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

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 2014 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-jun14-1.pdf (1,425 KB) pp. (2),ii,1–26

Audited Financial Statements

fsgnz-year-jun14-2.pdf (868 KB) pp. 27–158

Supplementary Statements

Additional Financial Information

Glossary of Terms

fsgnz-year-jun14-3.pdf (296 KB) pp. 159-181

Data and Charts - Commentary

  • Data and charts from Commentary section of the Financial Statements in MS Excel format.
fsgnz-year-jun14.xls (677 KB)

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

The New Zealand Government:

  • 2,645 entities
  • $89.4 billion revenue
  • $92.2 billion expenditure
  • $2.9 billion operating deficit
  • $256.1 billion assets
  • $175.3 billion liabilities

The economy continued to grow

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

Annual average % change in GDP

Annual average % change in GDP.

Facts and figures – June Year

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

Where does the Government's money come from?

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

Total revenue $89.4 billion

  • $2.7 billion increase from last year
  • Represents 39.0% of GDP
  • Core Crown tax revenue was $61.5 billion

Who pays income tax, and how much?

Who pays income tax, and how much?.
  • Next March tax year 3.5 million New Zealanders are expected to pay tax of $28.6 billion – an average of $8,171 each

Your tax dollar - where was it spent?

Your tax dollar – where was it spent?
  • $71.5 billion core Crown expenses
  • 55% of all spending on welfare, education and health
  • 22% of all spending by SOEs and Crown entities

Crown expenses

Expenses.

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

Your dollar provided...

$50.5 billion on welfare, health, education

Social welfare

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

Health

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

Education

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

Rebuilding Canterbury

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

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

Gap between spending and income narrows

Operating balance before gains and losses (OBEGAL)

Operating balance before gains and losses (OBEGAL).

$2.9 billion deficit

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

Operating receipts → Operating spending → Capital spending → Cash deficit → Net debt

Core Crown net debt

Core Crown net debt.

$59.9 billion core Crown net debt

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

What does the Government owe?

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

Liabilities trend

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

Total Crown liabilities.

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

What does the Government own?

What does the Government own?

Total Crown assets

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

Ministerial Statement

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

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

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

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

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

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

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

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

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

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

Hon Bill English
Minister of Finance

30 September 2014

Statement of Responsibility

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

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

Gabriel Makhlouf
Secretary to the Treasury

30 September 2014

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

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2014 and its operations for the year ended on that date.

Hon Bill English
Minister of Finance

30 September 2014

Commentary

Fiscal Overview

Fiscal Overview
Fiscal Overview.
 

Introduction

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

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

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

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 of the Crown, 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.
  • [2]Comparisons against the Pre-election Economic and Fiscal Update (Pre-election Update) are available on page 9.

At a Glance

Table 1 - Financial results
Year ended 30 June
$ million
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
Core Crown tax revenue 50,744 51,557 55,081 58,651 61,474 62,393 61,896
Core Crown expenses 64,013 70,450 69,076 70,306 71,467 72,367 71,616
OBEGAL (excluding minority interests) (6,315) (18,396) (9,240) (4,414) (2,933) (2,033) (2,447)
Operating balance (excluding minority interests) (4,509) (13,360) (14,897) 6,925 2,808 358 2,973
Residual cash (9,000) (13,343) (10,644) (5,742) (4,109) (6,886) (3,914)
Gross debt 53,591 72,420 79,635 77,984 81,956 87,686 82,157
   as a percentage of GDP 27.8% 36.0% 38.1% 36.7% 35.8% 38.5% 35.6%
Net debt 26,738 40,128 50,671 55,835 59,931 64,765 59,421
   as a percentage of GDP 13.9% 20.0% 24.2% 26.3% 26.2% 28.4% 25.8%
Net worth attributable to the Crown 94,586 80,579 59,348 68,071 75,568 61,997 70,032

Headlines:

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

Summary

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

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

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

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

Figure 1 - OBEGAL (excluding minority interests)
Figure 1 - OBEGAL (excluding minority interests).
Source:  The Treasury

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

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

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

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

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

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

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

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

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

Figure 3 - Operating balance (excluding minority interests)
Figure 3 - Operating balance (excluding minority interests).
Source:  The Treasury

...strengthening the Crown's net worth

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

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

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

Figure 4 - Net worth attributable to the Crown
Figure 4 - Net worth attributable to the Crown.
Source:  The Treasury

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

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

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

Year end results compared to Pre-election Update forecast

The Pre-election Update was published on 19 August 2014.  While the financial statements focus on results compared to Budget 2014 forecasts, this section compares outcomes against the recent Pre-election Update.

Table 2 - 2014 results compared to the Pre-election Update
Year ended 30 June
$ million
Actual
2014
Pre-election
Update
2014
Variance to
Pre-election
Update 2014
Core Crown tax revenue 61,474 61,516 (42)
Core Crown expenses 71,467 71,291 (176)
OBEGAL (excluding minority interests) (2,933) (2,595) (338)
Operating balance (excluding minority interests) 2,808 2,826 (18)
Residual cash (4,109) (4,191) 82
Gross debt 81,956 82,820 864
   as a percentage of GDP 35.8% 35.8%
Net debt 59,931 59,941 10
   as a percentage of GDP 26.2% 25.9%
Net worth attributable to the Crown 75,568 74,401 1,167

Overall, the results were broadly similar to the Pre-election Update.  This is not unexpected, as the Pre-election Update incorporated unaudited interim 2014 year-end results as a base for the forecast.  However, there have been some changes as the year-end results were finalised.

Core Crown tax revenue

Core Crown tax revenue was close to the Pre-election Update, with variances in GST ($87 million lower) and corporate tax ($44 million higher) partly offsetting each other.  The negative variance on GST can be attributed to continued weakness in nominal domestic consumption. In contrast, weakness in corporate tax was not as great as expected.

Core Crown expenses

Core Crown expenses were $176 million higher than the Pre-election Update.  Costs of $75 million associated with the Canterbury rebuild were reclassified as expenses (previously losses).  In addition Treaty of Waitangi-related expenses were $52 million higher than expected, with the remaining variances spread across a number of entities and expense types.

OBEGAL

The OBEGAL deficit was $338 million greater than in the Pre-election Update at $2.9 billion.

  • When the tax results of SOE's and Crown Entities are included, tax revenue was $122 million under forecast, due to the finalisation of their year-end results.
  • Core Crown expenses contributed to $176 million of this result (as discussed above).

Net worth attributable to the Crown

Net worth attributable to the Crown was $1.2 billion higher than forecast in the Pre-election Update.  Net property, plant and equipment revaluations account for the majority of this change, as valuations were not finalised at the time the forecast was released.

Debt

While gross debt was lower than expected (with the core Crown holding less debt instruments than forecast), financial assets were also lower, meaning net debt was close to forecast.

Revenue

Table 3 - Breakdown of revenue
Year ended
30 June
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
$million              
Core Crown tax revenue 50,744 51,557 55,081 58,651 61,474 62,393 61,896
Core Crown other revenue 5,472 5,993 5,484 5,498 5,823 5,989 5,879
Core Crown revenue 56,216 57,550 60,565 64,149 67,297 68,382 67,775
Crown entities, SOEs and eliminations 18,509 24,013 22,918 22,506 22,099 23,222 22,202
Total Crown revenue 74,725 81,563 83,483 86,655 89,396 91,604 89,977
% of GDP              
Core Crown tax revenue 26.4% 25.7% 26.3% 27.6% 26.8% 27.4% 26.8%
Core Crown other revenue 2.8% 3.0% 2.6% 2.6% 2.5% 2.6% 2.5%
Core Crown revenue 29.2% 28.6% 29.0% 30.2% 29.4% 30.0% 29.4%
Crown entities, SOEs and eliminations 9.6% 12.0% 11.0% 10.6% 9.6% 10.2% 9.6%
Total Crown revenue 38.6% 40.6% 39.9% 40.8% 39.0% 40.2% 39.0%

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

Core Crown Tax Revenue

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

  • Source deductions: $1.4 billion (6%) higher than the previous year owing to a stronger labour market. More people were employed, and salaries and wages were higher, which added an estimated $0.8 billion and $0.6 billion respectively to source deductions, compared with the June 2013 year.
  • GST: $0.8 billion stronger than 2013 largely owing to growth in domestic consumption.
  • Corporate tax: $0.3 billion higher than the year before, mainly owing to growth in current-year taxable profits of companies, somewhat offset by a decline in 2013 terminal tax.
Table 4 - Increase in core Crown tax revenue ($ billion)
Year ended 30 June  
2013 core Crown tax revenue 58.7
Source deductions 1.4
GST 0.8
Corporate tax 0.3
Other movements 0.3
2014 core Crown tax revenue 61.5

Source: The Treasury

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

  • Some of the principal drivers of tax revenue, (eg, compensation of employees and private consumption), grew at a slower rate than overall GDP, causing the related tax-to-GDP ratio to decrease by approximately 0.3%, and
  • A decline in terminal tax in 2014 reduced the tax-to-GDP ratio by approximately 0.4%.
  • Compared to forecasts in Budget 2014, core Crown tax revenue was $0.4 billion less than expected, with the largest difference being in GST. GST was $0.3 billion lower than forecast due mainly to weakness in nominal domestic consumption relative to forecast.
Figure 6 - Core Crown tax revenue
Figure 6 - Core Crown tax revenue.
Source:  The Treasury
Figure 7 - Core Crown tax revenue variance comparison
Figure 7 - Core Crown tax revenue variance comparison   .
Source:  The Treasury

Other Revenue

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

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

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

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

Expenses

Table 5 - Breakdown of expenses
Year ended
30 June
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
$million              
Social security and welfare 21,185 22,005 22,028 22,741 23,281 23,595 23,329
Health 13,128 13,753 14,160 14,498 14,898 14,950 14,889
Education 11,724 11,650 11,654 12,504 12,300 12,389 12,411
Core government services 2,974 5,563 5,428 4,294 4,502 4,637 4,792
Law and order 3,191 3,382 3,403 3,456 3,501 3,561 3,575
Other core Crown expenses 11,811 14,097 12,403 12,813 12,985 13,235 12,620
Core Crown expenses 64,013 70,450 69,076 70,306 71,467 72,367 71,616
Crown entities, SOEs and eliminations 17,027 29,509 23,647 20,701 20,703 21,130 20,598
Total Crown expenses 81,040 99,959 92,723 91,007 92,170 93,497 92,214
% of GDP              
Social security and welfare 11.0% 11.0% 10.5% 10.7% 10.2% 10.4% 10.1%
Health 6.8% 6.8% 6.8% 6.8% 6.5% 6.6% 6.5%
Education 6.1% 5.8% 5.6% 5.9% 5.4% 5.4% 5.4%
Core government services 1.5% 2.8% 2.6% 2.0% 2.0% 2.0% 2.1%
Law and order 1.7% 1.7% 1.6% 1.6% 1.5% 1.6% 1.5%
Other core Crown expenses 6.1% 7.0% 5.9% 6.0% 5.7% 5.8% 5.5%
Core Crown expenses 33.3% 35.1% 33.0% 33.1% 31.2% 31.8% 31.0%
Crown entities, SOEs and eliminations 8.8% 14.7% 11.3% 9.7% 9.0% 9.3% 8.9%
Total Crown expenses 42.1% 49.8% 44.3% 42.8% 40.2% 41.0% 40.0%

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

Core Crown Expenses

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

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

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

  • New Zealand Superannuation expenditure increased $0.7 billion, mostly a result of indexation and an increase in recipients of New Zealand Superannuation, from around 612,000 to 640,000.
  • Health and Ministry of Education expenses were higher ($0.4 billion and $0.2 billion respectively) than the previous year as a result of allocations in Budget 2013.
Table 6 - Movement in core Crown expenses ($ billion)
Year ended 30 June  
2013 core Crown expenses 70.3
New Zealand Superannuation 0.7
Health expenditure 0.4
Ministry of Education expenditure 0.3
Other (0.2)
 2014 core Crown expenses  71.5

Source: The Treasury

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

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

Figure 10 - Core Crown expenses variance comparison
Figure 10 - Core Crown expenses variance comparison   .
Source:  The Treasury

Other Expenses

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

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

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

Operating Balance

Table 7 - Total Crown operating balance (excluding minority interests)
Year ended
30 June
$ million
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
Total Crown OBEGAL (6,315) (18,396) (9,240) (4,414) (2,933) (2,033) (2,447)
Gains and losses:              
ACC actuarial gain/(loss) 410 996 (2,942) 2,369 479 498 1,082
GSF actuarial gain/(loss) (1,231) (574) (3,896) 1,251 577 713
ETS/Kyoto net position (15) 47 350 103 (324) (184)
Investment portfolios:              
     NZS Fund 1,750 3,518 (204) 4,374 3,735 1,358 2,872
     ACC 745 961 944 1,796 730 203 343
     Earthquake Commission 37 109 (53) 1
Other gains/(losses)* 110 (21) 144 1,445 544 332 594
Total Crown gains/(losses) 1,806 5,036 (5,657) 11,339 5,741 2,391 5,420
Total Crown operating balance (4,509) (13,360) (14,897) 6,925 2,808 358 2,973
% of GDP              
Total Crown OBEGAL (3.3)% (9.2)% (4.4)% (2.1)% (1.3)% (0.9)% (1.1)%
Total Crown gains/(losses) 0.9% 2.5% (2.7)% 5.3% 2.5% 1.0% 2.3%
Total Crown Operating balance (2.3)% (6.7)% (7.1)% 3.3% 1.2% 0.2% 1.3%

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

OBEGAL

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

Figure 11 - Components of OBEGAL by segment
Figure 11 - Components of OBEGAL by segment   .
Source:  The Treasury

Operating Balance

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

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

Figure 12 - Operating balance
Figure 12 - Operating balance   .
Source:  The Treasury

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

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

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

Canterbury Earthquake Recovery

Table 8 - Net costs to the Crown of the Canterbury Earthquakes to 30 June 2014

Year ending
30 June
$ million
Total to date Actual
to 2013
Actual
2014
Forecast
2014
Difference
to forecast
Local Infrastructure 1,516 1,407 109 101 8
Land zoning 1,000 903 97 (22) 119
Southern Response support package 582 458 124 67 57
Christchurch central city rebuild 588 115 473 456 17
Other earthquake costs 1,040 783 257 361 (104)
Canterbury earthquake recovery costs 4,726 3,666 1,060 963 97
EQC (net of reinsurance proceeds) 7,784 8,026 (242) (412) 170
Other Crown Entities (129) (217) 88 25 63
Total Crown net earthquake costs 12,381 11,475 906 576 330
Operating expenses 11,579 11,253 326 (64) 390
Capital expenditure 802 222 580 640 (60)
Total Crown net earthquake costs 12,381 11,475 906 576 330

This June year the net cost (including both operating and capital spending) of the Canterbury earthquakes was $0.9 billion, $0.4 billion higher than in the June 2013 year, and $0.3 billion higher than expected in Budget 14 (Table 8).  These results bring the total net costs to date to $12.4 billion.  It is important to note that this does not represent the total fiscal impact to the Crown of the earthquakes as some costs are yet to be incurred.

Operating expenses

The most significant operating expenses this year were incurred by:

  • Canterbury Earthquake Recovery Authority (CERA) with $0.2 billion in relation to the central city rebuild, $0.1 billion in relation to land zoning costs (largely  in relation to the red zone), and $0.1 billion for departmental and other costs. 
  • New Zealand Transport Agency with $0.1 billion for repair costs of local roads.
  • Southern Response costs increased around $0.1 billion to June 2014. 

Offsetting these costs were net recoveries of $0.2 billion for EQC and $0.1 billion due to insurance recoveries by agencies.

Capital expenses

Now the work in Christchurch has moved into the rebuild stage, capital costs have started to increase.  In total, just under $0.6 billion of capital expenditure was incurred this year:

  • $0.3 billion related to the Crown acquiring land for use in the Anchor Projects as part of the central city rebuild.
  • $0.1 billion for refurbishment costs in relation to tertiary education institutes and $0.2 billion of costs for Canterbury hospitals, the state housing stock, schools and the new justice and emergency services precinct.

Compared to Budget 2014

The $0.9 billion of costs incurred this year were $0.3 billion higher than forecast in Budget 2014 largely due to the following:

  • Updated actuarial valuations resulted in higher than forecast support package costs for Southern Response and lower than forecast net recoveries for EQC, totalling approximately $0.2 billion.
  • Land zoning costs were $0.1 billion higher than forecast largely due to lower than expected recoveries during the year.  Insurance recoveries with respect to red zone properties were lower than expected and anticipated funding from Christchurch City Council (CCC) for red zoning was also lower due to the level of uncertainty around the timing and amount of land recoveries.

Risk to cost estimates 

Risks remain that the Canterbury earthquake costs will be higher than estimated.  Key risks include the timing of expenditure and escalating costs as well as the independent review of infrastructure costs shared by the CCC and the Crown (due to be completed by 1 December 2014).  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.

Debt

Table 9 - Net debt [3] and Gross debt[4]
Year ended 30 June Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
Net debt ($m) 26,738 40,128 50,671 55,835 59,931 64,765 59,421
Net debt (% GDP) 13.9% 20.0% 24.2% 26.3% 26.2% 28.4% 25.8%
Gross debt ($m) 53,591 72,420 79,635 77,984 81,956 87,686 82,157
Gross debt (% GDP) 27.8% 36.0% 38.1% 36.7% 35.8% 38.5% 35.6%
Residual cash ($m) (9,000) (13,343) (10,644) (5,742) (4,109) (6,886) (3,914)
Residual cash (% GDP) (4.7%) (6.6%) (5.1%) (2.7%) (1.8%) (3.0%) (1.7%)

Net Debt

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

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

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

Residual Cash

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

  • Tax receipts were $3.5 billion higher than last year, which was in line with the improvement in core Crown tax revenue as discussed on page 10.
  • The Crown received $2.3 billion from the remaining companies in the Government's share offer programme (compared with $1.6 billion received for Mighty River Power last year). Refer to the box on page 20 for further discussion about the share programme.
  • Operating and interest payments were $2.2 billion higher than last year, in line with the increase to core Crown expenses and timing of cash payments being made.
Table 10 - Movements in residual cash
Year ended 30 June
2013 core Crown residual cash (5.7)
Increase in tax receipts 3.5
Proceeds from share offer 0.7
Increase in operating payments (2.2)
Other (0.4)
2014 core Crown residual cash   (4.1)

Source: The Treasury

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

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

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

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

Gross Debt

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

Figure 14 - Gross debt
Figure 14 - Gross debt   .
Source:  The Treasury

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

Crown's Borrowing Programme

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

Table 11 - Cash proceeds from debt programme
Year ended 30 June

$ million

Actual
2010
Actual
 2011
Actual
2012
Actual
 2013
Actual
 2014
Forecast
30 June 2014
Budget 13 Budget 14
Issue of government bonds 12,424 19,468 15,146 15,458 7,716 10,245 7,769
Repayment of government bonds (4,197) (7,602) (9,982) (2,196) (2,046)
Net issue/(repayment) of short-term borrowing[5] 636 (422) 2,139 (5,404) (935) 90 (795)
Total market debt cash flows 8,863 19,046 9,683 72 4,585 10,335 4,928
Issue of government bonds 799 270
Repayment of government bonds (656) (803) (1,501) (499) (757)
Net issue/(repayment) of short-term borrowing 170 (125) 430 100 (219)
Total non-market debt cash flows 313 (658) (1,071) (399) (976)
Total debt programme cash flows 9,176 18,388 8,612 (327) 4,585 9,359 4,928

Notes

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

Net Worth Attributable to the Crown

Table 12 - Net worth
Year ended 30 June
$ million
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
30 June 2014
Budget 13 Budget 14
Net worth attributable to the Crown 94,586 80,579 59,348 68,071 75,568 61,997 70,032
Net worth attributable to minority interests 402 308 432 1,940 5,211 3,185 5,435
Total net worth 94,988 80,887 59,780 70,011 80,779 65,182 75,467

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

Figure 15 - Net worth attributable to the Crown
Figure 15 - Net worth attributable to the Crown   .
Source:  The Treasury

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

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

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

Table 13 -Composition of the statement of financial position

Year ended 30 June
$ million
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast 30 June 2014
Budget 13 Budget 14
Property, plant and equipment 113,330 114,854 108,584 109,833 116,306 112,627 112,264
Financial assets and sovereign receivables 95,971 115,362 116,178 118,779 123,177 121,515 121,134
Other assets 14,054 14,999 15,556 15,804 16,600 16,036 15,905
Total assets 223,355 245,215 240,318 244,416 256,083 250,178 249,303
Borrowings 69,733 90,245 100,534 100,087 103,419 112,201 103,058
Other liabilities 58,634 74,083 80,004 74,318 71,885 72,795 70,778
Total liabilities 128,367 164,328 180,538 174,405 175,304 184,996 173,836
Net worth 94,988 80,887 59,780 70,011 80,779 65,182 75,467
Minority interests (402) (308) (432) (1,940) (5,211) (3,185) (5,435)
Net worth attributable to the Crown 94,586 80,579 59,348 68,071 75,568 61,997 70,032

Assets

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

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

  • The state housing portfolio ($2.1 billion of which $1.8 billion relates to land), reflecting the strength of the property market (primarily in Auckland).
  • The value of state highways increased by $1.6 billion, mainly due to revaluation changes for the corridor land and increase in held properties. The corridor land was revalued in four regions and Auckland accounted for the largest portion of the increase. The held properties have increased since 2013 due to acquisition of properties in advance of future road developments in Auckland and Wellington.
Figure 16 - Total Crown assets
Figure 16 - Total Crown assets   .
Source:  The Treasury

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

Liabilities

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

Figure 17 - Total Crown liabilities
Figure 17  - Total Crown liabilities   .
Source:  The Treasury

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

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

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

Government Share Offer Programme

The Government Share Offer Programme has now concluded. Minority shareholdings in Mighty River Power, Meridian Energy and Genesis Energy have been sold, and the Crown has reduced its shareholding in Air New Zealand.

As a result of the sale of shares to minority interests, the income from the entities assets must be shared with the minority interests. However, because the Crown retains control of the assets, no “sale” of assets is reported. As a result, 100% of the assets, liabilities, revenue and expenses will continue to be reported in the financial statements of the Government. The key change to the financial statements will be the disclosure of non-controlling minority interests in those assets, liabilities, revenue and expenses.

Core Crown

The core Crowns' direct investment in the Government Share Offer Programme, is shown in Table 14 below.

Table 14 - Government Share Offer Programme
Year ended 30 June
$ million
Last year Current year Total
Mighty River Power Meridian Energy Air New Zealand Genesis Energy
Percentage sold 48.24% 48.98% 20.05% 47.61%  
Gross proceeds 1,689 1,883 365 738 4,675
Net proceeds 1,642 1,827 364 706 4,539

As shown in Table 14, the Crown will receive $4,675 million from the sale of these shares.  Once the cost of the sales the estimated cost of the bonus share issues for Mighty River Power and Genesis Energy and the deferred settlement for Meridian Energy are deducted, the net proceeds from sale were $4,539 million.  

The profile for receipt of proceeds is as follows:

Profile for receipt of proceeds
$ million Gross
proceeds
Net
proceeds
Financial year    
2012/13 1,689 1,642
2013/14 2,358 2,269
2014/15 628 628
  4,675 4,539

Total Crown

In addition to the core Crown's direct investment in the Government Share Offer Programme, a number of Crown Financial Institutions (CFIs) have also invested in the companies as part of their normal investment activities. These investments have the effect of increasing the total Crown investment and therefore reducing the overall minority interest. The total Crown's direct investment in the Government Share Offer Programme, is outlined in note 35. 

While the Crown will continue to hold at least 51% of shares, the CFIs' shareholding will vary depending upon their investment strategies. 

Historical Financial Information

Historical Financial Information - $ million
Year ended 30 June
$ million
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
Statement of financial performance
Core Crown tax revenue 43,358 47,468 50,973 53,477 56,747 54,681 50,744 51,557 55,081 58,651 61,474
Core Crown other revenue 2,861 3,577 4,762 4,734 5,072 4,801 5,472 5,993 5,484 5,498 5,823
Core Crown revenue 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550 60,565 64,149 67,297
Crown entities, SOE revenue and eliminations 13,051 14,322 15,690 16,378 19,660 20,024 18,509 24,013 22,918 22,506 22,099
Total Crown revenue 59,271 65,367 71,425 74,589 81,479 79,506 74,725 81,563 83,483 86,655 89,396
Social security and welfare 14,252 14,682 15,598 16,768 17,877 19,382 21,185 22,005 22,028 22,741 23,281
Health 8,111 8,813 9,547 10,355 11,297 12,368 13,128 13,753 14,160 14,498 14,898
Education 7,585 7,930 9,914 9,269 9,551 11,455 11,724 11,650 11,654 12,504 12,300
Core government services 2,091 2,567 2,507 4,817 3,371 5,293 2,974 5,563 5,428 4,294 4,502
Other core Crown expenses 9,843 10,903 11,754 12,795 14,901 15,504 15,002 17,479 15,806 16,269 16,486
Core Crown expenses 41,882 44,895 49,320 54,004 56,997 64,002 64,013 70,450 69,076 70,306 71,467
Crown entities, SOE expenses and eliminations 11,816 13,397 15,015 14,725 18,845 19,397 17,027 29,509 23,647 20,701 20,703
Total Crown expenses 53,698 58,292 64,334 68,729 75,842 83,399 81,040 99,959 92,723 91,007 92,170
OBEGAL (excluding minority interests) 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,933)
Gains/(losses) 1,736 (1,144) 2,451 2,162 (3,253) (6,612) 1,806 5,036 (5,657) 11,339 5,741
Operating balance (excluding minority interests) 7,309 5,931 9,542 8,022 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 2,808
Statement of financial position
Property, plant and equipment 57,940 67,494 89,141 95,598 103,329 110,135 113,330 114,854 108,584 109,833 116,306
Financial assets 32,654 42,005 66,396 73,718 85,063 93,359 95,971 115,362 116,178 118,779 123,177
Other assets 18,756 19,714 9,503 11,031 12,443 13,657 14,054 14,999 15,556 15,804 16,600
Total assets 109,351 129,212 165,040 180,347 200,835 217,151 223,355 245,215 240,318 244,416 256,083
Borrowings 37,720 37,728 40,027 41,898 46,110 61,953 69,733 90,245 100,534 100,087 103,419
Other liabilities 32,036 37,243 41,042 41,622 49,211 55,683 58,634 74,083 80,004 74,318 71,885
Total liabilities 69,756 74,972 81,069 83,520 95,321 117,636 128,367 164,328 180,538 174,405 175,304
Minority interests 139 215 293 369 382 447 402 308 432 1,940 5,211
Net worth attributable to the Crown 39,456 54,025 83,678 96,458 105,132 99,068 94,586 80,579 59,348 68,071 75,568
Debt Indicators
Net debt 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835 59,931
Gross debt 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984 81,956
Historical Financial Information - as % of GDP
Year ended 30 June
as % of GDP
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
Nominal GDP (revised) 146,387 155,372 163,143 173,297 185,727 185,822 192,435 200,897 209,181 212,521 229,145
Statement of financial performance
Core Crown tax revenue 29.6% 30.6% 31.2% 30.9% 30.6% 29.4% 26.4% 25.7% 26.3% 27.6% 26.8%
Core Crown other revenue 2.0% 2.3% 2.9% 2.7% 2.7% 2.6% 2.8% 3.0% 2.6% 2.6% 2.5%
Core Crown revenue 31.6% 32.9% 34.2% 33.6% 33.3% 32.0% 29.2% 28.6% 29.0% 30.2% 29.4%
Crown entities, SOE and elimination revenue 8.9% 9.2% 9.6% 9.5% 10.6% 10.8% 9.6% 12.0% 11.0% 10.6% 9.6%
Total Crown revenue 40.5% 42.1% 43.8% 43.0% 43.9% 42.8% 38.8% 40.6% 39.9% 40.8% 39.0%
Social security and welfare 9.7% 9.4% 9.6% 9.7% 9.6% 10.4% 11.0% 11.0% 10.5% 10.7% 10.2%
Health 5.5% 5.7% 5.9% 6.0% 6.1% 6.7% 6.8% 6.8% 6.8% 6.8% 6.5%
Education 5.2% 5.1% 6.1% 5.3% 5.1% 6.2% 6.1% 5.8% 5.6% 5.9% 5.4%
Core government services 1.4% 1.7% 1.5% 2.8% 1.8% 2.8% 1.5% 2.8% 2.6% 2.0% 2.0%
Other core Crown expenses 6.7% 7.0% 7.2% 7.4% 8.0% 8.3% 7.8% 8.7% 7.6% 7.7% 7.2%
Core Crown expenses 28.6% 28.9% 30.2% 31.2% 30.7% 34.4% 33.3% 35.1% 33.0% 33.1% 31.2%
Crown entities, SOE and elimination expenses 8.1% 8.6% 9.2% 8.5% 10.1% 10.4% 8.8% 14.7% 11.3% 9.7% 9.0%
Total Crown expenses 36.7% 37.5% 39.4% 39.7% 40.8% 44.9% 42.1% 49.8% 44.3% 42.8% 40.2%
OBEGAL (excluding minority interests) 3.8% 4.6% 4.3% 3.4% 3.0% -2.1% -3.3% -9.2% -4.4% -2.1% -1.3%
Gains/(losses) 1.2% -0.7% 1.5% 1.2% -1.8% -3.6% 0.9% 2.5% -2.7% 5.3% 2.5%
Operating balance (excluding minority interests) 5.0% 3.8% 5.8% 4.6% 1.3% -5.7% -2.3% -6.7% -7.1% 3.3% 1.2%
Statement of financial position
Property, plant and equipment 39.6% 43.4% 54.6% 55.2% 55.6% 59.3% 58.9% 57.2% 51.9% 51.7% 50.8%
Financial assets and sovereign receivables 22.3% 27.0% 40.7% 42.5% 45.8% 50.2% 49.9% 57.4% 55.5% 55.9% 53.8%
Other assets 12.8% 12.7% 5.8% 6.4% 6.7% 7.3% 7.3% 7.5% 7.4% 7.4% 7.2%
Total assets 74.7% 83.2% 101.2% 104.1% 108.1% 116.9% 116.1% 122.1% 114.9% 115.0% 111.8%
Borrowings 25.8% 24.3% 24.5% 24.2% 24.8% 33.3% 36.2% 44.9% 48.1% 47.1% 45.1%
Other liabilities 21.9% 24.0% 25.2% 24.0% 26.5% 30.0% 30.5% 36.9% 38.2% 35.0% 31.4%
Total liabilities 47.7% 48.3% 49.7% 48.2% 51.3% 63.3% 66.7% 81.8% 86.3% 82.1% 76.5%
Minority interests 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.9% 2.3%
Net worth attributable to the Crown 27.0% 34.8% 51.3% 55.7% 56.6% 53.3% 49.2% 40.1% 28.4% 32.0% 33.0%
Debt Indicators
Net debt 16.3% 12.8% 9.9% 7.7% 5.5% 9.2% 13.9% 20.0% 24.2% 26.3% 26.2%
Gross debt 24.6% 22.8% 20.8% 17.7% 16.9% 23.3% 27.8% 36.0% 38.1% 36.7% 35.8%

Independent Report of the Auditor-General

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

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

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

  • the annual financial statements that include the statement of financial position as at 30 June 2014, the statement of financial performance, analysis of expenses by functional classification, statement of comprehensive income, statement of changes in net worth and statement of cash flows for the year ended on that date, a statement of segments and the notes to the financial statements that include accounting policies, a statement of borrowings in note 24, and other explanatory information; and
  • the statement of unappropriated expenditure, statement of expenses or capital expenditure incurred in emergencies and statement of trust money.

Opinion

In my opinion, the financial statements of the Government on pages 28 to 167:

  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect the Government's:
    • financial position as at 30 June 2014;
    • financial performance and cash flows for the year ended on that date; and
    • borrowings as at 30 June 2014, and unappropriated expenditure, expenses or capital expenditure incurred in emergencies, and trust monies managed by the Government, for the year ended on that date.

    My audit was completed on 30 September 2014. This is the date at which my opinion is expressed.

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

    Basis of opinion

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

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

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

    An audit also involves evaluating:

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

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

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

    Responsibilities of the Treasury and the Minister of Finance

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

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

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

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

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

    Responsibilities of the Auditor

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

    Independence

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

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

    Lyn Provost
    Controller and Auditor-General
    Wellington, New Zealand

    Audited Financial Statements

    Statement of Financial Performance for the year ended 30 June 2014

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

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

    Analysis of Expenses by Functional Classification for the year ended 30 June 2014

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

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

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

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

    Statement of Comprehensive Income for the year ended 30 June 2014

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

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

    Statement of Cash Flows for the year ended 30 June 2014

    Statement of Cash Flows for the year ended 30 June 2014
    Forecast
    Note Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m


    Cash Flows From Operations
     


    Cash was provided from
     
    60,695 60,442 Taxation receipts 2 59,853 56,413
    4,747 4,969 Other sovereign receipts 2 4,974 4,806
    17,175 16,460 Sales of goods and services
    16,608 16,651
    3,175 2,888 Interest and dividend receipts
    2,945 2,694
    5,443 6,168 Other operating receipts
    5,737 5,933
    91,235 90,927 Total cash provided from operations
    90,117 86,497


    Cash was disbursed to
     
    23,877 23,800 Transfer payments and subsidies
    23,447 22,780
    62,622 60,717 Personnel and operating payments
    59,891 58,450
    4,629 4,412 Interest payments
    4,312 4,369
    461 77 Forecast new operating spending
    (600) (660) Top-down expense adjustment
    90,989 88,346 Total cash disbursed to operations
    87,650 85,599
    246 2,581 Net cash flows from operations
    2,467 898


    Cash Flows From Investing Activities
     


    Cash was provided from
     
    553 591 Sale of physical assets
    651 525
    73,154 72,893 Sale of shares and other securities
    77,916 75,722
    Sale of intangible assets
    7
    1,279 1,574 Repayment of advances
    1,953 1,603
    47 132 Sale of investments in associates
    140 287
    75,033 75,190 Total cash provided from investing activities
    80,660 78,144


    Cash was disbursed to
     
    7,787 7,378 Purchase of physical assets
    6,154 5,694
    78,375 78,229 Purchase of shares and other securities
    83,641 69,380
    516 568 Purchase of intangible assets
    658 588
    3,308 3,740 Advances made
    3,482 3,008
    (18) 98 Acquisition of investments in associates
    67 7
    503 13 Forecast for new capital spending
    (50) (395) Top-down capital adjustment
    90,421 89,631 Total cash disbursed to investing activities
    94,002 78,677
    (15,388) (14,441) Net cash flows from investing activities
    (13,342) (533)
    (15,142) (11,860) Net cash flows from operating and investing activities
    (10,875) 365

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

    Statement of Cash Flows for the year ended 30 June 2014 (continued)
    Forecast
    Note Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    (15,142) (11,860) Net cash flows from operating and investing activities
    (10,875) 365


    Cash Flows From Financing Activities
     


    Cash was provided from
     
    141 382 Issue of circulating currency
    274 234
    1,500 2,216 Government share offer programme 35 2,186 1,547
    10,245 7,769 Issue of Government bonds
    7,716 15,458
    51 621 Issue of foreign currency borrowings
    1,524 447
    6,010 6,536 Issue of other New Zealand dollar borrowings
    6,315 10,278
    17,947 17,524 Total cash provided from financing activities
    18,015 27,964


    Cash was disbursed to
     
    2,046 Repayment of Government bonds
    2,196 9,982
    570 673 Repayment of foreign currency borrowings
    82 3,373
    3,363 6,285 Repayment of other New Zealand dollar borrowings
    7,147 10,912
    120 246 Dividends paid to minority interests
    166 20
    4,053 9,250 Total cash disbursed to financing activities
    9,591 24,287
    13,894 8,274 Net cash flows from financing activities
    8,424 3,677
    (1,248) (3,586) Net movement in cash
    (2,451) 4,042
    16,492 14,924 Opening cash balance
    14,924 10,686
    (230) Foreign-exchange gains/(losses) on opening cash
    (585) 196
    15,244 11,108 Closing cash balance
    11,888 14,924

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

    Statement of Cash Flows for the year ended 30 June 2014 (continued)
    Forecast
    Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m


    Reconciliation Between the Net Cash Flows from Operations and the Operating Balance  
    246 2,581 Net Cash Flows from Operations 2,467 898


    Items included in the operating balance
    but not in net cash flows from operations
     


    Gains/(losses)  
    1,748 3,604 Net gains/(losses) on financial instruments 4,820 7,270
    443 1,590 Net gains/(losses) on non-financial instruments 540 3,706
    2,191 5,194 Total gains/(losses) 5,360 10,976


    Other Non-cash Items in Operating Balance  
    (4,640) (4,644) Depreciation and amortisation (4,872) (4,812)
    (723) (843) Write-down on initial recognition of financial assets (789) (684)
    23 (18) Impairment of financial assets (excl receivables) (47) (497)
    461 458 Non-cash movement in defined benefit retirement plan liabilities 442 385
    2,517 1,730 Non-cash movement in insurance liabilities 1,409 1,106
    201 14 Other 223 299
    (2,161) (3,303) Total other non-cash items in operating balance (3,634) (4,203)


    Movements in Working Capital  
    (1,119) (1,346) Increase/(decrease) in receivables (1,553) (1,302)
    526 222 Increase/(decrease) in accrued interest 143 257
    73 18 Increase/(decrease) in inventories (41) (94)
    (29) (24) Increase/(decrease) in prepayments 39 32
    26 (87) Decrease/(increase) in deferred revenue (248) (2)
    605 (282) Decrease/(increase) in payables/provisions 275 363
    82 (1,499) Total movements in working capital (1,385) (746)
    358 2,973 Operating balance 2,808 6,925

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

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

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

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

    Statement of Financial Position as at 30 June 2014

    Statement of Financial Position as at 30 June 2014
    Forecast
    Note Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m


    Assets
     
    15,244 11,108 Cash and cash equivalents
    11,888 14,924
    18,070 17,873 Receivables 14 17,480 19,883
    44,713 47,870 Marketable securities, deposits and derivatives in gain 15 48,457 44,000
    18,176 19,672 Share investments 16 20,596 17,359
    25,312 24,611 Advances 17 24,756 22,613
    1,321 1,158 Inventory 18 1,099 1,140
    2,061 2,267 Other assets 19 2,510 2,295
    112,627 112,264 Property, plant & equipment 20 116,306 109,833
    9,642 10,021 Equity accounted investments 21 10,071 9,593
    2,837 2,841 Intangible assets and goodwill 22 2,920 2,776
    505 13 Forecast for new capital spending
    (330) (395) Top-down capital adjustment
    250,178 249,303 Total assets
    256,083 244,416


    Liabilities
     
    4,897 5,072 Issued currency
    4,964 4,691
    12,360 11,952 Payables 23 11,294 11,160
    1,553 1,802 Deferred revenue
    1,962 1,714
    112,201 103,058 Borrowings 24 103,419 100,087
    35,902 34,900 Insurance liabilities 25 35,825 37,712
    11,766 10,732 Retirement plan liabilities 26 10,885 11,903
    6,317 6,320 Provisions 27 6,955 7,138
    184,996 173,836 Total liabilities
    175,304 174,405
    65,182 75,467 Total assets less total liabilities
    80,779 70,011


    Net Worth
     
    6,230 13,344 Taxpayer funds
    13,300 10,862
    55,831 56,648 Property, plant and equipment revaluation reserve
    62,225 57,068
    (64) 40 Other reserves
    43 141
    61,997 70,032 Total net worth attributable to the Crown
    75,568 68,071
    3,185 5,435 Net worth attributable to minority interests
    5,211 1,940
    65,182 75,467 Total net worth 28 80,779 70,011

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

    Statement of Segments

    Current Year Actual vs Estimated Actuals

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

    Current Year Actual vs Prior Year Actual

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

    Notes to the Financial Statements

    Note 1: Summary of Accounting Policies

    Statement of compliance

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

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

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

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

    Reporting entity

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

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

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

    Basis of preparation

    The financial statements have been prepared on the basis of historic cost modified by the revaluation of certain assets and liabilities, and prepared on an accrual basis, unless otherwise specified (for example, the statement of cash flows).

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

    Judgements and estimations

    The preparation of these financial statements requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. For example, the present value of large cash flows that are predicted to occur a long time into the future, as with the settlement of ACC outstanding claim obligations and Government Superannuation retirement benefits, depends critically on judgements regarding future cash flows, including inflation assumptions and the risk free discount rate used to calculate present values.

    The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

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

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

    Early adoption of standards and interpretations

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

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

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

    Reporting period

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

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

    Note 1: Summary of Accounting Policies (continued)

    Significant Accounting Policies

    Basis of combination

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

    Core Crown entities

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

    Other entities

    • State-owned enterprises
    • Crown entities (excluding Tertiary Education Institutions)
    • Air New Zealand Limited
    • Organisations listed in Schedule 4 and 4A of the Public Finance Act 1989
    • Organisations listed in Schedule 5 of the Public Finance Act 1989

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

    Tertiary Education Institutions are equity accounted for the reasons explained in the notes to the Government's financial statements. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

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

    Income

    Taxation revenue levied through the Crown's sovereign power

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

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

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

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

    Revenue earned through operations

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

    Interest income

    Interest income is accrued using the effective interest method.

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

    Dividend income

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

    Rental income

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

    Donated or subsidised assets

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

    Expenses

    General

    Expenses are recognised in the period to which they relate.

    Welfare benefits and entitlements

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

    Grants and subsidies

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

    Interest expense

    Interest expense is accrued using the effective interest method.

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

    Foreign currency

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

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

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

    Sovereign receivables and taxes repayable

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

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

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

    Note 1: Summary of Accounting Policies (continued)

    Financial instruments

    Financial assets

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

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

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

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

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

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

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

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

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

    Financial liabilities

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

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

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

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

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

    Derivative Financial Instruments

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

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

    Hedging

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

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

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

    (a) Cash flow hedge

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

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

    (b) Fair value hedge

    Where a derivative qualifies as a hedge of the exposure to changes in fair value of an asset or liability (fair value hedge) any gain or loss on the derivative is recognised in the statement of financial performance together with any changes in the fair value of the hedged asset or liability. The carrying amount of the hedged item is adjusted by the fair value gain or loss on the hedged item in respect of the risk being hedged. Effective portions of the hedge are recognised in the same area of the statement of financial performance as the hedged item.

    Inventories

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

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

    Note 1: Summary of Accounting Policies (continued)

    Property, plant and equipment

    Measurement on initial recognition

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

    Capitalisation of borrowing costs

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

    Subsequent measurement

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

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

    Class of PPE Accounting policy
    Land and buildings

    Land and buildings are recorded at fair value less impairment losses and, for buildings, less depreciation accumulated since the assets were last revalued.

    Land associated with the rail network and state highways is valued using an estimate based on adjacent use, as an approximation to fair value.

    Valuations undertaken in accordance with standards issued by the New Zealand Property Institute are used where applicable.

    Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998, may be used if they have been confirmed as appropriate by an independent valuer.

    When revaluing buildings, there must be componentisation to the level required to ensure adequate representation of the material components of the buildings.  At a minimum, this requires componentisation to three levels: structure, building services and fit-out.

    Specialist military equipment

    Specialist military equipment is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.

    Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the basis for the valuation is confirmed as appropriate by an independent valuer.

    State highways State highways are recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.

    Rail network

    Rail infrastructure used for freight services (freight only and dual use lines required for freight operations) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued. Rail infrastructure not required for freight operations and used for metro services is recorded on a depreciated replacement cost basis less depreciation and impairment losses accumulated since the assets were last revalued.
    Aircraft Aircraft (excluding specialised military equipment) are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
    Electricity distribution Electricity distribution network assets are recorded at cost, less depreciation and impairment losses accumulated since the assets were purchased.
    Electricity generation Electricity generation assets are recorded at fair value less depreciation and impairment losses accumulated since the assets were last revalued.
    Specified cultural and heritage assets Specified cultural and heritage assets comprise national parks, conservation areas and related recreational facilities, as well as National Archives holdings and the collections of the National Library, Parliamentary Library and Te Papa.  Of these, non-land assets are recorded at fair value less subsequent impairment losses and, for non-land assets, less subsequent accumulated depreciation.  Assets are not reported with a financial value in cases where they are not realistically able to be reproduced or replaced, and where no market exists to provide a valuation.
    Other plant and equipment Other plant and equipment, which includes motor vehicles and office equipment, are recorded at cost less depreciation and impairment losses accumulated since the assets were purchased.

    Revaluation

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

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

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

    Depreciation

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

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

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

    Specified heritage and cultural assets are generally not depreciated.

    Impairment

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

    Note 1: Summary of Accounting Policies (continued)

    Disposal

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

    Public private partnerships

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

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

    Subsequent to initial recognition:

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

    Equity accounted investments

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

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

    Biological assets

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

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

    Intangible assets

    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 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 property, plant and equipment.

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

    Note 1: Summary of Accounting Policies (continued)

    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 estimate of the value of expected future pension benefits arising from employee service up to the reporting date. All movements in the liability, including actuarial gains and losses, are recognised in the statement of financial performance in the period in which they occur.

    Other employee entitlements

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

    Termination benefits

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

    Insurance contracts

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

    Reinsurance

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

    Reinsurance and other recoveries receivable

    Reinsurance and other recoveries receivable on paid claims and outstanding claims, are recognised as income in the statement of financial performance.

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

    Leases

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

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

    Other liabilities and provisions

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

    Contingent liabilities and contingent assets

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

    Commitments

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

    Commitments are classified as:

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

    Interest commitments on debts, commitments for funding, and commitments relating to employment contracts are not included in the statement of commitments.

    Comparatives

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

    Comparatives referred to as Budget 13 were forecasts published in the 2013 Budget Economic and Fiscal Update, while Budget 14 were forecasts published in the 2014 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

    Segment analysis

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

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

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

    Related parties

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

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

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

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

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

    Note 2:  Sovereign Revenue (Accrual) and Sovereign Receipts (Cash)

    Note 2: Sovereign Revenue (Accrual)
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    Direct Income Tax Revenue (accrual)  
    Individuals  
    23,709 23,811 Source deductions 23,738 22,330
    5,083 5,161 Other persons 5,216 5,210
    (1,488) (1,531) Refunds (1,573) (1,644)
    477 487 Fringe benefit tax 489 480
    27,781 27,928 Total individuals 27,870 26,376
    Corporate Tax  
    9,240 9,195 Gross companies tax 9,020 8,747
    (197) (195) Refunds (192) (151)
    447 421 Non-resident withholding tax 428 420
    2 Foreign-source dividend withholding payments 8 2
    9,490 9,423 Total corporate tax 9,264 9,018
    Other Direct Income Tax  
    1,671 1,642 Resident withholding tax on interest income 1,644 1,631
    607 472 Resident withholding tax on dividend income 446 516
    2,278 2,114 Total other direct income tax 2,090 2,147
    39,549 39,465 Total direct income tax 39,224 37,541
    Indirect Income Tax Revenue (accrual)  
    Goods and Services Tax  
    27,220 27,364 Gross goods and services tax 27,208 25,125
    (10,695) (11,079) Refunds (11,191) (9,920)
    16,525 16,285 Total goods and services tax 16,017 15,205
    Other Indirect Taxation  
    1,164 1,162 Road user charges 1,205 1,066
    931 848 Petroleum fuels excise - domestic production 865 855
    678 655 Alcohol excise - domestic production 650 663
    277 274 Tobacco excise - domestic production 273 281
    659 746 Petroleum fuels excise - imports[6] 747 674
    267 246 Alcohol excise - imports6 242 250
    1,043 1,029 Tobacco excise - imports6 999 954
    172 169 Other customs duty 172 178
    223 211 Gaming duties 211 214
    187 186 Motor vehicle fees 187 174
    62 68 Approved issuer levy and cheque duty 52 45
    36 36 Energy resources levies 35 34
    5,699 5,630 Total other indirect taxation 5,638 5,388
    22,224 21,915 Total indirect taxation 21,655 20,593
    61,773 61,380 Total taxation revenue 60,879 58,134
    Other Sovereign Revenue (accrual)  
    3,465 3,546 ACC levies 3,600 3,437
    338 338 Fire service levies 339 331
    269 275 EQC levies 274 242
    729 604 Child support 545 590
    173 173 Court fines 179 168
    322 447 Other miscellaneous items 513 404
    5,296 5,383 Total other sovereign revenue 5,450 5,172
    67,069 66,763 Total sovereign revenue 66,329 63,306
    Note 2: Sovereign Receipts (Cash)
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    Direct Income Tax Receipts (cash)  
    Individuals  
    23,584 23,665 Source deductions 23,621 22,188
    5,549 5,655 Other persons 5,466 5,194
    (2,222) (2,149) Refunds (2,276) (2,251)
    476 485 Fringe benefit tax 482 465
    27,387 27,656 Total individuals 27,293 25,596
    Corporate Tax  
    9,495 9,390 Gross companies tax 9,374 8,665
    (766) (652) Refunds (563) (597)
    446 399 Non-resident withholding tax 405 451
    2 Foreign-source dividend withholding payments 1
    9,175 9,139 Total corporate tax 9,216 8,520
    Other Direct Income Tax  
    1,670 1,641 Resident withholding tax on interest income 1,629 1,635
    607 471 Resident withholding tax on dividend income 449 516
    2,277 2,112 Total direct other income tax 2,078 2,151
    38,839 38,907 Total direct income tax 38,587 36,267
    Indirect Tax Receipts (cash)  
    Goods and Services Tax  
    26,352 26,537 Gross goods and services tax 26,596 24,539
    (10,195) (10,629) Refunds (10,948) (9,783)
    16,157 15,908 Total goods and services tax 15,648 14,756
      Other Indirect Taxation  
    1,164 1,162 Road user charges 1,187 1,064
    931 848 Petroleum fuels excise - domestic production 861 865
    678 655 Alcohol excise - domestic production 651 666
    277 274 Tobacco excise - domestic production 268 287
    2,141 2,190 Customs duty 2,179 2,035
    223 208 Gaming duties 208 216
    187 186 Motor vehicle fees 178 179
    62 68 Approved issuer levy and cheque duty 51 44
    36 36 Energy resources levies 35 34
    5,699 5,627 Total other indirect taxation 5,618 5,390
    21,856 21,535 Total indirect taxation 21,266 20,146
    60,695 60,442 Total tax receipts collected 59,853 56,413
    Other Sovereign Receipts (cash)  
    3,438 3,550 ACC levies 3,579 3,524
    338 338 Fire service levies 340 331
    267 278 EQC levies 273 274
    237 227 Child support 219 230
    148 148 Court fines 149 159
    319 428 Other miscellaneous items 414 288
    4,747 4,969 Total other sovereign receipts 4,974 4,806
    65,442 65,411 Total sovereign receipts 64,827 61,219

    Notes

    • [6]Customs excise-equivalent duty.

    Note 3:  Sales of Goods and Services

    Note 3: Sales of Goods and Services
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    By type  
    9,021 8,236 Sales of goods 8,153 8,536
    8,059 8,196 Rendering of services 8,319 8,177
    17,080 16,432 Total sales of goods and services 16,472 16,713
    By source  
    1,397 1,513 Core Crown 1,488 1,461
    15,431 15,459 Crown entities 15,539 15,102
    14,394 13,699 State-owned enterprises 13,752 14,102
    (14,142) (14,239) Inter-segment eliminations (14,307) (13,952)
    17,080 16,432 Total sales of goods and services 16,472 16,713

    Note 4:  Interest Revenue and Dividends

    Note 4: Interest Revenue and Dividends
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    By type  
    600 572 Student loans (interest unwind)[7] 579 590
    1,076 1,132 Other financial assets classified as amortised cost or available for sale 1,190 1,073
    17 6 Financial assets classified as held for trading 13 48
    1,313 845 Financial assets classified as fair value through profit and loss 734 671
    3,006 2,555 Total interest revenue 2,516 2,382
    582 605 Dividends 659 557
    3,588 3,160 Total interest revenue and dividends 3,175 2,939
    By source  
    2,639 2,304 Core Crown 2,295 2,104
    1,242 1,156 Crown entities 1,249 1,270
    878 885 State-owned enterprises 879 856
    (1,171) (1,185) Inter-segment eliminations (1,248) (1,291)
    3,588 3,160 Total interest revenue and dividends 3,175 2,939

    Notes

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

    Note 5:  Other Revenue

    Note 5: Other Revenue
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    1,225 1,232 Rental income 1,230 1,175
    385 372 Sale of royalties 383 421
    29 (155) EQC insurance claim on reinsurers (123) (127)
    2,228 2,173 Other revenue 1,930 2,228
    3,867 3,622 Total other revenue 3,420 3,697

    EQC anticipates that a significant proportion of the cost of damage relating to the Canterbury earthquake sequence will be recovered from reinsurers (which is recorded as reinsurance receivables). Actuarial valuations of the reinsurance recoverable resulted in a reversal of income in both the current and previous years. Further information on insurance expenses and underwriting results can be found in note 11.

    Note 6:  Transfer Payments and Subsidies

    Note 6: Transfer Payments and Subsidies
    Forecast
    Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m


    Social Assistance Grants  
    10,894 10,903 New Zealand superannuation 10,913 10,235
    1,773 1,693 Jobseeker support and emergency benefit 1,691
    1,392 1,422 Supported living payment 1,422
    1,288 1,225 Sole parent support 1,222
    67 63 Domestic purposes benefit 63 1,738
    53 52 Invalid's benefit 52 1,330
    32 29 Sickness benefit 29 782
    29 29 Unemployment benefit 29 812
    2,038 1,976 Family tax credit 1,965 2,018
    539 556 Other working for families tax credits 462 544
    1,191 1,149 Accommodation assistance 1,146 1,177
    662 670 Income related rents 726 611
    380 379 Disability allowances 379 384
    574 542 Student allowances 539 596
    1,316 1,354 Other social assistance benefits 1,288 1,321
    22,228 22,042 Total social assistance grants 21,926 21,548


    Subsidies  
    748 822 KiwiSaver subsidies 901 723


    Other transfer payments  
    509 530 Official development assistance 533 437
    23,485 23,394 Total transfer payments and subsidies 23,360 22,708

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

    Note 7:  Personnel Expenses

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

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

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

    Note 8:  Depreciation and Amortisation

    Note 8: Depreciation and Amortisation
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    Depreciation expense  
    1,195 1,193 Buildings 1,213 1,150
    420 457 State highways 460 449
    439 416 Electricity generation assets 404 431
    208 205 Electricity distribution network 175 152
    346 295 Specialist military equipment 282 272
    166 226 Aircraft (excluding military) 260 213
    177 184 Rail network 20 14
    18 20 Specified cultural and heritage assets 25 24
    1,043 1,029 Other plant and equipment 966 992
    4,012 4,025 Total depreciation expense 3,805 3,697
    628 619 Amortisation and impairment of non-financial assets 1,067 1,115
    4,640 4,644 Total depreciation and amortisation 4,872 4,812

    Note 9:  Other Operating Expenses

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

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

    Other operating expenses is the large residual item. Most of these costs represent payments made for services provided by third parties (road maintenance for example) or for raw materials (fuel, medicines or inventory for example). They also include other day-to-day operating costs.

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

    Notes

    • [8]The audit of financial statements are those of the Government reporting entity and its sub-entities. Audit fees are eliminated because the Office of the Auditor-General is consolidated into these financial statements.
    • [9]External auditing firms carry out other work for entities that they audit on behalf of the Auditor-General.

    Note 10:  Interest Expenses

    Note 10: Interest Expenses
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    By type  
    3,611 4,129 Financial liabilities classified as amortised cost 4,100 4,014
    8 Financial liabilities classified as held for trading 5
    846 287 Financial liabilities classified as fair value through profit and loss 260 293
    51 45 Interest unwind on provisions 40 46
    4,516 4,461 Total interest expenses 4,400 4,358
    By source  
    3,622 3,641 Core Crown 3,620 3,620
    239 224 Crown entities 219 235
    1,279 1,173 State-owned enterprises 1,161 1,248
    (624) (577) Inter-segment eliminations (600) (745)
    4,516 4,461 Total interest expenses 4,400 4,358

    Note 11:  Insurance Expenses

    Note 11: Insurance Expenses
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    By entity  
    3,315 3,461 Accident Compensation Corporation (ACC) 3,484 3,133
    (19) (252) Earthquake Commission (EQC) (111) (103)
    (95) 61 Southern Response 87 (22)
    14 13 Other 17 19
    Inter-segment eliminations 24 4
    3,215 3,283 Total insurance expenses 3,501 3,031
    By type  
    Property damage claims in relation to Canterbury earthquakes (281) (227)
    Personal accident and injury claims 3,484 3,133
    Other insurance expenses 298 125
    Total insurance expenses 3,501 3,031

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

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

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

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

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

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

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

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

    Underwriting surplus/(deficit)
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    Net ACC Underwriting Result  
    Premium revenue (refer to note 2) 3,600 3,437
    Recoveries revenue (including reinsurance recovery)
    ACC underwriting revenue 3,600 3,437
    Less claims and other expenses (3,481) (1,181)
    Net ACC underwriting surplus/(deficit) 119 2,256
    ACC operating cash flows associated with the underwriting result are:  
    Cash receipts 3,579 3,524
    Cash payments (3,435) (3,072)
    Net ACC operating cash flows 144 452
    Analysis of EQC insurance expense
      Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    Analysis of EQC insurance expense
    By type  
    Claims expense (271) (167)
    Movement in unexpired risk liability 9 (68)
    Other underwriting expenses 151 132
    Total EQC claims and other expenses (111) (103)
    EQC Claims Incurred  
    Current year net EQC claims incurred  
    Gross claims incurred and related expenses - undiscounted 112 37
    Discount and discount movement (2)
    Total current year net claims incurred 110 37
    Previous years' net EQC claims incurred  
    Reassessment of gross claims and expenses - undiscounted (446) (349)
    Discount and discount movement 65 145
    Total previous years' net claims incurred (381) (204)
    EQC claims expense (271) (167)
    Net EQC Underwriting Result  
    Premium revenue 274 242
    Recoveries revenue (including reinsurance recovery) (123) (127)
    EQC underwriting revenue 151 115
    Less claims and other expenses (111) (103)
    Net EQC underwriting surplus/(deficit) 262 218
    EQC operating cash flows associated with the underwriting result are:  
    Cash receipts 1,549 1,590
    Cash payments (2,020) (1,923)
    Net EQC operating cash flows (471) (333)
    Analysis of Southern Response insurance expense  
    By type  
    Claims expense 111 2
    Movement in unexpired risk liability
    Total Southern Response claims and other expenses 111 2
    less operating costs relating to claims (24) (24)
    Total Southern Response insurance expenses (excluding operations) 87 (22)
    Net Southern Response Underwriting Result  
    Premium revenue
    Recoveries revenue (including reinsurance recovery) (37) 27
    Southern Response underwriting revenue (37) 27
    Less claims and other expenses 111 2
    Net Southern Response underwriting surplus/(deficit) (148) 25
    Southern Response operating cash flows associated with the underwriting result are:  
    Cash receipts 291 452
    Cash payments (386) (294)
    Net Southern Response operating cash flows (95) 158

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

    Note 12:  Gains and Losses on Financial Instruments

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

    Note 13:  Gains and Losses on Non-Financial Instruments

    Note 13: Gains and Losses on Non-Financial Instruments
    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    By type  
    498 1,082 Actuarial gains/(losses) on ACC outstanding claims 479 2,369
    713 Actuarial gains/(losses) on GSF liability 577 1,251
    (171) Foreign exchange gains/(losses) (328) 101
    24 Other gains/(losses) on non-financial liabilities 14 1
    (53) (61) Gains/(losses) on disposal or revaluation of property, plant and equipment (210) (24)
    (8) Gains/(losses) on agricultural assets (7) (46)
    (2) 11 Other gains/(losses) on non-financial assets 15 54
    443 1,590 Net gains/(losses) on non-financial instruments 540 3,706
    By source  
    (2) 557 Core Crown 220 1,298
    446 1,034 Crown entities 477 2,309
    (1) (6) State-owned enterprises (156) 100
    5 Inter-segment eliminations (1) (1)
    443 1,590 Net gains/(losses) on non-financial instruments 540 3,706

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

    Note 14:  Receivables

    Note 14: Receivables
    Forecast
    Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m


    By type  
    7,831 8,555 Tax receivables 8,112 8,184
    3,953 2,998 Levies, fines and penalty receivables 3,265 3,183
    478 501 Social benefit receivables 530 515
    12,262 12,054 Sovereign receivables 11,907 11,882
    1,485 1,366 Reinsurance receivables 1,409 3,135
    4,323 4,453 Trade and other receivables 4,164 4,866
    18,070 17,873 Total receivables 17,480 19,883


    By maturity  
    15,334 14,730 Expected to be realised within one year 15,024 15,742
    2,736 3,143 Expected to be outstanding for more than one year 2,456 4,141
    18,070 17,873 Total receivables 17,480 19,883


    By source  
    10,260 11,507 Core Crown 11,819 11,924
    7,099 6,035 Crown entities 6,379 8,369
    2,358 2,077 State-owned enterprises 1,762 2,037
    (1,647) (1,746) Inter-segment eliminations (2,480) (2,447)
    18,070 17,873 Total receivables 17,480 19,883

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

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

    All sovereign receivables are denominated in New Zealand dollars.

    Sovereign receivables

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

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

    Recoverable amounts

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

    Tax receivables are classified as past due when any outstanding tax is not paid by the taxpayer's due date. Due dates will vary depending on the type of tax outstanding (eg, GST, income tax, PAYE) and the taxpayer's balance date. Past due debt includes debt collected under instalment, debt under dispute, default assessments and debts of taxpayers who are bankrupt, in receivership or in liquidation. IRD has debt management policies and procedures to actively manage the collection of past due debt.

    Ageing of Tax Receivables Past Due (Gross)

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

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

    Note 14: Receivables (continued)

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Levies, Fines and Penalty Receivables

     
    Gross ACC levy receivables 3,063 3,027
    Gross other levies, fines and penalty receivables 2,781 2,515
    Total gross levies, fines and penalty receivables 5,844 5,542
    Impairment of ACC levy receivables (84) (118)
    Impairment of other levies, fines and penalty receivables (2,495) (2,241)
    Total impairment of receivables (2,579) (2,359)
    Total levies, fines and penalty receivables 3,265 3,183

    Impairment of ACC Levy Receivables

     
    Opening balance 118 122
    Impairment losses recognised during the year (2)
    Amounts written off as uncollectible 1 (2)
    Impairment losses reversed (35)
    Closing balance 84 118
    Collective impairment allowance 84 118
    Individual impairment allowance    -     - 
    Impairment of ACC Levy Receivables 84 118

    Impairment of other Levies, Fines and Penalty Receivables

     
    Opening balance 2,241 1,969
    Impairment losses recognised during the year 341 363
    Amounts written off as uncollectible
    Impairment losses reversed (87) (91)
    Closing balance 2,495 2,241
    Collective impairment allowance 2,495 2,241
    Individual impairment allowance    -     - 
    Impairment of other Levies, Fines and Penalty Receivables 2,495 2,241

    Ageing of Levies, Fines and Penalty Receivables Past Due But Not Impaired

     
    Less than six months
    Between six months and one year
    Greater than one year
    Total levies, fines and penalty receivables past due but not impaired    -     - 

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Social Benefit Receivables

     
    Gross social benefit receivables 1,239 1,178
    Impairment of social benefit receivables (709) (663)
    Total social benefit receivables 530 515

    Impairment of Social Benefit Receivables

     
    Opening balance 663 628
    Impairment losses recognised during the year 68 79
    Amounts written off as uncollectible (22) (44)
    Closing balance 709 663
    Collective impairment allowance 709 663
    Individual impairment allowance    -     - 
    Impairment of Social Benefit Receivables 709 663

    Ageing of Social Benefit Receivables Past Due But Not Impaired

     
    Less than six months 31 30
    Between six months and one year 61 67
    Greater than one year    - 
    Total social benefit receivables past due but not impaired 92 97

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Trade and Other Receivables

     
    Gross trade and other receivables 4,256 4,954
    Impairment of trade and other receivables (92) (88)
    Total trade and other receivables 4,164 4,866

    Impairment of Trade and Other Receivables

     
    Opening balance 88 93
    Impairment losses recognised during the year 10 7
    Amounts written off as uncollectible (12) (14)
    Impairment losses reversed 6 2
    Closing balance 92 88
    Collective impairment allowance 65 64
    Individual impairment allowance 27 24
    Impairment of Trade and Other Receivables 92 88

    Ageing of Trade and Other Receivables Past Due But Not Impaired

     
    Less than six months 170 180
    Between six months and one year 11 17
    Greater than one year 1 2
    Total trade and other receivables past due but not impaired 182 199

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

    Note 15: Marketable Securities, Deposits and Derivatives in Gain

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    36,314 39,762 Marketable securities 38,307 34,346
    2,089 2,407 Long term deposits 3,844 3,588
    3,906 3,194 Derivatives in gain 4,164 3,775
    2,404 2,507 IMF financial assets 2,142 2,291
    44,713 47,870 Total marketable securities, deposits and derivatives in gain 48,457 44,000

    By maturity

     
    30,197 30,316 Expected to be realised within one year 30,433 26,833
    14,516 17,554 Expected to be held for more than one year 18,024 17,167
    44,713 47,870 Total marketable securities, deposits and derivatives in gain 48,457 44,000

    By source

     
    32,224 34,355 Core Crown 34,178 31,056
    19,950 22,712 Crown entities 23,500 20,045
    3,167 2,813 State-owned enterprises 2,472 2,586
    (10,628) (12,010) Inter-segment eliminations (11,693) (9,687)
    44,713 47,870 Total marketable securities, deposits and derivatives in gain 48,457 44,000

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

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

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

    Note 16: Share Investments

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By maturity

     
    7,250 10,695 Expected to be realised within one year 11,428 7,651
    10,926 8,977 Expected to be held for more than one year 9,168 9,708
    18,176 19,672 Total share investments 20,596 17,359

    By source

     
    7,199 10,778 Core Crown 11,579 7,665
    10,664 8,851 Crown entities 8,896 9,496
    340 316 State-owned enterprises 483 342
    (27) (273) Inter-segment eliminations (362) (144)
    18,176 19,672 Total share investments 20,596 17,359

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

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

    Note 17: Advances

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    8,989 8,752 Student loans 8,716 8,288
    14,544 14,784 Kiwibank mortgages 14,630 13,202
    1,779 1,075 Other advances 1,410 1,123
    25,312 24,611 Total advances 24,756 22,613

    By source

     
    14,633 13,883 Core Crown 14,280 13,419
    130 226 Crown entities 209 248
    15,491 15,106 State-owned enterprises 14,860 13,499
    (4,942) (4,604) Inter-segment eliminations (4,593) (4,553)
    25,312 24,611 Total advances 24,756 22,613

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

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    Student Loans

     
    14,144 14,209 Nominal value 14,235 13,562
    (5,155) (5,457) Write-down on initial recognition and impairment (5,519) (5,274)
    8,989 8,752 Total student loans 8,716 8,288
    Gross carrying value 10,163 9,723
    Impairment of student loans (1,447) (1,435)
    Total student loans 8,716 8,288

    By maturity

     
    Expected to be repaid within one year 1,193 1,049
    Expected to be outstanding for more than one year 7,523 7,239
    Total student loans 8,716 8,288

    Movement During the Year

     
    8,528 8,288 Opening balance 8,288 8,291
    1,632 1,545 Net new lending (excluding fees) 1,512 1,470
    11 11 New lending - establishment fee 11 11
    (537) (644) Initial write-down to fair value (630) (536)
    (1,135) (1,050) Repayments made during the year (1,032) (1,054)
    600 572 Interest unwind 579 590
    (110) 30 Impairment losses (recognised)/reversed during the year (12) (484)
    Other movements
    8,989 8,752 Closing balance student loans 8,716 8,288

    Impairment of Student Loans

     
    Opening balance 1,435 951
    Impairment losses recognised during the year 12 484
    Amounts written off as uncollectible
    Impairment losses reversed
    Closing balance 1,447 1,435

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

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

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

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

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

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

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

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

    Note 17: Advances (continued)

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    Kiwibank Mortgages

     

    By maturity

     
    1,209 1,199 Expected to be repaid within one year 1,102 1,071
    13,335 13,585 Expected to be outstanding for more than one year 13,528 12,131
    14,544 14,784 Total Kiwibank mortgages 14,630 13,202

    Impairment of Kiwibank Mortgages

     
    Opening balance 72 91
    Impairment losses recognised on mortgages 3 18
    Amounts written off as uncollectible (9) (26)
    Impairment losses reversed (7) (11)
    Closing balance 59 72
    Collective impairment allowance 37 44
    Individual impairment allowance 22 28
    Impairment of Kiwibank Mortgages 59 72

    Ageing of Kiwibank Mortgages Past Due But Not Impaired

     
    Less than six months 142 183
    Between six months and one year
    Greater than one year    - 
    Total Kiwibank mortgages past due but not impaired 142 183

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

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

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    Other Advances

     

    By maturity

     
    689 526 Expected to be repaid within one year 140 391
    1,090 549 Expected to be outstanding for more than one year 1,270 732
    1,779 1,075 Total other advances 1,410 1,123

    Impairment of Other Advances

     
    Opening balance 150 148
    Impairment losses recognised during the year 3 10
    Amounts written off as uncollectible (2) (6)
    Impairment losses reversed (2) (2)
    Closing balance 149 150
    Collective impairment allowance 146 146
    Individual impairment allowance 3 4
    Impairment of Other Advances 149 150

    Ageing of Other Advances Past Due But Not Impaired

     
    Less than six months 3 9
    Between six months and one year 9
    Greater than one year 2
    Total other advances past due but not impaired 12 11

    Measurement Basis for Other Advances

     
    622 598 Other advances measured at amortised cost 921 791
    1,157 477 Other advances measured at fair value 489 332
    1,779 1,075 Total other advances 1,410 1,123

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

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

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

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

    Note 18: Inventory

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    Inventories held for sale 104 105
    Military inventories 308 311
    Other consumables 687 724
    1,321 1,158 Total inventory 1,099 1,140

    By maturity

     
    1,036 862 Expected to be sold or consumed within one year 733 783
    285 296 Expected to be sold or consumed after one year 366 357
    1,321 1,158 Total inventory 1,099 1,140

    By source

     
    393 380 Core Crown 370 382
    188 167 Crown entities 174 165
    740 611 State-owned enterprises 555 593
    Inter-segment eliminations
    1,321 1,158 Total inventory 1,099 1,140

    Note 19: Other Assets

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    533 506 Prepayments 570 531
    50 264 Investment property 301 201
    614 518 Biological assets 587 583
    361 361 Investment in supranational organisations 333 368
    503 618 Other 719 612
    2,061 2,267 Total other assets 2,510 2,295

    By maturity

     
    1,087 1,134 Expected to be realised within one year 1,269 1,188
    974 1,133 Expected to be held for more than one year 1,241 1,107
    2,061 2,267 Total other assets 2,510 2,295

    By source

     
    1,299 1,317 Core Crown 1,263 1,222
    216 435 Crown entities 434 394
    579 553 State-owned enterprises 848 708
    (33) (38) Inter-segment eliminations (35) (29)
    2,061 2,267 Total other assets 2,510 2,295

    Note 20: Property, Plant and Equipment

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
       

    Net Carrying Value

       
       

    By class of asset

       
    34,759 34,934 Land 37,138 34,453
    25,312 25,969 Buildings 27,396 25,784
    18,918 18,875 State highways 19,709 17,930
    14,104 13,660 Electricity generation assets 13,941 13,555
    4,273 4,167 Electricity distribution network 3,992 3,865
    3,330 2,854 Specialist military equipment 2,891 3,094
    2,502 2,677 Specified cultural and heritage assets 2,975 2,617
    2,498 2,639 Aircraft (excluding military) 2,287 2,296
    1,012 1,134 Rail network 936 1,035
    5,919 5,355 Other plant and equipment 5,041 5,204
    112,627 112,264 Total property, plant and equipment 116,306 109,833
       

    By source

       
    30,565 29,971 Core Crown 30,963 29,507
    52,207 53,043 Crown entities 56,802 51,823
    29,855 29,250 State-owned enterprises 28,541 28,503
    Inter-segment eliminations
    112,627 112,264 Total property, plant and equipment 116,306 109,833
       

    By holding

       
        Leasehold 1,970 1,858
        Public Private Partnerships 313 110
        Freehold (excluding PPP) 114,023 107,865
    112,627 112,264 Total property, plant and equipment 116,306 109,833
        Property, plant and equipment pledged to secure borrowing 1,836 1,743

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

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

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

    Note 20: Property, Plant and Equipment (continued)

      Total Land Buildings State highways Electricity generation assets Electricity distribution network Specialist military equipment Specified cultural and heritage assets Aircraft (excluding military) Rail network Other plant and equipment
    For the year ended 30 June 2014 $m $m $m $m $m $m $m $m $m $m $m

    Gross carrying amount

                         
    Opening balance 1 July 2013 122,796 34,453 28,277 17,930 13,611 4,930 3,094 3,073 2,312 1,275 13,841
    Additions 6,672 286 1,669 1,599 839 320 350 65 431 136 977
    Disposals (1,432) (320) (176) (83) (3) (100) (4) (11) (27) (708)
    Net revaluations 3,038 3,340 (11) 257 (89) (417) 344 (367) (20) 1
    Other[10] (732) (621) 86 (1) (83) 33 6 (45) (27) (80)
    Total gross carrying amount 130,342 37,138 29,845 19,702 14,275 5,183 3,029 3,471 2,304 1,364 14,031

    Accumulated Depreciation and Impairment

                         
    Opening balance 1 July 2013 12,963 2,493 56 1,065 456 16 240 8,637
    Eliminated on disposal (813) (83) (2) (49) (9) (20) (650)
    Eliminated on revaluation (2,133) (1,207) (466) (129) (144) 24 (211)
    Impairment losses charged to operating balance 346 4 185 157
    Depreciation expense 3,805 1,213 460 404 175 282 25 260 20 966
    Other10 (132) 29 (1) 5 (28) (17) (120)
    Total accumulated depreciation 14,036 2,449 (7) 334 1,191 138 496 17 428 8,990
    Carrying value as at 30 June 2014 116,306 37,138 27,396 19,709 13,941 3,992 2,891 2,975 2,287 936 5,041

    By holding

                         
    Leasehold 1,970 227 2 1,704 37
    Public Private Partnerships 313 13 300
    Freehold (excluding PPP) 114,023 37,125 26,869 19,709 13,939 3,992 2,891 2,975 583 936 5,004
      116,306 37,138 27,396 19,709 13,941 3,992 2,891 2,975 2,287 936 5,041
      Total Land Buildings State highways Electricity generation assets Electricity distribution network Specialist military equipment Specified cultural and heritage assets Aircraft (excluding military) Rail network Other plant and equipment
    For the year ended 30 June 2013 $m $m $m $m $m $m $m $m $m $m $m

    Gross carrying amount

                         
    Opening balance 1 July 2012 121,717 33,626 27,551 17,546 14,714 4,453 4,153 3,036 2,266 860 13,512
    Additions 5,779 465 1,220 1,010 609 657 201 128 175 434 880
    Disposals (1,471) (420) (228) (17) (180) (20) (9) (20) (1) (576)
    Net revaluations (2,047) 942 (204) (626) (893) (1,241) 43 (72) 4
    Other[11] (1,182) (160) (62) (802) 1 (125) (37) (18) 21
    Total gross carrying amount 122,796 34,453 28,277 17,930 13,611 4,930 3,094 3,073 2,312 1,275 13,841

    Accumulated Depreciation and Impairment

                         
    Opening balance 1 July 2012 13,133 2,505 314 977 933 398 16 4 7,986
    Eliminated on disposal (659) (101) (3) (48) (30) (6) (14) (457)
    Eliminated on revaluation (3,587) (1,125) (449) (650) (1,203) 9 (169)
    Impairment losses charged to operating balance 473 19 222 232
    Depreciation expense 3,697 1,150 449 431 152 272 24 213 14 992
    Other (94) 64 (55) (16) 28 31 (30) (116)
    Total accumulated depreciation 12,963 2,493 56 1,065 456 16 240 8,637
    Carrying value as at 30 June 2013 109,833 34,453 25,784 17,930 13,555 3,865 3,094 2,617 2,296 1,035 5,204

    By holding

                         
    Leasehold 1,858 228 2 1,590 38
    Public Private Partnerships 110 9 101
    Freehold (excluding PPP) 107,865 34,444 25,455 17,930 13,553 3,865 3,094 2,617 706 1,035 5,166
      109,833 34,453 25,784 17,930 13,555 3,865 3,094 2,617 2,296 1,035 5,204

    Notes

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

    Revaluation details

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

    Land and buildings

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

    Breakdown of land and buildings
    (total valuation over $500m)
    Land Buildings Total
    30 June
    2014
    $m
    30 June
    2013
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m
    Housing stock 11,361 9,580 7,307 6,778 18,668 16,358
    School property 3,167 2,887 8,385 7,941 11,552 10,828
    State highway corridor land 8,853 8,003 10 11 8,863 8,014
    Conservation estate 5,432 5,364 59 60 5,491 5,424
    Hospitals 782 707 4,093 4,135 4,875 4,842
    Rail network corridor land 3,256 3,256    -     -  3,256 3,256
    Defence Force land and buildings 621 631 1,227 1,287 1,848 1,918
    Prisons and Department of Corrections office buildings 167 207 1,947 1,681 2,114 1,888
    Landcorp farmland and buildings 1,109 1,047 121 125 1,230 1,172
    Ministry of Justice land and buildings 423 418 495 461 918 879
    Police stations 150 168 522 537 672 705
    Other 1,817 2,185 3,230 2,768 5,047 4,953
    Land and buildings 37,138 34,453 27,396 25,784 64,534 60,237
    Description Valuer/Reviewer Approach Timing
    Housing stock Quotable Value NZ Limited Valuations based on market evidence or adjusted current rating valuations. Annual valuation with the latest completed as at 30 June 2014.
    School property Quotable Value Limited or experienced staff (reviewed by Quotable Value Limited) Valuations based on market evidence where possible, or ODRC. Annual valuation with the latest completed as at 30 June 2014.
    State highway corridor land and held properties Darroch Ltd, a registered property valuation company, peer reviewed by Opus International Consultants Ltd with NZTA.

    Valued using opportunity cost based on adjacent use as an approximation to fair value, or where fair value is not able to be reliably determined using market based evidence, DRC is used to determine fair value.

    Held properties are valued using opportunity cost based on adjacent use as an approximation to fair value, or a discounted cash flow calculation. Where fair value is not able to be reliably determined using market based evidence the cost approach is used to determine fair value.

    A full valuation is completed on a rolling regional basis, with each region fully valued at least once every 3-5 years. The latest valuation and indexation was completed as at 30 June 2014.

    A full valuation is completed on all held properties every second year. The alternate years valuation uses an indexation method. The latest valuation was completed on 30 June 2013.

    Conservation estate (national parks, forest parks, conservation areas, reserves) PropertyIQ rateable valuations reviewed by Logan Stone Limited Valued based on rateable valuations where possible.  Land not matched to a rateable valuation was assessed using a calculated average per hectare rate. Annual valuation with the latest completed as at 30 June 2014.
    Hospitals Each District Health Board uses an independent valuer Land values were based on market evidence while buildings were valued at ODRC.   Three to five year cycle with varying valuation dates depending on each DHB.
    New Zealand Rail Corporation rail corridor land Darroch Limited Land associated with the rail corridor was valued using an opportunity cost based on adjacent use, as an approximation to fair value. Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2012.
    NZ Defence Force Land and Buildings Beca Valuations Limited and updated internally by NZ Defence Force for buildings Valued using a market based approach unless reliable market evidence was unavailable, in which case ODRC was used to calculate fair value. Valuations completed at least once every five years with the latest independent land and buildings valuation completed as at 30 June 2013 and buildings internally updated valuation completed as at 31 December 2013.
    Prisons and Department of Corrections office buildings Beca Valuations Limited Valued based on market evidence, except for prison buildings, which were valued at ODRC.  Three-year valuation cycle with the latest full valuation completed as at 30 June 2014.
    Landcorp farmland and associated buildings Rural Value Limited The valuations based on observed market evidence take into account general factors that influence farm land prices, recent farm sales in the relevant regions and specific encumbrances over the land.    Annual valuation with the latest completed as at 30 June 2014.
    Ministry of Justice locations (including courtrooms) Beca Valuations Limited Based on market evidence where possible, or ODRC. The valuations are performed on a rolling basis over three years.  The full valuation cycle was completed on 30 June 2013.
    Police stations and national headquarters Valuations undertaken by NZ Police and certified by independent valuers. The internal valuation performed based on market evidence where possible, or ODRC.  Valuations completed at least once every five years with the latest being as at 30 June 2012.

    Specified cultural and heritage assets

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

    Carrying value of specified cultural and heritage assets
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    National Library 1,005 849
    Te Papa 833 830
    National Archives 623 449
    Conservation 459 442
    Parliamentary Library 27 28
    Other 28 19
    2,975 2,617
    Description Valuer/Reviewer Approach Timing
    National Library collections Webb's The collection was divided into categories by format to associate records that could be said to have a broad commonality of value.  Items were then valued based on market assessments and comparisons with other items of a similar nature. Three-year valuation cycle with the latest full valuation completed as at 30 June 2014.
    Te Papa collections

    History, Photography, Library, Collections: Webbs Auckland

    Natural History Collection: Webbs Auckland & internal experts

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

    Note 20: Property, Plant and Equipment (continued)

    Other asset classes subject to revaluation

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

    Carrying value of other asset classes subject to revaluation
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    State highways 19,709 17,930
    Electricity generation assets 13,941 13,555
    Specialist military equipment 2,891 3,094
    Aircraft (excluding military) 2,287 2,296
    Rail network 936 1,035
    39,764 37,910
    Description Valuer/Reviewer Approach Timing

    State highways[12]

    Roads, bridges, culverts, tunnels, underpasses including the formation works, road structure, drainage works and traffic facilities.

    Opus International Consultants Limited State Highways are valued using the DRC of the existing asset database.  (See below for further comments). A full valuation is completed yearly where the majority of assets are indexed. The latest valuation completed as at 30 June 2014.
    Electricity generation assets [13]      
    Meridian Energy: Hydro stations, wind and solar farms Pricewaterhouse Coopers (PwC) Based on an income approach assessing both the capitalisation of earnings and the discounted cash flow methodology. A review of the carrying values of Meridian's assets is completed annually. If this indicates the carrying value is a fair representation of fair value a full revaluation is not completed.
    Mighty River Power: Hydro and Geothermal stations and gas-fired generation plants PwC Based on net present value of future earnings of the assets on an existing use basis excluding disposal and restoration costs. Annual valuation with the latest completed as at 30 June 2014.
    Genesis Energy: Thermal and Hydro stations and Wind farms Internal valuation independently reviewed by PwC Based on the present value of estimated future cash flows of the assets. Valuation completed at least once every five years with the latest valuation being as at 30 June 2013.
    Specialist military equipment Internal valuations by subject matter experts Valuations use a market based approach unless reliable market evidence is not available, in which case ODRC is used to calculate fair value. Valuation completed at least once every five years with the latest valuation being as at 31 December 2013.

    Aircraft

    Aircraft and spare engines and flight simulators

    The Aircraft Value Analysis Company An external valuation is obtained to ascertain indicative market values of each aircraft on a stand-alone basis.   Annual valuation with the latest completed as at 30 June 2014.

    Rail network [14]

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

    Buildings - Darroch Limited Non-specialised building assets not on the rail corridor were valued based on market evidence using comparable sales.  Specialised building assets and buildings on rail corridor land were valued using ODRC.  Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2014.
    Other Rail Network Assets ­ Ernst and Young

    Railway infrastructure used for freight services (freight only and dual use lines required for freight operations) has been valued using the recoverable amount, being scrap value less costs to sell.

    Railway infrastructure not required for freight operations and used for metro has been valued using ODRC reflecting the public benefit nature of these assets.

    Additional information regarding state highways asset valuation

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

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

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

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

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

    Additional information regarding electricity generation assets

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

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

    Meridian Energy Limited
    Assumption Sensitivity range Valuation Impact on fair value of generation assets
    Future NZ electricity price estimates $69/MWh to $98/MWh by 2033 (in real terms) +/- $3/MWh $365 million / ($365 million)
    Generation volume 13,052 GWh +/- 250 GWh $261 million / ($261 million)
    Operating expenditure $258 million p.a. +/- $10 million p.a. ($127 million) / $127 million
    Genesis Energy Limited
    Assumption Sensitivity range Valuation Impact on fair value of generation assets
    Wholesale electricity price path $76/MWh to $137/MWh by 2025 (in nominal terms) +/- 10% $527 million / ($440 million)
    Generation volume 3320 GWh to 6112 GWh +/- 10% $527 million / ($440 million)
    Discount rate 11.3% to 12.8% +/- 1% $466 million / ($284 million)
    Mighty River Power Limited
    Assumption Sensitivity range Valuation Impact on fair value of generation assets
    Future wholesale electricity price path $70/MWh to $95/MWh (in real terms) +/- 10% $684 million / ($687 million)
    Discount rate Not publicly available +/- 0.5% $489 million / ($645 million)
    Operational expenditure $188 million p.a. +/- 10% ($230 million) / $230 million

    Notes

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

    Note 20: Property, Plant and Equipment (continued)

    Additional information regarding rail network

    Carrying value of rail network
    Recoverable
    amount
    $m
    ODRC
    $m
    30 June
    2014
    Carrying
    value
    $m
    Network required for freight 107 4,128 107
    Network not required for freight (including metro) 14 719 719
    Total rail infrastructure 121 4,847 826
    Buildings     78
    Capital work in progress     32
    Rail network 936
    Carrying value of rail network
    Recoverable
    amount
    $m
    ODRC
     
    $m
    30 June
    2013
    Carrying
    value
    $m
    Network required for freight 118 4,151 118
    Network not required for freight (including metro) 14 654 654
    Total rail infrastructure 132 4,805 772
    Buildings     115
    Capital work in progress     148
    Rail network 1,035

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

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

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

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

    Additional information regarding Public Private Partnerships

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

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

    Auckland South Corrections Facility

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

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

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

    Note 21: Equity Accounted Investments

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

    Tertiary Education Institutions (TEIs)

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

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

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

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    Operating Results

     
    2,154 2,251 Revenue from Crown 2,238 2,221
    2,290 2,383 Other revenue 2,533 2,388
    (4,313) (4,464) Expenses (4,528) (4,440)
    131 170 Net surplus 243 169

    Net worth

     

    Assets

     
    1,355 1,392 Financial assets 1,364 1,392
    8,288 8,400 Property, plant and equipment 8,535 8,102
    307 343 Other assets 480 343
    9,950 10,135 Total assets 10,379 9,837

    Liabilities

     
    238 193 Borrowings 222 193
    1,533 1,584 Other liabilities 1,649 1,584
    1,771 1,777 Total liabilities 1,871 1,777
    8,179 8,358 Net worth 8,508 8,060

    New Zealand Local Government Funding Agency (NZLGFA)

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

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

    Note 22: Intangible Assets and Goodwill

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    Computer software 1,736 1,517
    Goodwill 628 655
    Other intangible assets 556 604
    2,837 2,841 Total intangible assets and goodwill 2,920 2,776

    By maturity

     
    Expected to be sold or consumed within one year 425 406
    Expected to be sold or consumed after one year 2,495 2,370
    Total intangible assets and goodwill 2,920 2,776

    By source

     
    1,175 1,136 Core Crown 1,184 1,041
    534 498 Crown entities 542 573
    1,128 1,207 State-owned enterprises 1,194 1,162
    Inter-segment eliminations
    2,837 2,841 Total intangible assets and goodwill 2,920 2,776
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Computer Software

     

    Internally-Generated Computer Software

     

    Cost

     
    Opening balance 2,820 2,558
    Additions 399 387
    Disposals (47) (148)
    Other movements 9 23
    Total cost 3,181 2,820

    Accumulated Amortisation

     
    Opening balance 1,816 1,696
    Eliminated on disposal (31) (100)
    Impairment losses charged to operating balance 17 22
    Amortisation 248 229
    Other movements 41 (31)
    Total accumulated amortisation 2,091 1,816
    Carrying value of internally-generated computer software 1,090 1,004

    Purchased Computer Software

     

    Cost

     
    Opening balance 1,807 1,645
    Additions 287 223
    Disposals (53) (50)
    Other movements (9) (11)
    Total cost 2,032 1,807

    Accumulated Amortisation

     
    Opening balance 1,294 1,132
    Eliminated on disposal (46) (41)
    Impairment losses charged to operating balance
    Amortisation 177 177
    Other movements (39) 26
    Total accumulated amortisation 1,386 1,294
    Carrying value of purchased computer software 646 513
    Total computer software 1,736 1,517
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Goodwill

     

    Cost

     
    Opening balance 891 985
    Additions 16 7
    Disposals (2) (66)
    Other movements (41) (35)
    Total cost 864 891

    Accumulated Impairment

     
    Opening balance 236 239
    Eliminated on disposal (2)
    Impairment losses charged to operating balance 2
    Reversals of impairment losses charged to operating balance
    Amortisation charge
    Other movements (3)
    Total accumulated impairment 236 236
    Carrying value of goodwill 628 655

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

    Note 23: Payables

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    8,403 7,756 Accounts payable 7,626 7,616
    3,957 4,196 Taxes repayable 3,668 3,544
    12,360 11,952 Total payables 11,294 11,160

    By maturity

     
    11,747 11,332 Expected to be settled within one year 10,411 10,688
    613 620 Expected to be outstanding for more than one year 883 472
    12,360 11,952 Total payables 11,294 11,160

    By source

     
    6,860 7,682 Core Crown 7,800 7,873
    5,929 5,584 Crown entities 5,382 4,996
    5,663 5,003 State-owned enterprises 4,832 4,877
    (6,092) (6,317) Inter-segment eliminations (6,720) (6,586)
    12,360 11,952 Total payables 11,294 11,160

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

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

    Note 24: Borrowings

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By type

     
    68,469 60,499 Government bonds 60,337 57,377
    3,541 3,087 Treasury bills 3,147 4,084
    204 190 Government retail stock 183 199
    7,183 6,849 Settlement deposits with Reserve Bank 7,758 7,575
    1,854 2,099 Derivatives in loss[15] 2,245 3,188
    1,475 1,574 Finance lease liabilities 1,501 1,454
    29,475 28,760 Other borrowings 28,248 26,210
    112,201 103,058 Total borrowings [16] 103,419 100,087

    By source

     
    94,504 88,438 Core Crown 89,086 84,870
    5,416 5,107 Crown entities 5,155 5,251
    27,733 26,916 State-owned enterprises 26,185 24,839
    (15,452) (17,403) Inter-segment eliminations (17,007) (14,873)
    112,201 103,058 Total borrowings 103,419 100,087

    By maturity

     
    42,962 37,299 Expected to be settled within one year 39,072 30,517
    69,239 65,759 Expected to be outstanding for more than one year 64,347 69,570
    112,201 103,058 Total borrowings 103,419 100,087

    By guarantee

     
    84,580 76,653 Sovereign-guaranteed debt[17] 77,461 75,684
    27,621 26,405 Non-sovereign debt 25,958 24,403
    112,201 103,058 Total borrowings 103,419 100,087

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

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

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

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

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

    Government Bonds

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

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Government bonds measured at fair value

     
    Carrying value 2,783 2,372
    Amount payable on maturity 2,630 2,113
    Fair value impact from changes in credit risk for the year
    Cumulative fair value impact from changes in credit risk

    Treasury Bills

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

    Notes

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

    Note 24: Borrowings (continued)

    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 act as a liquidity mechanism used to settle wholesale obligations amongst the banks and provide the basis for settling most of the retail transactions that occur every working day between corporates and individuals.

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

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

    Finance Lease Liabilities

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By source

     
    6 8 Core Crown 7 12
    48 44 Crown entities 45 39
    1,425 1,522 State-owned enterprises 1,449 1,403
    (4) Inter-segment eliminations
    1,475 1,574 Total finance lease liabilities 1,501 1,454

    Undiscounted Minimum Lease Payments

     
    No later than one year 217 193
    Later than one year and not later than five years 805 774
    Later than five years 646 643
    Total undiscounted minimum lease payments 1,668 1,610

    Present Value of Minimum Lease Payments

     
    No later than one year 188 172
    Later than one year and not later than five years 697 691
    Later than five years 616 591
    Total present value of minimum lease payments 1,501 1,454
    Future finance charges 167 156

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

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

    Other Borrowings

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

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

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Other borrowings measured at fair value

     
    Carrying value 5,305 4,676
    Amount payable on maturity 5,226 4,196
    Fair value impact from changes in credit risk for the year 160 (42)
    Cumulative fair value impact from changes in credit risk 22 165

    Note 25: Insurance Liabilities

    Forecast Actual
    Budget
    2013
    $m
    Budget
    2014
    $m
    30 June
    2014
    $m
    30 June
    2013
    $m

    By entity

     
    31,423 29,209 ACC liability 29,948 29,446
    3,743 4,308 EQC property damage liability 4,747 6,869
    698 1,327 Southern Response liability 1,434 1,744
    38 56 Other insurance liabilities 63 67
    Inter-segment eliminations (367) (414)
    35,902 34,900 Total insurance liabilities 35,825 37,712

    By component

     
    Outstanding claims liability 33,358 35,225
    Unearned premium liability 2,196 2,384
    Unearned premium liability deficiency 271 103
    Other
    Total insurance liabilities 35,825 37,712

    By maturity

     
    7,306 8,883 Expected to be settled within one year 9,706 10,103
    28,596 26,017 Expected to be outstanding for more than one year 26,119 27,609
    35,902 34,900 Total insurance liabilities 35,825 37,712

    Assets arising from insurance obligations are:

     
    Receivables for premiums 2,689 2,917
    Reinsurance claim recoveries 1,409 3,135

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

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

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

    Analysis of insurance liabilities

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

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

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

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

    Analysis of ACC insurance liability

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    ACC outstanding claims liability 27,696 27,162
    ACC unearned premium liability 2,050 2,242
    ACC unearned premium liability deficiency 202 42
    Total ACC liability 29,948 29,446

    Analysis of Outstanding ACC Claims Liability

     
    Undiscounted outstanding claims liability 76,628 74,809
    Discount adjustment (52,104) (50,754)
    Risk margin 3,172 3,107
    Total outstanding ACC claims liability 27,696 27,162
    Discounted central estimate of future payments for outstanding claims 22,898 22,384
    Claims handling expenses 1,626 1,671
    Outstanding claims liability before risk margin 24,524 24,055
    Risk margin 3,172 3,107
    Total outstanding ACC claims liability 27,696 27,162

    Movement in Outstanding ACC Claims Liability

     
    Opening balance 27,162 28,396
    Claims incurred for the year 3,642 3,421
    Claims paid out in the year (3,335) (2,970)
    Discount rate unwind 706 684
    Experience adjustments (actuarial gains and losses):  
    - actual and assumed claim experience 443 (1,195)
    - change in discount rate (93) (939)
    - change in inflation rate (829) (235)
    Other movements
    Closing outstanding ACC claims liability 27,696 27,162

    Movement in ACC Unearned Premium Liability

     
    Opening balance 2,242 2,183
    Earning of premiums previously deferred (2,242) (2,183)
    Deferral of premiums on current year contracts 2,050 2,242
    Other
    Closing ACC unearned premium liability 2,050 2,242

    Claims development historical analysis

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

    2008
    $m
    2009
    $m
    2010
    $m
    2011
    $m
    2012
    $m
    2013
    $m
    2014
    $m
    30 June
    2014
    $m

    Estimate of ultimate claims costs:

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

    Analysis of ACC unearned premium liability deficiency

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

    Key Assumptions

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

    (i) Risk-free discount rates

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

    (ii) Risk margin

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

    (iii) Inflation and indexation

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

    (iv) Rehabilitation Rate

    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
    2014
    Next
    Year
    30 June
    2014
    Beyond
    Next
    Year
    30 June
    2013
    Next
    Year
    30 June
    2013
    Beyond
    Next
    Year

    Summary of assumptions

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

    Notes

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

    Note 25: Insurance Liabilities (continued)

    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
    2014
    $m
    30 June
    2013
    $m

    Sensitivity of assumptions

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

    Undiscounted outstanding claims liability

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

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

    Analysis of EQC insurance liability

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    The EQC liability comprises:
    EQC outstanding claims liability 4,532 6,666
    EQC unearned premium liability 146 142
    EQC unearned premium liability deficiency 69 61
    Total EQC liability 4,747 6,869

    By type

     
    Property damage claims in relation to Canterbury earthquakes 4,441 6,634
    Other insurance liabilities 306 235
    Total EQC liability 4,747 6,869

    Analysis of Outstanding EQC Insurance Liability

     
    Undiscounted outstanding claims liability 4,302 6,340
    Discount adjustment (62) (125)
    Risk margin 292 451
    Total outstanding EQC insurance liability 4,532 6,666
    Discounted central estimate of future payments for outstanding claims 3,998 5,754
    Claims handling expenses 242 461
    Outstanding claims liability before risk margin 4,240 6,215
    Risk margin 292 451
    Total outstanding EQC insurance liability 4,532 6,666

    Movement in Outstanding EQC Insurance Liability

     
    Opening balance 6,666 8,638
    Net claims incurred/reassessed for the year - Canterbury earthquakes (368) (205)
    Claims incurred for the year - other 96 38
    Claims paid out in the year (1,868) (1,787)
    Other movements 6 (18)
    Closing outstanding EQC insurance liability 4,532 6,666
    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m
    Movement in EQC Unearned Premium Liability  
    Opening balance 142 110
    Earning of premiums previously deferred (142) (110)
    Deferral of premiums on current year contracts 146 142
    Other
    Closing EQC unearned premium liability 146 142
    Analysis of EQC unearned premium liability deficiency  
    Unearned premium liability 146 142
    Discounted central estimate of payments for insured future claims 228 221
    Central estimate of discounted future reinsurance recoveries (16) (18)
    Risk margin 3
    Present value of expected cash flows for future claims 215 203
    Total EQC unearned premium liability deficiency 69 61

    Note 25: Insurance Liabilities (continued)

    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 2014 30 June 2013

    Summary of assumptions

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

    Sensitivity Analysis

    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
    2014
    $m
    30 June
    2013
    $m

    Sensitivity of assumptions

     
    Weighted average term to settlement + 0.5 years 62 90
    - 0.5 years (8) (18)
    Claims inflation rate +1% 6 19
    -1% (9) (43)
    Risk-free discount rate +1% (13) (33)
    -1% 13 33
    Risk margin +1% 31 40
    -1% (32) (40)
    Claims handling expense ratio +1% 24 35
    -1% (25) (34)

    Analysis of Southern Response liability

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

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

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

    Actual
    30 June
    2014
    $m
    30 June
    2013
    $m

    Analysis of Outstanding Southern Response Claims Liability

     
    Undiscounted outstanding claims liability 1,361 1,659
    Discount adjustment (54) (65)
    Risk margin 127 150
    Total outstanding Southern Response claims liability 1,434 1,744
    Expected future claims payments - central estimate 1,244 1,521
    Claims handling expenses 63 73
    Outstanding claims liability before risk margin 1,307 1,594
    Risk margin 127 150
    Total outstanding Southern Response claims liability 1,434 1,744

    Movement in Outstanding Southern Response Claims Liability

     
    Opening balance 1,744 2,062
    Net claims incurred/reassessed for the year - Canterbury earthquakes 87 (22)
    Claims paid out in the year (397) (296)
    Closing outstanding Southern Response claims liability 1,434 1,744

    Note 25: Insurance Liabilities (continued)

    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 5.8% inflation assumption (2013: 8.6%) has been made relating to building costs in Canterbury.

    (iii) Discount rate

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

    (iv) Risk margin

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

    30 June
    2014
    30 June
    2013

    Summary of assumptions

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

    Key Assumptions

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

    (i) Risk-free discount rates

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

    (ii) Risk margin

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

    (iii) Inflation and indexation

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

    (iv) Rehabilitation Rate

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

    (v) Liability adequacy test

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

    Sensitivity Analysis

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

    Note 26: Retirement Plan Liabilities

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m
    11,767 10,738 Government Superannuation Fund (GSF) 10,886 11,908
    (1) (6) Other funds (1) (5)
    11,766 10,732 Total retirement plan liabilities 10,885 11,903

    By source

     
    11,774 10,744 Core Crown 10,889 11,915
    2 1 Crown entities 2 1
    (10) (13) State-owned enterprises (6) (13)
    Inter-segment eliminations
    11,766 10,732 Total retirement plan liabilities 10,885 11,903

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

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

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

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Net GSF Obligation

     
    Present value of defined benefit obligation 14,560 15,290
    Fair value of plan assets (3,674) (3,382)
    Present value of unfunded defined benefit obligation 10,886 11,908

    Present value of defined benefit obligation

       
    Opening defined benefit obligation 15,290 16,557
    Expected current service cost 92 112
    Expected unwind of discount rate 404 394
    Actuarial losses/(gains) (365) (920)
    Benefits paid (861) (853)
    Closing defined benefit obligation 14,560 15,290

    Fair value of plan assets

     
    Opening fair value of plan assets 3,382 3,018
    Expected return on plan assets 183 162
    Actuarial gains/(losses) 212 331
    Funding of benefits paid by Government 727 683
    Contributions from other entities 22 19
    Contributions from members 41 47
    Benefits paid (861) (853)
    Other (32) (25)
    Closing fair value of plan assets 3,674 3,382

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

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Personnel Expenses

     
    Expected current service cost 92 112
    Expected unwind of discount rate on GSF obligation 404 394
    Expected return on plan assets (183) (162)
    Contributions from members and funding employers (63) (66)
    Other expenses[19] 32 25
        Past service cost
    274 282 Total included in personnel expenses 282 303

    Net (Gains)/Losses on Non-Financial Instruments

    (713) Actuarial (gains)/losses recognised in the year (577) (1,251)
    274 (431) Total GSF expense (295) (948)

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

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

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

    Actual
    30 June 2014
    %
    30 June 2013
    %

    Summary of assumptions

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

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

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

    Notes

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

    Note 26: Retirement Plan Liabilities (continued)

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

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

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

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

    Sensitivity Analysis

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

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

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

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

    Impact on net GSF obligation
    Change Actual
      30 June 2014
    $m
    30 June 2013
    $m

    Sensitivity of assumptions

       
    Discount rate (Present value of the obligation) + 1% (1,485) (1,587)
    - 1% 1,800 1,927
    Share price (Fair value of planned assets) + 10% (223) (194)
    - 10% 223 194

    Historical Analysis

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

    Undiscounted defined benefit obligation

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

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

    Note 27: Provisions

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    By type

     
    3,233 3,181 Provision for employee entitlements 3,444 3,374
    351 Provision for ETS credits 521 179
    987 987 Provision for National Provident Fund guarantee 910 977
    Provision for Canterbury Red Zone support package 66 222
    837 391 Provision for Water Infrastructure costs 394 769
    62 123 Provision for weathertight services financial assistance package 112 123
    1,198 1,287 Other provisions 1,508 1,494
    6,317 6,320 Total provisions 6,955 7,138

    By source

     
    3,905 3,776 Core Crown 4,208 4,492
    1,907 1,988 Crown entities 2,076 1,979
    963 1,013 State-owned enterprises 1,177 1,151
    (458) (457) Inter-segment eliminations (506) (484)
    6,317 6,320 Total provisions 6,955 7,138

    By maturity

     
    3,078 3,079 Expected to be settled within one year 3,487 3,355
    3,239 3,241 Expected to be outstanding for more than one year 3,468 3,783
    6,317 6,320 Total provisions 6,955 7,138
    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for employee entitlements

     
    Opening provision 3,374 3,253
    Additional provisions recognised 1,769 1,714
    Provision used during the period (1,543) (1,469)
    Reversal of previous provision (160) (122)
    Unwind of discount rate 4 (2)
    Closing provision 3,444 3,374

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


    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for ETS credits

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

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

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

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

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

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for National Provident Fund guarantee

     
    Opening provision 977 1,076
    Additional provisions recognised
    Provision used during the period (73) (73)
    Reversal of previous provision 26 (16)
    Unwind of discount rate and effect of changes in discount rate (20) (10)
    Closing provision 910 977

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

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for Canterbury Red Zone support package

    Opening provision 222 745
    Additional provisions recognised 1 37
    Provision used during the period (164) (500)
    Reversal of previous provision 6 (66)
    Unwind of discount rate and effect of changes in discount rate 1 6
    Closing provision 66 222

    Net provision

     
    Provision for Red Zone properties 66 222
    Estimated insurance proceeds from Red Zone Properties (403) (517)
    Net (recoverable)/provision for Red Zone properties (337) (295)

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

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

    Note 27: Provisions (continued)

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for Water Infrastructure costs

     
    Opening provision 769 530
    Additional provisions recognised 437
    Provision used during the period (391) (156)
    Reversal of previous provision
    Unwind of discount rate and effect of changes in discount rate 16 (42)
    Closing provision 394 769

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

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

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

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

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

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Provision for weathertight services financial assistance package

    Opening provision 123 189
    Additional provisions recognised
    Provision used during the period (7) (7)
    Reversal of previous provision (6) (60)
    Unwind of discount rate and effect of changes in discount rate 2 1
    Closing provision 112 123

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

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

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

    Actual
    30 June 2014
    $m
    30 June 2013
    $m

    Other provisions

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

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

    Note 28: Net Worth

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m
    6,230 13,344 Taxpayer funds 13,300 10,862
    55,831 56,648 Property, plant and equipment revaluation reserve 62,225 57,068
    84 94 Investment revaluation reserve 58 107
    (142) (44) Cash flow hedge reserve 33 58
    (6) (56) Foreign currency translation reserve (92) (49)
    46 Share based payment reserve 44 25
    3,185 5,435 Net worth attributable to minority interests 5,211 1,940
    65,182 75,467 Total net worth 80,779 70,011

    Taxpayer Funds

     
    5,601 10,862 Opening taxpayers funds 10,862 3,520
    358 2,973 Operating balance (excluding minority interests) 2,808 6,925
    175 (542) Gain/(loss) on Government share offers in SOEs (577) 167
    133 69 Transfers from/(to) property, plant and equipment revaluation  reserve 229 268
    (37) (18) Other movements (22) (18)
    6,230 13,344 Closing taxpayer funds 13,300 10,862

    Property, Plant and Equipment Revaluation Reserve

    55,965 57,068 Opening revaluation reserve 57,068 56,001
    (351) Net revaluations 5,386 1,335
    (134) (69) Transfers from/(to) taxpayer funds (229) (268)
    55,831 56,648 Closing revaluation reserve 62,225 57,068

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

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Investment Revaluation Reserve

     
    76 107 Opening investment revaluation reserve 107 71
    8 (12) Increase arising on revaluation of available-for-sale financial   assets (42) 39
    (1) Cumulative (gain)/loss transferred to the statement of financial  performance on sale of available-for-sale financial assets (7) (3)
    84 94 Closing investment revaluation reserve 58 107

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

    Note 28: Net Worth (continued)

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Cash Flow Hedge Reserve

     
    (121) 58 Opening cash flow hedge reserve 58 (195)
    (21) (101) Transfer into reserve 30 278
    (4) Transfer to the statement of financial performance (36) (7)
    3 Transfer to initial carrying value of hedged item (19) (18)
    (142) (44) Closing cash flow hedge reserve 33 58

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

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Foreign currency translation reserve

     
    (45) (49) Opening foreign currency translation reserve (49) (49)
    39 (7) Arising from translation of foreign operations (43)
    (6) (56) Closing foreign currency translation reserve (92) (49)

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

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Share based payment reserve

     
    25 Opening share based payment reserve 25
    21 Partial share sales 22 25
    Lapses/Forfeitures (4)
    Other movements 1
    46 Closing share based payment reserve 44 25

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

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

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

    Forecast Actual
    Budget 2013
    $m
    Budget 2014
    $m
    30 June 2014
    $m
    30 June 2013
    $m

    Net Worth Attributable to Minority Interests

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

    Transactions with minority interests include dividend payments and dividend reinvestments.

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

    Note 29: Capital Objectives and Fiscal Policy

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

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

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

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

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

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

    Debt

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

    Operating balance

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

    Operating expenses

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

    Operating revenues

    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 2013 Fiscal Strategy Report 2014 Fiscal Position 2014[21]

    Debt

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

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

    Debt

    Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 34% of GDP in 2017/18.

    Net core Crown debt (excluding NZS Fund and advances) is forecast to be 23.8% in 2017/18 and to be 20.0% of GDP in 2019/20.

    Debt

    Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2014 was 38.6% of GDP (2013: 39.7%).

    Core Crown net debt (excluding NZS Fund and advances) at 30 June 2014 was 26.2% of GDP (2013: 26.3%).

    Operating balance

    Our intention is to return the operating balance (before gains and losses) to surplus as soon as practical and no later than 2014/15, subject to any significant shocks.

    Based on the operating allowance for the 2013 Budget, the operating balance (before gains and losses) is forecast to be -0.9% of GDP in 2013/14. The operating balance (before gains and losses) is forecast to be 0.0% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance.

    The operating balance is forecast to be 0.2% of GDP in 2013/14.

    Operating balance

    Our intention is to return the operating balance (before gains and losses) to surplus as soon as practical and no later than 2014/15, subject to any significant shocks.

    The operating balance (before gains and losses) is forecast to be -1.1% of GDP in 2013/14. The operating balance (before gains and losses) is forecast to be 0.2% of GDP in 2014/15. This is consistent with the long-term objective for the operating balance.

    The operating balance is forecast to be 1.3% of GDP in 2014/15.

    Operating balance

    The operating (before gains and losses) deficit for the year ended 30 June 2014 was 1.3% of GDP (2013: 2.1%).

    The operating surplus for the year ended 30 June 2014 was 1.2% of GDP (2013: 3.3%).

    Expenses

    Our intention is to support a return to fiscal surplus by restraining the growth in core Crown expenses - so that they are reduced to around 30% of GDP by 2015/16.

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

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

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

    Expenses

    Our intention is to support a return to fiscal surplus by restraining the growth in core Crown expenses - so that they are reduced to around 30% of GDP by 2015/16.

    Core Crown expenses are forecast to be 29.9% of GDP in 2017/18.

    Total Crown expenses are forecast to be 38.8% of GDP in 2017/18.

    This assumes a new operating allowance of $1.5 billion in Budget 2015, growing at 2% for Budgets thereafter (GST exclusive).

    Expenses

    Core Crown expenses for the year ended 30 June 2014 were 31.2% GDP (2013: 33.1%).

    Total Crown expenses for the year ended 30 June 2014 were 40.2% of GDP (2013: 42.8%).

    Revenues

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

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

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

    Revenues

    Total Crown revenues are forecast to be 40.3% of GDP in 2017/18.

    Core Crown revenues are forecast to be 31.1% of GDP in 2017/18.

    Core Crown tax revenues are forecast to be 28.5% of GDP in 2017/18.

    Revenues

    Total Crown revenues for the year ended 30 June 2014 were 39.0% of GDP (2013: 40.8%).

    Core Crown revenues for the year ended 30 June 2014 were 29.4% of GDP (2012: 30.2%).

    Core Crown tax revenues for the year ended 30 June 2014 were 26.8% of GDP (2013: 27.6%).

    Net worth

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

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

    Net worth

    Total Crown net worth is forecast to be 34.9% of GDP in 2017/18.

    Total net worth attributable to the Crown is forecast to be 32.8% of GDP in 2017/18.

    Net worth

    Total net worth attributable to the Crown as at 30 June 2014 was 33.0% of GDP (2013: 32.0%).

    Core Crown net worth as at 30 June 2014 was 12.6% of GDP (2013: 12.1%).

    Notes

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

    Note 30: Canterbury Earthquakes

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

      Note  30 June 2014
    $m
    30 June 2013
    $m

    Canterbury earthquake-related obligations

         
    EQC property damage liability 25 4,441 6,634
    Southern Response property damage liability 25 1,434 1,744
    Total insurance liabilities   5,875 8,378
    Provision for Canterbury Red Zone support package 27 66 222
    Provision for water infrastructure costs 27 394 769
    Other provisions   35
    Total provisions   495 991
    Total Canterbury earthquake-related obligations   6,370 9,369

    Canterbury earthquake-related receivables

         
    EQC reinsurance receivables   1,225 2,623
    Southern Response reinsurance receivables   184 512
    Total reinsurance receivables 14 1,409 3,135
    Red Zone insurance recoveries 27 403 517
    Other receivables   11 295
    Total other receivables   414 812
    Total Canterbury earthquake-related receivables   1,823 3,947
    Net Canterbury earthquake-related obligations   4,547 5,422

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

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

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

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

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

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

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

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

    Note 30: Canterbury Earthquakes (continued)

    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.

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

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

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

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

    b) Local Infrastructure

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

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

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

    During this financial year, the costs of infrastructure recovery in the Waimakariri and Selwyn districts have been finalised. The Government indemnities that were previously in place for these areas have been removed or are now redundant and replaced with agreements with the relevant territorial authorities. No additional payments to these authorities are expected.

    Response Costs

    During the year, no additional expenses have been recorded for response costs. The total Canterbury earthquake response costs (primarily temporary repairs to essential infrastructure) were $226 million.

    Recovery Costs

    During the year, an additional $16 million of expenses has been recorded in relation to the Crown's provision for water infrastructure costs (2013: $395 million). As a result of the cost sharing agreement between the Government and CCC, the Government's share of water recovery costs to date were $965 million.

    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, $93 million (2013: $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 $324 million. While costs associated with water infrastructure are recognised upfront, the repair of local roadways is recognised in the year of repair, consistent with the approach taken to all subsidised local roading repairs.

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. NZTA have entered into a loan agreement with the Crown to fund the ongoing NZTA contribution above this amount over the next three years.

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 2014. The net effect of the re-estimation of the red zone support package was a reversal of expenses of $73 million in the current year. The actuary has used the best available information, but it is acknowledged that there have been limitations on the data available from insurers particularly in relation to recoveries. 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.

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. During the 2014 financial year an additional $124 million of net expenses was recognised (2013: $53 million net revenues).

The most recent estimate of the total potential cost of the Crown's support is $492 million including a risk margin ($90 million in net revenues are expected beyond the year ended 30 June 2014). 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 2014 (including discussion on the sensitivity of assumptions) are outlined in note 25.

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 2014, $473 million (2013: $115 million) has been recognised relating to the purchase of land and operating costs for these projects.

f) Other Earthquake Costs

Other costs represent various other initiatives raised in support of Canterbury. The 2014 net cost includes $118 million in relation to capital expenditure on Canterbury hospitals, schools, TEIs and the justice and emergency services precinct. In addition, $88 million of net costs (operating and capital) incurred by Crown entities other than EQC, and $19 million in relation to welfare support. The remaining $120 million includes the operating costs of the Canterbury Earthquake Recovery Authority (CERA), welfare support, state highway repairs, emergency and temporary housing and miscellaneous other earthquake-related costs.

Note 31: Commitments

  Actual
  30 June 2014
$m
30 June 2013
$m

Capital Commitments

   
Specialist military equipment 732 549
Land and buildings 878 717
Other property, plant and equipment 5,307 5,478
Other capital commitments 919 790
Tertiary Education Institutions 201 169
Total capital commitments 8,037 7,703

Operating Lease Commitments

   
Non-cancellable accommodation leases 3,059 2,792
Other non-cancellable leases 2,340 2,735
Tertiary Education Institutions 494 466
Total operating lease commitments 5,893 5,993
Total commitments 13,930 13,696

By source

   
Core Crown 4,916 4,226
Crown entities 5,465 5,296
State-owned enterprises 4,847 5,078
Inter-segment eliminations (1,298) (904)
Total commitments  13,930 13,696

By Term

   

Capital Commitments

   
One year or less 3,863 3,689
From one year to two years 1,591 1,764
From two to five years 2,107 2,025
Over five years 476 225
Total capital commitments  8,037 7,703

Operating Lease Commitments

   
One year or less 921 1,101
From one year to two years 970 985
From two to five years 1,810 1,900
Over five years 2,192 2,007
Total operating lease commitments  5,893 5,993
Total commitments 13,930 13,696

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 2014 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 (eg, 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 2014
$m
30 June 2013
$m

Quantifiable Contingent Liabilities

     
Guarantees and indemnities a 222 225
Uncalled capital b 5,662 6,286
Legal proceedings and disputes c 604 707
Other contingent liabilities d 357 432
Total quantifiable contingent liabilities   6,845 7,650

By source

     
Core Crown   6,568 7,350
Crown entities   44 35
State-owned enterprises   233 265
Total quantifiable contingent liabilities   6,845 7,650

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 2014
$m
30 June 2013
$m
New Zealand Export Credit Office guarantees i  93 76
Air New Zealand letters of credit and performance bonds ii 52   51
Housing New Zealand Crown mortgage portfolio iii 26   33
Other guarantees and indemnities   51   65
Total guarantees and indemnities   222 225

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 combined liability of the Crown, being the total outstanding amount owed under the guaranteed mortgages.

Note 32: Contingent Liabilities and Contingent Assets (continued)

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 2014
$m
30 June 2013
$m
Asian Development Bank i 2,728 2,992
International Monetary Fund - promissory notes ii 1,013 1,163
International Monetary Fund - arrangements to borrow iii 937 1,052
International Bank for Reconstruction and Development iv 968 1,056
Other uncalled capital   16 23
Total uncalled capital   5,662 6,286

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 2014
$m
30 June 2013
$m
Tax disputes i 591 641
Other legal proceedings and disputes   13 66
Total legal proceedings and disputes   604 707

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.

d) Other quantifiable contingent liabilities

    Actual
  Note  30 June 2014
$m
30 June 2013
$m
Transpower capital expenditure recovery i 90 156
Unclaimed monies ii 112 101
Air New Zealand partnership iii 82 47
Other contingent liabilities   73 128
Total other contingent liabilities   357 432

i Transpower capital expenditure recovery

Transpower has contingent liabilities relating to capital expenditure that may not be 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.

Note 32: Contingent Liabilities and Contingent Assets (continued)

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 claims and proceedings

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.

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.
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. 
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993. As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.
Genesis Energy Limited Deed between Genesis Power Limited and the Crown. The agreement sees the Crown compensate Genesis in the event that Genesis has less gas than it requires 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. 
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 11CE of the District Courts Act 1947

Section 4F of the Justices of the Peace 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 Contract 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 with the approval of the Minister, 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 approved and 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.

Note 32: Contingent Liabilities and Contingent Assets (continued)

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.

i) 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.

ii) Air New Zealand litigation

Air New Zealand is defending two class actions in the United States. One makes allegations of anti-competitive conduct against many airlines in relation to pricing in the air cargo business. Following settlements, seven airlines including Air New Zealand continue to defend the claim. A similar, previously reported class action filed in Australia was discontinued against Air New Zealand in June 2014 resulting in legal costs of $3 million being recovered by Air New Zealand.

The second class action being defended in the United States, alleges that Air New Zealand together with other airlines acted anti-competitively in respect of fares and surcharges on trans-Pacific routes.

The allegations of anti-competitive conduct in the air cargo business in Hong Kong and Singapore are 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 determined that Air New Zealand had breached competition laws, the Company would have potential liability for damages or (in Australia) pecuniary penalties.

iii) Kiwibank

In June 2013, a group called Fair Play on Fees announced plans for a representative action against banks in New Zealand in relation to certain default fees charged to New Zealand customers. In November 2013, the group issued proceedings against Kiwibank. The potential outcome of the proceedings cannot be determined with any certainty at this stage.

iv) 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.

v) 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.

vi) Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge certain 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. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

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. Entities 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 are likely to 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. A number of these disputed items relating to the relativity mechanism payment are currently subject to an arbitration process.

Contingent Assets

    Actual
  Note 30 June 2014 30 June 2013

Contingent assets

     
Tax disputes i 90 169
Suspensory loans issued to integrated schools ii 31 38
Other contingent assets   12 63
Total contingent assets   133 270

By source

     
Core Crown   129 245
Crown entities   4 4
State-owned enterprises   21
Total quantifiable contingent liabilities   133 270

i) Tax disputes

A contingent asset is recognised when the Inland Revenue has advised 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 cash collectable from the disputes process based on experience and similar prior cases, net of losses carried forward.

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.

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

Designation Category

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 other comprehensive income 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

Designation
Financial assets as at 30 June 2014 Note Loans and receivables
at amortised cost
$m
Available for sale
$m
Held for trading
$m
Fair value through P&L
$m
Total
$m
Cash and cash equivalents 11,888 11,888
Trade and other receivables22 14 5,562 5,562
Long-term deposits 15 3,762 82 3,844
Derivatives in gain 15 4,164 4,164
Marketable securities 15 669 52 37,586 38,307
IMF financial assets 15 2,142 2,142
Share investments 16 22 85 6 20,483 20,596
Student loans 17 8,716 8,716
Kiwibank mortgages 17 14,630 14,630
Other advances 17 921 57 432 1,410
Total financial assets 47,643 811 4,222 58,583 111,259
Designation
Financial assets as at 30 June 2013 Note Loans and receivables
at amortised cost
$m
Available for sale
$m
Held for trading
$m
Fair value through P&L
$m
Total
$m
Cash and cash equivalents 14,924 14,924
Trade and other receivables[22] 14 7,962 7,962
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 50,917 697 3,950 51,294 106,858

As at 30 June 2014, the carrying value of financial assets that had been pledged as collateral was $1,006 million (2013: $2,016 million). These transactions are conducted under terms that are usual and customary to standard securities borrowing.

Financial Liabilities

Financial liabilities as at 30 June 2014 Designation
Note Amortised cost Held for trading Fair value through P&L Total
  $m $m $m $m
Issued currency[23] 4,964 4,964
Accounts payable 23 7,626 7,626
Borrowings: 24        
     Government bonds 57,554 2,783 60,337
     Treasury bills 3,147 3,147
     Government retail stock 183 183
     Settlement deposits with Reserve Bank 7,758     7,758
     Derivatives in loss 2,245 2,245
     Finance lease liabilities 1,501 1,501
     Other borrowings 22,943 5,305 28,248
Total borrowings 93,086 2,245 8,088 103,419
Total financial liabilities 105,676 2,245 8,088 116,009
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 currency23 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 Bank   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

Notes

  • [22]The trade and other receivables financial assets include reinsurance receivables but exclude deposit guarantee scheme receivables.
  • [23]Issued currency is not designated but is recorded at face value. Face value for issued currency is equivalent to amortised cost.

Note 33: Financial Instruments (continued)

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 2014 Quoted market price
$m
Observable markets
$m
Significant
non-observable inputs
$m
Total
$m

Financial assets

       
Long-term deposits 82 82
Derivatives in gain 14 3,953 197 4,164
Marketable securities 9,736 26,768 1,803 38,307
Share investments 19,782 33 759 20,574
Kiwibank mortgages
Other advances 128 361 489
Total financial assets at fair value 29,532 30,964 3,120 63,616

Financial liabilities

       
Government bonds 2,783 2,783
Treasury bills
Government retail stock
Derivatives in loss 18 2,144 83 2,245
Other borrowings 578 4,727 5,305
Total financial liabilities at fair value 3,379 6,871 83 10,333
Net financial instuments at fair value 26,153 24,093 3,037 53,283

As at 30 June 2013

Quoted market price
$m
Observable markets
$m
Significant
non-observable inputs
$m
Total
$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 instruments at fair value 24,575 18,120 3,010 45,705

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 2014 Marketable securities
$m
Share investments
$m
Kiwibank mortgages
$m
Other advances
$m
Derivatives
in gain/ (loss)
$m
Other borrowings
$m
Total
$m
Opening balance 1,657 1,072 217 94 (30) 3,010
Total gains/(losses) recognised in the statement of financial performance (43) 107 16 (87) 29 22
Total gains/(losses) recognised in the  statement of comprehensive income (3) (1) 63 59
Purchases 793 151 3 1 948
Sales (136) (202) (5) (343)
Issues 143 143
Settlements (558) (306) (2) 44 (822)
Transfers into and out of level 3 93 (63) (12) 2 20
Closing balance 1,803 759 361 114 3,037
Marketable securities
$m
Share investments
$m
Kiwibank mortgages
$m
Other advances
$m
Derivatives
in gain/ (loss)
$m
Other borrowings
$m
Total
$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

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
$m
Share investments
$m
Kiwibank mortgages
$m
Other advances
$m
Derivatives
in gain/ (loss)
$m
Other borrowings
$m
Total
$m
Year ended 30 June 2014 194 203 16 (1) 29 441
Year ended 30 June 2013 184 94 (18) 83 (11) 332

Note 33: Financial Instruments (continued)

Derivatives

Carrying Value Notional Value
Derivatives as at 30 June 2014 Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$m
Foreign exchange contracts 409 169 240 22,726 9,835 32,561
Foreign exchange options 2 1 1 12 85 97
Cross currency swaps 2,216 543 1,673 13,926 3,950 17,876
Interest rate swaps 502 1,104 (602) 26,004 43,453 69,457
Futures 4 7 (3) 2,785 1,674 4,459
Other derivatives 1,031 421 610 16,607 12,562 29,169
Total derivatives 4,164 2,245 1,919 82,060 71,559 153,619
Carrying Value Notional Value
Derivatives as at 30 June 2013 Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$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
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

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 Accounted 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
$m
Carrying value in loss
$m
Net carrying value
$m

Hedge accounted derivatives as at 30 June 2014

Derivatives hedging fair value 8 58 (50)
Derivatives hedging cash flows 173 240 (67)

Hedge accounted derivatives as at 30 June 2013

Derivatives hedging fair value 41 21 20
Derivatives hedging cash flows 239 217 22

As a result of fair value hedge accounting, the hedged items were adjusted by a loss of $47 million (2013: gain of $4 million), which is included in the statement of financial performance along with the change in fair value of the hedging derivative.

The periods when cash flows are expected to occur from activities subject to cash flow hedge accounting and when they are expected to effect the operating balance are:

$m 1-2 years
$m
2-5 years
$m
>5 years
$m
Total
$m

As at 30 June 2014

         
Timing of cash flows (38) 3 (131) (127) (293)
Increase/(decrease) in operating balance (53) 5 (118) 99 (67)

As at 30 June 2013

Timing of cash flows 62 3 1 1 67
Increase/(decrease) in operating balance 32 (5) (6) 21 42

The same types of derivative instruments listed on the previous page are used for hedge accounting.

(b)  Risk management policies

Risk management policies are outlined for entities that hold significant portfolios of financial instruments. The size of these portfolios on an unconsolidated basis (ie, including cross-holdings of Government stock and other Crown instruments) are:

  30 June 2014 30 June 2013
  Unconsolidated
financial
assets
$m
Unconsolidated
financial
 liabilities
$m
Unconsolidated
financial
assets
$m
Unconsolidated
financial
liabilities
$m
ACC 27,913 1,468 25,278 1,332
Air New Zealand 2,149 2,194 2,093 2,043
EQC 3,552 37 5,346 448
Genesis Energy 255 1,209 302 1,285
Inland Revenue Department 11,316 260 11,232 301
Meridian Energy 547 1,508 824 1,606
Mighty River Power 372 1,431 455 1,601
New Zealand Debt Management Office (NZDMO) 13,185 81,112 12,713 76,585
NZ Post (including Kiwibank) 16,856 16,310 15,418 14,990
NZ Superannuation Fund 26,990 1,812 23,419 1,721
Public Trust 547 511 626 594
Reserve Bank 18,849 16,405 19,342 16,659
Southern Response 1,318 4 1,746 8
Transpower 594 3,863 576 3,731

The risk management policies applied by each of these entities are outlined below.

Manager Financial Instrument Portfolio Risk Management
Accident Compensation Corporation ACC Reserves The Investment Committee sets Investment Guidelines by requiring investment portfolio managers to manage their portfolios within defined market exposure limits.  These include exposure limits such as limits on the percentage weight of any particular company in the portfolio relative to its benchmark weight; limits on aggregate investment companies not represented in the benchmark; limits on the maximum investment in any individual company; ratings related credit limits on both a per-issuer and aggregate basis; duration limits relative to the duration of the benchmark; and maximum credit exposure to single entities.  Compliance with the Investment Guidelines is reviewed by ACC’s Investments Risk and Compliance group on a daily basis and by the internal auditors on a half-yearly basis.
Air New Zealand Financial instruments arising from its business activity. The Board of directors approve risk management policies.  Compliance with these policies is reviewed and reported monthly to the Board and is included as part of the internal audit programme.  Group policy is not to enter, issue, or hold financial instruments for speculative purposes.
Earthquake Commission Assets in National Disaster Fund (NDF) The NDF has a short-term time horizon in that the assets are being fully applied to meeting Canterbury earthquake damage claims.  The Commission is managing the NDF to ensure both liquidity and stability of asset values.  Its assets comprise only New Zealand Government bonds and commercial bank cash instruments.
Genesis Energy

Financial instruments arising from its business activity including:

  • interest rate swaps and options
  • foreign currency swaps and options
  • electricity swaps and options
  • oil price swaps and options.
The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise financial risk to the Group.  Trading in financial instruments, including derivatives, for speculative purposes is not permitted by the Board.
Inland Revenue Department Student Loans Risk is minimised by the collection of compulsory repayments from NZ-based borrowers through the tax system.  In addition, advances are widely dispersed over a large number of borrowers, reducing the concentration of credit risk.
Meridian Energy Financial instruments arising from its business activity Meridian’s overall risk management programme focuses on the unpredictability of financial markets and the electricity spot price and seeks to minimise potential adverse effects on the financial performance and economic value of the Group.  The Group uses financial instruments to mitigate these risk exposures.
Mighty River Power Financial instruments arising from its business activity The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to proactively manage these risks with the aim of protecting shareholder wealth.  The Group uses financial instruments to hedge these risk exposures.
NZDMO

Financial assets and liabilities held to:

  • finance the Government's gross borrowing requirements
  • provide funds to Government entities, and
  • provide capital market services and derivative transactions to Government entities.
NZDMO operates within a risk management framework that is approved by the Minister of Finance.  The framework specifies NZDMO's policies for managing market risk, credit risk, liquidity risk, funding risk and operational risk.  The risk management framework is subject to continuous improvement.
New Zealand Post (including Kiwibank) Financial instruments from its debt portfolio and investment activity.  This includes activities as a financial intermediary and financial market participant. The Board is responsible for risk management policies and procedures.  This includes appointing a finance risk and investment committee to monitor risk management.  In addition, Kiwibank's Asset-Liability Committee, Executive Risk Committee and Enterprise Portfolio Management Office have been formed to ensure bank-wide input and appropriate focus on specific risk matters.
The New Zealand Superannuation Fund (NZS Fund) Investment Fund assets

The Guardians manage the NZS Fund's risks by adopting an appropriate risk profile that is commensurate with the return objective and time horizon of the Fund.  The objective is to:

  • avoid concentration of risk by ensuring there is adequate diversification between and within asset classes and geographically
  • carefully select and monitor  managers to ensure the Guardians have sufficient conviction that each manager will maximise the probability that return expectations will be met
  • ensure that there are no unintended biases away from the intended investment strategy, and
  • perform rigorous measurement and management of market risk.
Public Trust Financial assets and liabilities The Trust has a Board Investment Committee that sets the investment policies and reviews, procedures, practices and investment performance.
The Reserve Bank of New Zealand Financial assets and liabilities held for the purpose of effective foreign exchange intervention capability, wholesale banking liquidity and circulating currency. The main financial risks to which the Bank is exposed include credit risk, foreign currency risk, interest rate risk and liquidity risk.  The overall risk management framework is designed to strongly encourage the sound and prudent management of the Bank's risks.
Southern Response Financial assets The company's financial risk management activities focus on ensuring that the financial assets are managed in accordance with the investment strategy set out in the Crown Support Deed  and that sufficient liquidity is maintained at all times to meet its insurance liabilities.
Transpower Financial instruments arising from its business activity The Board has approved policy and guidelines and authorised the use of various financial instruments.  The policy adopted by the Board prohibits the use of financial instruments for speculative purposes.

(c) Market risk management

The Government's activities expose it primarily to the financial risks of changes in interest rates, foreign exchange rates and equity markets. These risks are managed at portfolio level consistent with the policy purpose of the portfolio and risk management objectives. Detailed information on the exposure to market risk and policies for managing this risk are available in the separate financial statements prepared by the Manager for each portfolio.

The Government's exposure to market risk reflects the combination of these portfolio management practices. These practices include use of Value-at-Risk (VaR) limits and stop-loss limits to manage risk. While NZDMO and Reserve Bank's activities collectively manage the core Crown's exposure to foreign exchange, there is no other centralised management of market or other risk.

There has been no significant change to the manner in which the Government reporting entities that manage the Government's portfolios, manage and measure risks from previous year.

Derivative financial instruments are used across the portfolios to manage exposure to interest rate, foreign currency and electricity sector risk. Refer to section on derivatives in note 33(a) for further information on these derivatives.

Interest rate risk management

The Government is exposed to interest rate risk as entities in the Government reporting entity borrow and invest funds at both fixed and floating interest rates. The risk is managed at the entity level in accordance with their capital objectives and risk management policies. These objectives and policies include maintaining an appropriate mix between fixed and floating rate borrowings, by the use of interest rate swap contracts and forward interest rate contracts, and by the use of Value-at-Risk and stop-loss limits. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles.

Interest rate sensitivity analysis

The following analysis of financial instruments shows how the operating balance and equity reserves would have been affected by a 100 basis point increase or decrease in New Zealand interest rates while holding all other variables constant. The effect on the operating balance is primarily from changes in interest revenue and interest expense on floating rate instruments and changes in the value of instruments measured at fair value through profit and loss. The Government does not have material exposure to foreign interest rates.

The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative financial instruments at the balance sheet date. The effect of exposure to interest rates on the valuation of non-financial instruments, such as the ACC liability and GSF defined benefit plan, are provided in the relevant notes to the financial statements.

Movements in interest rates affect the financial results of the Government in the following manner:

  • the resulting valuation changes for fixed interest instruments that are measured at fair value through profit and loss will affect the operating balance, while the valuation changes of fixed interest instruments designated as available-for-sale will affect equity reserves
  • the resulting changes in interest expense and interest revenue on floating rate instruments will affect the operating balance, and
  • where derivatives are designated as cash flow hedges of floating rate instruments, equity reserves will be affected by the resulting changes in the fair value of these derivatives.

If interest rates had been 100 basis points higher/(lower) at balance date and all other variables were held constant, the effect of financial instruments would increase/(decrease) the Government's financial results as outlined in the following table. The impact is net of any hedging by way of interest rate derivatives.

Change in New Zealand Interest Rates
Impact on operating balance Impact on net worth
2014
$m
2013
$m
2014
$m
2013
$m
Increase 1% (100 basis points) (455) (532) (405) (493)
Decrease 1% (100 basis points) 478 592 428 554

The Government's sensitivity to interest rates has not changed significantly since last year. Interest rate sensitivity on financial instruments have a minor impact compared with other longer-dated obligations such as ACC outstanding claims liability and the GSF defined benefit obligations (refer note 25 on page 97, and note 26 on page 107 for sensitivity information for these long-term liabilities).

Note 33: Financial Instruments (continued)

Foreign currency risk management

The Government undertakes transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts and cross currency interest rate swaps. The carrying amounts of the Government's foreign currency denominated financial assets and financial liabilities translated to NZD at the reporting date are as follows:

As at 30 June 2014 Note  NZD NZ$m USD NZ$m Yen NZ$m Euro NZ$m Other NZ$m Total NZ$m
Cash and cash equivalents 5,648 3,646 1,685 230 679 11,888
Trade and other receivables 14 4,642 525 22 52 321 5,562
Long-term deposits 15 3,646 60 9 30 99 3,844
Derivatives in gain 15 28,926 (14,959) (1,918) (4,924) (2,961) 4,164
Marketable securities 15 11,072 15,656 1,364 4,253 5,962 38,307
IMF financial assets 15 2,142 2,142
Share investments 16 3,876 4,746 1,474 3,880 6,620 20,596
Student loans 17 8,716 8,716
Kiwibank mortgages 17 14,630 14,630
Other advances 17 779 104 460 67 1,410
Total financial assets 81,935 9,778 2,636 3,981 12,929 111,259
Issued currency 4,964 4,964
Accounts payable 23 6,702 447 17 12 448 7,626
Borrowings: 24            
   Government bonds 60,337 60,337
   Treasury bills 3,147 3,147
   Government retail stock 183 183
   Settlement deposits with Reserve Bank 7,758 7,758
   Derivatives in loss (240) (3,327) 1,469 989 3,354 2,245
   Finance lease liabilities 570 714 217 1,501
   Other borrowings 20,878 4,392 2,978 28,248
Total financial liabilities 104,299 2,226 1,703 1,001 6,780 116,009
Net financial currency holdings (22,364) 7,552 933 2,980 6,149 (4,750)

Foreign currency risk management

As at 30 June 2013 Note  NZD NZ$m USD NZ
$m
Yen NZ
$m
Euro NZ
$m
Other NZ
$m
Total NZ
$m
Cash and cash equivalents 6,233 3,173 3,092 1,544 882 14,924
Trade and other receivables 14 6,771 693 13 213 272 7,962
Long-term deposits 15 3,254 80 5 86 163 3,588
Derivatives in gain 15 16,065 (1,093) (3,766) (3,499) (3,932) 3,775
Marketable securities 15 8,246 15,506 1,684 3,657 5,253 34,346
IMF financial assets 15 2,291 2,291
Share investments 16 4,574 4,450 1,021 1,860 5,454 17,359
Student loans 17 8,288 8,288
Kiwibank mortgages 17 13,202 13,202
Other advances 17 927 115 4 77 1,123
Total financial assets 67,560 22,924 2,049 3,865 10,460 106,858
Issued currency 4,691 4,691
Accounts payable 23 6,702 340 399 82 93 7,616
Borrowings: 24
   Government bonds 57,377 57,377
   Treasury bills 4,084 4,084
   Government reta