received $1.69 billion from the sale of 48.2% of its ownership.

Table 2 - Partial sale of shares
  $m
Net assets at time of sale 3,052
Crown interest (51.8%) 1,581
Minority interest (48.2%) 1,471
Proceeds from sale  
Gross proceeds 1,685
Direct costs of share sale (22)
Net Cash proceeds 1,663
Loyalty bonus shares (25)
Net proceeds after bonus shares issued 1,638
Amount sold to minority interests (1,471)
Gain on partial sale 167

Source:  The Treasury (as at 14 May 2013)

What was sold?

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

What did the Crown receive?

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

What is the cost of the loyalty bonus shares?

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

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

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

Why does the total Crown investment change?

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

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

Revenue

Table 3 - Breakdown of revenue
Year ended 30 June

$million
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Forecast
30 June 2013
Budget 12 Budget 13
Core Crown tax revenue 54,681 50,744 51,557 55,081 58,651 58,251 58,286
Core Crown other revenue 4,801 5,472 5,993 5,484 5,498 5,940 5,523
Core Crown revenue 59,482 56,216 57,550 60,565 64,149 64,191 63,809
Crown entities, SOEs and eliminations 20,024 18,509 24,013 22,918 22,506 22,112 22,654
Total Crown revenue 79,506 74,725 81,563 83,483 86,655 86,303 86,463
% of GDP    
Core Crown tax revenue 29.5% 26.5% 25.7% 26.4% 27.6% 26.7% 27.3%
Core Crown other revenue 2.6% 2.9% 3.0% 2.6% 2.6% 2.7% 2.6%
Core Crown revenue 32.1% 29.3% 28.7% 29.1% 30.2% 29.5% 29.8%
Crown entities, SOEs and eliminations 10.8% 9.7% 12.0% 11.0% 10.6% 10.1% 10.6%
Total Crown revenue 42.9% 39.0% 40.7% 40.1% 40.7% 39.6% 40.4%

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

Core Crown Tax Revenue

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

Figure 6 - Core Crown tax revenue
Figure 6 - Core Crown tax revenue   .
Source:  The Treasury

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

  • Source deductions: $1.1 billion higher than last year owing to a stronger labour market. More people were employed (0.7% higher than 2012), and wages were higher (2.1% above the same time a year earlier), which directly resulted in increased tax from source deductions. Also, as taxpayers' earnings increase, their average tax rate increases owing to the progressive nature of the personal income tax scale (often referred to as fiscal drag). In addition, the tax exemptions related to KiwiSaver contributions were removed during the year, increasing the tax take.
  • Other individuals[2]: $1.1 billion (or 36.8%) higher than a year earlier, largely owing to growth in taxable income over the past year and boosted by the base broadening measures from Budget 2010 (eg, removing the depreciation exemption on buildings). While the tax policy changes took effect in the 2011/12 tax year, for many taxpayers the financial impact first occurred within the current financial year. In addition, strength in equity markets is likely to have led to higher income from investments.
  • GST: $0.6 billion stronger as both private consumption and residential investment increased (up 2.8% and 23% respectively).
  • Corporate tax: $0.5 billion higher than the year before, mainly owing to growth in current-year taxable profits of firms and an increase in investment returns.
  • Compared to forecast in Budget 2013, core Crown tax revenue was $0.4 billion (0.6%) above, with the largest differences being in corporate tax and GST.
  • Corporate tax was $0.5 billion above Budget 2013 forecast mainly owing to higher-than-expected current-year taxable profits, mostly concentrated within a few sectors of the economy.
  • GST was $0.2 billion lower than forecast mainly because both private consumption and residential investment were slightly weaker than forecast.
Table 4 - Increase in core Crown tax revenue ($billion)
2012 core Crown tax revenue 55.1
Source deductions 1.1
Other individuals 1.1
GST 0.6
Corporate tax 0.5
Other movements 0.3
2013 core Crown tax revenue 58.7
Figure 7 - Core Crown tax revenue against Budget 2013
Figure 7 - Core Crown tax revenue against Budget 2013   .
Source:  The Treasury

Other Revenue

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

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

Figure 8 - Other revenue
Figure 8 - Other revenue   .
Source:  The Treasury

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

Notes

  • [2]This tax type includes tax paid by sole traders, partnerships and trusts

Expenses

Table 5 - Breakdown of expenses
Year ended 30 June
$ million
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Forecast
30 June 2013
Budget 12 Budget 13
Social security and welfare 19,382 21,185 22,005 22,028 22,741 23,239 22,893
Health 12,368 13,128 13,753 14,160 14,498 14,745 14,526
Education 11,455 11,724 11,650 11,654 12,504 12,387 12,355
Core government services 5,293 2,974 5,563 5,428 4,294 6,537 5,572
Law and order 3,089 3,191 3,382 3,403 3,456 3,558 3,511
Other core Crown expenses 12,415 11,811 14,097 12,403 12,813 13,266 12,792
Core Crown expenses 64,002 64,013 70,450 69,076 70,306 73,732 71,649
Crown entities, SOEs and eliminations 19,397 17,027 29,509 23,647 20,701 20,378 21,089
Total Crown expenses 83,399 81,040 99,959 92,723 91,007 94,110 92,738
% of GDP    
Social security and welfare 10.4% 11.0% 11.0% 10.6% 10.7% 10.7% 10.7%
Health 6.7% 6.8% 6.9% 6.8% 6.8% 6.8% 6.8%
Education 6.2% 6.1% 5.8% 5.6% 5.9% 5.7% 5.8%
Core government services 2.9% 1.6% 2.8% 2.6% 2.0% 3.0% 2.6%
Law and order 1.7% 1.7% 1.7% 1.6% 1.6% 1.6% 1.6%
Other core Crown expenses 6.7% 6.2% 7.0% 6.0% 6.0% 6.1% 6.0%
Core Crown expenses 34.5% 33.4% 35.2% 33.1% 33.1% 33.8% 33.5%
Crown entities, SOEs and eliminations 10.5% 8.9% 14.7% 11.3% 9.7% 9.4% 9.9%
Total Crown expenses 45.0% 42.3% 49.9% 44.5% 42.8% 43.2% 43.4%

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

Core Crown Expenses

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

Figure 9 - Core Crown expenses
Figure 9 - Core Crown expenses   .
Source:  The Treasury

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

  • Education expenses made up most of the increase as they were $0.9 billion higher than in 2012, with the majority being related to impairments of the student loan receivables ($0.8 billion). The impairments were higher because of one-off improvements last year and updated assumptions about student incomes, which meant that repayments are now expected to be slightly slower than previously estimated. The remainder of the increase was a result of funding allocations to Education in the 2012 Budget.
  • Spending on benefits increased $0.7 billion, mostly a result of an increase in recipients of New Zealand Superannuation, from 585,000 to 613,000, as the population ages.
  • Expenses related to weathertight homes were impacted by a one-off $400 million decrease in 2012, which was not repeated this year. Overall, the remaining provision is $123 million (refer to note 27 of the financial statements for further details).
Table 6 - Movement in core Crown expenses
Year ended 30 June  
2012 core Crown expenses 69.1
Education 0.9
New Zealand Superannuation 0.7
Weathertight homes 0.4
Earthquake costs (0.9)
Other 0.1
2013 core Crown expenses 70.3

Source:    The Treasury

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

Compared to Budget

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

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

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

Figure 10 - Core Crown expenses compared to Budget 13
Figure 10 - Core Crown expenses compared to Budget 13   .
Source:  The Treasury

SOE and Crown Entity Expenses

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

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

Canterbury Earthquake Recovery

Table 7 - Net costs to the Crown of the Canterbury Earthquakes
Year ending 30 June
$million
Total Actual
2011
Actual
2012
Actual
2013
Forecast
2013
Difference
to forecast
Local Infrastructure 1,407 195 729 483 1,164 (681)
Land zoning 903 653 258 (8) 189 (197)
Southern Response support package 458 355 156 (53) (49) (4)
Christchurch central city rebuild 115 115 187 (72)
Other earthquake costs 783 390 149 244 295 (51)
Canterbury earthquake recovery costs 3,666 1,593 1,292 781 1,786 (1,005)
EQC (net of reinsurance proceeds) 8,026 7,471 662 (107) (164) 57
Other Crown Entities (217) 23 (41) (199) 40 (239)
Total Crown net earthquake costs 11,475 9,087 1,913 475 1,662 (1,187)
Operating expenses 11,253 9,087 1,900 266 1,395 (1,129)
Capital expenditure 222 13 209 267 (58)
Total Crown net earthquake costs 11,475 9,087 1,913 475 1,662 (1,187)

This year the net cost (including both operating and capital spending) of the Canterbury earthquakes was $0.5 billion, $1.4 billion lower than the previous year, and $1.2 billion lower than expected in Budget 13 (Table 7). These results bring the total net costs to date to $11.5 billion. It is important to note that this is not an estimate of full costs; more costs will be incurred as the rebuild progresses and as further policy decisions are made.

Operating expenses

The largest expense this year was in relation to the estimate of repair costs of local infrastructure (mainly water and roads), which increased $0.5 billion as estimates of the Crown's obligation became more certain. In June the Crown negotiated a cost sharing agreement with the Christchurch City Council to contribute up to $1.8 billion for these costs. With $1.4 billion spent so far, a further $0.4 billion is yet to be incurred.

Capital expenses

In total, $0.2 billion of costs were capitalised during 2013, including:

  • $0.1 billion that related to the Crown acquiring land that will be used to develop the Anchor Projects (eg, the Avon River Precinct) as part of the rebuild of Christchurch. As business cases for these projects are finalised and approved, construction will begin and further costs will be incurred.
  • $0.1 billion of refurbishment costs for tertiary institutes, hospitals, the state housing stock and schools.

As noted earlier, capital costs will start to increase as the work in Christchurch moves into the rebuild stage.

Compared to Budget

The $0.5 billion of costs incurred this year was $1.2 billion lower than forecast in Budget 13 with costs of infrastructure, land zoning and the central city rebuild all being less than expected:

  • Local infrastructure costs were lower than forecast as the cost sharing agreement was finalised after the Budget was released and the Crown's agreed share was lower than previously expected.
  • Land zoning was $0.2 billion lower than forecast as updated information was received on settlements during the year providing additional clarity over the cost of outstanding offers.
  • There was $0.1 billion less spent on acquisitions of land in the CBD for anchor projects, largely a result of delays in planned purchases. These acquisitions will still happen, but in later years.

Risk to cost estimates

Risks remain that the Canterbury earthquake costs are higher than expected in future years, for example the Crown could contribute more to the rebuild than currently agreed if the Council's actual costs exceed current estimates. Note 30 in the financial statements includes more detail about the costs this year and provides detailed information about the judgements and uncertainties involved in the cost estimations.

Operating Balance

Table 8 - Total Crown operating balance
Year ended 30 June
$million
Actual 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Forecast
30 June 2013
Budget 12 Budget 13
Total Crown OBEGAL (3,893) (6,315) (18,396) (9,240) (4,414) (7,897) (6,285)
Gains and losses:    
ACC actuarial gain/(loss) (4,491) 410 996 (2,942) 2,369 1,047
GSF actuarial gain/(loss) (695) (1,231) (574) (3,896) 1,251 918
ETS/Kyoto net position 768 (15) 47 350 103 212
Investment portfolios:    
     NZS Fund (3,495) 1,750 3,518 (204) 4,374 1,327 3,431
     ACC (181) 745 961 944 1,796 264 2,526
     Earthquake Commission (349) 37 109 (53) 1
Other gains/(losses)[3] 1,831 110 (21) 144 1,445 607 69
Total Crown gains/(losses) (6,612) 1,806 5,036 (5,657) 11,339 2,198 8,203
Total Crown operating balance (10,505) (4,509) (13,360) (14,897) 6,925 (5,699) 1,918
% of GDP    
Total Crown OBEGAL (2.1)% (3.3)% (9.2)% (4.4)% (2.1)% (3.6)% (2.9)%
Total Crown gains/(losses) (3.6)% 0.9% 2.5% (2.7)% 5.3% 1.0% 3.8%
Total Crown Operating balance (5.7)% (2.4)% (6.7)% (7.1)% 3.3% (2.6)% 0.9%

OBEGAL

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

Operating Balance

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

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

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

Figure 11 - Operating balance
Figure 11 - Operating balance   .
Source:  The Treasury

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

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

Notes

  • [3]Other gains and losses includes the net surplus from associates and joint ventures and operating balances from minority interests.

Debt

Table 9 - Net debt[4] and Gross debt[5]
Year ended 30 June Actual 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Forecast
30 June 2013
Budget 12 Budget 13
Net debt ($m) 17,119 26,738 40,128 50,671 55,835 61,265 57,945
Net debt (% GDP) 9.2% 13.9% 20.0% 24.3% 26.3% 28.1% 27.1%
Gross debt ($m) 43,356 53,591 72,420 79,635 77,984 79,972 78,636
Gross debt (% GDP) 23.4% 27.9% 36.2% 38.2% 36.7% 36.7% 36.8%

Net Debt

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

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

Figure 12 - Net debt
Figure 12 - Net debt   .
Source:  The Treasury

Residual Cash

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

Table 10 - Movements in residual cash
Year ended 30 June ($billion)  
2012 core Crown residual cash (10.6)
Increase in tax receipts 3.6
Proceeds from sale of MRP 1.7
Decreases in advances 0.7
Increase in operating payments (0.4)
Higher interest payments (0.4)
Other movements (0.3)
2013 core Crown residual cash (5.7)

Source:   The Treasury

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

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

Gross Debt

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

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

Figure 13 - Gross debt
Figure 13 - Gross debt   .
Source:  The Treasury

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

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

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

Crown's Borrowing Programme

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

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

Table 11 - Cash proceeds from debt programme
Year ended 30 June
$million
Actual 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Forecast
30 June 2013
Budget 12 Budget 13
Issue of government bonds 5,775 12,424 19,468 15,146 15,458 14,122 15,554
Repayment of government bonds (2,750) (4,197) (7,602) (9,982) (9,982) (9,982)
Net issue/(repayment) of short-term borrowing[6] 5,782 636 (422) 2,139 (5,404) (3,701) (5,553)
Total market debt cash flows 8,807 8,863 19,046 9,683 72 439 19
Issue of government bonds 541 799 270
Repayment of government bonds (515) (656) (803) (1,501) (499) (499) (499)
Net issue/(repayment) of short-term borrowing (150) 170 (125) 430 100
Total non-market debt cash flows (124) 313 (658) (1,071) (399) (499) (499)
Total debt programme cash flows 8,683 9,176 18,388 8,612 (327) (60) (480)

Notes

  • [4]Net debt is defined as core Crown net debt excluding the NZS Fund and advances.
  • [5]Gross debt is defined as gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
  • [6]Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper

Net Worth Attributable to the Crown

Table 12 - Movement in net worth attributable to the Crown
Year ended 30 June
$million
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Forecast
30 June 2013
Budget 12 Budget 13
Opening net worth 105,132 99,068 94,586 80,579 59,348 70,303 59,348
Operating balance (10,505) (4,509) (13,360) (14,897) 6,925 (5,699) 1,918
Property, plant and equipment revaluations 4,235 196 (443) (6,461) 1,367 (29)
Other movements in reserves 206 (169) (204) 127 431 (44) 239
Closing net worth 99,068 94,586 80,579 59,348 68,071 64,560 61,476

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

Figure 14 - Net worth attributable to the Crown
Figure 14 - Net worth attributable to the Crown   .
Source:  The Treasury

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

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

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

Table 13 - Composition of the statement of financial position
Year ended 30 June
$million
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Forecast
30 June 2013
Budget 12 Budget 13
Property, plant and equipment 110,135 113,330 114,854 108,584 109,833 121,335 109,334
Financial assets and sovereign receivables 93,359 95,971 115,362 116,178 118,779 107,071 116,121
Other assets 13,657 14,054 14,999 15,556 15,804 15,881 15,230
Total assets 217,151 223,355 245,215 240,318 244,416 244,287 240,685
Borrowings 61,953 69,733 90,245 100,534 100,087 103,207 100,780
Other liabilities 55,683 58,634 74,083 80,004 74,318 74,872 76,635
Total liabilities 117,636 128,367 164,328 180,538 174,405 178,079 177,415
Net worth 99,515 94,988 80,887 59,780 70,011 66,208 63,270
Minority interests (447) (402) (308) (432) (1,940) (1,648) (1,794)
Net worth attributable to the Crown 99,068 94,586 80,579 59,348 68,071 64,560 61,476

Assets

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

Figure 15 - Total Crown assets
Figure 15 - Total Crown assets   .
Source:  The Treasury

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

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

Solid Energy

Subsequent to balance date Solid Energy reached an agreement that addresses the Company's current solvency and liquidity issues.  The agreement for the capital restructure includes:

  • A restructuring of the bulk of its bank debt facilities, including renegotiation of covenant requirements,
  • An exchange of certain portions of bank debt and Medium Term Note facilities for $75 million of Redeemable Preference Shares,
  • Issuing $25 million of additional Redeemable Preference Shares to the Crown for cash,
  • A new flexible working capital secured facility of $50 million to be provided by the Crown,
  • A land mortgage secured facility of up to $50 million to be provided by the Crown, and
  • A stand-by facility of up to $30 million in the event the Company is unable to discharge certain obligations.

The key terms of the capital restructure were agreed by 30 September 2013, however final settlement and documentation was not completed and is expected to be finalised during October 2013.

As a result of this agreement, the financial position of the Company has been reported in these financial statements on a going concern basis and the assets have been valued, where appropriate, based on their value-in-use rather than disposal value.

Challenges, however, remain for the Company, given the scale of restructure required and its inherent exposure to the USD coal price and USD/NZD exchange rate.  The capital restructure is yet to be implemented and there remain certain risks, including that the agreement may be subject to dispute.  Any further deterioration in the Company's financial position, or amendments to the current agreement, may adversely impact the Crown as it is unlikely to recover the carrying value of the assets in the event the Company is unable to continue trading.

Liabilities

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

Figure 16 - Total Crown liabilities
Figure 16 - Total Crown liabilities   .
Source:  The Treasury

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

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

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

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

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

Sensitivities and Risks to the Crown Balance Sheet

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes.  Fair value can be derived in a number of ways, traditionally based on market prices, but where these are not available, values can be best estimates based on certain assumptions.   While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities with changes in the underlying assumptions.  Below is a summary of some of the key sensitivities to the valuation of the Crown's major assets and liabilities and the impact these can have on the operating balance (but usually no impact to OBEGAL).

Table 14 - Financial instruments sensitivities
Financial assets
Impact on operating balance
%change $million
Interest rates + 1 % (532)
  - 1 % 592
Share prices + 10 % 1,681
  - 10 % (1,681)
NZD exchange rate + 10 % (1,029)
  - 10 % 1,160

Source:    The Treasury

Interest rates, share prices and exchange rates

Financial assets are the largest asset type on the Crown's balance sheet and have increased significantly in recent years (an increase of $90 billion in the last ten years, to be $119 billion in 2013).  Crown Financial Institutions (eg, NZSF and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile.  Table 14 shows the sensitivity of the operating balance to changes in these variables. 

Discount rates and inflation rates

Table 15 - Long term liability sensitivities
Impact on operating balance
$million
Discount rate Inflation rate
+ 1 % - 1 % + 1 % - 1 %
ACC outstanding claims 3,628 (4,823) (4,966)  3,788
GSF retirement liability 1,587 (1,927) (1,508)* 1,831*
EQC outstanding claims 33 (33) (19)   43 
SRESL outstanding claims 19 (19) (29)   28 

Source:   The Treasury

*Estimated as at 30 June 2013

The Crown has a number of significant long-term liabilities which are actuarially valued based on estimated future cash flows over 50 years into the future.  As part of the actuarial valuation, inflation rates are used to help estimate future cash flows while discount rates are used to obtain the value of those future cash flows in today's dollars (its present value).   Changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods (eg, ACC's cash flows of $75 billion are discounted to $27 billion).  Table 15 shows the impact that a 1% change in inflation and discount rates would have on the operating balance.

Changes in other estimates

Outside of market factors, valuations are subject to a number of judgements and estimates.  In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information.  Some examples of this, as discussed earlier, include:

  • The valuation of ACC claims: better information about future costs and rehabilitation rates led to a $1.2 billion reduction in the claims liability (page 16).
  • The cost of the weathertight homes financial assistance package: claims experience reduced initial estimates of costs by $400 million last year (page 13).
  • Earthquake related insurance liabilities: reassessments of future claim costs led to a $1.8 billion fall in expenses of EQC and Southern Response this year (page 13).
  • Student loan receivables: assumptions around the expectations of student incomes and repayment rates effect the speed the Crown will recoup these loans, with changes being reported as an expense (page 12).

Other risks to the balance sheet

In addition to those items on balance sheet there are a number of liabilities that may arise in the future but are not yet included; either because they're dependent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot yet be measured reliably.  If these contingencies crystallise, there will be associated costs with a negative impact on the operating balance.  Refer to note 32 for a list of the contingent liabilities that the Crown was exposed to at 30 June 2013.

Historical Financial Information

Historical Financial Information - $million
Year ended 30 June
$ million
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
Statement of financial performance  
Core Crown tax revenue 40,518 43,358 47,468 50,973 53,477 56,747 54,681 50,744 51,557 55,081 58,651
Core Crown other revenue 2,922 2,861 3,577 4,762 4,734 5,072 4,801 5,472 5,993 5,484 5,498
Core Crown revenue 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550 60,565 64,149
Crown entities, SOE revenue and eliminations 13,170 13,051 14,322 15,690 16,378 19,660 20,024 18,509 24,013 22,918 22,506
Total Crown revenue 56,611 59,271 65,367 71,425 74,589 81,479 79,506 74,725 81,563 83,483 86,655
Social security and welfare 13,907 14,252 14,682 15,598 16,768 17,877 19,382 21,185 22,005 22,028 22,741
Health 7,501 8,111 8,813 9,547 10,355 11,297 12,368 13,128 13,753 14,160 14,498
Education 7,016 7,585 7,930 9,914 9,269 9,551 11,455 11,724 11,650 11,654 12,504
Core government services 2,130 2,091 2,567 2,507 4,817 3,371 5,293 2,974 5,563 5,428 4,294
Other core Crown expenses 9,343 9,843 10,903 11,754 12,795 14,901 15,504 15,002 17,479 15,806 16,269
Core Crown expenses 39,897 41,882 44,895 49,320 54,004 56,997 64,002 64,013 70,450 69,076 70,306
Crown entities, SOE expenses and eliminations 12,347 11,816 13,397 15,015 14,725 18,845 19,397 17,027 29,509 23,647 20,701
Total Crown expenses 52,245 53,698 58,292 64,334 68,729 75,842 83,399 81,040 99,959 92,723 91,007
OBEGAL 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414)
Gains/(losses) (2,745) 1,736 (1,144) 2,451 2,162 (3,253) (6,612) 1,806 5,036 (5,657) 11,339
Operating balance 1,621 7,309 5,931 9,542 8,022 2,384 (10,505) (4,509) (13,360) (14,897) 6,925
Statement of financial position  
Property, plant and equipment 52,667 57,940 67,494 89,141 95,598 103,329 110,135 113,330 114,854 108,584 109,833
Financial assets 27,799 32,654 42,005 66,396 73,718 85,063 93,359 95,971 115,362 116,178 118,779
Other assets 18,461 18,756 19,714 9,503 11,031 12,443 13,657 14,054 14,999 15,556 15,804
Total assets 98,927 109,351 129,212 165,040 180,347 200,835 217,151 223,355 245,215 240,318 244,416
Borrowings 39,327 37,720 37,728 40,027 41,898 46,110 61,953 69,733 90,245 100,534 100,087
Other liabilities 31,588 32,036 37,243 41,042 41,622 49,211 55,683 58,634 74,083 80,004 74,318
Total liabilities 70,915 69,756 74,972 81,069 83,520 95,321 117,636 128,367 164,328 180,538 174,405
Minority interests 94 139 215 293 369 382 447 402 308 432 1,940
Net worth attributable to the Crown 27,918 39,456 54,025 83,678 96,458 105,132 99,068 94,586 80,579 59,348 68,071
Debt Indicators  
Net debt 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835
Gross debt 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984
Historical Financial Information - as % of GDP
Year ended 30 June
as % of GDP
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
Nominal GDP (revised) 135,673 146,350 155,381 163,291 173,288 185,729 185,476 191,745 200,294 208,394 212,701
Statement of financial performance  
Core Crown tax revenue 29.9% 29.6% 30.5% 31.2% 30.9% 30.6% 29.5% 26.5% 25.7% 26.4% 27.6%
Core Crown other revenue 2.2% 2.0% 2.3% 2.9% 2.7% 2.7% 2.6% 2.9% 3.0% 2.6% 2.6%
Core Crown revenue 32.0% 31.6% 32.9% 34.1% 33.6% 33.3% 32.1% 29.3% 28.7% 29.1% 30.2%
Crown entities, SOE and elimination revenue 9.7% 8.9% 9.2% 9.6% 9.5% 10.6% 10.8% 9.7% 12.0% 11.0% 10.6%
Total Crown revenue 41.7% 40.5% 42.1% 43.7% 43.0% 43.9% 42.9% 39.0% 40.7% 40.1% 40.7%
Social security and welfare 10.3% 9.7% 9.4% 9.6% 9.7% 9.6% 10.4% 11.0% 11.0% 10.6% 10.7%
Health 5.5% 5.5% 5.7% 5.8% 6.0% 6.1% 6.7% 6.8% 6.9% 6.8% 6.8%
Education 5.2% 5.2% 5.1% 6.1% 5.3% 5.1% 6.2% 6.1% 5.8% 5.6% 5.9%
Core government services 1.6% 1.4% 1.7% 1.5% 2.8% 1.8% 2.9% 1.6% 2.8% 2.6% 2.0%
Other core Crown expenses 6.9% 6.7% 7.0% 7.2% 7.4% 8.0% 8.4% 7.8% 8.7% 7.6% 7.6%
Core Crown expenses 29.4% 28.6% 28.9% 30.2% 31.2% 30.7% 34.5% 33.4% 35.2% 33.1% 33.1%
Crown entities, SOE and elimination expenses 9.1% 8.1% 8.6% 9.2% 8.5% 10.1% 10.5% 8.9% 14.7% 11.3% 9.7%
Total Crown expenses 38.5% 36.7% 37.5% 39.4% 39.7% 40.8% 45.0% 42.3% 49.9% 44.5% 42.8%
OBEGAL 3.2% 3.8% 4.6% 4.3% 3.4% 3.0% -2.1% -3.3% -9.2% -4.4% -2.1%
Gains/(losses) -2.0% 1.2% -0.7% 1.5% 1.2% -1.8% -3.6% 0.9% 2.5% -2.7% 5.3%
Operating balance 1.2% 5.0% 3.8% 5.8% 4.6% 1.3% -5.7% -2.4% -6.7% -7.1% 3.3%
Statement of financial position  
Property, plant and equipment 38.8% 39.6% 43.4% 54.6% 55.2% 55.6% 59.4% 59.1% 57.3% 52.1% 51.6%
Financial assets and sovereign receivables 20.5% 22.3% 27.0% 40.7% 42.5% 45.8% 50.3% 50.1% 57.6% 55.7% 55.8%
Other assets 13.6% 12.8% 12.7% 5.8% 6.4% 6.7% 7.4% 7.3% 7.5% 7.5% 7.4%
Total assets 72.9% 74.7% 83.2% 101.1% 104.1% 108.1% 117.1% 116.5% 122.4% 115.3% 114.9%
Borrowings 29.0% 25.8% 24.3% 24.5% 24.2% 24.8% 33.4% 36.4% 45.1% 48.2% 47.1%
Other liabilities 23.3% 21.9% 24.0% 25.1% 24.0% 26.5% 30.0% 30.6% 37.0% 38.4% 34.9%
Total liabilities 52.3% 47.7% 48.3% 49.6% 48.2% 51.3% 63.4% 66.9% 82.0% 86.6% 82.0%
Minority interests 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.9%
Net worth attributable to the Crown 20.6% 27.0% 34.8% 51.2% 55.7% 56.6% 53.4% 49.3% 40.2% 28.5% 32.0%
Debt Indicators  
Net debt 18.1% 16.3% 12.8% 9.9% 7.7% 5.5% 9.2% 13.9% 20.0% 24.3% 26.3%
Gross debt 27.0% 24.6% 22.8% 20.8% 17.7% 16.9% 23.4% 27.9% 36.2% 38.2% 36.7%

Independent Report of the Auditor-General

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

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

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

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

Opinion

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

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

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

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

Basis of opinion

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

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

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

An audit also involves evaluating:

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

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

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

Responsibilities of the Treasury and the Minister of Finance

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

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

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

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

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

Responsibilities of the Auditor

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

Independence

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

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

Lyn Provost
Controller and Auditor-General

Wellington, New Zealand

Matters Relating to the Electronic Presentation of the Audited Financial Statements

This audit report relates to the Financial Statements of the Government of New Zealand for the year ended 30 June 2013 included on the Treasury's web site. The Secretary to the Treasury is responsible for the maintenance and integrity of the Treasury's web site. We have not been engaged to report on the integrity of the Treasury's web site. We accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.

The audit report refers only to the financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to or from the financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements and related audit report dated 30 September 2013 to confirm the information included in the audited financial statements presented on this web site.

Legislation in New Zealand governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Audited Financial Statements

Statement of Financial Performance for the year ended 30 June 2013

Statement of Financial Performance
Forecast
30 June 2013
Note Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Revenue  
57,663 57,839 Taxation revenue 2 58,134 54,665
5,446 5,126 Other sovereign revenue 2 5,172 5,130
63,109 62,965 Total sovereign revenue 63,306 59,795
16,337 16,809 Sales of goods and services 3 16,713 16,785
3,376 3,051 Interest revenue and dividends 4 2,939 2,763
3,481 3,638 Other revenue 5 3,697 4,140
23,194 23,498 Total revenue earned through operations 23,349 23,688
86,303 86,463 Total revenue (excluding gains) 86,655 83,483
Expenses  
23,218 22,918 Transfer payments and subsidies 6 22,708 22,354
19,676 20,156 Personnel expenses 7 19,935 19,475
4,687 4,858 Depreciation and amortisation 8 4,812 6,350
38,929 37,628 Other operating expenses 9 36,163 35,678
4,663 4,301 Interest expenses 10 4,358 4,290
3,289 3,165 Insurance expenses 11 3,031 4,576
348 42 Forecast new operating spending
(700) (330) Top-down expense adjustment
94,110 92,738 Total expenses (excluding losses) 91,007 92,723
(90) (10) Minority interests share of operating balance before gains/losses 28 (62)
(7,897) (6,285) Operating balance before gains/(losses) (4,414) (9,240)
1,735 5,859 Net gains/(losses) on financial instruments 12 7,270 692
201 2,088 Net gains/(losses) on non-financial instruments 13 3,706 (6,526)
1,936 7,947 Total gains/(losses) 10,976 (5,834)
262 256 Net surplus from associates and joint ventures 395 233
Minority interests share of net gains/losses 28 (32) (56)
(5,699) 1,918 Operating balance (excluding minority interest) 6,925 (14,897)
Consisting of:  
(5,609) 1,928 Operating balance (including minority interest) 7,019 (14,841)
90 10 Minority interests share of operating balance 94 56
(5,699) 1,918 Operating balance (excluding minority interest) 6,925 (14,897)

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

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

Analysis of Expenses by Functional Classification - Total Crown expenses
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Total Crown expenses  
26,912 26,439 Social security and welfare 26,268 25,457
340 287 GSF pension expenses 286 197
14,013 13,978 Health 13,856 13,650
13,158 13,112 Education 13,366 12,401
6,233 5,300 Core government services 3,960 5,057
3,779 3,732 Law and order 3,670 3,592
1,973 1,780 Defence 1,766 1,693
8,723 9,123 Transport and communications 9,052 10,237
8,321 8,647 Economic and industrial services 8,375 10,441
2,315 2,475 Heritage, culture and recreation 2,351 2,412
1,738 1,641 Primary services 1,579 1,479
1,090 1,037 Housing and community development 989 608
713 517 Environmental Protection 528 784
491 657 Other 603 425
4,663 4,301 Finance costs 4,358 4,290
348 42 Forecast new operating spending
(700) (330) Top-down expense adjustment
94,110 92,738 Total Crown expenses (excluding losses) 91,007 92,723

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.

Analysis of Expenses by Functional Classification - Core Crown expenses
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Core Crown expenses  
23,239 22,893 Social security and welfare 22,741 22,028
329 278 GSF pension expenses 278 192
14,745 14,526 Health 14,498 14,160
12,387 12,355 Education 12,504 11,654
6,537 5,572 Core government services 4,294 5,428
3,558 3,511 Law and order 3,456 3,403
2,016 1,822 Defence 1,804 1,736
2,174 2,352 Transport and communications 2,255 2,232
2,134 2,052 Economic and industrial services 1,978 2,157
883 842 Heritage, culture and recreation 804 901
819 684 Primary services 659 635
304 317 Housing and community development[1] 283 (149)
702 519 Environmental Protection 530 763
491 657 Other 603 425
3,766 3,557 Finance costs 3,619 3,511
348 42 Forecast new operating spending
(700) (330) Top-down expense adjustment
73,732 71,649 Total core Crown expenses (excluding losses) 70,306 69,076

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

Notes

  • [1] Housing and community development expenses for the year ended 30 June 2012 include a reversal of $408 million in relation to the weathertight services financial assistance package.

Statement of Comprehensive Income
for the year ended 30 June 2013

Statement of Comprehensive Income
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
(5,609) 1,928 Operating balance (including minority interest) 7,019 (14,841)
Other comprehensive income  
(29) Revaluation of physical assets 1,367 (6,461)
Share of associates revaluation of physical assets
(3) 74 Net change in hedging instruments entered into for cash flow hedges 280 143
55 4 Foreign currency translation differences for foreign operations (2)
10 5 Valuation gains/(losses) on investments available for sale taken to reserves 36 13
2 (19) Other movements 7 1
64 35 Total other comprehensive income 1,690 (6,306)
(5,545) 1,963 Total comprehensive income 8,709 (21,147)
Attributable to:  
90 10  - minority interests 153 84
(5,635) 1,953  - the Crown 8,556 (21,231)
(5,545) 1,963 Total comprehensive income 8,709 (21,147)

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

Statement of Cash Flows
for the year ended 30 June 2013

Statement of Cash Flows
Forecast
30 June 2013
Note Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Cash Flows From Operations  
Cash was provided from  
56,856 56,738 Taxation receipts 2 56,413 53,582
4,729 4,758 Other sovereign receipts 2 4,806 4,890
16,369 16,926 Sales of goods and services 16,651 16,812
3,106 2,821 Interest and dividend receipts 2,694 2,603
7,172 5,773 Other operating receipts 5,933 4,395
88,232 87,016 Total cash provided from operations 86,497 82,282
Cash was disbursed to  
23,284 22,937 Transfer payments and subsidies 22,780 22,840
62,535 60,608 Personnel and operating payments 58,450 59,107
4,797 4,366 Interest payments 4,369 3,954
348 42 Forecast new operating spending
(700) (330) Top-down expense adjustment
90,264 87,623 Total cash disbursed to operations 85,599 85,901
(2,032) (607) Net cash flows from operations 898 (3,619)
Cash Flows From Investing Activities  
Cash was provided from  
649 426 Sale of physical assets 525 596
83,088 82,157 Sale of shares and other securities 75,722 61,477
4 Sale of intangible assets 7 1
1,341 1,496 Repayment of advances 1,603 1,845
1,500 1,500 Government share offer in MRP 35 1,547
33 241 Sale of investments in associates 287 181
86,611 85,824 Total cash provided from investing activities 79,691 64,100
Cash was disbursed to  
7,688 6,349 Purchase of physical assets 5,694 6,362
75,608 73,176 Purchase of shares and other securities 69,380 61,053
515 548 Purchase of intangible assets 588 568
3,181 2,701 Advances made 3,008 3,129
23 17 Acquisition of investments in associates 7 296
194 2 Forecast for new capital spending
(100) (280) Top-down capital adjustment
87,109 82,513 Total cash disbursed to investing activities 78,677 71,408
(498) 3,311 Net cash flows from investing activities 1,014 (7,308)
(2,530) 2,704 Net cash flows from operating and investing activities 1,912 (10,927)

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

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

Statement of Cash Flows
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
(2,530) 2,704 Net cash flows from operating and investing activities 1,912 (10,927)
Cash Flows From Financing Activities  
Cash was provided from  
144 264 Issue of circulating currency 234 203
14,122 15,554 Issue of Government bonds 15,458 15,155
182 547 Issue of foreign currency borrowings 447 1,004
5,691 9,074 Issue of other New Zealand dollar borrowings 10,278 14,196
20,139 25,439 Total cash provided from financing activities 26,417 30,558
Cash was disbursed to  
10,201 9,982 Repayment of Government bonds 9,982 7,601
805 2,874 Repayment of foreign currency borrowings 3,373 7,426
7,125 9,337 Repayment of other New Zealand dollar borrowings 10,912 3,843
50 Dividends paid to minority interests 20 7
18,181 22,193 Total cash disbursed to financing activities 24,287 18,877
1,958 3,246 Net cash flows from financing activities 2,130 11,681
(572) 5,950 Net movement in cash 4,042 754
14,899 10,686 Opening cash balance 10,686 9,801
(144) Foreign-exchange gains/(losses) on opening cash 196 131
14,327 16,492 Closing cash balance 14,924 10,686

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

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

Statement of Cash Flows
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Reconciliation Between the Net Cash Flows from Operations
and the Operating Balance
 
(2,032) (607) Net Cash Flows from Operations 898 (3,619)
Items included in the operating balance
but not in net cash flows from operations
 
Gains/(losses)  
1,735 5,859 Net gains/(losses) on financial instruments 7,270 692
201 2,088 Net gains/(losses) on non-financial instruments 3,706 (6,526)
1,936 7,947 Total gains/(losses) 10,976 (5,834)
Other Non-cash Items in Operating Balance  
(4,687) (4,858) Depreciation and amortisation (4,812) (6,350)
(748) (751) Write-down on initial recognition of financial assets (684) (850)
181 15 Impairment of financial assets (excl receivables) (497) 248
405 395 Non-cash movement in defined benefit retirement plan liabilities 385 512
2,985 1,222 Non-cash movement in insurance liabilities 1,106 1,070
262 258 Other 299 232
(1,602) (3,719) Total other non-cash items in operating balance (4,203) (5,138)
Movements in Working Capital  
(3,767) (1,381) Increase/(decrease) in receivables (1,302) (242)
404 295 Increase/(decrease) in accrued interest 257 (175)
59 14 Increase/(decrease) in inventories (94) (74)
(44) 64 Increase/(decrease) in prepayments 32 32
32 132 Decrease/(increase) in deferred revenue (2) (38)
(685) (827) Decrease/(increase) in payables/provisions 363 191
(4,001) (1,703) Total movements in working capital (746) (306)
(5,699) 1,918 Operating balance 6,925 (14,897)

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

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

Statement of Changes in Net Worth
Forecast
Total Net Worth
Note Actual
Budget 12
$m
Budget 13
$m
  Taxpayer
funds
$m
Reserves
$m
Minority
interest
$m
Total net
worth
$m
80,887 80,887 Net worth at 30 June 2011 18,188 62,391 308 80,887
(10,642) (14,841) Operating balance (14,897) 56 (14,841)
(47) (6,461) Net revaluations (6,461) (6,461)
58 80 Transfers to/(from) reserves 228 (148) 80
83 (Gains)/losses transferred to the
statement of financial performance
  55 28 83
47 (8) Other movements 1 (9) (8)
(10,584) (21,147) Total comprehensive income (14,668) (6,563) 84 (21,147)
40 Transactions with minority interests   40 40
70,303 59,780 Net worth at 30 June 2012 3,520 55,828 432 59,780
(5,609) 1,928 Operating Balance 6,925 94 7,019
(29) Net revaluations 1,335 32 1,367
(1) 55 Transfers to/(from) reserves 250 (17) 27 260
(4) (Gains)/losses transferred to the
statement of financial performance
  (10) (10)
65 13 Other movements 73 73
(5,545) 1,963 Total comprehensive income 7,175 1,381 153 8,709
200 175 Gain on Government share offers 167 167
1,300 1,325 Increase in minority interest from
Government share offers
1,371 1,371
(50) 27 Transactions with minority interests   (16) (16)
66,208 63,270 Net worth at 30 June 2013 28 10,862 57,209 1,940 70,011

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

Statement of Financial Position
as at 30 June 2013

Statement of Financial Position
Forecast
30 June 2013
Note Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Assets  
14,327 16,492 Cash and cash equivalents 14,924 10,686
16,799 19,189 Receivables 14 19,883 20,956
36,197 40,392 Marketable securities, deposits and derivatives in gain 15 44,000 48,385
15,853 16,616 Share investments 16 17,359 14,385
23,895 23,432 Advances 17 22,613 21,766
1,360 1,248 Inventory 18 1,140 1,234
2,051 2,064 Other assets 19 2,295 2,134
121,335 109,334 Property, plant & equipment 20 109,833 108,584
9,967 9,509 Equity accounted investments 21 9,593 9,483
2,571 2,687 Intangible assets and goodwill 22 2,776 2,705
282 2 Forecast for new capital spending
(350) (280) Top-down capital adjustment
244,287 240,685 Total assets 244,416 240,318
Liabilities  
4,704 4,756 Issued currency 4,691 4,457
13,503 11,822 Payables 23 11,160 11,604
1,399 1,579 Deferred revenue 1,714 1,712
103,207 100,780 Borrowings 24 100,087 100,534
36,919 38,917 Insurance liabilities 25 37,712 41,186
11,481 12,227 Retirement plan liabilities 26 11,903 13,539
6,866 7,334 Provisions 27 7,138 7,506
178,079 177,415 Total liabilities 174,405 180,538
66,208 63,270 Total assets less total liabilities 70,011 59,780
Net Worth  
2,144 5,601 Taxpayer funds 10,862 3,520
62,550 55,965 Property, plant and equipment revaluation reserve 57,068 56,001
(134) (90) Other reserves 141 (173)
64,560 61,476 Total net worth attributable to the Crown 68,071 59,348
1,648 1,794 Net worth attributable to minority interests 1,940 432
66,208 63,270 Total net worth 28 70,011 59,780

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

Statement of Segments

Current Year Actual vs Estimated Actuals
Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
Actual
2013
$m
Estimated
Actuals
2013
$m
Actual
2013
$m
Estimated
Actuals
2013
$m
Actual
2013
$m
Estimated
Actuals
2013
$m
Actual
2013
$m
Estimated
Actuals
2013
$m
Actual
2013
$m
Estimated
Actuals
2013
$m

Revenue

         
Taxation revenue 58,651 58,286 (517) (447) 58,134 57,839
Other sovereign revenue 1,133 1,085 5,295 5,307 (1,256) (1,266) 5,172 5,126
Revenue from core Crown funding 24,096 24,341 (24,096) (24,341)
Sales of goods and services 1,461 1,456 1,856 1,873 14,102 14,170 (706) (690) 16,713 16,809
Interest revenue and dividends 2,104 2,196 1,270 1,204 856 822 (1,291) (1,171) 2,939 3,051
Other revenue 800 786 2,547 2,146 978 1,135 (628) (429) 3,697 3,638
Total Revenue (excluding gains) 64,149 63,809 35,064 34,871 15,936 16,127 (28,494) (28,344) 86,655 86,463

Expenses

         
Transfer payments and subsidies 22,709 22,917 (1) 1 22,708 22,918
Personnel expenses 6,037 6,071 10,966 11,148 2,949 2,947 (17) (10) 19,935 20,156
Other operating expenses 37,940 39,392 21,660 21,806 11,555 11,674 (27,149) (27,221) 44,006 45,651
Interest expenses 3,620 3,557 235 236 1,248 1,152 (745) (644) 4,358 4,301
Forecast new operating spending and top down adjustment (288) (288)
Total Expenses (excluding losses) 70,306 71,649 32,861 33,190 15,752 15,773 (27,912) (27,874) 91,007 92,738
Operating balance before gains/(losses)  attributable to minority interests 10 (75) (10) 3 (62) (10)
Operating Balance before gains/(losses) (6,157) (7,840) 2,213 1,681 109 344 (579) (470) (4,414) (6,285)
Gains/(losses) and other items 6,528 5,140 3,664 2,626 505 112 642 325 11,339 8,203
Operating Balance 371 (2,700) 5,877 4,307 614 456 63 (145) 6,925
Figure 16 - Total Crown liabilities   .
1,918

Assets

         
Financial assets 75,111 71,616 41,297 42,107 20,058 20,685 (17,687) (18,287) 118,779 116,121
Property, plant and equipment 29,507 29,561 51,823 50,714 28,503 29,058 109,833 109,334
Investments in associates, CEs and SOEs 32,611 32,635 8,151 8,134 187 216 (31,356) (31,476) 9,593 9,509
Other assets 2,646 2,627 1,133 913 2,463 2,499 (31) (40) 6,211 5,999
Forecast adjustments (278) (278)
Total Assets 139,875 136,161 102,404 101,868 51,211 52,458 (49,074) (49,803) 244,416 240,685

Liabilities

         
Borrowings 84,870 85,309 5,251 5,156 24,839 25,884 (14,873) (15,569) 100,087 100,780
Other liabilities 29,392 28,882 45,261 47,351 7,226 7,556 (7,561) (7,154) 74,318 76,635
Total Liabilities 114,262 114,191 50,512 52,507 32,065 33,440 (22,434) (22,723) 174,405 177,415
Net Worth 25,613 21,970 51,892 49,361 19,146 19,018 (26,640) (27,080) 70,011 63,270
Cost of Acquisition of Physical Assets 1,112 1,560 2,314 2,328 2,281 2,462 (13) (1) 5,694 6,349
Current Year Actual vs Prior Year Actual
Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
Actual
2013
$m
Actual
2012
$m
Actual
2013
$m
Actual
2012
$m
Actual
2013
$m
Actual
2012
$m
Actual
2013
$m
Actual
2012
$m
Actual
2013
$m
Actual
2012
$m

Revenue

         
Taxation revenue 58,651 55,081 (517) (416) 58,134 54,665
Other sovereign revenue 1,133 935 5,295 5,384 (1,256) (1,189) 5,172 5,130
Revenue from core Crown funding 24,096 23,590 (24,096) (23,590)
Sales of goods and services 1,461 1,448 1,856 1,817 14,102 14,230 (706) (710) 16,713 16,785
Interest revenue and dividends 2,104 1,795 1,270 1,181 856 858 (1,291) (1,071) 2,939 2,763
Other revenue 800 1,306 2,547 2,499 978 943 (628) (608) 3,697 4,140
Total Revenue (excluding gains) 64,149 60,565 35,064 34,471 15,936 16,031 (28,494) (27,584) 86,655 83,483

Expenses

         
Transfer payments and subsidies 22,709 22,367 (1) (13) 22,708 22,354
Personnel expenses 6,037 5,915 10,966 10,754 2,949 2,819 (17) (13) 19,935 19,475
Other operating expenses 37,940 37,283 21,660 22,220 11,555 13,537 (27,149) (26,436) 44,006 46,604
Interest expenses 3,620 3,511 235 246 1,248 1,268 (745) (735) 4,358 4,290
Total Expenses (excluding losses) 70,306 69,076 32,861 33,220 15,752 17,624 (27,912) (27,197) 91,007 92,723
Operating balance before gains/(losses) attributable to minority interests 10 (75) 3 (62)
Operating Balance before gains/(losses) (6,157) (8,511) 2,213 1,251 109 (1,593) (579) (387) (4,414) (9,240)
Gains/(losses) and other items 6,528 (3,160) 3,664 (1,892) 505 170 642 (775) 11,339 (5,657)
Operating Balance 371 (11,671) 5,877 (641) 614 (1,423) 63 (1,162) 6,925 (14,897)

Assets

         
Financial assets 75,111 74,981 41,297 40,075 20,058 19,186 (17,687) (18,064) 118,779 116,178
Property, plant and equipment 29,507 29,377 51,823 49,939 28,503 29,268 109,833 108,584
Investments in associates, CEs and SOEs 32,611 31,308 8,151 7,982 187 340 (31,356) (30,147) 9,593 9,483
Other assets 2,646 2,743 1,133 905 2,463 2,463 (31) (38) 6,211 6,073
Total Assets 139,875 138,409 102,404 98,901 51,211 51,257 (49,074) (48,249) 244,416 240,318

Liabilities

         
Borrowings 84,870 84,510 5,251 5,325 24,839 25,374 (14,873) (14,675) 100,087 100,534
Other liabilities 29,392 30,528 45,261 49,357 7,226 7,281 (7,561) (7,162) 74,318 80,004
Total Liabilities 114,262 115,038 50,512 54,682 32,065 32,655 (22,434) (21,837) 174,405 180,538
Net Worth 25,613 23,371 51,892 44,219 19,146 18,602 (26,640) (26,412) 70,011 59,780
Cost of Acquisition of Physical Assets 1,112 1,219 2,314 2,136 2,281 3,007 (13) 5,694 6,362

Notes to the Financial Statements

Note 1: Summary of Accounting Policies

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

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

Reporting Entity

The consolidated financial statements for the Government reporting entity (financial statements of the Government of New Zealand), as defined in section 2(1) of the Public Finance Act 1989, means:

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

The description “consolidated financial statements for the Government reporting entity” and the description “financial statements of the Government” have the same meaning and can be used interchangeably.

Basis of Preparation

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

The financial statements are prepared on an accrual basis.

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

Judgements and Estimations

The preparation of these financial statements requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. For example, the present value of large cash flows that are predicted to occur a long time into the future, as with the settlement of ACC outstanding claim obligations and Government Superannuation retirement benefits, depends critically on judgements regarding future cash flows, including inflation assumptions and the risk free discount rate used to calculate present values. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. A second area of uncertainty relates to the estimation of the claims and provisions arising from the Canterbury earthquakes.

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

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

Early Adoption Standards and Interpretations

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

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

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

Significant Accounting Policies

Reporting and Forecast Period

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

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

Basis of Combination

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

Core Crown entities Other entities
  • Ministers of the Crown
  • State-owned enterprises
  • Government departments
  • Crown entities (excluding Tertiary Education Institutions)
  • Offices of Parliament
  • the Reserve Bank of New Zealand
  • New Zealand Superannuation Fund
  • Air New Zealand Limited
  • Organisations listed in Schedule 4 of the Public Finance Act 1989
  • Companies 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 financial statements. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

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

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

Income

Taxation revenue levied through the Crown's sovereign power

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

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

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 Assessment filed date
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 of the services unless an alternative method better represents the stage of completion of the transaction.

Interest income

Interest income is accrued using the effective interest rate method.

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

Dividend income

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

Rental income

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

Donated or subsidised assets

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

Expenses

General

Expenses are recognised in the period to which they relate.

Welfare benefits and entitlements

Welfare benefits and entitlements, including New Zealand Superannuation, are recognised in the period when an application for a benefit has been received and the eligibility criteria met.

Grants and subsidies

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

Interest expense

Interest expense is accrued using the effective interest rate method.

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

Note 1: Summary of Accounting Policies (continued)

Foreign Currency

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

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

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

Sovereign Receivables and Taxes Repayable

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

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

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

Financial Instruments

Financial assets

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

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

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

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

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

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

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

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

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

Financial liabilities

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

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

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

Derivatives

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

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

Hedging

Individual entities consolidated within the Government reporting entity apply hedge accounting after considering the costs and benefits of adoption, including:

  • whether an economic hedge exists and the effectiveness of that hedge
  • whether the hedge accounting qualifications could be met, and
  • the extent to which it would improve the relevance of reported results.

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

(a) Cash flow hedge

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

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

(b) Fair value hedge

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

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

Inventories

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

Inventories include unissued currency and harvested agricultural produce (eg, logs and wool). The cost of harvested agricultural produce is measured at fair value less estimated costs to sell at the point of harvest.

Note 1: Summary of Accounting Policies (continued)

Property, Plant and Equipment (PPE)

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

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

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

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 opportunity cost 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 available.

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 are 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 network Electricity distribution network assets are recorded at cost, less depreciation and impairment losses accumulated since the assets were purchased.
Electricity generation assets 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 accumulated depreciation. 

Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, and when they do not generate cash flows 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.

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

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

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

Realised gains and losses arising from disposal of PPE are recognised in the statement of financial performance in the period in which the transaction occurs. Any balance attributable to the disposed asset in the asset revaluation reserve is transferred to taxpayer funds.

Generally, government borrowings are not directly attributable to individual assets. Therefore, any borrowing costs incurred during the period required to complete and prepare assets for their intended use are expensed rather than capitalised. The major exception relates to service concession assets resulting from public private partnership arrangements where the liability incurred, and therefore the associated interest costs, are directly attributable to the service concession asset.

Where an asset's recoverable amount is less than its carrying amount, it is reported at its recoverable amount and an impairment loss is recognised. The main reason for holding some assets (for example, electricity generation assets) is to generate cash. For these assets the recoverable amount is the higher of the amount that could be recovered by sale (after deducting the costs of sale) or the amount that will be generated by using the asset through its useful life. Some assets do not generate cash (for example, state highways) and for those assets, depreciated replacement cost is used. Losses resulting from impairment are reported in the statement of financial performance, unless the asset is carried at a revalued amount in which case any impairment loss is treated as a revaluation decrease.

Depreciation is charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of PPE, less any estimated residual value, over its remaining useful life.

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

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.

Equity Accounted Investments

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

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

Biological Assets

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

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

Intangible Assets

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

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

The Government's holdings of assigned amount units arising from the Kyoto protocol are reported at fair value. Other intangible assets with finite lives are subsequently recorded at cost less any amortisation and impairment losses. Amortisation is charged to the statement of financial performance on a straight-line basis over the useful life of the asset. Typically, the estimated useful life of computer software is three to five years.

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

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

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

Goodwill is tested for impairment annually.

Non-current Assets Held for Sale and Discontinued Operations

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

Investment Property

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

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

Note 1: Summary of Accounting Policies (continued)

Employee Benefits

Pension liabilities

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

Other employee entitlements

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

Termination benefits

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

Insurance Contracts

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

Reinsurance

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

Reinsurance and other recoveries receivable

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

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

Deferred acquisition costs

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

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

Leases

Finance leases transfer, to the Crown as lessee, substantially all the risks and rewards incident on the ownership of a leased asset. Initial recognition of a finance lease results in an asset and liability being recognised at amounts equal to the lower of the fair value of the leased property or the present value of the minimum lease payments. The capitalised values are amortised over the period in which the Crown expects to receive benefits from their use.

Operating leases are those where the lessor substantially retains the risks and rewards of ownership. Expenditure incurred in relation to these leases is recognised in a systematic manner over the term of the lease. Leasehold improvements are capitalised and the cost is amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter. Lease incentives received are recognised evenly over the term of the lease as a reduction in rental expense.

Other Liabilities and Provisions

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

Contingent Liabilities and Contingent Assets

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

Commitments

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

Commitments are classified as

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

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

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

Comparatives

When presentation or classification of items in the financial statements is amended or accounting policies are changed voluntarily, comparative figures have been restated to ensure consistency with the current period unless it is impracticable to do so.

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

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

Comparatives referred to as Budget 12 were forecasts published in the 2012 Budget Economic and Fiscal Update while Budget 13 were forecasts published in the 2013 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

Segment Analysis

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

  • Core Crown: This group, which includes Ministers, Departments, Offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund most closely represents the budget sector and provides information that is useful for fiscal analysis purposes.
  • State-owned enterprises: This group includes entities governed by the State-owned Enterprises Act 1986, Public Finance Act 1989 schedule 5 companies and for the purposes of these statements also includes Air New Zealand Limited. This group represents entities that undertake commercial activity.
  • Crown entities: This group includes entities governed by the Crown Entities Act 2004. These entities have separate legal form and specified governance frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy).

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

Related Parties

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

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

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

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

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

Note 2: Sovereign Revenue (Accrual)

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Direct Income Tax Revenue (accrual)

 

Individuals

 
22,563 22,387 Source deductions 22,330 21,237
4,386 5,026 Other persons 5,210 4,232
(1,567) (1,473) Refunds (1,644) (1,736)
458 460 Fringe benefit tax 480 462
25,840 26,400 Total individuals 26,376 24,195

Corporate Tax

 
8,301 8,372 Gross companies tax 8,747 8,310
(279) (197) Refunds (151) (202)
455 448 Non-resident withholding tax 420 500
Foreign-source dividend withholding payments 2 4
8,477 8,623 Total corporate tax 9,018 8,612

Other Direct Income Tax

 
1,673 1,602 Resident withholding tax on interest income 1,631 1,679
375 394 Resident withholding tax on dividend income 516 292
2,048 1,996 Total other direct income tax 2,147 1,971
36,365 37,019 Total direct income tax 37,541 34,778

Indirect Income Tax Revenue (accrual)

 

Goods and Services Tax

 
26,795 25,490 Gross goods and services tax 25,125 25,199
(11,052) (10,085) Refunds (9,920) (10,627)
15,743 15,405 Total goods and services tax 15,205 14,572

Other Indirect Taxation

 
1,152 1,062 Road user charges 1,066 1,045
939 878 Petroleum fuels excise - domestic production 855 847
698 656 Alcohol excise - domestic production 663 656
223 288 Tobacco excise - domestic production 281 244
626 611 Petroleum fuels excise - imports1 674 631
249 258 Alcohol excise - imports1 250 241
983 986 Tobacco excise - imports1 954 993
179 182 Other customs duty 178 173
231 225 Gaming duties 214 216
170 178 Motor vehicle fees 174 175
69 55 Approved issuer levy and cheque duty 45 58
36 36 Energy resources levies 34 36
5,555 5,415 Total other indirect taxation 5,388 5,315
21,298 20,820 Total indirect taxation 20,593 19,887
57,663 57,839 Total taxation revenue 58,134 54,665

Other Sovereign Revenue (accrual)

 
3,395 3,409 ACC levies 3,437 3,695
313 333 Fire service levies 331 326
240 240 EQC levies 242 107
660 647 Child support 590 311
178 173 Court fines 168 176
660 324 Other miscellaneous items 404 515
5,446 5,126 Total other sovereign revenue 5,172 5,130
63,109 62,965 Total sovereign revenue 63,306 59,795

Note 2: Sovereign Receipts (Cash)

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Direct Income Tax Receipts (cash)

 

Individuals

 
22,450 22,240 Source deductions 22,188 21,010
5,062 5,278 Other persons 5,194 4,720
(2,493) (2,252) Refunds (2,251) (2,468)
457 458 Fringe benefit tax 465 458
25,476 25,724 Total individuals 25,596 23,720

Corporate Tax

 
8,737 8,754 Gross companies tax 8,665 8,792
(756) (667) Refunds (597) (814)
454 448 Non-resident withholding tax 451 434
Foreign-source dividend withholding payments 1 4
8,435 8,535 Total corporate tax 8,520 8,416

Other Direct Income Tax

 
1,672 1,601 Resident withholding tax on interest income 1,635 1,699
375 394 Resident withholding tax on dividend income 516 290
2,047 1,995 Total direct other income tax 2,151 1,989
35,958 36,254 Total direct income tax 36,267 34,125

Indirect Tax Receipts (cash)

 

Goods and Services Tax

 
25,895 24,855 Gross goods and services tax 24,539 24,574
(10,552) (9,785) Refunds (9,783) (10,435)
15,343 15,070 Total goods and services tax 14,756 14,139
 

Other Indirect Taxation

 
1,152 1,062 Road user charges 1,064 1,048
939 878 Petroleum fuels excise - domestic production 865 845
698 656 Alcohol excise - domestic production 666 654
223 288 Tobacco excise - domestic production 287 238
2,037 2,037 Customs duty 2,035 2,057
231 224 Gaming duties 216 216
170 178 Motor vehicle fees 179 169
69 55 Approved issuer levy and cheque duty 44 55
36 36 Energy resources levies 34 36
5,555 5,414 Total other indirect taxation 5,390 5,318
20,898 20,484 Total indirect taxation 20,146 19,457
56,856 56,738 Total tax receipts collected 56,413 53,582

Other Sovereign Receipts (cash)

 
3,413 3,427 ACC levies 3,524 3,693
313 333 Fire service levies 331 326
270 276 EQC levies 274 134
225 241 Child support 230 243
144 161 Court fines 159 157
364 320 Other miscellaneous items 288 337
4,729 4,758 Total other sovereign receipts 4,806 4,890
61,585 61,496 Total sovereign receipts 61,219 58,472

Note 3: Sales of Goods and Services

Forecast 30 June 2013 Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
8,847 8,866 Sales of goods 8,536 9,110
7,461 7,914 Rendering of services 8,148 7,604
29 29 Deposit guarantee schemes - guarantee fees 29 71
16,337 16,809 Total sales of goods and services 16,713 16,785

By source

 
1,379 1,456 Core Crown 1,461 1,448
14,553 15,111 Crown entities 15,102 14,657
13,857 14,170 State-owned enterprises 14,102 14,230
(13,452) (13,928) Inter-segment eliminations (13,952) (13,550)
16,337 16,809 Total sales of goods and services 16,713 16,785

Note 4: Interest Revenue and Dividends

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
601 581 Student loans (interest unwind) 590 526
1,083 1,028 Other financial assets classified as amortised cost or available for sale 1,073 994
15 30 Financial assets classified as held for trading 48 36
1,186 878 Financial assets classified as fair value through profit and loss 671 737
2,885 2,517 Total interest revenue 2,382 2,293
491 534 Dividends 557 470
3,376 3,051 Total interest revenue and dividends 2,939 2,763

By source

 
2,397 2,196 Core Crown 2,104 1,795
1,123 1,204 Crown entities 1,270 1,181
905 822 State-owned enterprises 856 858
(1,049) (1,171) Inter-segment eliminations (1,291) (1,071)
3,376 3,051 Total interest revenue and dividends 2,939 2,763

Included in total interest revenue above is interest on impaired financial assets of:

 
Impaired student loans 590 526
Impaired other financial assets classified as amortised cost or available for sale 1 1
Total interest revenue on impaired financial assets 591 527

Note 5: Other Revenue

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
1,171 1,186 Rental income 1,175 1,129
383 386 Sale of royalties 421 379
64 57 EQC insurance claim on reinsurers (127) 391
1,863 2,009 Other revenue 2,228 2,241
3,481 3,638 Total other revenue 3,697 4,140

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

Note 6: Transfer Payments and Subsidies

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Social Assistance Grants

 
10,243 10,235 New Zealand superannuation 10,235 9,584
2,113 2,047 Family tax credit 2,018 2,082
1,820 1,738 Domestic purposes benefit 1,738 1,811
1,321 1,329 Invalids benefit 1,330 1,325
1,243 1,178 Accommodation assistance 1,177 1,195
881 806 Unemployment benefit 812 883
781 782 Sickness benefit 782 775
595 572 Other working for families tax credits 544 567
602 592 Student allowances 596 644
626 637 Income related rents 611 580
366 385 Disability allowances 384 401
1,440 1,377 Other social assistance benefits 1,321 1,309
22,031 21,678 Total social assistance grants 21,548 21,156

Subsidies

 
688 738 KiwiSaver subsidies 723 688

Other transfer payments

 
499 502 Official development assistance 437 510
23,218 22,918 Total transfer payments and subsidies 22,708 22,354

Note 7: Personnel Expenses

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
18,423 18,925 Salaries and wages 18,921 18,330
337 300 Costs incurred on GSF and other defined benefit plans 290 198
309 282 Costs incurred on defined contribution plans (e.g. Kiwisaver) 386 452
607 649 Other personnel expenses 338 495
19,676 20,156 Total personnel expenses 19,935 19,475

By source

 
6,003 6,071 Core Crown 6,037 5,915
10,897 11,148 Crown entities 10,966 10,754
2,786 2,947 State-owned enterprises 2,949 2,819
(10) (10) Inter-segment eliminations (17) (13)
19,676 20,156 Total personnel expenses 19,935 19,475

Key management personnel compensation

 
Salaries and other short-term employee benefits 9 8
Post-employment benefits 1
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. The Authority takes into account other benefits available to members of the Executive as set out in the Executive Travel, Accommodation, Attendance, and Communication Services Determination (No 2) 2009 (the " Determination"). The Determination was determined by the Minister Responsible for Ministerial Services. Members of Parliament, including Members of the Executive, have access to other non-cash entitlements as determined by the Speaker of the House of Representatives. Details of these entitlements (e.g. travel discounts) can be found on the New Zealand Parliament website (www.parliament.nz).

Note 8: Depreciation and Amortisation

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Depreciation expense

 
1,178 1,155 Buildings 1,150 1,174
413 412 State highways 449 432
413 488 Electricity generation assets 431 388
197 176 Electricity distribution network 152 137
306 278 Specialist military equipment 272 237
227 213 Aircraft (excluding military) 213 153
221 198 Rail network 14 223
19 19 Specified cultural and heritage assets 24 27
1,096 1,322 Other plant and equipment 992 1,032
4,070 4,261 Total depreciation expense 3,697 3,803
617 595 Amortisation and impairment of non-financial assets1 1,115 2,547
4,687 4,858 Total depreciation and amortisation 4,812 6,350

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

Note 9: Other Operating Expenses

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
4,540 4,532 Donations and ex-gratia payments 4,451 3,682
1,125 1,124 Rental and leasing costs 1,117 1,109
1,883 1,766 Impairment of financial assets 1,755 1,004
748 751 Write-down on initial recognition of financial assets 684 850
488 516 Lottery prize payments 515 529
227 227 Inventory expenses 565 474
Impairment of inventory 12 24
40 Bonus share offer expense (refer to note 35) 25
6 5 Fees paid to audit firms (refer below) 1 5
29,912 28,667 Other operating expenses 27,038 28,001
38,929 37,628 Total other operating expenses 36,163 35,678

By source

 
39,542 37,972 Core Crown 36,565 35,876
16,442 17,067 Crown entities 17,065 16,321
9,605 9,784 State-owned enterprises 9,689 9,802
(26,660) (27,195) Inter-segment eliminations (27,156) (26,321)
38,929 37,628 Total other operating expenses 36,163 35,678

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.

Actual
30 June
2013
$m
30 June
2012
$m

Audit and related expenses

 
Auditor-General fees for the audit of financial statements1 38 35
Auditor-General fees for assurance and related services 1 1
Fees for other services
  39 36
Inter-segment eliminations (39) (36)
Total audit and related expenses

Fees for other work2

 
Fees for assurance and related services 1 2
Fees for tax services 1
Fees for other services 2
Fees paid to audit firms 1 5
  1. The audit of financial statements are those of the Government reporting entity and its sub-entities. Audit fees are eliminated because the Office of the Auditor-General is consolidated into these financial statements.
  2. External auditing firms carry out other work for entities that they audit on behalf of the Auditor-General.

Note 10: Interest Expenses

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
3,423 3,829 Financial liabilities classified as amortised cost 4,014 3,785
6 6 Financial liabilities classified as held for trading 5 34
1,181 420 Financial liabilities classified as fair value through profit and loss 293 404
53 46 Interest unwind on provisions 46 67
4,663 4,301 Total interest expenses 4,358 4,290

By source

 
3,766 3,557 Core Crown 3,620 3,511
247 236 Crown entities 235 246
1,254 1,152 State-owned enterprises 1,248 1,268
(604) (644) Inter-segment eliminations (745) (735)
4,663 4,301 Total interest expenses 4,358 4,290

Note 11: Insurance Expenses

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By entity

 
3,300 3,136 Accident Compensation Corporation (ACC) 3,133 3,010
71 74 Earthquake Commission (EQC) (103) 1,073
(93) (58) Southern Response (22) 586
11 37 Other 19 20
(24) Inter-segment eliminations 4 (113)
3,289 3,165 Total insurance expenses 3,031 4,576

By type

 
Property damage claims in relation to Canterbury earthquakes (227) 1,612
Personal accident and injury claims 3,133 3,010
Other insurance expenses 125 (46)
Total insurance expenses 3,031 4,576

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 2013 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 the note provides additional information on the insurance expenses for ACC, EQC, and Southern Response.

An analysis of the insurance liabilities is provided in note 25.

Actual
Analysis of ACC insurance expense 30 June
2013
$m
30 June
2012
$m

By type

 
Claims expense 1,122 6,186
Movement in unexpired risk liability (27) 68
Other underwriting expenses 86 99
Total ACC claims and other expenses 1,181 6,353
Less expenses reported elsewhere in the statement of financial performance  
    Actuarial gain/(loss) 2,369 (2,942)
    Operating costs relating to claims (417) (401)
Total ACC insurance expenses (excluding gains/(losses) and operations) 3,133 3,010

Given the uncertainty over insurance claims, it is likely that the final cost will be different from the original liability established. 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.

Actual
30 June
2013
$m
30 June
2012
$m

ACC Claims Incurred

 

Current year net ACC claims incurred

 
Gross claims incurred and related expenses - undiscounted 7,071 7,130
Discount and discount movement (4,149) (4,144)
Total current year net claims incurred 2,922 2,986

Previous years' net ACC claims incurred

 
Reassessment of gross claims and expenses - undiscounted (2,817) (6,789)
Discount and discount movement 1,017 9,989
Total previous years' net claims incurred (1,800) 3,200
ACC claims expense 1,122 6,186

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).

Actual
30 June
2013
$m
30 June
2012
$m

Net ACC Underwriting Result

 
Premium revenue (refer to note 2) 3,437 3,695
Recoveries revenue (including reinsurance recovery)
ACC underwriting revenue 3,437 3,695
Less claims and other expenses (1,181) (6,353)
Net ACC underwriting surplus/(deficit) 2,256 (2,658)

ACC operating cash flows associated with the underwriting result are:

 
Cash receipts 3,524 3,693
Cash payments (3,072) (3,059)
Net ACC operating cash flows 452 634
Actual
Analysis of EQC insurance expense 30 June
2013
$m
30 June
2012
$m

By type

 
Claims expense (167) 1,193
Movement in unexpired risk liability (68) (192)
Other underwriting expenses 132 72
Total EQC claims and other expenses (103) 1,073

Net EQC Underwriting Result

 
Premium revenue 242 107
Recoveries revenue (including reinsurance recovery) (127) 391
EQC underwriting revenue 115 498
Less claims and other expenses (103) 1,073
Net EQC underwriting surplus/(deficit) 218 (575)

EQC operating cash flows associated with the underwriting result are:

 
Cash receipts 274 134
Cash payments (1,923) (2,890)
Net EQC operating cash flows (1,649) (2,756)

EQC Claims Incurred

 

Current year net EQC claims incurred

 
Gross claims incurred and related expenses - undiscounted 37 719
Discount and discount movement (17)
Total current year net claims incurred 37 702

Previous years' net EQC claims incurred

 
Reassessment of gross claims and expenses - undiscounted (349) (147)
Discount and discount movement 145 638
Total previous years' net claims incurred (204) 491
EQC claims expense (167) 1,193
Actual
Analysis of Southern Response insurance expense 30 June
2013
$m
30 June
2012
$m

By type

 
Claims expense 2 609
Movement in unexpired risk liability
Total Southern Response claims and other expenses 2 609
less operating costs relating to claims (24) (23)
Total Southern Response insurance expenses (excluding operations) (22) 586

Net Southern Response Underwriting Result

 
Premium revenue 248
Recoveries revenue (including reinsurance recovery) 27
Southern Response underwriting revenue 27 248
Less claims and other expenses 2 609
Net Southern Response underwriting surplus/(deficit) 25 (361)

Southern Response operating cash flows associated with the underwriting result are:

 
Cash receipts 452 526
Cash payments (294) (540)
Net Southern Response operating cash flows 158 (14)

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
11 Foreign exchange gains on financial assets measured at amortised cost 448 40
(15) (12) Foreign exchange losses on financial assets measured at amortised cost (13) (86)
7 1 Change in fair value of financial assets classified as held for trading 38 (6)
(3) Gain/(loss) on disposal of financial assets measured at amortised cost 224 79
735 1,129 Change in fair value of financial assets classified as fair value through profit and loss 2,651 469
727 1,126 Net gains/(losses) on financial assets 3,348 496
7 Foreign exchange gain on financial liabilities measured at amortised cost 8 1
(4) 58 Foreign exchange loss on financial liabilities measured at amortised cost (14) (55)
Change in fair value of financial liabilities classified as held for trading
(5) (5) Gain/(loss) on disposal of financial liabilities measured at amortised cost 55 (4)
80 164 Change in fair value of financial liabilities classified as fair value through profit and loss 175 (362)
78 217 Net gains/(losses) on financial liabilities 224 (420)
930 4,516 Net gain/(loss) on derivatives 3,698 616
1,735 5,859 Net gains/(losses) on financial instruments 7,270 692

By source

 
1,685 3,944 Core Crown 5,081 526
288 1,529 Crown entities 1,192 930
(46) 61 State-owned enterprises 354 9
(192) 325 Inter-segment eliminations 643 (773)
1,735 5,859 Net gains/(losses) on financial instruments 7,270 692

Note 13: Gains and Losses on Non-Financial Instruments

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
1,047 Actuarial gains/(losses) on ACC outstanding claims 2,369 (2,942)
918 Actuarial gains/(losses) on GSF liability 1,251 (3,896)
212 Foreign exchange gains/(losses) 101 329
8 Other gains/(losses) on non-financial liabilities 1 (124)
(12) (74) Gains/(losses) on disposal or revaluation of property, plant and equipment (24) (77)
206 (10) Gains/(losses) on agricultural assets (46) 120
(2) Gains/(losses) on intangible assets (2) (26)
(1) (3) Other gains/(losses) on non-financial assets 56 90
201 2,088 Net gains/(losses) on non-financial instruments 3,706 (6,526)

By source

 
7 1,121 Core Crown 1,298 (3,790)
(11) 967 Crown entities 2,309 (2,955)
205 (1) State-owned enterprises 100 220
1 Inter-segment eliminations (1) (1)
201 2,088 Net gains/(losses) on non-financial instruments 3,706 (6,526)

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 originally calculating the liability (experience adjustments) and the effect of changes in actuarial assumptions.

Note 14: Receivables

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
6,974 7,323 Tax receivables 8,184 7,257
3,290 3,874 Levies, fines and penalty receivables 3,183 3,267
456 502 Social benefit receivables 515 502
10,720 11,699 Sovereign receivables 11,882 11,026
29 29 Recoverable from Deposit Guarantee Scheme receiverships 39 270
6,050 7,461 Trade and other receivables 7,962 9,660
16,799 19,189 Total receivables 19,883 20,956

By maturity

 
13,951 15,029 Expected to be realised within one year 15,742 15,173
2,848 4,160 Expected to be outstanding for more than one year 4,141 5,783
16,799 19,189 Total receivables 19,883 20,956

By source

 
9,357 10,360 Core Crown 11,924 10,974
6,146 8,664 Crown entities 8,369 10,011
2,791 2,311 State-owned enterprises 2,037 2,154
(1,495) (2,146) Inter-segment eliminations (2,447) (2,183)
16,799 19,189 Total receivables 19,883 20,956

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.

Actual
30 June
2013
$m
30 June
2012
$m

Tax Receivables

 
Gross tax receivable 12,565 11,666
Impairment of tax receivables (4,381) (4,409)
Total tax receivables 8,184 7,257

Gross Tax Receivable

 
Current 7,223 6,262
Past due 5,342 5,404
Total gross tax receivable 12,565 11,666
% past due 42% 46%

Impairment of Tax Receivables

 
Opening balance 4,409 4,144
Impairment losses recognised during the year 897 1,114
Amounts written off as uncollectible (925) (849)
Closing balance 4,381 4,409

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.

Actual
30 June
2013
$m
30 June
2012
$m
The estimated recoverable amount of this portfolio and key assumptions underpinning the valuation are:  
Net recoverable amount of tax receivables (current) 7,185 6,242
Net recoverable amount of tax receivables (past due) 999 1,015
Discount rate 5.10% 5.60%
Impact on recoverable amount of a 2% increase in discount rate (20) (18)
Impact on recoverable amount of a 2% decrease in discount rate 21 20

Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date.

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

Actual
30 June
2013
$m
30 June
2012
$m
Ageing of Tax Receivables Past Due (Gross)  
Less than six months 904 884
Between six months and one year 363 453
Between one year and two years 788 899
Greater than two years 3,287 3,168
Tax receivables past due 5,342 5,404

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

Actual
30 June
2013
$m
30 June
2012
$m

Levies, Fines and Penalty Receivables

 
Gross ACC levy receivables 3,027 3,072
Gross other levies, fines and penalty receivables 2,515 2,286
Total gross levies, fines and penalty receivables 5,542 5,358
Impairment of ACC levy receivables (118) (122)
Impairment of other levies, fines and penalty receivables (2,241) (1,969)
Total impairment of receivables (2,359) (2,091)
Total levies, fines and penalty receivables 3,183 3,267

Impairment of ACC Levy Receivables

 
Opening balance 122 79
Impairment losses recognised during the year (2) 14
Amounts written off as uncollectible (2)
Impairment losses reversed 29
Closing balance 118 122
Collective impairment allowance 118 122
Individual impairment allowance    -     - 
Impairment of ACC Levy Receivables 118 122

Impairment of other Levies, Fines and Penalty Receivables

 
Opening balance 1,969 1,937
Impairment losses recognised during the year 363 145
Amounts written off as uncollectible
Impairment losses reversed (91) (113)
Closing balance 2,241 1,969
Collective impairment allowance 2,241 1,969
Individual impairment allowance    -     - 
Impairment of other Levies, Fines and Penalty Receivables 2,241 1,969

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 penalties receivables, the majority is in the debtor portfolio administered by the Ministry of Justice (i.e. court fines, associated court fees and enforcement fees) with a net book value of $175 million (2012: $213 million). Their carrying amount provides a reasonable approximation of their fair value. The recoverable amount of these Justice receivables is calculated using discounted cash flows (net of estimated service costs).

Actual
30 June
2013
$m
30 June
2012
$m

Social Benefit Receivables

 
Gross social benefit receivables 1,178 1,130
Impairment of social benefit receivables (663) (628)
Total social benefit receivables 515 502

Impairment of Social Benefit Receivables

 
Opening balance 628 570
Impairment losses recognised during the year 79 69
Amounts written off as uncollectible (44) (11)
Closing balance 663 628
Collective impairment allowance 663 628
Individual impairment allowance    -     - 
Impairment of Social Benefit Receivables 663 628

Ageing of Social Benefit Receivables Past Due But Not Impaired

 
Less than six months 30 70
Between six months and one year 67 28
Greater than one year    - 
Total social benefit receivables past due but not impaired 97 98

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 $502 million (2012: $490 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.

30 June
2013
$m
30 June
2012
$m

Recoverable from Deposit Guarantee Scheme receiverships

 
  Opening balance of recoveries expected from receiverships 270 739
  Recoveries expected from entities defaulting during the year  
  Revision of expected recoveries 8 90
  Transfer of assets from receivershipsinto Crown Asset Management Limited (38) (92)
  Revaluation gains on assets transferred 14
  Payments received from receivers (215) (467)
Closing balance 39 270
Total payments to depositors under the Guarantee scheme 34

As a consequence of payments made to depositors of failed finance companies under the deposit guarantee scheme, the Crown has inherited the beneficial interest in the proceeds that can be recovered from the secured assets of the receiverships. The reported receivables represent the receivers' best estimates of likely recoveries from the receiverships. However, the eventual return to the Crown is dependent upon the value that can be realised from these entities' assets and the timing of receipts. A range of outcomes for eventual recoveries is possible.

In addition to Retail Deposit Guarantee Scheme, the Government operated an opt-in wholesale scheme from November 2008 to April 2010. As at 30 June 2013, 13 guarantee certificates remained in place (value of $3.47 billion). No provision is made for losses under this scheme as the probability of loss is considered remote.

Actual
30 June
2013
$m
30 June
2012
$m

Trade and Other Receivables

 
Gross trade and other receivables 8,050 9,753
Impairment of trade and other receivables (88) (93)
Total trade and other receivables 7,962 9,660

Impairment of Trade and Other Receivables

 
Opening balance 93 82
Impairment losses recognised during the year 7 20
Amounts written off as uncollectible (14) (14)
Impairment losses reversed 2 5
Closing balance 88 93
Collective impairment allowance 64 69
Individual impairment allowance 24 24
Impairment of Trade and Other Receivables 88 93

Ageing of Trade and Other Receivables Past Due But Not Impaired

 
Less than six months 180 248
Between six months and one year 17 5
Greater than one year 2 2
Total trade and other receivables past due but not impaired 199 255

Trade and other receivables include $3,135 million relating to reinsurance receivables in Southern Response and EQC (2012: $5,003 million). The rest of the trade and other receivables are short term, with $2,214 million (2012: $4,273 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

Actual
30 June
2013
$m
30 June
2012
$m

Reinsurance receivable

 
Opening balance 5,003 5,381
Reinsurance recognised/reassessed during the year (100) 407
Reinsurance acquired through business combination
Reinsurance received during the year (1,768) (785)
Closing balance 3,135 5,003

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

Note 15: Marketable securities, deposits and derivatives in gain

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
28,027 31,391 Marketable securities 34,346 38,682
1,697 2,013 Long term deposits 3,588 2,422
4,028 4,797 Derivatives in gain 3,775 5,032
2,445 2,191 IMF financial assets 2,291 2,249
36,197 40,392 Total marketable securities, deposits and derivatives in gain 44,000 48,385

By maturity

 
21,583 27,037 Expected to be realised within one year 26,833 34,451
14,614 13,355 Expected to be held for more than one year 17,167 13,934
36,197 40,392 Total marketable securities, deposits and derivatives in gain 44,000 48,385

By source

 
24,378 29,091 Core Crown 31,056 37,330
19,197 19,580 Crown entities 20,045 18,713
2,633 2,916 State-owned enterprises 2,586 2,607
(10,011) (11,195) Inter-segment eliminations (9,687) (10,265)
36,197 40,392 Total marketable securities, deposits and derivatives in gain 44,000 48,385

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By maturity

 
7,375 6,701 Expected to be realised within one year 7,651 6,388
8,478 9,915 Expected to be held for more than one year 9,708 7,997
15,853 16,616 Total share investments 17,359 14,385

By source

 
7,370 6,650 Core Crown 7,665 6,341
8,461 9,671 Crown entities 9,496 7,806
57 322 State-owned enterprises 342 264
(35) (27) Inter-segment eliminations (144) (26)
15,853 16,616 Total share investments 17,359 14,385

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
8,781 8,528 Student loans 8,288 8,291
13,830 13,261 Kiwibank mortgages 13,202 12,445
1,284 1,643 Other advances 1,123 1,030
23,895 23,432 Total advances 22,613 21,766

By source

 
14,211 13,704 Core Crown 13,419 13,580
280 131 Crown entities 248 325
14,273 14,203 State-owned enterprises 13,499 12,765
(4,869) (4,606) Inter-segment eliminations (4,553) (4,904)
23,895 23,432 Total advances 22,613 21,766

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Student Loans

 
13,840 13,512 Nominal value 13,562 12,969
(5,059) (4,984) Write-down on initial recognition and impairment (5,274) (4,678)
8,781 8,528 Total student loans 8,288 8,291
Gross carrying value 9,723 9,242
Impairment of student loans (1,435) (951)
Total student loans 8,288 8,291

By maturity

 
Expected to be repaid within one year 1,049 930
Expected to be outstanding for more than one year 7,239 7,361
Total student loans 8,288 8,291

Movement During the Year

 
8,238 8,291 Opening balance 8,291 7,460
1,644 1,553 New lending (excluding fees) 1,470 1,586
12 12 New lending - establishment fee 11 11
(651) (528) Initial write-down to fair value (536) (701)
(953) (1,149) Repayments made during the year (1,054) (877)
601 581 Interest unwind 590 526
(110) (232) Impairment losses (recognised)/reversed during the year (484) 286
Other movements
8,781 8,528 Closing balance student loans 8,288 8,291

Impairment of Student Loans

 
Opening balance 951 1,237
Impairment losses recognised during the year 484
Amounts written off as uncollectible
Impairment losses reversed (286)
Closing balance 1,435 951

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

Actual
30 June
2013
30 June
2012
Significant assumptions behind the carrying value are:  
Effective interest rate - weighted average 7.1% 7.2%
Interest rate applied to loans for overseas borrowers 5.1%-6.2% 4.6%-6.7%
CPI 1.4%-2.5% 1.8%-2.5%
Future salary inflation 2.2%-3.5% 3.2%-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 2013. It is determined by discounting the cash flows at an appropriate discount rate.

Actual
30 June
2013
$m
30 June
2012
$m
Fair value of the student loan portfolio 8,298 8,527
Impact on fair value of a 1% increase in discount rate (423) (396)
Impact on fair value of a 1% decrease in discount rate 471 432

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 2013. At that date the fair value was calculated on a discount rate of 7.1% (2012: 6.6%) whereas a weighted average effective interest rate of 7.1% (2012: 7.2%) 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.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Kiwibank Mortgages

 

By maturity

 
1,245 1,103 Expected to be repaid within one year 1,071 1,036
12,585 12,158 Expected to be outstanding for more than one year 12,131 11,409
13,830 13,261 Total Kiwibank mortgages 13,202 12,445

Impairment of Kiwibank Mortgages

 
Opening balance 91 87
Impairment losses recognised on mortgages 18 45
Amounts written off as uncollectible (26) (31)
Impairment losses reversed (11) (10)
Closing balance 72 91
Collective impairment allowance 44 50
Individual impairment allowance 28 41
Impairment of Kiwibank Mortgages 72 91

Ageing of Kiwibank Mortgages Past Due But Not Impaired

 
Less than six months 183 202
Between six months and one year
Greater than one year    - 
Total Kiwibank mortgages past due but not impaired 183 202

Kiwibank mortgages are measured at amortised cost. This amortisation 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 $13,210 million (2012: $12,497 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
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Other Advances

 

By maturity

 
550 567 Expected to be repaid within one year 391 480
734 1,076 Expected to be outstanding for more than one year 732 550
1,284 1,643 Total other advances 1,123 1,030

Impairment of Other Advances

 
Opening balance 148 190
Impairment losses recognised during the year 10 39
Amounts written off as uncollectible (6) (80)
Impairment losses reversed (2) (1)
Closing balance 150 148
Collective impairment allowance 146 140
Individual impairment allowance 4 8
Impairment of Other Advances 150 148

Ageing of Other Advances Past Due But Not Impaired

 
Less than six months 9 7
Between six months and one year
Greater than one year 2
Total other advances past due but not impaired 11 7

Measurement Basis for Other Advances

 
923 612 Other advances measured at amortised cost 791 790
361 1,031 Other advances measured at fair value 332 240
1,284 1,643 Total other advances 1,123 1,030

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 (i.e. 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 $330 million is undrawn as at 30 June 2013.

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 2013 the facility had not been utilised.

Note 18: Inventory

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
Inventories held for sale 105 102
Military inventories 311 293
Other consumables 724 839
1,360 1,248 Total inventory 1,140 1,234

By maturity

 
1,071 1,011 Expected to be sold or consumed within one year 783 952
289 237 Expected to be sold or consumed after one year 357 282
1,360 1,248 Total inventory 1,140 1,234

By source

 
441 378 Core Crown 382 399
163 166 Crown entities 165 183
756 704 State-owned enterprises 593 652
Inter-segment eliminations
1,360 1,248 Total inventory 1,140 1,234

Note 19: Other Assets

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
449 563 Prepayments 531 499
55 73 Investment property 201 58
780 638 Biological assets 583 640
368 361 Investment in supranational organisations 368 367
399 429 Other 612 570
2,051 2,064 Total other assets 2,295 2,134

By maturity

 
886 1,069 Expected to be realised within one year 1,188 1,086
1,165 995 Expected to be held for more than one year 1,107 1,048
2,051 2,064 Total other assets 2,295 2,134

By source

 
1,265 1,171 Core Crown 1,222 1,233
164 244 Crown entities 394 228
660 682 State-owned enterprises 708 713
(38) (33) Inter-segment eliminations (29) (40)
2,051 2,064 Total other assets 2,295 2,134

Note 20: Property, Plant and Equipment

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
   

Net Carrying Value

   
   

By class of asset

   
35,551 34,021 Land 34,453 33,626
25,528 25,015 Buildings 25,784 25,046
19,120 17,989 State highways 17,930 17,546
15,348 13,911 Electricity generation assets 13,555 14,400
3,835 3,989 Electricity distribution network 3,865 3,476
3,346 3,196 Specialist military equipment 3,094 3,220
2,506 2,481 Specified cultural and heritage assets 2,617 2,592
2,222 2,240 Aircraft (excluding military) 2,296 2,250
7,614 866 Rail network1 1,035 856
6,265 5,626 Other plant and equipment 5,204 5,572
121,335 109,334 Total property, plant and equipment 109,833 108,584
   

By source

   
30,140 29,561 Core Crown 29,507 29,377
51,182 50,715 Crown entities 51,823 49,939
40,013 29,058 State-owned enterprises 28,503 29,268
Inter-segment eliminations
121,335 109,334 Total property, plant and equipment 109,833 108,584
   

By holding

   
1,610 1,828 Leasehold 1,858 1,833
119,725 107,506 Freehold 107,975 106,751
121,335 109,334 Total property, plant and equipment 109,833 108,584
    Property, plant and equipment pledged to secure borrowing 1,743 1,680

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 (i.e. national parks, forest parks, conservation areas and recreational facilities) is included in the Land category.

As a consequence of the financial difficulties experienced with the deterioration in its market conditions, the assets of Solid Energy, primarily its mining assets and plant and equipment have been impaired by $190 million during the year to 30 June 2013.

  1. In the previous financial year (2011/12) the valuation methodology for the rail network (excluding metro only assets) changed from optimised depreciated replacement cost to fair value based on recoverable amount resulting in a significant impairment.
  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
Other1 (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
Freehold 107,975 34,453 25,556 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
  1. "Other" gross carrying movements include a $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.
  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 2012 $m $m $m $m $m $m $m $m $m $m $m

Gross carrying amount

                     
Opening balance 1 July 2011 126,601 36,022 26,652 16,802 14,455 3,547 4,038 2,954 1,821 7,508 12,802
Additions 6,514 152 1,337 1,123 344 927 110 38 611 269 1,603
Disposals (941) (209) (109) 1 (8) (13) (8) (8) (20) (567)
Net revaluations (9,793) (2,168) (303) (380) 54 (12) 47 (116) (6,915)
Other (664) (171) (26) (131) (8) 25 5 (30) (2) (326)
Total gross carrying amount 121,717 33,626 27,551 17,546 14,714 4,453 4,153 3,036 2,266 860 13,512

Accumulated Depreciation and Impairment

                     
Opening balance 1 July 2011 11,747 2,113 16 857 707 420 16 408 7,210
Eliminated on disposal (634) (28) (17) (6) (6) (15) (562)
Eliminated on revaluation (3,415) (717) (432) (116) (1) 2 (120) (2,031)
Impairment losses charged to operating balance 1,884 1 29 1,409 445
Depreciation expense 3,803 1,174 432 388 137 237 27 153 223 1,032
Other (252) (38) (3) (4) 1 (18) (5) (185)
Total accumulated depreciation 13,133 2,505 314 977 933 444 16 4 7,940
Carrying value as at 30 June 2012 108,584 33,626 25,046 17,546 14,400 3,476 3,220 2,592 2,250 856 5,572

By holding

                     
Leasehold 1,833 263 1,518 52
Freehold 106,751 33,626 24,783 17,546 14,400 3,476 3,220 2,592 732 856 5,520
108,584 33,626 25,046 17,546 14,400 3,476 3,220 2,592 2,250 856 5,572

Note 20: Property, Plant and Equipment (continued)

Revaluation details

Revaluations are carried out for a number of classes of property, plant and equipment as detailed in the accounting policies on pages 47-48. Information about the significant valuations within each of the revalued classes of assets is provided below.

Land and buildings

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).

Land Buildings Total
Breakdown of land and buildings
(total valuation over $500m)
30 June
2013
$m
30 June
2012
$m
30 June
2013
$m
30 June
2012
$m
30 June
2013
$m
30 June
2012
$m
Housing stock 9,580 8,744 6,778 6,406 16,358 15,150
School property 2,887 2,726 7,941 7,887 10,828 10,613
State highway corridor land 8,003 8,353 11 12 8,014 8,365
Conservation estate 5,364 5,454 60 46 5,424 5,500
Hospitals 707 616 4,135 3,916 4,842 4,532
Rail network corridor land 3,256 3,260    -     -  3,256 3,260
Defence Force land and buildings 631 674 1,287 1,176 1,918 1,850
Prisons and Department of Corrections office buildings 207 212 1,681 1,769 1,888 1,981
Landcorp farmland and buildings 1,047 1,032 125 120 1,172 1,152
Ministry of Justice land and buildings 418 418 461 463 879 881
Police stations 168 168 537 503 705 671
Other 2,185 1,969 2,768 2,748 4,953 4,717
Land and buildings 34,453 33,626 25,784 25,046 60,237 58,672
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 2013
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 2013
State highway corridor land and held properties Opus International Consultants Limited Valued using opportunity cost based on adjacent use as an approximation to 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 completed as at 30 June 2013.
Conservation estate (national parks, forest parks, conservation areas, reserves) Property IQ 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 conservancy average per hectare rate. Annual valuation with the latest completed as at 30 June 2013
Hospitals Each District Health Board uses an independent valuer Land values were based on market evidence while buildings were valued at ODRC.  The largest DHB is Auckland DHB, which had its land and buildings valued at $799 million (2012:  $761 million) by Telfer Young. 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 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 being as at 30 June 2013
Prisons and Department of Corrections office buildings Darroch 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 2011
Landcorp farmland and associated buildings Darroch Limited The valuations take into account general factors that influence farm land prices and recent farm sales in the relevant regions and specific encumbrances over the land.    Annual valuation with the latest completed as at 30 June 2013
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 Reviewed by Beca Valuations Limited The internal valuation performed by experienced staff was based on market evidence where possible, or ODRC.  Three-year cycle with the latest full valuation completed as at
30 June 2013

Specified cultural and heritage assets

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:

Actual
30 June
2013
$m
30 June
2012
$m
National Library 849 846
Te Papa 830 824
National Archives 449 446
Conservation 442 350
Parliamentary Library 28 28

Other

19 98
2,617 2,592
Description Valuer/Reviewer Approach Timing
National Library collections Internal valuation Valued by experienced staff in accordance with guidelines released by the New Zealand Library Association. Three-year valuation cycle with the latest full valuation completed as at 30 June 2011
Te Papa collections

Archaeozoological: Foss Leach

Taonga Maori International & Pacific Collections: Webbs Auckland

All collections are valued based on market value by independent valuers. Valuations completed  at least once every three years with the latest valuations for all collections completed as at 30 June 2013
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.  Three year cycle with the latest full valuation completed as at 30 June 2011


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. Valued at least once every five years and more often if the change since last revaluation is deemed material
Parliament Library collection Internal valuation Valued by experienced staff in accordance with guidelines released by the New Zealand Library Association.  ODRC was used to value current use collections while permanently retained collections were valued at estimated market value using sources such as auction records and book dealers' catalogues. Annual valuation with the latest completed as at 30 June 2013

Note 20: Property, Plant and Equipment (continued)

Other asset classes subject to revaluation

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

Actual
30 June
2013
$m
30 June
2012
$m
State highways[7] 17,930 17,546
Electricity generation assets 13,555 14,400
Specialist military equipment 3,094 3,220
Aircraft (excluding military) 2,296 2,250
Rail network 1,035 856
37,910 38,272
Description Valuer/Reviewer Approach Timing

State highways [7]

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 ODRC of the existing asset database.  (See below for further comments). 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 was completed as at 30 June 2013
Electricity generation assets [8]
Meridian Energy: Hydro stations, wind and solar farms Pricewaterhouse Coopers (PwC) Based on both the capitalisation of earnings methodology, applied to Meridian as a whole, and the discounted cash flow methodology. Valuation completed at least once every five years with the latest valuation being as at 30 June 2013
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 2013
Genesis Power: Thermal and Hydro stations and Wind farms Internal valuation independently reviewed by PwC Based on the net present value of future cash flows associated with the assets on an existing use basis excluding disposal and restoration costs. 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 30 June 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 2013

Rail network [9]

Buildings, bridges, tunnels, tracks, level crossings signals and electrification.  All these assets are held on freehold basis.

Buildings - Darroch Limited





Other Rail Network Assets ­ Ernst and Young

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. 

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.

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

Additional information regarding state highways asset valuation

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's) 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 are not currently able to be reliably measured.

NZTA has a plan to improve the accuracy of the asset databases and identify all costs able to be capitalised, which will serve to reduce 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

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

The following table outlines the sensitivity of the fair value of these assets to changes in two key assumptions, keeping all other valuation inputs constant.

Change Impact on
valuation
Sensitivity of assumptions 30 June
2013
$m
Future wholesale electricity price +10% 1,810
  -10% (1,810)
Discount rate +1% (2,322)
  -1% 3,861

Assumptions in relation to generation output also impact the valuation of the assets, but they are generally linked to the future wholesale electricity price and therefore have similar sensitivities to changes in price assumptions.

As this is the first year of disclosure for these sensitivities, no prior year comparatives have been provided.

For further information on the valuation of electricity generation assets, refer to the individual annual reports of the State-owned electricity generation companies (Genesis Energy, Meridian Energy and Mighty River Power).

Additional information regarding rail network

Recoverable
amount
ODRC  30 June
2013
Carrying
value
$m $m $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
Recoverable
amount
ODRC
 
30 June
2012
Carrying
value
$m $m $m
Network required for freight 154 5,035 154
Network not required for freight (including metro) 10 499 499
Total rail infrastructure 164 5,534 653
Buildings     142
Capital work in progress     61
Rail network 856

The rail network comprises around 4,000 kilometres of track 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. 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 anoptimised 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 $194 million (2012: $223 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 $213 million (2012: $240 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.

Notes

  • [7]Additional information regarding state highways assets is provided on page 85.
  • [8]Additional information regarding electricity generation assets is provided on page 85.
  • [9]Additional information regarding the rail network assets is provided on page 86.

Note 21: Equity Accounted Investments

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
8,301 8,048 Tertiary Education Institutions 8,060 7,915
1,666 1,461 Other 1,533 1,568
9,967 9,509 Total equity accounted investments 9,593 9,483

Tertiary Education Institutions (TEIs)

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.

The financial year of TEIs is the academic year ending 31 December. Half-year information is used to incorporate TEI information into the financial statements. All other associates have a 30 June balance date.

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Operating Results

 
2,205 2,193 Revenue from Crown 2,221 2,203
2,221 2,311 Other revenue 2,388 2,316
(4,257) (4,371) Expenses (4,440) (4,386)
169 133 Net surplus 169 133

Net worth

 

Assets

 
1,450 1,355 Financial assets 1,392 1,355
8,199 8,157 Property, plant and equipment 8,102 8,024
323 307 Other assets 343 307
9,972 9,819 Total assets 9,837 9,686

Liabilities

 
228 238 Borrowings 193 238
1,443 1,533 Other liabilities 1,584 1,533
1,671 1,771 Total liabilities 1,777 1,771
8,301 8,048 Net worth 8,060 7,915

New Zealand Local Government Funding Agency (NZLGFA)

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 2013, NZLGFA recognised revenue of $5.7 million (2012: $10.9 million) and a surplus of $1.3 million (2012: $4.2 million deficit). NZLGFA's assets and liabilities were $2,688.2 million (2012: $943.0 million) and $2,664.8 million (2012: $922.3 million) respectively. The Crown's share of the net assets is $4.7 million (2012: $4.1 million).

Note 22: Intangible Assets and Goodwill

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
Computer software 1,517 1,375
Net Kyoto position 53 202
Goodwill 655 746
Other intangible assets 551 382
2,571 2,687 Total intangible assets and goodwill 2,776 2,705

By maturity

 
Expected to be sold or consumed within one year 406 412
Expected to be sold or consumed after one year 2,370 2,293
Total intangible assets and goodwill 2,776 2,705

By source

 
1,294 1,071 Core Crown 1,041 1,112
472 504 Crown entities 573 494
805 1,112 State-owned enterprises 1,162 1,099
Inter-segment eliminations
2,571 2,687 Total intangible assets and goodwill 2,776 2,705
Actual
30 June
2013
$m
30 June
2012
$m

Computer Software

 

Internally-Generated Computer Software

 

Cost

 
Opening balance 2,558 2,332
Additions 387 345
Disposals (148) (87)
Other movements 23 (32)
Total cost 2,820 2,558

Accumulated Amortisation

 
Opening balance 1,696 1,551
Eliminated on disposal (100) (64)
Impairment losses charged to operating balance 22 28
Amortisation 229 244
Other movements (31) (63)
Total accumulated amortisation 1,816 1,696
Carrying value of internally-generated computer software 1,004 862

Purchased Computer Software

 

Cost

 
Opening balance 1,645 1,503
Additions 223 196
Disposals (50) (65)
Other movements (11) 11
Total cost 1,807 1,645

Accumulated Amortisation

 
Opening balance 1,132 1,018
Eliminated on disposal (41) (50)
Impairment losses charged to operating balance 7
Amortisation 177 168
Other movements 26 (11)
Total accumulated amortisation 1,294 1,132
Carrying value of purchased computer software 513 513
Total computer software 1,517 1,375

Note 22: Intangible Assets and Goodwill (continued)

Actual
30 June
2013
$m
30 June
2012
$m

Net Kyoto Position

 
Opening net asset 202 291
Change in the price of carbon and foreign exchange rate (132) (177)
Change in net projected emission units (17) 88
Closing net asset 53 202
30 June
2013
Emission
Units
million
tonnes
(Mt)
30 June
2012
Emission
Units
million
tonnes
(Mt)

Net Kyoto Position

 
Kyoto target (assigned amount units) 309.6 309.6
Less AAUs allocated to emission reducing projects 4.5 4.5
Total commitment target 305.1 305.1

Projected emission units

 
Agriculture 170.2 170.5
Energy (incl. transport) and industrial processes 183.1 184.9
Waste 10.1 10.0
Solvent and other product use 0.1 0.2
Total projected emission units 363.5 365.6
Removals via forest 91.5 92.2
Deforestation emissions (14.3) (6.4)
Less net removals via forests 77.2 85.8
Net projected emission units 286.3 279.8
Less net transfers of AAUs 3.1 2.2
Add Kyoto compliant units surrendered under ETS 48.3 12.3
Surplus units 64.0 35.4

The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) is reduced to 1990 gross emissions levels or to take responsibility for the difference.

New Zealand's Kyoto Protocol compliance over the first commitment period will not be finalised until 2015 when the annual submission covering the period 2008 to 2012 is submitted and internationally reviewed. These financial statements report on the New Zealand Government's obligations for the first commitment period, but not for future commitment periods as the New Zealand Government has no specific fiscal obligation beyond the first commitment period.

The carbon price of €0.49 per unit has been used which in New Zealand dollars equates to $NZ0.82 (2012: €3.60 or $NZ5.70). The carbon price has been determined by the Ministry for the Environment based on the Secondary Certified Emission Reduction (sCER) unit price as published by Point Carbon.

The projected balance of Kyoto Protocol units (the net position) is compiled by the Ministry for the Environment using sectoral projection reports from across government.

Within New Zealand, the Emissions Trading Scheme (ETS) will transfer a price of carbon through the economy. The outstanding balance of units allocated under the ETS is reported as a provision in note 27. The ETS provision includes the free allocation of units to foresters who have opted-in to the scheme. When the forests are harvested, the foresters may use the units to meet their carbon obligations. During the first commitment period, the Ministry for the Environment estimate that 91.5 million tonnes of credits will be generated by carbon removals via forests (2012: 92.2 million tonnes). Of this amount, 48.9 million tonnes has been allocated to foresters through the ETS as at 30 June 2013 (2012: 30.9 million tonnes). To the extent that these forests are harvested (in subsequent commitment periods), and a future international agreement is negotiated, there may be an associated liability generated that will need to be repaid. As the forestry credits have been incorporated when calculating the current position for the first commitment period, the associated obligation of the Crown in respect of future commitment periods has been reported as a separate contingent liability (refer note 32).

Actual
30 June
2013
$m
30 June
2012
$m

Goodwill

 

Cost

 
Opening balance 985 707
Additions 7 280
Disposals (66) (1)
Other movements (35) (1)
Total cost 891 985

Accumulated Impairment

 
Opening balance 239 222
Eliminated on disposal (2) (1)
Impairment losses charged to operating balance 2 17
Reversals of impairment losses charged to operating balance
Amortisation charge
Other movements (3) 1
Total accumulated impairment 236 239
Carrying value of goodwill 655 746

Goodwill in relation to Air New Zealand of $258 million (2012: $258 million) has been tested for impairment at June 2013 based on a value in use discounted cash flow valuation.

A valuation was performed in June 2012 based on a value in use discounted cash flow valuation and this valuation has been relied upon for the year ended 30 June 2013. The 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 infromation. 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 10.0-10.5%. The 2012 valuation confirmed that there was no impairment to the goodwill asset required.

Note 23: Payables

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
10,139 8,456 Accounts payable 7,616 8,255
3,364 3,366 Taxes repayable 3,544 3,349
13,503 11,822 Total payables 11,160 11,604

By maturity

 
12,856 11,231 Expected to be settled within one year 10,688 11,309
647 591 Expected to be outstanding for more than one year 472 295
13,503 11,822 Total payables 11,160 11,604

By source

 
7,367 6,626 Core Crown 7,873 7,139
6,501 5,922 Crown entities 4,996 5,642
5,523 5,435 State-owned enterprises 4,877 4,968
(5,888) (6,161) Inter-segment eliminations (6,586) (6,145)
13,503 11,822 Total payables 11,160 11,604

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

Note 24: Borrowings
Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
57,296 58,713 Government bonds 57,377 53,850
4,700 3,576 Treasury bills 4,084 8,954
251 204 Government retail stock 199 229
6,244 7,183 Settlement deposits with Reserve Bank 7,575 5,917
2,401 2,035 Derivatives in loss1 3,188 2,807
1,471 1,499 Finance lease liabilities 1,454 1,515
30,844 27,570 Other borrowings 26,210 27,262
103,207 100,780 Total borrowings2 100,087 100,534

By source

 
85,674 85,309 Core Crown 84,870 84,510
5,257 5,156 Crown entities 5,251 5,325
27,636 25,884 State-owned enterprises 24,839 25,374
(15,360) (15,569) Inter-segment eliminations (14,873) (14,675)
103,207 100,780 Total borrowings 100,087 100,534

By maturity

 
34,345 30,511 Expected to be settled within one year 30,517 43,195
68,862 70,269 Expected to be outstanding for more than one year 69,570 57,339
103,207 100,780 Total borrowings 100,087 100,534

By guarantee

 
76,212 74,924 Sovereign-guaranteed debt3 75,684 75,701
26,995 25,856 Non-sovereign debt 24,403 24,833
103,207 100,780 Total borrowings 100,087 100,534
  1. Derivatives are included in either borrowings or marketable securities depending on their gain or loss position at balance date. This treatment leads to fluctuations in individual items primarily due to exchange rate movements.
  2. 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.
  3. 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.

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.

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

Government Bonds

Actual
30 June
2013
$m
30 June
2012
$m
Government bonds measured at amortised cost 55,005 51,016
Government bonds measured at fair value 2,372 2,834
Total Government bonds 57,377 53,850

Government bonds are measured at amortised cost, unless it is managed and its performance is evaluated on a fair value basis. Where it 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 $57,513 million (2012: $56,489 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. In each case, the rating outlook is stable.

Actual
30 June
2013
$m
30 June
2012
$m
Government bonds measured at fair value  
Carrying value 2,372 2,834
Amount payable on maturity 2,113 2,446
Fair value impact from changes in credit risk for the year
Cumulative fair value impact from changes in credit risk

Treasury Bills

Treasury bills are reported at either amortised cost or fair value, with fair value based on observable market price. 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.

Settlement Deposits with Reserve Bank

Settlement deposits with the Reserve Bank represent the level of money deposited with the Reserve Bank by commercial banks. They represent 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 now reported at amortised cost (previously at fair value), 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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By source

 
10 10 Core Crown 12 17
52 50 Crown entities 39 47
1,413 1,442 State-owned enterprises 1,403 1,456
(4) (3) Inter-segment eliminations (5)
1,471 1,499 Total finance lease liabilities 1,454 1,515

Undiscounted Minimum Lease Payments

 
No later than one year 193 199
Later than one year and not later than five years 774 766
Later than five years 643 739
Total undiscounted minimum lease payments 1,610 1,704
Present Value of Minimum Lease Payments  
No later than one year 172 170
Later than one year and not later than five years 691 668
Later than five years 591 678
Total present value of minimum lease payments 1,454 1,516
Future finance charges 156 188

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
24,111 19,535 Other borrowings measured at amortised cost 21,534 22,465
6,733 8,035 Other borrowings measured at fair value 4,676 4,797
30,844 27,570 Total other borrowings 26,210 27,262

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 performance is evaluated on a fair value basis.

The fair value of other borrowings measured at amortised cost is $21,458 million (2012: $22,344 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 flows 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.

Of these borrowings, $4,115 million (2012: $6,560 million) is sovereign-issued debt administered by the Reserve Bank and NZDMO.

The remaining borrowings of $22,095 million (2012: $20,702 million) comprise non-sovereign-issued debt of Crown entities and State-owned enterprises.

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 to the amount actually payable on maturity where the effect of discounting cash flows is material.

Actual
30 June
2013
$m
30 June
2012
$m

Other borrowings measured at fair value

 
Carrying value 4,676 4,797
Amount payable on maturity 4,196 3,718
Fair value impact from changes in credit risk for the year (42) (9)
Cumulative fair value impact from changes in credit risk 165 (146)

Note 25: Insurance Liabilities

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By entity

 
30,651 30,767 ACC liability 29,446 30,648
5,210 7,114 EQC property damage liability 6,869 8,877
992 1,439 Southern Response liability 1,744 2,062
66 53 Other insurance liabilities 67 48
(456) Inter-segment eliminations (414) (449)
36,919 38,917 Total insurance liabilities 37,712 41,186

By component

 
Outstanding claims liability 35,225 38,695
Unearned premium liability 2,384 2,293
Unearned premium liability deficiency 103 198
Other
Total insurance liabilities 37,712 41,186

By maturity

 
8,887 8,320 Expected to be settled within one year 10,103 8,850
28,032 30,597 Expected to be outstanding for more than one year 27,609 32,336
36,919 38,917 Total insurance liabilities 37,712 41,186

Assets arising from insurance obligations are:

 
Receivables for premiums 2,917 2,898
Reinsurance claim recoveries 3,135 5,003

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

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 in advance of the insured period.

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), and Mr Chris Latham, a Fellow of the Institute of Actuaries of Australia. Mr Rhodes and Mr Latham 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.

Actual
30 June
2013
$m
30 June
2012
$m

The ACC liability comprises:

 
ACC outstanding claims liability 27,162 28,396
ACC unearned premium liability 2,242 2,183
ACC unearned premium liability deficiency 42 69
Total ACC liability 29,446 30,648

Analysis of Outstanding ACC Claims Liability

 
Undiscounted outstanding claims liability 74,809 73,151
Discount adjustment (50,754) (47,997)
Risk margin 3,107 3,242
Total outstanding ACC claims liability 27,162 28,396
Discounted central estimate of future payments for outstanding claims 22,384 23,497
Claims handling expenses 1,671 1,657
Outstanding claims liability before risk margin 24,055 25,154
Risk margin 3,107 3,242
Total outstanding ACC claims liability 27,162 28,396

Movement in Outstanding ACC Claims Liability

 
Opening balance 28,396 24,510
Claims incurred for the year 3,421 3,234
Claims paid out in the year (2,970) (2,918)
Discount rate unwind 684 727

Experience adjustments (actuarial gains and losses):

 
- actual and assumed claim experience (1,195) (1,933)
- change in discount rate (939) 5,084
- change in inflation rate (235) (209)
- change in other economic assumptions
Other movements (99)
Closing outstanding ACC claims liability 27,162 28,396

Movement in ACC Unearned Premium Liability

 
Opening balance 2,183 2,429
Earning of premiums previously deferred (2,183) (2,429)
Deferral of premiums on current year contracts 2,242 2,183
Other
Closing ACC unearned premium liability 2,242 2,183

Claims development historical analysis

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

2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2013
$m

Estimate of ultimate claims costs:

   
At the end of the accident year 4,189 5,847 7,476 7,414 7,917 7,295 7,225  
One year later 5,190 7,061 7,113 7,126 6,697 6,546  
Two years later 6,182 6,821 7,094 6,325 6,301  
Three years later 6,266 6,763 6,426 6,110  
Four years later 6,552 6,088 5,965  
Five years later 6,090 5,837  
Six years later 5,876              
Current estimate of cumulative claim costs 5,876 5,837 5,965 6,110 6,301 6,546 7,225 43,860
Cumulative payments (2,014) (2,137) (2,039) (1,735) (1,633) (1,553) (1,157) (12,268)
Outstanding claims undiscounted 3,862 3,700 3,926 4,375 4,668 4,993 6,068 31,592
Discount (22,450)
Claims handling costs 1,883
2006 and prior claims (net present value) 16,121
Short tail outstanding claims 16
Total outstanding ACC claims liability 27,162
Actual
30 June
2013
$m
30 June
2012
$m

Analysis of ACC unearned premium liability deficiency

 
Unearned premium liability 2,242 2,183
Adjusted for unearned premium relating to residual claims and premium liabilities without deficiency (339)
Adjusted ACC unearned premium liability 2,242 1,844
Discounted central estimate of payments for insured future claims 1,997 1,636
Central estimate of discounted future reinsurance recoveries
Risk margin 287 277
Present value of expected cash flows for future accident claims 2,284 1,913
Total ACC unearned premium liability deficiency 42 69

In 2012, unearned premiums relating to residual claims were excluded from this calculation as they related to accidents that occurred prior to 1999. This approach was changed in 2013 to include these unearned premiums in the calculation as this is considered a better match for the liability, which also includes residual claims.

Note 25: Insurance Liabilities (continued)

Key Assumptions

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 4.86% (2012: 4.52%) and a long term discount rate of 5.50% beyond 21 years (2012: 6.00% beyond 23 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

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.

30 June
2013
30 June
2013
30 June
2012
30 June
2012
Next
Year
Beyond
Next
Year
Next
Year
Beyond
Next
Year

Summary of assumptions

   
Average weighted term to settlement from reporting date 15 years   15 years
11 months   10 months
Weighted average risk margin 12.9%   12.9%
Probability of adequacy of liability 75.0%   75.0%
Risk margin for liability adequacy test 18.2%   18.0%
Probability of adequacy of liability to cover unearned premiums 75.0%   75.0%
Risk-free discount rate1 2.7% 3.1% to 5.5% 2.4% 2.5% to 6.0%
Inflation rates (excluding superimposed inflation):    
    Weekly compensation 3.0% 3.3% to 3.5% 3.0% 3.3% to 3.5%
    Impairment benefits 1.1% 2.0% to 2.5% 1.1% 2.1% to 2.5%
    Social rehabilitation benefits (serious and non serious injury) 2.2% 2.5% to 2.7% 2.2% 2.5% to 2.7%
    Hospital rehabilitation benefits 2.2% 2.5% to 2.7% 2.2% 2.5% to 2.7%
    Medical costs 2.2% 2.5% to 2.7% 2.2% 2.5% to 2.7%
Superimposed inflation:    
    Social rehabilitation benefits (serious injury) 2.1% 2.3% to 5.4% 2.0% 2.3% to 5.3%
    Social rehabilitation benefits (non-serious injury) 0.0% 2.0% to 3.8% 3.3% 2.0% to 3.3%
    Hospital rehabilitation benefits 5.0% 4.0% to 5.0% 5.0% 4.0% to 5.0%
    Medical costs (GP's) 2.0% 3.0% to 4.0% 2.0% 2.0% to 5.0%
    Medical costs (Radiology) 4.3% 5.0% to 5.8% 4.3% 4.3% to 6.5%
    Medical costs (Physiotherapists) 1.7% 2.0% to 2.3% 1.7% 1.7% to 2.3%
    Medical costs others (specialists) 1.8% 2.5% to 3.3% 1.8% 1.8% to 4.0%
  1. The risk-free discount rate beyond 21 years is 5.5% (2012: the rate beyond 23 years was 6.0%).

Sensitivity Analysis

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:

Change Impact on liability
Actual
  30 June
2013
$m
30 June
2012
$m

Sensitivity of assumptions

 
Average weighted term to settlement from reporting date +1 year (820) (855)
   -1 year 846 882
Risk-free discount rate +1% (3,628) (3,792)
-1% 4,823 5,000
Inflation rates (including superimposed inflation) +1% 4,966 5,131
-1% (3,788) (3,946)
Social rehabilitation benefits - superimposed inflation for non-serious injury claims +1% 1,028 1,055
  -1% (774) (800)
Social rehabilitation benefits - superimposed inflation after four years for serious injury claims +1% 2,564 2,554
  -1% (1,875) (1,883)

Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $24,055 million (2012: $25,154 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 2013. These estimated cash flows include the effects of assumed future inflation.

Actual
30 June
2013
$m
30 June
2012
$m
No later than 1 year 1,834 1,793
Later than 1 year and no later than 2 years 1,364 1,366
Later than 2 years and no later than 5 years 3,628 3,629
Later than 5 years and no later than 10 years 5,769 5,745
Later than 10 years and no later than 15 years 5,693 5,648
Later than 15 years and no later than 20 years 5,767 5,695
Later than 20 years and no later than 25 years 5,898 5,807
Later than 25 years and no later than 30 years 5,981 5,893
Later than 30 years and no later than 35 years 5,967 5,871
Later than 35 years and no later than 40 years 5,829 5,738
Later than 40 years and no later than 45 years 5,556 5,464
Later than 45 years and no later than 50 years 5,142 5,042
Later than 50 years 16,381 15,460
Undiscounted outstanding claims liability 74,809 73,151

Note 25: Insurance Liabilities (continued)

Analysis of EQC insurance liability

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

The actuarial valuation report for 2013 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 them 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
2013
$m
30 June
2012
$m

The EQC liability comprises:

 
EQC outstanding claims liability 6,666 8,638
EQC unearned premium liability 142 110
EQC unearned premium liability deficiency 61 129
Total EQC liability 6,869 8,877

By type

 
Property damage claims in relation to Canterbury earthquakes 6,634 8,625
Other insurance liabilities 235 252
Total EQC liability 6,869 8,877

Analysis of Outstanding EQC Insurance Liability

 
Undiscounted outstanding claims liability 6,340 8,298
Discount adjustment (125) (270)
Risk margin 451 610
Total outstanding EQC insurance liability 6,666 8,638
Discounted central estimate of future payments for outstanding claims 5,754 7,456
Claims handling expenses 461 572
Outstanding claims liability before risk margin 6,215 8,028
Risk margin 451 610
Total outstanding EQC insurance liability 6,666 8,638

Movement in Outstanding EQC Insurance Liability

 
Opening balance 8,638 10,204
Net claims incurred/reassessed for the year - Canterbury earthquakes (205) 1,163
Claims incurred for the year - other 38 30
Claims paid out in the year (1,787) (2,807)
Other movements (18) 48
Closing outstanding EQC insurance liability 6,666 8,638
Actual
30 June
2013
$m
30 June
2012
$m

Movement in EQC Unearned Premium Liability

 
Opening balance 110 46
Earning of premiums previously deferred (110) (46)
Deferral of premiums on current year contracts 142 110
Other
Closing EQC unearned premium liability 142 110

Analysis of EQC unearned premium liability deficiency

 
Unearned premium liability 142 110
Discounted central estimate of payments for insured future claims 221 264
Central estimate of discounted future reinsurance recoveries (18) (25)
Risk margin
Present value of expected cash flows for future claims 203 239
Total EQC unearned premium liability deficiency 61 129

Key Assumptions

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.

30 June
2013
30 June
2012

Summary of assumptions

 
Weighted average term to settlement 0.72 years 1.3 years
Claims inflation rate - base 2.5% 2.5%
Claims inflation rate - demand surge 3.6% to 7.0% 2.9% to 6.9%
Risk-free discount rate 2.7% to 3.6% 2.4% to 3.3%
Weighted average risk margin - net (of reinsurance) claims 11.3% 14.3%
Weighted average risk margin - gross outstanding claims 7.3% 7.6%
Claims handling expense ratio 7.2% 7.7%

Sensitivity Analysis

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:

Change Impact on liability
Actual
  30 June
2013
$m
30 June
2012
$m
Sensitivity of assumptions  
Weighted average term to settlement + 0.5 years 30 14
- 0.5 years (18) (35)
Claims inflation rate +1% 19 75
-1% (43) (75)
Risk-free discount rate +1% (33) (75)
-1% 33 76
Risk margin +1% 40 43
-1% (40) (43)
Claims handling expense ratio +1% 35 67
-1% (34) (78)

Analysis of Southern Response liability

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 2013. 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.

Actual
30 June
2013
$m
30 June
2012
$m

The Southern Response liability comprises:

 
Southern Response outstanding claims liability 1,744 2,062
Southern Response unearned premium liability
Southern Response unearned premium liability deficiency
Total Southern Response liability 1,744 2,062

By type

 
Property damage claims in relation to Canterbury earthquakes 1,744 2,062
Other insurance liabilities
Total Southern Response liability 1,744 2,062

Analysis of Outstanding Southern Response Claims Liability

 
Undiscounted outstanding claims liability 1,659 1,874
Discount adjustment (65) (56)
Risk margin 150 244
Total outstanding Southern Response claims liability 1,744 2,062
Expected future claims payments - central estimate 1,521 1,729
Claims handling expenses 72 89
Outstanding claims liability before risk margin 1,593 1,818
Risk margin 151 244
Total outstanding Southern Response claims liability 1,744 2,062

Movement in Outstanding Southern Response Claims Liability

 
Opening balance 2,062 1,985
Claims liability sold through business combination (189)
Net claims incurred/reassessed for the year - Canterbury earthquakes (22) 449
Claims incurred for the year - other (discontinued operations) 143
Claims paid out in the year (296) (326)
Other movements
Closing outstanding Southern Response claims liability 1,744 2,062

Key Assumptions

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 8.6% inflation assumption (2012: 8.0%) 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.

However, relative to 30 June 2012, for a number of areas the uncertainties have now reduced. In light of this, the risk margin has been reduced to 10.0% (14.2% in 2012).

30 June
2013
30 June
2012

Summary of assumptions

 
Average weighted term to settlement from reporting date  
    Earthquake related claims 1.8 years 1.8 years
Inflation  
    Building costs 8.6% 8.0%
    Other cover types 3.0% 3.0%
Risk-free discount rate 2.9% 2.2% to 3.0%
Weighted average risk margin - gross outstanding claims 10.0% 14.2%
Probability of adequacy of liability 75.0% 75.0%

Sensitivity Analysis

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:

Change Impact on liability
Actual
  30 June
2013
$m
30 June
2012
$m

Sensitivity of assumptions

 
Inflation +1% 29 23
-1% (28) (23)
Risk-free discount rate +1% (19) (19)
-1% 19 20
Weighted average risk margin +1% 15 17
-1% (15) (17)

Note 26: Retirement Plan Liabilities

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
11,478 12,228 Government Superannuation Fund (GSF) 11,908 13,539
3 (1) Other funds (5)
11,481 12,227 Total retirement plan liabilities 11,903 13,539

By source

 
11,479 12,236 Core Crown 11,915 13,548
1 2 Crown entities 1 2
(10) State-owned enterprises (13) (10)
1 (1) Inter-segment eliminations (1)
11,481 12,227 Total retirement plan liabilities 11,903 13,539

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 2013. 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:

Actual
30 June
2013
$m
30 June
2012
$m

Net GSF Obligation

 
Present value of defined benefit obligation 15,290 16,557
Fair value of plan assets (3,382) (3,018)
Present value of unfunded defined benefit obligation 11,908 13,539

Present value of defined benefit obligation

 
Opening defined benefit obligation 16,557 13,311
Expected current service cost 112 92
Expected unwind of discount rate 394 367
Actuarial losses/(gains) (920) 3,686
Benefits paid (853) (897)
Other (2)
Closing defined benefit obligation 15,290 16,557

Fair value of plan assets

 
Opening fair value of plan assets 3,018 3,159
Expected return on plan assets 162 194
Actuarial gains/(losses) 331 (210)
Funding of benefits paid by Government 658 699
Contributions from other entities 19 23
Contributions from members 47 50
Benefits paid (853) (897)
Other
Closing fair value of plan assets 3,382 3,018

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

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Personnel Expenses

 
Expected current service cost 112 92
Expected unwind of discount rate on GSF obligation 394 367
Expected return on plan assets (162) (194)
Contributions from members and funding employers (66) (73)
    Past service cost
329 278 Total included in personnel expenses 278 192

Net (Gains)/Losses on Non-Financial Instruments

 
(918) Actuarial (gains)/losses recognised in the year (1,251) 3,896
329 (640) Total GSF expense (973) 4,088

The Government expects to make a contribution of $750 million to GSF in the year ending 30 June 2014.

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:

Actual
30 June
2013
%
30 June
2012
%

Summary of assumptions

 

For following year

 
Discount rate 2.7% 2.4%
Expected return on plan assets 5.5% 6.3%
Expected rate of salary increases 3.0% 3.0%
Expected rate of inflation 1.9% 2.1%

Beyond next year

 
Discount rates between 2 and 22 years 3.1% to 5.5% 2.5% to 5.9%
Discount rate from 23 years onwards 5.5% 6.0%
Expected return on plan assets 5.5% 6.3%
Expected rate of salary increases 3.0% 3.0%
Expected rate of inflation for 2 years 2.3% 2.4%
Expected rate of inflation from 2 to 4 years 2.4% 2.5%
Expected rate of inflation from 4 years onwards 2.5% 2.5%

The defined benefit obligation decreased in the year to 30 June 2013 by $1,267 million, mainly due to an increase in the short and medium term discount rates (up to 18 years) partially offset by a reduction in the long-term discount rate from 6% to 5.5%.

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

Actual
30 June
2013
$m
30 June
2012
$m
Equity instruments 1,944 1,441
Other debt instruments 569 690
Cash and short term investments 215 139
Property 14 137
Other 640 611
Fair value of plan assets 3,382 3,018

The expected rate of return on the plan assets of 5.50% (2012: 6.25%) 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 2013 was 16.71%, or $493 million (2012: -0.54% or-$16 million).

Sensitivity Analysis

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:


Change Impact on obligation
Actual
30 June
2013
$m
30 June
2012
$m

Sensitivity of assumptions

 
Discount rate + 1% (1,587) (1,785)
- 1% 1,927 2,175

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.

Impact on operating balance Impact on net worth
Actual Actual
Change in share prices 30 June
2013
$m
30 June
2012
$m
30 June
2013
$m
30 June
2012
$m
Strengthen/weaken by 10% 194 144 194 144

The plan's sensitivity to share prices has not changed significantly from the previous year.

Historical Analysis

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:

Actual
30 June
2013
$m
30 June
2012
$m
30 June
2011
$m
30 June
2010
$m
30 June
2009
$m
Present value of defined benefit obligation 15,290 16,557 13,311 12,881 11,792
Fair value of plan assets (3,382) (3,018) (3,159) (2,945) (2,804)
Present value of unfunded defined benefit obligation 11,908 13,539 10,152 9,936 8,988
Experience adjustment - increase/(decrease) in plan assets 331 (210) 159 117 (806)
Less experience adjustment - increase/(decrease) in plan liabilities (90) 28 388 286 79
Total experience adjustments - (losses)/gains 421 (238) (229) (169) (885)
Changes in actuarial assumptions 830 (3,658) (345) (1,062) 190
Actuarial (losses)/gains recognised in the year 1,251 (3,896) (574) (1,231) (695)

Undiscounted defined benefit obligation

The reported GSF defined benefit obligation of $15,290 million (2012: $16,557 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 2013. These estimated cash flows include the effects of assumed future inflation.

30 June
2013
$m
30 June
2012
$m
No later than 1 year 922 913
Later than 1 year and no later than 2 years 915 910
Later than 2 years and no later than 5 years 2,819 2,818
Later than 5 years and no later than 10 years 4,863 4,900
Later than 10 years and no later than 15 years 4,811 4,908
Later than 15 years and no later than 20 years 4,490 4,634
Later than 20 years and no later than 25 years 3,928 4,119
Later than 25 years and no later than 30 years 3,188 3,396
Later than 30 years and no later than 35 years 2,383 2,587
Later than 35 years and no later than 40 years 1,619 1,799
Later than 40 years and no later than 45 years 992 1,132
Later than 45 years and no later than 50 years 534 631
Later than 50 years 349 440
Undiscounted defined benefit obligation 31,813 33,187

Note 27: Provisions

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

By type

 
3,133 3,286 Provision for employee entitlements 3,374 3,253
815 1 Provision for ETS credits 179 375
843 1,033 Provision for National Provident Fund guarantee 977 1,076
462 Provision for Canterbury Red Zone support package 222 745
1,350 Provision for Infrastructure costs 769 530
306 71 Provision for weathertight services financial assistance package 123 189
1,769 1,131 Other provisions 1,494 1,338
6,866 7,334 Total provisions 7,138 7,506

By source

 
4,529 4,903 Core Crown 4,492 4,965
1,814 1,884 Crown entities 1,979 1,899
925 986 State-owned enterprises 1,151 1,103
(402) (439) Inter-segment eliminations (484) (461)
6,866 7,334 Total provisions 7,138 7,506

By maturity

 
3,784 3,088 Expected to be settled within one year 3,355 3,368
3,082 4,246 Expected to be outstanding for more than one year 3,783 4,138
6,866 7,334 Total provisions 7,138 7,506
Actual
30 June
2013
$m
30 June
2012
$m
Provision for employee entitlements  
Opening provision 3,253 3,050
Additional provisions recognised 1,714 1,799
Provision used during the period (1,469) (1,518)
Reversal of previous provision (122) (71)
Unwind of discount rate (2) (7)
Closing provision 3,374 3,253

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 rising from 2.0% next year to 5.5% in later years.

Actual
30 June
2013
$m
30 June
2012
$m

Provision for ETS credits

 
Opening provision 375 612
New provision recognised during the period (ETS expenses) 55 334
Provision used during the period (ETS revenue) (16) (64)
(Gains)/losses on NZ Units (235) (507)
Closing provision 179 375

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 $NZ1.80 (30 June 2012: €3.62 or $NZ5.73).

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.

Actual
30 June
2013
$m
30 June
2012
$m

Provision for National Provident Fund guarantee

 
Opening provision 1,076 983
Additional provisions recognised
Provision used during the period (73) (74)
Reversal of previous provision (16) (12)
Unwind of discount rate and effect of changes in discount rate (10) 179
Closing provision 977 1,076

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 $977 million (2012: $1,076 million), represented by a gross estimated pension obligation of $1,011 million (2012: $1,115 million) with net investment assets valued at $34 million (2012: $39 million).

Actual
30 June
2013
$m
30 June
2012
$m

Provision for Canterbury Red Zone support package

 
Opening provision 745 1,039
Additional provisions recognised 37 614
Provision used during the period (500) (816)
Reversal of previous provision (66) (98)
Unwind of discount rate and effect of changes in discount rate 6 6
Closing provision 222 745

Net provision

 
Provision for Red Zone properties 222 745
Estimated insurance proceeds from Red Zone Properties (517) (565)
Net (recoverable)/provision for Red Zone properties (295) 180

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 2013. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine these valuations.

The majority of property owners within the red zone have settled prior to 30 June 2013, so 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)

Actual
30 June
2013
$m
30 June
2012
$m

Provision for Water Infrastructure costs

 
Opening provision 530
Additional provisions recognised 437 554
Provision used during the period (156) (24)
Reversal of previous provision
Unwind of discount rate and effect of changes in discount rate (42)
Closing provision 769 530

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 3.6% 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.

Actual
30 June
2013
$m
30 June
2012
$m

Provision for weathertight services financial assistance package

 
Opening provision 189 567
Additional provisions recognised 30
Provision used during the period (7)
Reversal of previous provision (60) (408)
Unwind of discount rate and effect of changes in discount rate 1
Closing provision 123 189

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 2013.

The provision assumes that the package will be taken up for 2,619 (2012: 3,544) dwellings.

Actual
30 June
2013
$m
30 June
2012
$m

Other provisions

 
Opening provision 1,338 1,335
Additional provisions recognised 446 307
Provision used during the period (245) (286)
Reversal of previous provision (38) (42)
Unwind of discount rate and effect of changes in discount rate (7) 24
Closing provision 1,494 1,338

Note 28: Net Worth

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
2,144 5,601 Taxpayer funds 10,862 3,520
62,550 55,965 Property, plant and equipment revaluation reserve 57,068 56,001
79 76 Investment revaluation reserve 107 71
(279) (121) Cash flow hedge reserve 58 (195)
66 (45) Foreign currency translation reserve (49) (49)
40 Share based payment reserve 25
1,648 1,794 Net worth attributable to minority interests 1,940 432
66,208 63,310 Total net worth 70,011 59,780

Taxpayer Funds

 
7,573 3,520 Opening taxpayers funds 3,520 18,188
(5,699) 1,918 Operating balance excluding minority interests 6,925 (14,897)
200 175 Gain on Government share offers in SOEs 167
69 7 Transfers from/(to) property, plant and equipment revaluation reserve 268 228
1 (19) Other movements (18) 1
2,144 5,601 Closing taxpayer funds 10,862 3,520

Property, Plant and Equipment Revaluation Reserve

 
62,618 56,001 Opening revaluation reserve 56,001 62,690
(29) Net revaluations 1,335 (6,461)
(68) (7) Transfers from/(to) taxpayer funds (268) (228)
62,550 55,965 Closing revaluation reserve 57,068 56,001

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.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Investment Revaluation Reserve

 
69 71 Opening investment revaluation reserve 71 58
10 4 Increase arising on revaluation of available-for-sale financial assets 39 12
1 Cumulative (gain)/loss transferred to the statement of financial performance on sale of available-for-sale financial assets (3) 1
79 76 Closing investment revaluation reserve 107 71

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.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Cash Flow Hedge Reserve

 
(276) (195) Opening cash flow hedge reserve (195) (310)
(3) 74 Transfer into reserve 278 80
(5) Transfer to the statement of financial performance (7) 54
5 Transfer to initial carrying value of hedged item (18) (19)
(279) (121) Closing cash flow hedge reserve 58 (195)

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.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Foreign currency translation reserve

 
11 (49) Opening foreign currency translation reserve (49) (47)
55 4 Arising from translation of foreign operations (2)
66 (45) Closing foreign currency translation reserve (49) (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.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m
Share based payment reserve  
Opening share based payment reserve
40 Partial share sales 25
Lapses/Forfeitures
Other movements
40 Closing share based payment reserve 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. Lapses/Forfeitures relate to shareholders who were eligible to receive bonus shares having forfeited this right by selling the shares before the two year period has expired.

Forecast
30 June 2013
Actual
Budget 12
$m
Budget 13
$m
30 June 2013
$m
30 June 2012
$m

Net Worth Attributable to Minority Interests

 
308 432 Opening minority interest 432 308
90 10 Operating balance attributable to minority interests 94 56
1,300 1,325 Increase in minority interest from Government share offers (refer to note 35)  1,371 -
(50) 27 Transactions with minority interests (16) 40
Movement in reserves attributable to minority interests 59
Other movements 28
1,648 1,794 Closing minority interest 1,940 432

Consisting of interests in:

 
Mighty River Power 1,431
Air New Zealand 468 399
Crown Fibre Holdings Limited subsidiaries 41 33
Other
Closing minority interest 1,940 432

Minority share of OBEGAL:

 
Mighty River Power 4
Air New Zealand 67
Crown Fibre Holdings Limited subsidiaries (9)
Other
OBEGAL attributable to minority interests 62

Minority share of gains and losses

 
Mighty River Power 6
Air New Zealand 26 56
Crown Fibre Holdings Limited subsidiaries
Other
Gains and losses attributable to minority interests 32 56
Operating Balance attributable to minority interests 94 56

Transactions with minority interests include dividend payments and dividend reinvestments.

Note 29: Capital Objectives and Fiscal Policy

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, and
  • pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

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.

Note that the Public Finance (Fiscal Responsibility) Amendment Act 2013 was enacted on 3 September 2013. The amendment Act introduces three new principles of responsible fiscal management:

  • 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.

The Act also amends the wording of the current principle relating to the tax system.

These new and amended principles of responsible fiscal management will apply to the Government's fiscal strategy as set out in its 2014 Fiscal Strategy Report.

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

Long Term Fiscal Intentions - Fiscal Strategy Report 2013[10]

Debt

Manage total debt at prudent levels. Over the short to medium term, it is prudent to allow an increase in debt to deal with the current economic and fiscal shocks.

However, we need to ensure that this increase is eventually reversed and that we return to a level of debt that can act as a buffer against future shocks.

We will do this by ensuring that net debt remains consistently below 35 per cent of GDP, and is then brought back to a level no higher than 20 per cent of GDP by 2020. We will work towards achieving this earlier as conditions permit.

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 per cent of GDP.

Operating revenues

Ensure sufficient operating revenue to meet the operating balance objective.

Net worth

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 2012 Fiscal Strategy Report 2013 Fiscal Position 2013[11]

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 35.1% of GDP in 2015/16.

Core Crown net debt (excluding NZS Fund and advances) is forecast to be 27.7% in 2015/16.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 38.8 per cent of GDP in 2016/17.

Net core Crown debt (excluding NZS Fund and advances) is forecast to be 27.3 per cent of GDP in 2016/17.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2013 was 39.6% of GDP (2012: 40.4%).

Core Crown net debt (excluding NZS Fund and advances) at 30 June 2013 was 26.3% of GDP (2012: 24.3%).

Operating balance

Based on the operating allowance for the 2012 Budget, the operating balance (before gains and losses) is forecast to be -3.6% of GDP in 2012/13. The operating balance (before gains and losses) is forecast to be 0.1% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance.

The operating balance is forecast to be -2.6% in 2012/13.

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 per cent of GDP in 2013/14. The operating balance (before gains and losses) is forecast to be 0.0 per cent 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 per cent of GDP in 2013/14.

Operating balance

The operating (before gains and losses) deficit for the year ended 30 June 2013 was 2.1% of GDP (2012: 4.4%).

The operating surplus for the year ended 30 June 2013 was 3.3% of GDP (deficit 2012: 7.1%).

Expenses

Core Crown expenses are forecast to be 30.2% of GDP in 2015/16.

Total Crown expenses are forecast to be 39.6% of GDP in 2015/16.

This assumes a new operating allowance of $800 million for Budget 2013, increasing to $1.19 billion in Budget 2014 and 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 per cent of GDP by 2015/16.

Core Crown expenses are forecast to be 30.0 per cent of GDP in 2016/17.

Total Crown expenses are forecast to be 39.5 per cent of GDP in 2016/17.

This assumes a new operating allowance of $1 billion in Budget 2014, growing at 2 per cent for Budgets thereafter (GST exclusive).

Expenses

Core Crown expenses for the year ended 30 June 2013 were 33.1% GDP (2012: 33.1%).

Total Crown expenses for the year ended 30 June 2013 were 42.8% of GDP (2012: 44.5%).

Revenues

Total Crown revenues are forecast to be 40.5% of GDP in 2015/16.

Core Crown revenues are forecast to be 30.5% of GDP in 2015/16.

Core Crown tax revenues are forecast to be 27.8% of GDP in 2015/16.

Revenues

Total Crown revenues are forecast to be 40.6 per cent of GDP in 2016/17.

Core Crown revenues are forecast to be 30.9 per cent of GDP in 2016/17.

Core Crown tax revenues are forecast to be 28.3 per cent of GDP in 2016/17.

Revenues

Total Crown revenues for the year ended 30 June 2013 were 40.7% of GDP (2012: 40.1%).

Core Crown revenues for the year ended 30 June 2013 were 30.2% of GDP (2012: 29.1%).

Core Crown tax revenues for the year ended 30 June 2013 were 27.6% of GDP (2012: 26.4%).

Net worth

Total Crown net worth is forecast to be 28.6% of GDP in 2015/16. 

Core Crown net worth is forecast to be 8.8% of GDP in 2015/16.

Net worth

Total net worth attributable to the Crown is forecast to be 28.7 per cent of GDP in 2016/17.

Core Crown net worth is forecast to be 12.1 per cent of GDP in 2016/17.

Net worth

Total net worth attributable to the Crown as at 30 June 2013 was 32.0% of GDP (2012: 28.5%).

Core Crown net worth as at 30 June 2013 was 12.0% of GDP (2012: 11.2%).

Notes

  • [10]The long-term fiscal intentions are unchanged from those stated in the Fiscal Strategy Report 2012.
  • [11]GDP for the year ended 30 June 2013 was $212,701 million (2012: $208,394 million). Comparative GDP percentages have been updated to reflect restated Statistics New Zealand nominal GDP.

Note 30: Canterbury Earthquakes

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 earthquake s 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.

Below is a summary of the Government's significant obligations and the receivables in relation to the Canterbury earthquakes.

Note 30 June
2013
$m
30 June
2012
$m

Canterbury earthquake-related obligations

 
EQC property damage liability 25 6,634 8,625
Southern Response property damage liability 25 1,744 2,062
Total insurance liabilities 8,378 10,687
Provision for Canterbury Red Zone support package 27 222 745
Provision for water infrastructure costs 27 769 530
Total provisions 991 1,275
Total Canterbury earthquake-related obligations 9,369 11,962

Canterbury earthquake-related receivables

 
EQC reinsurance receivables 14 2,623 4,066
Southern Response reinsurance receivables 14 512 937
Total reinsurance receivables 3,135 5,003
Red Zone insurance recoveries 27 517 565
Other insurance receivables 295
Total other insurance receivables 812 565
Total Canterbury earthquake-related receivables 3,947 5,568
Net Canterbury earthquake-related obligations 5,422 6,394

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 experts to make a number of assessments such as 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 are 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:

Actual
Note 30 June
2013
$m
30 June
2012
$m
30 June
2011
$m
Total
$m
EQC insurance claims a (107) 662 7,471 8,026
Local Infrastructure b 483 729 195 1,407
Land zoning c (8) 258 653 903
Southern Response support package d (53) 156 355 458
Christchurch central city rebuild e 115 115
Other earthquake costs f 45 108 413 566
Net earthquake costs 475 1,913 9,087 11,475
Gross earthquake expenses 815 2,823 13,601 17,239
Earthquake related revenue (e.g. reinsurance) (340) (910) (4,514) (5,764)
Net earthquake costs 475 1,913 9,087 11,475
Operating expenses 266 1,900 9,087 11,253
Capital expenditure 209 13 222
Net earthquake costs 475 1,913 9,087 11,475

In addition to these net earthquake costs, the Government's assets have suffered damage. In previous years approximately $375 million was impaired against the asset revaluation reserve. In the current year, there were no significant impairments through the reserve.

These results do not represent the total expense to the Government of the earthquakes as some expenditure is yet to be incurred, or will not be determined until further policy decisions have been made. These decisions are likely to result in fiscal costs being incurred at a future time.

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

Note a - Earthquake Commission (EQC) Insurance Claims

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.

These financial statements include a net EQC recovery of $107 million for the year ended 30 June 2013 relating to the Canterbury earthquakes (2012: $662 million net cost). This 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 enhanced information regarding these claims.

During the year, $1.8 billion was paid out taking the total to $5.7 billion for settling approved claims, leaving an outstanding insurance liability estimate of $6.7 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.

Note b - Local Infrastructure

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.

The Government has recently 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 sets 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). As at 30 June 2013, the Government has not entered into agreements with other territorial authorities in Canterbury.

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.

Response Costs

During the year, net expenses of $3 million has been recorded for response costs taking the total Canterbury earthquake response costs (primarily temporary repairs to essential infrastructure) to $226 million.

Recovery Costs

As a result of the cost sharing agreement between the Government and CCC, expenses of $395 million (2012: $554 million) for the Government's share of water recovery costs have been included in the financial statements for the year ended 30 June 2013. Total costs of water infrastructure of $949 million have been recognised.

While best available information has been used to provide the estimate of water infrastructure recovery costs, significant uncertainties remain with regard to:

  1. the amount of damage to infrastructure under the ground, and
  2. the basis for restoring the infrastructure, whether it is like-for-like, or some other method.

Details of the calculation of the estimate of the water infrastructure costs (including discussion on the sensitivity of assumptions) are provided in note 27 of these financial statements.

In addition, $85 million has been included in the current year for costs associated with the repair of local roadways taking the total costs of local roading repairs to date to $232 million. While costs associated with water infrastructure are recognised upfront, the repair of local roadways is recognised in the year of repair.

This spreading of costs reflects that the first call for funding these future expenses will be from dedicated ring-fenced revenue in the form of road user charges, fuel excise duties, and registration fees paid to the National Land Transport Fund. The Government and New Zealand Transport Authority (NZTA) have agreed that up to $50 million a year will be made available from the National Land Transport Fund for repairs to Canterbury roads. The mechanism for funding the ongoing NZTA contribution above this amount is yet to be confirmed.

Note c - Land Zoning

On the 23 June 2011 the Government announced zones of land damage in Christchurch and parts of the Waimakariri district. This land was mapped into four zones, with “Red Zone” land identified as being unlikely to be suitable for continued residential occupation for a prolonged period of time. For this reason, the Government instigated a process for purchasing insured residential land in the Red Zone on a voluntary basis. Since the initial zoning announcement, further zoning announcements and other land zoning policy decisions were made.

Included within the land zoning costs for 30 June are both costs associated with the red zone support package, and expenses in relation to other land zoning related costs. Melville Jessup Weaver (a firm of consulting actuaries) was engaged to revalue the Crown's obligation and associated insurance recoveries for the red zone support package as at 30 June 2013. The net effect of the re-estimation of the red zone support package was a reversal of expenses of $25 million in the current year. The actuary has used the best available information, but it is acknowledged that there have been limitations on the quality and quantity of data available from insurers. Details of the calculation of the estimate are provided in note 27 of these financial statements.

The provision for outstanding property settlements excludes any costs associated with the demolition and removal of red zone houses, salvage income, and any future sale or use of land that will be purchased. The impact of these exclusions will depend on future decisions regarding the use of any land acquired.

Note d - Southern Response Earthquake Services Support Package

On 7 April 2011 the Government provided a financial support package for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch. The financial support to AMI was provided via a Crown Support Deed (CSD) under which the Crown subscribed for $500 million of convertible preference shares which were called but unpaid. The net loss incurred on the acquisition of AMI was $335 million and an operating deficit to the end of 30 June 2011 of $20 million was reported in that year.

On 5 April 2012 IAG purchased the on-going insurance business of AMI. Immediately after completion of the sale, the Crown paid $100 million of the unpaid balance on the preference shares and took ownership of AMI's residual earthquake business. The earthquake business was renamed Southern Response Earthquake Services Limited (Southern Response). In the 2012 financial year net costs of $401 million were recognised and partly offset by a gain realised on the sale of the ongoing business of AMI of $245 million, resulting in a net cost of $156 million being recorded for the financial year. During the 2013 financial year $53m of net revenues were recognised.

While the potential cost of the Crown's support has been estimated at $458 million in total including a risk margin, the ultimate cost will be dependent on the financial performance of the company and the underlying emerging experience from the earthquake series such as further late notified claims in relation to the liability (and resulting reinsurance recoveries) arising from the Canterbury earthquakes. The liability has been valued by an independent actuary (Finity Consulting Pty Limited).

The uncertainties regarding Southern Response's outstanding claims liability are similar to those of EQC (with the exception of risks associated with land claims). The details of the insurance liability at 30 June 2013 (including discussion on the sensitivity of assumptions) are outlined in note 25.

Note e - Christchurch Central City Rebuild

The Government has agreed to contribute to certain Anchor Projects in the Christchurch central business district. During the year ended 30 June 2013, $115 million has been recognised with regards to the purchase of land and operating costs for these projects.

Note f - Other Earthquake Costs

The 2013 net cost includes insurance proceeds of $320 million for the Canterbury District Health Board. Other costs represent various other initiatives raised in support of Canterbury, including the operating costs of the Canterbury Earthquake Recovery Authority (CERA), welfare support, emergency and temporary housing, state highway repairs and various other operating and capital costs incurred by Crown entities.

Note 31: Commitments

  Actual
30 June
2013
$m
30 June
2012
$m

Capital Commitments

   
Specialist military equipment 549 239
Land and buildings 717 697
Other property, plant and equipment 5,478 6,001
Other capital commitments 790 501
Tertiary Education Institutions 169 255
Total capital commitments 7,703 7,693

Operating Lease Commitments

   
Non-cancellable accommodation leases 2,792 2,719
Other non-cancellable leases 2,735 2,713
Tertiary Education Institutions 466 282
Total operating lease commitments 5,993 5,714
Total commitments 13,696 13,407

By source

   
Core Crown 4,226 4,593
Crown entities 5,296 5,463
State-owned enterprises 5,078 5,388
Inter-segment eliminations (904) (2,037)
Total commitments  13,696 13,407

By Term

   

Capital Commitments

   
One year or less 3,689 3,070
From one year to two years 1,764 1,443
From two to five years 2,025 2,724
Over five years 225 456
Total capital commitments  7,703 7,693

Operating Lease Commitments

   
One year or less 1,101 1,157
From one year to two years 985 891
From two to five years 1,900 1,810
Over five years 2,007 1,856
Total operating lease commitments  5,993 5,714
Total commitments 13,696 13,407

Note 32: Contingent Liabilities and Contingent Assets

Contingent liabilities and contingent assets involving amounts of over $20 million are separately disclosed. Any quantifiable contingencies less than $20 million are included in the “other quantifiable” total. Some contingencies of the Crown are not able to be quantified; these unquantifiable contingent liabilities and contingent assets are disclosed as at 30 June 2013 where they are expected to be material but not remote.

Contingent liabilities are:

  • costs that the Crown will have to face if a particular event occurs, or
  • present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities).

Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability was realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. However, in the case of some contingencies (e.g. uncalled capital), the negative impact would be restricted to net core Crown debt.

Contingent assets are possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Contingent Liabilities

Actual
Note 30 June
2013
$m
30 June
2012
$m

Quantifiable Contingent Liabilities

     
Guarantees and indemnities a 225 430
Uncalled capital b 6,286 6,327
Legal proceedings and disputes c 707 411
Other contingent liabilities d 432 584
Total quantifiable contingent liabilities 7,650 7,752

By source

     
Core Crown   7,350 7,622
Crown entities   35 40
State-owned enterprises   265 90
Total quantifiable contingent liabilities 7,650 7,752

a) Guarantees and Indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or performance of an obligation of another party, should that party default. Guarantees generally relate to the payment of money but may require the performance of services. Guarantees given under Section 65ZD of the Public Finance Act 1989 are disclosed in accordance with Section 26Q(3)(b)(i)(B) of the same Act.

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event.

    Actual
  Note 30 June
2013
30 June
2012
    $m $m
New Zealand Export Credit Office guarantees i 76 92
Air New Zealand letters of credit and performance bonds ii 51 26
Housing New Zealand Crown mortgage portfolio iii 33 40
Indemnification of touring exhibitions   220
Other guarantees and indemnities   65 52
Total guarantees and indemnities   225 430

i.  New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office (NZECO) provides a range of guarantee products to assist New Zealand exporters manage risk and capitalise on trade opportunities around the globe.  The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector. 

ii.  Air New Zealand letters of credit and performance bonds

The letters of credit are primarily given in relation to passenger charges and airport landing charges.  Guarantees are also provided in respect of credit card obligations.  The performance bonds are primarily given in respect of engineering contracts.

iii.  Housing New Zealand Crown mortgage portfolio

HNZC sold a significant portion of its Crown mortgage portfolio to Westpac Bank between 1996 and 1999. As a condition of the sale, HNZC (on behalf of the Crown) has agreed to indemnify Westpac against any future losses arising from default. The indemnity applies over the life of the loan and is estimated to continue until 2026, this reflects the maximum exposure and was actuarially assessed.

 

b) Uncalled Capital

As part of the Crown's commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of these organisations, contributes capital by subscribing to shares in certain institutions. The capital (when called) is typically used to raise additional funding for loans to member countries, or in the case of the quota contributions to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid-in” capital and “callable capital or promissory notes”.

  Actual
Note 30 June
2013
$m
30 June
2012
$m
Asian Development Bank i 2,992 2,988
International Monetary Fund - promissory notes ii 1,163 1,174
International Monetary Fund - arrangements to borrow iii 1,052 1,081
International Bank for Reconstruction and Development iv 1,056 1,039
Other uncalled capital   23 45
Total uncalled capital 6,286 6,327

i.  Asian Development Bank (ADB)

New Zealand was a founding-regional member of the ADB, their aim is to accelerate economic development in developing countries in Asia and the South Pacific. New Zealand is a regional member but as a donor is not entitled to borrow from the Bank. Accordingly, New Zealand is in a similar position to a non-regional member, and contributes to the ADB's resources only as required by ADB.

ii.  IMF Promissory Notes

New Zealand's subscription to the IMF is partly paid in cash and partly in promissory notes (being uncalled capital). The respective levels of called and uncalled capital change when calls are made by the IMF under the Financial Transactions plan to provide loan packages to borrowing countries. Even though promissory notes are technically “at call”, they are treated as contingent liabilities, as there are significant restrictions on the actual ability to call them, and there is no realistic estimate of either the amount or the timeframe of any call.

iii.  IMF arrangements to borrow

The Crown has agreed to make funds available to the IMF to support international financial systems in the event of a significant crisis. This is a contingent liability as it will depend upon uncertain trigger events occurring and the IMF calling the funds.

iv.  International Bank for Reconstruction and Development (IBRD)

The IBRD is the main lending organisation of the World Bank Group. New Zealand, along with 188 other countries, is a member country and shareholder in the World Bank Group. The percentage of ownership is determined by the size of the economy and the amount of capital contributed to support the Bank's borrowing activities among international capital markets.

c) Legal proceedings and disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown. The amount shown is the amount claimed and thus the maximum potential cost; it does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

    Actual
Note 30 June
2013
$m
30 June
2012
$m
Tax disputes i 641 365
Healthcare litigation ii 26 20
Other legal proceedings and disputes   40 26
Total legal proceedings and disputes 707 411

i) Tax disputes 

When a taxpayer disagrees with an assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court. This contingent liability represents the outstanding debt of tax assessments raised against which an objection has been lodged and legal action is proceeding.

ii) Healthcare litigation

Claims have been lodged against the Crown in respect of alleged negligence for issues regarding treatment and care.

d) Other quantifiable contingent liabilities

  Actual
Note 30 June
2013
$m
30 June
2012
$m
Transpower capital expenditure recovery i 156 15
Unclaimed monies ii 101 79
Air New Zealand partnership iii 47 39
Kyoto protocol units iv 35 349
Other contingent liabilities   93 102
Total other contingent liabilities 432 584

i.  Transpower New Zealand Limited

Transpower has a contingent liability relating to capital expenditure that was not approved by the regulator. If this expenditure is not subsequently approved it cannot be recovered from customers.

ii.  Unclaimed monies

Under the Unclaimed Money Act 1971, entities (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.

iii.  Air New Zealand partnership

The Air New Zealand Group has a partnership agreement in relation to the Christchurch Engineering Centre (CEC), holding a 49% interest. By the nature of the agreement, joint and several liabilities exist between the two parties; the contingent liability represents Air New Zealand's share of CEC's liabilities.

iv.  Kyoto protocol units

During the first commitment period, it was estimated that 91.5 million tonnes of carbon credits would be generated by carbon removals via forests. To the extent that these forests are harvested in subsequent commitment periods there will be an associated liability generated that will need to be repaid. As at 30 June 2013, approximately 48.9 million tonnes has been transferred to forest owners in the form of New Zealand Units. The Crown's contingent liability is calculated as the remaining credits the Crown is potentially liable for (42.6 million tonnes). Using the carbon price as at 30 June 2013 (0.82 $NZD), the contingent liability was estimated at $35 million. This is significantly less than last year owing to a fall in the carbon price from $5.70 at 30 June 2012.

Unquantifiable Contingent Liabilities

This part of the statement provides details of those contingent liabilities of the Crown which are not quantified, excluding those that are considered remote, reported by the following categories:

a)  Indemnities

b)  Legal disputes

c)  Other contingent liabilities

a)  Indemnities

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event.

A number of these indemnities are provided to organisations within the Crown's control. If these indemnities were to crystallise, the Crown would compensate the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt.

a) Indemnities
Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001 Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Airways Corporation of New Zealand Airways' contract with New Zealand Defence Force Any claim brought against Airways by third parties arising from military flight operations undertaken by the Royal New Zealand Air Force
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993 

Any deficiency in EQC's assets to cover the Commission's financial liabilities In the event of a major natural disaster.

EQC expects to have the necessary financing to meet its liabilities as they fall due over the next twelve months, hence a call on its Crown guarantee is not expected for the coming year. 

Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei.  The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party. 
Genesis Power Limited

Deed between Genesis Power Limited and the Crown

The agreement sees the Crown compensate Genesis in the event that it has less gas than they require for the long-term supply of gas to cover Huntly Power station's minimum needs.

  Genesis acquisition of Tekapo A & B power stations Indemnity against any damage to bed of lakes and rivers subject to operating easements. 
Genesis Power Limited, Meridian Energy Limited, and Mighty River Power Limited   The 1988 Deed - Sale and Purchase Agreement to ECNZ's successors

As a result of the split of ECNZ in December 1998, Ministers transferred the benefits of the indemnity of ECNZ to its successors (Meridian Energy Limited, Mighty River Power Limited and Genesis Power Limited) in relation to the specified assets transferred to each of those companies.
The liability is open-ended and is of significant commercial value.  Directors are unlikely to forego the indemnity without substantial compensation. 

Housing New Zealand Limited (HNZL) The Crown has provided a warranty in respect of title to the assets transferred to HNZL

The Crown indemnified HNZL against:

  • any breach of the warranty provided, and
  • any third-party claims that are a result of acts or omissions prior to 1 November 1992.

The Crown also indemnified the directors and officers of HNZL against any liability consequent upon the assets not complying with statutory requirements, provided it is taking steps to rectify any non-compliance.

New Zealand Rail Corporation

The Minister of Finance signed the indemnity on 1 September 2004

The directors of NZ Railways Corporation against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities

  Section 10 of the Finance Act 1990 Guarantees all loan and swap obligations of the New Zealand Railways Corporation. 
Justices of the Peace, Community Magistrates and Disputes Tribunal Referee

Section 197 of the Summary Proceedings Act 1957

Section 58 of the Disputes Tribunal Act 1988

Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.
Maui Contracts Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited The contracts provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices.  These revisions may result in the Crown refunding monies or receiving monies from those parties.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information Any losses arising from a breach of the deed.

New Zealand Aluminium Smelter and Comalco

 

The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill. The indemnity relates to costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority. 
New Zealand Local Authorities

Section 9 of the Civil Defence Emergency Management Act 2002.

Civil Defence Emergency Management Plan

The Guide to the National Civil Defence Emergency Management Plan (‘the Guide') states that the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is issued by the Director of Civil Defence Emergency Management.
Persons exercising investigating powers Section 63 of the Corporations (Investigation and Management) Act 1989 Indemnifies the Financial Markets Authority (formerly Securities Commission), the Registrar and Deputy Registrar of Companies, members of advising committees within the Act, every statutory manager of a corporation, and persons appointed pursuant to sections 17 to 19 of the Act, in the exercise of investigating powers, unless the power has been exercised in bad faith.

Synfuels-Waitara Outfall Indemnity

 

 

 

1990 sale of the Synfuels plant and operations to New Zealand Liquid Fuels Investment Limited (NZLFI) The Crown transferred to NZLFI the benefit and obligation of a Deed of Indemnity between the Crown and Borthwick-CWS Limited (and subsequent owners) in respect of the Waitara effluent transfer line which was laid across the Waitara meat processing plant site.  The Crown has the benefit of a counter indemnity from NZLFI which has since been transferred to Methanex Motunui Limited.

Westpac New Zealand Limited

 

The Domestic Transaction Banking Services Master Agreement with Westpac Banking Corporation (Westpac's rights and obligations under this agreement were vested in Westpac New Zealand Limited under the Westpac New Zealand Act 2006), dated 30 November 2004

The Crown has indemnified Westpac:

  • In relation to letters of credit issued on behalf of the Crown.
  • For costs and expenses incurred by reason of third party claims against Westpac relating to indirect instructions, direct debits, third party cheques, departmental credit card merchant agreements, use of online banking products and IRD processing arrangements.
  Supplier Payments Service - New Zealand Government Master Agreement dated 23 June 2010 The Crown indemnified Westpac New Zealand Limited against certain costs, damages and losses to third parties resulting from unauthorised, forged or fraudulent payment instructions (excluding costs, damages and losses arising from Westpac's wilful default, negligence or breach of the agreement or other applicable legal obligation

b)  Legal claims and proceedings

There are numerous legal actions that have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case, or if the Crown were to lose it would be unlikely to have greater than a $20 million impact. Based on these factors, not all legal actions are individually disclosed. The claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs.

v.  Accident Compensation Corporation (ACC) litigations 

There are several legal actions against ACC in existence, arising in the main from challenges to operational decisions made by ACC. Given the stage of proceedings and uncertainty as to outcomes of the cases, no estimate of the financial effect can be made.

vi.  Air New Zealand litigation

Air New Zealand is currently named in class actions. Two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. A class action in the United States alleges that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended. The allegations made in relation to the air cargo business are also the subject of proceedings by the Australian Competition and Consumer Commission. A defended hearing in the Federal Court concluded in May 2013 and a decision is awaited. In the event that the Court determines that Air New Zealand had breached Australian laws, the Company would have potential liability for pecuniary penalties.

vii.  Television New Zealand (TVNZ)

TVNZ is subject to a number of legal claims. Given the stage of proceedings and uncertainty as to outcomes of the cases, no estimate of the financial effect can be made and no provision for any potential liability has been made in the financial statements.

viii.  Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Crown with respect to land which has been transferred by the Crown to an SOE or tertiary institution, or is subject to the Crown Forest Assets Act 1989.

On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. There are currently two such actions against the Crown being heard at the Court of Appeal and the Supreme Court. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

ix.  Ministry of Education litigation

Post Primary Teachers Association and several teachers have lodged a claim in the High Court alleging breach of statutory duty in respect of the Novopay system failures. The Ministry is defending this claim.

c) Other contingent liabilities

i.  Criminal Proceeds (Recovery) Act

The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required.

ii.  Environmental liabilities

Under common law and various statutes, the Crown may have responsibility to remedy adverse effects on the environment arising from Crown activities. Departments managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

In accordance with NZ IAS 37: Provisions, Contingent Liabilities and Contingent Assets any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions.

iii.  Treaty of Waitangi claims – settlement relativity payments

The Deeds of Settlement negotiated with Waikato Tainui and Ngāi Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the Crown is liable to make payments to maintain the real value of Waikato Tainui's and Ngāi Tahu's settlements as a proportion of all Treaty Settlements. The agreed relativity proportions are 17% for Waikato - Tainui and approximately 16% for Ngāi Tahu.

The relativity mechanism has now been triggered, and in future years, additional costs may be incurred in accordance with the relativity mechanism as Treaty settlements are reached. However, the final amount payable to settle this matter cannot be quantified yet due to uncertainty around when current and future negotiations will be settled and the value of these settlements when reached. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

Contingent Assets

    Actual
Note 30 June
2013
$m
30 June
2012
$m

Contingent assets

     
Tax disputes i 169 150
Suspensory loans issued to integrated schools ii 38 45
Transpower New Zealand Limited iii 21 24
Insurance claims - Canterbury earthquakes iv 166
Other contingent assets   42 25
Total contingent assets 270 410

By source

     
Core Crown   245 224
Crown entities   4 162
State-owned enterprises   21 24
Total quantifiable contingent liabilities 270 410

i)  Tax disputes

A contingent asset is recognised when the Inland Revenue has advised, or was about to advise, a taxpayer of a proposed adjustment to their tax assessment. The taxpayer has the right to dispute this adjustment and a disputes resolution process can be entered into. The contingent asset is based on the likely outcome of the disputes process based on experience and similar prior cases.

ii)  Suspensory loans to Schools

These loans were issued by the Ministry of Education to integrated schools; however, loan repayments were not due to begin until certain dates in the future. A contingent asset is recorded at the estimated value of payments until the point that the loans are called to be repaid.

iii) Transpower New Zealand Limited’s revenue recovery

Transpower has a net contingent asset relating to a regulatory asset from historical under recoveries of revenue. The contingent asset relates to the future revenue that will be received as the regulatory asset is recovered over time from customers.

iv) Insurance claims – Canterbury earthquakes

The 2012 comparative relates to insurance proceeds receivable by Housing New Zealand Corporation that has since been received.

Note 33: Financial Instruments

The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as NZDMO, Reserve Bank, NZS Fund, Inland Revenue and ACC. The financial management objectives of each of these portfolios are influenced by the purpose and associated governance framework for which the portfolio is held. The purposes of a portfolio may cover:

  • public policy considerations eg, the provision of student loans to support tertiary education policy
  • liquidity management eg, Treasury bills and Government bonds are the primary debt instruments for funding core Government operations, and
  • long-term economic return eg, the function of the NZ Superannuation Fund.

These purposes are not mutually exclusive, with portfolios typically established for, or arising from, a public policy objective, such as pre-funding future superannuation expenses, but in doing so are managed to maximise economic returns consistent with the policy objective.

Reporting to Ministers on these portfolios is done on a portfolio-by-portfolio basis. The institutional frameworks and policy objectives of these portfolios are reviewed periodically. Otherwise, reporting on the consolidated financial management and performance of these portfolios is done in the context of the interim and annual Financial Statements of the Government and the forecasts reported in the Half-Year and Budget Economic and Fiscal Updates.

Details of the significant accounting policies and methods adopted including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability, are disclosed in note 1 to the financial statements.

This note provides the following details of the Crown's financial instruments:

a) Analysis of financial instruments

  • Designation category
  • Fair value hierarchy
  • Fair value movements
  • Derivatives
  • Hedge accounted derivatives

b) Risk management policies

c) Market risk management

  • Interest rate risk management
  • Foreign currency risk management
  • Equity market risk management

d) Credit risk management

  • Concentration of credit risk by credit rating
  • Concentration of credit risk by geographical area
  • Concentration of credit risk by industry

e) Liquidity risk management

(a) Analysis of financial instruments

Financial instruments are measured at either fair value or amortised cost. Financial instruments measured at fair value are further classified into three designations; available for sale, held for trading and fair value through profit and loss. Changes in the value of an instrument may be reported in the operating balance or directly in net worth depending on its designation. The following table details the value of financial assets and financial liabilities by class of instrument and by designation category, as defined in the accounting policies in note 1.

Financial Assets

Financial assets as at
30 June 2013
Designation
Note Loans and receivables
at amortised cost
Available for sale Held for trading Fair value
through P&L
Total
  $m $m $m $m $m
Cash and cash equivalents 14,924 14,924
Trade and other receivables 14 7,912 -   7,912
Long-term deposits 15 3,444 144 3,588
Derivatives in gain 15 3,775 3,775
Marketable securities 15 523 166 33,657 34,346
IMF financial assets 15 2,291 2,291
Share investments 16 28 107 9 17,215 17,359
Student loans 17 8,288 8,288
Kiwibank mortgages 17 13,202 13,202
Other advances 17 778 67 278 1,123
Total financial assets 50,867 697 3,950 51,294 106,808
Financial assets as at 30 June 2012 Designation
Note Loans and receivables
at amortised cost
Available for sale Held for trading Fair value
through P&L
Total
  $m $m $m $m $m
Cash and cash equivalents 10,686 10,686
Trade and other receivables 14 9,660 9,660
Long-term deposits 15 2,258 164 2,422
Derivatives in gain 15 5,032 5,032
Marketable securities 15 505 130 38,047 38,682
IMF financial assets 15 2,249 2,249
Share investments 16 26 100 14,259 14,385
Student loans 17 8,291 8,291
Kiwibank mortgages 17 12,401 44 12,445
Other advances 17 790 50 190 1,030
Total financial assets 46,361 655 5,162 52,704 104,882

As at 30 June 2013, the carrying value of financial assets that had been pledged as collateral was $1,978 million (2012: $1,512 million). These transactions are conducted under terms that are usual and customary to standard securities borrowing.

Financial Liabilities

Financial liabilities as at
30 June 2013
Designation
Note Amortised cost Held for trading Fair value
through P&L
Total
  $m $m $m $m
Issued currency 4,691 4,691
Accounts payable 23 7,616 7,616
Borrowings: 24        
     Government bonds 55,005 2,372 57,377
     Treasury bills 4,084 4,084
     Government retail stock 199 199
     Settlement deposits with Reserve Bank1 7,575 7,575
     Derivatives in loss 3,188 3,188
     Finance lease liabilities 1,454 1,454
     Other borrowings 21,534 90 4,586 26,210
Total borrowings 89,851 3,278 6,958 100,087
Total financial liabilities 102,158 3,278 6,958 112,394
Financial liabilities as at
30 June 2012
Designation
Note Amortised cost Held for trading Fair value
through P&L
Total
  $m $m $m $m
Issued currency 4,457 4,457
Accounts payable 23 8,255 8,255
Borrowings: 24
     Government bonds 51,016 2,834 53,850
     Treasury bills 8,557 397 8,954
     Government retail stock 229 229
     Settlement deposits with Reserve Bank1 5,917 5,917
     Derivatives in loss 2,807 2,807
     Finance lease liabilities 1,515 1,515
     Other borrowings 22,465 189 4,608 27,262
Total borrowings 89,699 2,996 7,839 100,534
Total financial liabilities 102,411 2,996 7,839 113,246
  1. The Reserve Bank have reclassified their settlement deposits balances from fair value through profit and loss to amortised cost.

Fair Value Hierarchy

The following table details the basis for the valuation of financial assets and financial liabilities measured at fair value. This includes those financial assets and financial liabilities that are available for sale, held for trading, or fair value through profit and loss. Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair value may be determined using different methods depending on the type of asset or liability. Where possible, assets and liabilities are valued with reference to a quoted market price, or based on other observable current market transactions. Where this is not available, valuation techniques may be used to determine fair value. In these instances, fair value is generally based on the discounted value of future cashflows using applicable yield curves and adjusted for additional risks, including credit risks, where applicable. Maximum use is made of observable market data when selecting variables and developing assumptions for the valuation techniques.

There have been no changes in valuation techniques during the year.

As at 30 June 2013 Quoted
market
price
Observable
markets
Significant
non-
observable
inputs
Total
$m $m $m $m

Financial assets

       
Long-term deposits 15 129 144
Derivatives in gain 12 3,509 254 3,775
Marketable securities 10,801 21,888 1,657 34,346
Share investments 16,217 42 1,072 17,331
Kiwibank mortgages
Other advances 128 217 345
Total financial assets at fair value 27,045 25,696 3,200 55,941

Financial liabilities

       
Government bonds 2,372 2,372
Treasury bills
Government retail stock -  
Derivatives in loss 17 3,011 160 3,188
Other borrowings 81 4,565 30 4,676
Total financial liabilities at fair value 2,470 7,576 190 10,236
Net financial assets at fair value 24,575 18,120 3,010 45,705
As at 30 June 2012 Quoted
market
price
Observable
markets
Significant
non-
observable
inputs
Total
$m $m $m $m

Financial assets

       
Long-term deposits 164 164
Derivatives in gain 17 4,812 203 5,032
Marketable securities 9,941 27,149 1,592 38,682
Share investments 13,677 33 649 14,359
Kiwibank mortgages 44 44
Other advances 133 107 240
Total financial assets at fair value 23,635 32,291 2,595 58,521

Financial liabilities

       
Government bonds 2,834 2,834
Treasury bills 397 397
Government retail stock
Derivatives in loss 7 2,558 242 2,807
Other borrowings 192 4,564 41 4,797
Total financial liabilities at fair value 3,033 7,519 283 10,835
Net financial assets at fair value 20,602 24,772 2,312 47,686

Fair Value Movements

The following table details movements in the fair value of financial instruments measured using significant non-observable inputs.

As at 30 June 2013 Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives in
gain/(loss)
Other
borrowings
Total
$m $m $m $m $m $m $m
Opening balance 1,592 649 44 107 (39) (41) 2,312
Total gains/(losses) recognised in the statement of financial performance 222 122 (18) 13 11 350
Total gains/(losses) recognised in the statement of comprehensive income 9 364 373
Purchases 398 253 14 (15) 650
Sales (193) (14) (19) (226)
Issues 115 115
Settlements (253) (44) (1) (216) (514)
Transfers into and out of level 3 (118) 62 6 (50)
Closing balance 1,657 1,072 217 94 (30) 3,010
As at 30 June 2012 Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/
(loss)
Other
borrowings
Total
$m $m $m $m $m $m $m
Opening balance 1,170 479 448 45 (87) 2,055
Total gains/(losses) recognised in the statement of financial performance 29 (45) (10) (2) (5) (41) (74)
Total gains/(losses) recognised in the statement of comprehensive income 4 45 49
Purchases 777 229 2 1,008
Sales (126) (14) (24) (164)
Issues 2 65 4 71
Settlements (264) (394) (1) 26 (633)
Transfers into and out of level 3
Closing balance 1,592 649 44 107 (39) (41) 2,312

Total gains/(losses) included in the statement of financial performance in relation to those financial assets and financial liabilities held as at 30 June:

Marketable
securities
Share
investments
Kiwibank
mortgages
Other
advances
Derivatives
in gain/
(loss)
Other
borrowings
Total
$m $m $m $m $m $m $m
Year ended 30 June 2013 184 94 (18) 83 (11) 332
Year ended 30 June 2012 (7) (72) (10) (1) 747 (41) 616

Derivatives

 
Carrying Value Notional Value
Derivatives as at 30 June 2013 Derivatives in gain Derivatives in loss Net carrying value Derivatives in gain Derivatives in loss Total Notional value
  $m $m $m $m $m $m
Foreign exchange contracts 538 701 (163) 19,540 22,493 42,033
Foreign exchange options 2 (2) 13 202 215
Cross currency swaps 1,863 545 1,318 14,590 6,473 21,063
Interest rate swaps 719 1,274 (555) 21,302 36,995 58,297
Interest rate options
Futures 5 7 (2) 2,331 2,169 4,500
Other derivatives 650 659 (9) 14,615 13,207 27,822
Total derivatives 3,775 3,188 587 72,391 81,539 153,930
 
Carrying Value Notional Value
Derivatives as at 30 June 2012 Derivatives in gain Derivatives in loss Net carrying value Derivatives in gain Derivatives in loss Total Notional value
  $m $m $m $m $m $m
Foreign exchange contracts 607 213 394 17,520 10,059 27,579
Foreign exchange options 1 1 45 98 143
Cross currency swaps 2,585 368 2,217 20,966 5,441 26,407
Interest rate swaps 1,079 1,461 (382) 15,046 21,362 36,408
Interest rate options 15 (15) 65 165 230
Futures 17 17 4,702 3,245 7,947
Other derivatives 743 749 (6) 17,252 21,548 38,800
Total derivatives 5,032 2,807 2,225 75,596 61,918 137,514

Derivative financial instruments are used across the portfolios to manage exposure to interest rate, foreign currency and electricity sector risk. These transactions do not generally involve any principal exchange at commencement. They are an agreement to change the characteristics of the underlying transactions. The credit exposure is therefore limited to the net market value movement resulting from changes in relevant interest rates or currencies. The notional value is therefore a reference to the calculation base, not a reflection of the counterparty exposure. Instruments utilised include:

  • foreign exchange contracts and options to hedge exchange rate risk arising from foreign investments and liabilities as well as budgeted overseas purchases. Under foreign exchange contracts the Government agrees to exchange one currency for another at a future date using an exchange rate determined when the contract is entered into
  • cross currency swaps. Cross currency swaps combine an interest rate swap and a currency swap whereby the interest rate in one currency is fixed, and the interest rate in the other is floating. In doing so, they manage both interest rate and currency risk
  • interest rate swaps and options to manage interest rate risk. Under interest rate swap contracts, the Government agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Government to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt and the cash flow exposures on the issued variable rate debt. They are also used to reduce interest rate risk for a number of Government departments
  • other derivatives include electricity derivatives. Electricity derivatives are typically “contracts for differences” entered into by the electricity generation State-owned enterprises to hedge against volatility in electricity prices
  • futures. Futures are contracts stipulating the purchase or sale of currencies or securities of a specified quantity, at a specified price and on a predetermined date in the future.

Hedge Derivatives

Some derivatives are reported using the hedge accounting approaches available under financial reporting standards. Changes in the fair value of hedging instruments designated as cash flow hedges are accumulated within equity and to the extent that the hedges are deemed effective. To the extent that the hedges are ineffective for accounting, changes in fair value are recognised in the statement of financial performance. A fair value hedge enables the hedged item to be adjusted by the effective portion of the fair value hedge and for this adjustment to be reported in the statement of financial performance.

The carrying values of hedge accounted derivatives were:

Carrying value in gain Carrying value in loss Net carrying value
$m $m $m

Hedge accounted derivatives as at 30 June 2013

     
Derivatives hedging fair value 41 21 20