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Year end financial statements

Financial Statements of the Government of New Zealand for the Year Ended 30 June 2018

Ministerial Statement

The year end results for 2017/18 demonstrate the Coalition Government's commitment to managing the economy well, together with prudent and effective fiscal policy. The books show an increasing OBEGAL surplus, a reduction in net core Crown debt, and rising net worth.

The Government is on track to deliver on the Budget Responsibility Rules while making the long-term, sustained investments needed to build infrastructure, lift productivity, and build a more sustainable and inclusive economy.

These results reflect a strong economy, with nominal GDP growing by 5.5% for the year ended 30 June 2018. Core Crown tax revenue was up 6.1 percent from the previous year with all major tax types increasing, reflecting more people in employment, increases in average wages, additional domestic consumption and higher corporate profits. Average wages rose 3.0% and the number of people in employment grew by 3.7%. The Treasury notes that growth in corporate taxation was due to profit growth amongst companies both large and small, and across most sectors of the economy.

Core Crown expenditure rose 5.6% from the previous year, growing at a slower rate than core Crown revenue. The increase in core Crown expenditure was largely due to investment in the health and education sectors, as well as spending on superannuation and other transfers. Expenditure as a percentage of GDP was 27.9 percent, which was below Treasury’s Budget 2018 forecast.

The operating balance before gains and losses (OBEGAL) reached a surplus of $5.5 billion, an increase of $1.5 billion when compared to 2016/17. This is $2.4 billion ahead of the OBEGAL position forecast at Budget 2018, and the largest surplus since 2008.

Gains on financial instruments consisted of investment gains of $5.3 billion, reflecting continuing strong investment performance (primarily in NZSF and ACC). Together with losses on non-financial instruments of $2.8 billion, the total Crown operating balance was $8.4 billion. Volatility in this measure reflects volatility in equity markets and long-term liability valuations.

The Crown's assets increased by $26.3 billion to $339.9 billion at 30 June, while total Crown liabilities only increased by $7.2 billion to $204.3 billion. Net worth attributable to the Crown increased by $19.1 billion to $129.6 billion, reflecting the operating result for the year and an upward valuation of the Crown's physical assets of $10.6 billion.

The restarting of contributions to the New Zealand Superannuation Fund and increased capital investment led to a slight decrease in the residual cash surplus, with the core Crown recording a residual cash surplus of $1.3 billion.

This lead to a decline in nominal net core Crown debt to $57.5 billion, a decline of $2.0 billion from 2016/17. In GDP terms, net core Crown debt fell from 21.7% in 2016/17 to 19.9% this year.

The year end statements represent a strong result. The Government is committed to continuing the disciplined fiscal approach that has supported this result, while improving New Zealanders’ living standards. Looking ahead we will take a broader approach in order to improve the wellbeing of current and future New Zealanders. Budget 2019 will detail this approach.

Hon Grant Robertson
Minister of Finance

1 October 2018

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 Public Benefit Entity Accounting Standards (PBE standards) for the public sector.

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

Gabriel Makhlouf
Secretary to the Treasury

1 October 2018

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 2018 and its operations for the year ended on that date.

Hon Grant Robertson
Minister of Finance

1 October 2018

Commentary on the Financial Statements

Fiscal Overview

Fiscal Overview.

At a Glance

Core Crown tax revenue was $4.6 billion more than last year and was higher than the Budget 2018 forecast by $0.7 billion (page 9).

Core Crown expenses were $4.2 billion higher than last year, but $1.1 billion less than Budget 2018 forecast (page 11).

Residual cash was a surplus of $1.3 billion, down $1.3 billion from last year's residual cash surplus of $2.6 billion (page 15).

Core Crown gross debt increased nominally by $0.9 billion to $88.1 billion from the prior year, and also increased as a percentage of GDP to 30.4% (page 17).

Core Crown net debt decreased in nominal terms by $2.0 billion, while also continuing to decrease as a percentage of GDP (to 19.9%) (page 15).

The operating balance before gains and losses (OBEGAL) surplus of $5.5 billion, was $1.5 billion higher than last year, reflecting a 6.1% growth in core Crown tax revenue 0.5% higher than the increase in core Crown expenses (page 13).

The total Crown operating balance (excluding minority interests) was $8.4 billion as a result of the OBEGAL surplus and total Crown net gains of $2.9 billion (page 14).

Net worth attributable to the Crown increased $19.1 billion due to the operating balance, and uplifts on the Crown’s property plant and equipment (page 19).

The financial statements of the Government received an unmodified auditor's opinion for the year ended 30 June 2018.

Table 1 - Financial results
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Core Crown tax revenue1 61,563 66,636 70,445 75,644 80,224 77,536 79,537
Core Crown expenses 71,174 72,363 73,929 76,339 80,576 80,486 81,720
Residual cash (4,109) (1,827) (1,322) 2,574 1,346 (1,789) (1,255)
Core Crown gross debt2 81,956 86,125 86,928 87,141 88,053 84,078 87,467
    as a percentage of GDP 34.6% 35.1% 33.7% 31.8% 30.4% 29.8% 30.1%
Net core Crown debt3 59,931 60,631 61,880 59,480 57,495 64,111 60,409
    as a percentage of GDP 25.3% 24.7% 24.0% 21.7% 19.9% 22.8% 20.8%
OBEGAL (excluding minority interests) (2,802) 414 1,831 4,069 5,534 2,858 3,141
Operating balance (excluding minority interests) 2,939 5,771 (5,369) 12,317 8,396 5,496 6,997
Total borrowings 103,419 112,580 113,956 111,806 115,652 111,500 115,978
Net worth attributable to the Crown 75,486 86,454 89,366 110,532 129,644 105,566 117,649
    as a percentage of GDP 31.9% 35.2% 34.6% 40.3% 44.8% 37.5% 40.4%
  1. Core Crown tax revenue is higher than total Crown tax revenue due to eliminations.
  2. Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
  3. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.

A comparison of the year end results against Budget 2018 is included on pages 25 to 26.

These financial statements[1] contain the audited results for the financial year ended 30 June 2018. The results are compared against previous years and against forecasts for the 2017/18 year:

  • Budget 2017 refers to the 2017 Budget Economic and Fiscal Update published in May 2017, and
  • Budget 2018 refers to the 2018 Budget Economic and Fiscal Update published in May 2018.

This commentary should be read in conjunction with the financial statements on pages 37 to 130.

Notes
  1. [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. Total Crown is comprised of the core Crown, State-owned Enterprises (including mixed ownership model companies) and Crown entities.

Summary

The economy remained strong…

Nominal GDP grew by 5.5% in the year to June 2018 to $289.3 billion. Total wage and salary income grew strongly during the year, with average wages up by 3.0% the numbers of people in employment up by 3.7%, and total hours worked increased by 4.4% on average over the year. The GDP growth was reflected in private consumption growth of 4.8%, plus strong contributions to economic growth from residential construction and inbound tourist spending, up by 6.6% and 8.4% respectively. The total population grew by 2.0%, boosted by a net inflow of nearly 65,000 migrants in the year to June.

Figure 1 - Core Crown revenue and core Crown expenses

Figure 1 - Core Crown revenue and core Crown expenses

Source:  The Treasury

... with core Crown tax revenue increasing...

Core Crown tax revenue was $80.2 billion, up $4.6 billion (6.1%) from the year before. The increase in core Crown tax revenue was broadly a result of more people in employment, increases in average wages, additional domestic spending and higher corporate profits.

Figure 2 - Operating balance before gains and losses (OBEGAL)

Figure 2 - Operating balance before gains and losses (OBEGAL)

Source: The Treasury

... at a faster pace than growth in core Crown expenses resulting in an OBEGAL surplus...

As a share of the economy, core Crown expenses increased to 27.9% of GDP (27.8% of GDP in 2017); in nominal terms, core Crown expenses increased by $4.2 billion (5.6%) to $80.6 billion.

The largest drivers of growth in nominal core Crown expenditure were Budget 2017 decisions and the Government's mini-Budget decisions (which came into effect in 2017/18), as well as an increase in social assistance expenses. Additional increases were in the Transport sector and in relation to the Emissions Trading Scheme (ETS).

Overall the OBEGAL surplus of $5.5 billion increased by $1.5 billion from last year.

Figure 3 - Operating balance (excluding minority interests)

Figure 3 - Operating balance (excluding minority interests)

Source:  The Treasury

… with net gains leading to an operating balance surplus...

Investment gains were $5.3 billion in 2017/18. Most of the gains this year were from NZS Fund recording an investment gain of $3.6 billion in the current year (compared to a gain of $5.5 billion last year). In addition, ACC recorded investment gains of $1.7 billion (compared to $0.9 billion last year).

Offsetting the investment gains, actuarial losses in relation to long-term liability valuations for ACC and Government Superannuation Fund (GSF) totalled $2.4 billion (and compared to an actuarial gain of $1.4 billion last year).

When these results are combined with the OBEGAL surplus, the operating balance (after gains and losses) and excluding minority interests was a surplus of $8.4 billion ($3.9 billion lower than the 2017 operating balance surplus of $12.3 billion).

The Crown's operating balance is particularly sensitive to changes in some key assumptions used to value financial assets and liabilities and non-financial liabilities.

Figure 4 - Net worth attributable to the Crown

Figure 4 - Net worth attributable to the Crown

Source:  The Treasury

... which contributed to growth on the balance sheet alongside revaluation uplifts…

Alongside the operating balance of $8.4 billion, revaluation uplifts of the Crown's physical assets, increased by $10.6 billion, resulting in net worth attributable to the Crown increasing by $19.1 billion to be $129.6 billion.

Increases in property, plant and equipment and financial assets such as NZS Fund investments contributed to the growth in assets while borrowings and insurance liabilities were the main drivers in liability growth.

Total assets increased by $26.3 billion to $339.9 billion, while liabilities grew by $7.2 billion $204.3 billion.

Figure 5 - Core Crown residual cash

Figure 5 - Core Crown residual cash

Source:  The Treasury

... and resulted in a core Crown cash surplus, reducing net core Crown debt.

Overall, a core Crown residual cash surplus of $1.3 billion was achieved, a decrease of $1.3 billion from last year's residual cash surplus of $2.6 billion.

The core Crown operating cash flow strengthened on last year, increasing by $1.0 billion, to $7.3 billion. This increase reflects the increase in core Crown tax receipts more than offsetting the growth in core Crown operating payments. Capital spending of $5.9 billion was higher than last year by $2.2 billion.

The capital spending largely consisted of net purchases of physical assets of $2.5 billion, investment in Crown entities of $2.8 billion and the resumption of Government contributions to NZS Fund of $0.5 billion.

Net core Crown debt decreased nominally by $2.0 billion from last year to be $57.5 billion, largely as a result of the residual cash surplus. As a percentage of GDP, net core Crown debt has continued to fall, from 21.7% in 2016/17 to 19.9% in 2017/18.

Figure 6 - Net core Crown debt1

Figure 6 - Net core Crown debt

Source:  The Treasury

  1. Net core Crown debt excluding the NZS Fund and advances.

Revenue

Total Crown revenue was $110.0 billion, an increase of $6.6 billion from last year largely due to increased core Crown tax revenue.

Table 2 - Breakdown of revenue
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Core Crown tax revenue 61,563 66,636 70,445 75,644 80,224 77,536 79,537
Core Crown other revenue 5,530 5,577 5,676 6,138 6,554 6,224 6,422
Core Crown revenue 67,093 72,213 76,121 81,782 86,778 83,760 85,959
Crown entities, SOEs and eliminations (Other) 21,443 21,592 21,295 21,640 23,195 21,805 23,277
Total Crown revenue 88,536 93,805 97,416 103,422 109,973 105,565 109,236
% of GDP              
Core Crown tax revenue 26.0% 27.2% 27.3% 27.6% 27.7% 27.5% 27.3%
Core Crown other revenue 2.3% 2.3% 2.2% 2.2% 2.3% 2.2% 2.2%
Core Crown revenue 28.3% 29.4% 29.5% 29.8% 30.0% 29.7% 29.5%
Crown entities, SOEs and eliminations (Other) 9.1% 8.8% 8.2% 7.9% 8.0% 7.8% 8.0%
Total Crown revenue 37.4% 38.2% 37.7% 37.7% 38.0% 37.5% 37.5%

Core Crown Tax Revenue

Core Crown tax revenue was $80.2 billion, up $4.6 billion (6.1%) from the year before. The increase in core Crown tax revenue was broadly a result of more people in employment, increases in average wages, additional domestic spending and higher corporate profits.

Figure 7 - Core Crown tax revenue

Figure 7 - Core Crown tax revenue

Source:  The Treasury

Most major tax types increased over the year with the three most significant tax types making up most of the increase (Table 3):

  • Source deductions increased by $2.1 billion (7.3%). This increase was due to growth in the number of people in employment on the back of population growth and the effect of rising average tax rates as wages increase.
  • Goods and Services Tax (GST) was $1.3 billion (6.7%) higher than last year, with most of the growth coming via domestic consumption, which was up 4.8% on the previous year. Residential investment activity, ie, building new houses and adding to renovating existing houses, grew by 6.6%, accounting for $0.2 billion of the growth in GST.
  • Corporate tax revenue increased by $0.8 billion (6.2%), mainly due to profit growth amongst companies both large and small, and across most sectors of the economy. Within corporate tax, tax paid by Portfolio Investment Entities (PIEs) increased by $0.2 billion (38%).
Table 3 - Increase in core Crown tax revenue in nominal terms
Year ended 30 June ($ billion)
2017 core Crown tax revenue 75.6
Source deductions 2.1
GST 1.3
Corporate tax 0.8
Other movements 0.4
2018 core Crown tax revenue 80.2

Source:  The Treasury

Other Revenue

Other revenue (Table 2) includes other fees and levies (eg, ACC levies), revenue from operations of Crown Entities (CEs) and State-owned Enterprises (SOEs), interest revenue and dividend revenue.

Core Crown other revenue, at $6.6 billion increased by $0.4 billion since last year. Around half of this increase was attributable to revenue from the New Zealand Emissions Trading Scheme (ETS) increasing from $0.5 billion in 2016/17 to $0.7 billion in the current year. This increase was owing to more carbon units being surrendered to the Crown and an increase in the price of these surrendered units.

The SOE and CE sectors (including inter-segment eliminations) recorded revenue of $23.2 billion, an increase of $1.6 billion from the prior year. This increase related largely to sales of goods and services in the SOE sector.

Figure 8 - Other revenue

Figure 8 - Other revenue

Source:  The Treasury

Expenses

Total Crown expenses were $104.0 billion in the current year, $5.0 billion more than last year.

Table 4 - Breakdown of expenses
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Social security and welfare 23,026 23,523 24,081 25,294 25,999 26,247 26,110
Health 14,898 15,058 15,626 16,223 17,159 17,096 17,185
Education 12,300 12,879 13,158 13,281 13,629 13,985 13,937
Core government services 4,502 4,134 4,102 3,957 4,670 4,843 5,086
Law and order 3,463 3,515 3,648 3,882 4,184 4,119 4,276
Other core Crown expenses 12,985 13,254 13,314 13,702 14,935 14,196 15,126
Core Crown expenses 71,174 72,363 73,929 76,339 80,576 80,486 81,720
Crown entities, SOEs and eliminations (Other) 20,005 20,701 21,208 22,668 23,438 21,823 23,943
Total Crown expenses 91,179 93,064 95,137 99,007 104,014 102,309 105,663
% of GDP              
Social security and welfare 9.7% 9.6% 9.3% 9.2% 9.0% 9.3% 9.0%
Health 6.3% 6.1% 6.1% 5.9% 5.9% 6.1% 5.9%
Education 5.2% 5.2% 5.1% 4.8% 4.7% 5.0% 4.8%
Core government services 1.9% 1.7% 1.6% 1.4% 1.6% 1.7% 1.7%
Law and order 1.5% 1.4% 1.4% 1.4% 1.4% 1.5% 1.5%
Other core Crown expenses 5.4% 5.5% 5.1% 5.1% 5.3% 5.0% 5.2%
Core Crown expenses 30.0% 29.5% 28.6% 27.8% 27.9% 28.6% 28.1%
Crown entities, SOEs and eliminations (Other) 8.5% 8.4% 8.2% 8.3% 8.1% 7.7% 8.2%
Total Crown expenses 38.5% 37.9% 36.8% 36.1% 36.0% 36.3% 36.3%

Core Crown Expenses

While nominal expenditure increased by $4.2 billion (almost double the previous year's growth), core Crown expenses as a share of the economy were slightly higher than the previous year at 27.9% of GDP (Figure 9).

Figure 9 - Core Crown expenses

Figure 9 - Core Crown expenses

Source:  The Treasury

This nominal growth is largely the result of the Government decisions made at Budget 2017 and the Government's mini-Budget. The largest decisions related to Health, Education and Law and Order, which came into effect in 2017/18 along with increased social assistance spending. Table 5 shows the largest contributors to the increase in core Crown expenses over the year:

  • Social assistance expenses were higher than last year by $0.7 billion. This was owing to an increase in payments to New Zealand Superannuation recipients, as recipient numbers increased from around 716,900 in 2016/17, to 741,300 in 2017/18 and payment rates increased due to wage adjustments.
  • Transport expenses increased by $0.4 billion from prior year, due to an increase in state highway maintenance, in particular relating to the Kaikōura alternate route, and work to address damage caused by significant weather events.
  • ETS expenses increased by $0.4 billion compared to last year. This was due to the increased price of carbon units issued.
Table 5 - Movement in core Crown expenses
Year ended 30 June ($ billion)
2017 core Crown expenses 76.3
Budget decisions 2.6
Social assistance expenses 0.7
Transport expenses 0.4
ETS expense 0.4
Other movements 0.2
2018 core Crown expenses 80.6

Source:  The Treasury

Figure 10 shows the composition of core Crown expenses by key areas of Government spending. Social security and welfare and health expenses make up just over half (53%) of the core Crown expenses, while education is the third highest area of expenditure (17%).

Other core Crown expenses (19%) includes a number of other areas of spending (eg, transport, economic, defence, environmental protection and finance costs) and this remained consistent with spending in the prior year.

Figure 10 - Composition of core Crown expenses

Figure 10 - Composition of core Crown expenses

Source:  The Treasury

Other Expenses

The SOE and CE sectors (including inter-segment eliminations) recorded expenses that were $0.8 billion (3.4%) higher than 2016/17. The largest driver of the increase was DHB expenses being $0.5 billion higher than the previous year as a result of allocations to Health in Budget 2017.

Operating Balance

Table 6 - Total Crown operating balance (excluding minority interests)
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Total Crown OBEGAL (2,802) 414 1,831 4,069 5,534 2,858 3,141
Gains and losses:              
ACC actuarial gain/(loss) 479 (1,352) (5,099) 387 (1,881) - (883)
GSF actuarial gain/(loss) 577 (322) (2,028) 964 (553) - (149)
ETS net position (324) (366) (1,503) 73 (462) - (448)
Investment portfolios:              
   NZS Fund 3,735 3,156 (76) 5,512 3,564 2,280 3,896
   ACC 730 2,397 1,420 901 1,713 189 908
Other gains/(losses)1 544 1,844 86 411 481 169 532
Total Crown gains/(losses) 5,741 5,357 (7,200) 8,248 2,862 2,638 3,856
Total Crown operating balance 2,939 5,771 (5,369) 12,317 8,396 5,496 6,997
% of GDP              
Total Crown OBEGAL -1.2% 0.2% 0.7% 1.5% 1.9% 1.0% 1.1%
Total Crown gains/(losses) 2.4% 2.2% -2.8% 3.0% 1.0% 1.0% 1.3%
Total Crown Operating balance 1.2% 2.4% -2.1% 4.5% 2.9% 2.0% 2.4%
  1. Other gains and losses includes the net surplus from associates and joint ventures/operations.

OBEGAL (Operating Balance Before Gains and Losses)

The OBEGAL surplus of $5.5 billion is an improvement of $1.5 billion from last year.

Figure 11 shows the composition of OBEGAL from the different reporting segments of the Government. For the year ended 30 June 2018, the core Crown segment continued its upwards trend as a result of the strong tax outturn, outpacing the increase in core Crown expenses, as discussed earlier.

Figure 11 - Components of OBEGAL by segment

Figure 11 - Components of OBEGAL by segment

Source:  The Treasury

The SOE segment remained relatively stable, increasing slightly from a surplus of $0.5 billion in 2016/17, to a surplus of $0.7 billion in 2017/18.

Partially offsetting the core Crown results, the Crown entity segment reported a deficit of $0.8 billion, $0.3 billion less than the previous year's deficit of $1.1 billion. The primary driver of this improved result relates to lower insurance expenditure of $0.4 billion. Both ACC and Southern Response had lower insurance expenses compared to 2017 and this was partially offset by EQC's higher insurance expenses. In addition, higher District Health Boards expenditure also reduced the Crown entity segment's OBEGAL result.

Operating Balance

When the net gains/(losses) and the net surplus from associates and joint ventures ($0.4 billion) for the year are combined with the OBEGAL surplus, this resulted in a total Crown operating balance surplus of $8.4 billion, $3.9 billion lower than last year's operating balance surplus of $12.3 billion.

Total net gains for the year were $2.4 billion, $5.3 billion lower than the prior year's gains of $7.7 billion.

Gains on financial instruments consisted of investment gains of $5.3 billion ($1.0 billion lower than the prior year), reflecting continued strong investment performance (primarily in NZSF and ACC). The decrease from the prior year was mainly due to unfavourable movements in exchange rates.

Losses on non-financial instruments of $2.8 billion ($4.1 billion lower than the prior year's gains) largely consisted of actuarial losses on the ACC and GSF long term liabilities. These losses were due to decreases in the discount rates (used to value all outstanding claims in today's dollars). In addition, losses on the Emissions Trading Scheme of $0.5 billion were incurred primarily due to the valuation of carbon units at a higher price.

As can be seen from the volatility in Figure 12, the operating balance is particularly sensitive to the effect of gains and losses resulting from balance sheet movements and actuarial valuations. Note 2 (pages 53 to 58) of the financial statements discusses the key judgements and assumptions underpinning these financial statements.

Figure 12 - Operating balance (excluding minority interests)

Figure 12 - Operating balance (excluding minority interests)

Source:  The Treasury

Debt

Table 7 - Net debt, gross debt and residual cash
Year ended 30 June Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
30 June 2018
Budget
2017
Budget
2018
Net debt1 ($m) 59,931 60,631 61,880 59,480 57,495 64,111 60,409
Net debt (% GDP) 25.3% 24.7% 24.0% 21.7% 19.9% 22.8% 20.8%
Residual cash ($m) (4,109) (1,827) (1,322) 2,574 1,346 (1,789) (1,255)
Residual cash (% GDP) -1.7% -0.7% -0.5% 0.9% 0.5% -0.6%  -0.4% 
Gross debt2 ($m) 81,956 86,125 86,928 87,141 88,053 84,078 87,467 
Gross debt (% GDP) 34.6% 35.1% 33.7% 31.8% 30.4% 29.8% 30.1%
Total Borrowings 103,419 112,580 113,956 111,806 115,652 111,500 115,978
  1. Net debt is defined as core Crown net debt excluding the NZS Fund and advances.
  2. Gross debt is defined as gross sovereign-issued debt excluding the Reserve Bank settlement cash and Reserve Bank bills.

Net Debt

Net debt has decreased by $2.0 billion from $59.5 billion in 2016/17 to $57.5 billion in the current year. This is largely owing to the residual cash surplus of $1.3 billion, explained below. As a share of the economy, net debt continued to fall (19.9% of GDP versus 21.7% 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 core Crown debt

Figure 13 - Net core Crown debt

Source:  The Treasury

Residual Cash

Net cash flows from core Crown operations for the year exceeded net capital spending, resulting in a residual cash surplus of $1.3 billion. This compares to a residual cash surplus of $2.6 billion last year. Table 8 summarises the key residual cash movements from last year to the current year.

  • Tax receipts were $5.4 billion higher than last year which was in line with the improvement in core Crown revenue discussed on page 9.
  • Operating payments (including interest) were $4.1 billion higher than last year, in line with the increase in core Crown expenses.
  • Capital payments were up $2.2 billion from last year at $5.9 billion in 2017/18 (detailed on next page).
Table 8 - Movement in residual cash
Year ended 30 June ($ billion)
2017 core Crown residual cash surplus 2.6
Increase in tax receipts 5.4
Increase in operating payments (4.1)
Increase in capital spending (2.2)
Other movements (0.4)
2018 core Crown residual cash surplus 1.3

Source:  The Treasury

Capital spending for 2017/18 totalled $5.9 billion and included:

  • Net purchase of physical assets of $2.5 billion, including $0.8 billion by the Ministry of Education in relation to school property, $0.5 billion for defence equipment and $0.3 billion by the Ministry of Health for hospitals.
  • Net investments of $2.8 billion, the largest of which was the Crown’s $1.6 billion investment in NZTA for state highways. Other investments included $0.4 billion in KiwiRail, $0.3 billion in City Rail Link and $0.2 billion in Southern Response.
  • Net advances were an outflow of $0.1 billion.
  • Government contributions to the NZ Superannuation Fund were $0.5 billion resuming for the first time since 2009.

Figure 14 - Net core Crown capital cash flows

Figure 14 - Net core Crown capital cash flows

Source:  The Treasury

By analysing capital cash flows by sector, Figure 15 shows that 61% of capital spending ($3.3 billion) was within the transport and education sectors. The total spend in the transport sector was $2.5 billion (45%), largely owing to work on the state highway network. The education sector spent $0.9 billion (16%) purchasing physical assets, investing in schools and upgrading existing property to maintain the quality of the property portfolio.

Figure 15 - Profile of net core Crown capital cash flows

Figure 15 - Profile of net core Crown capital cash flows

Source:  The Treasury

Gross Debt

Gross debt, which reflects the borrowings of the core Crown, increased nominally by $1.0 billion from $87.1 billion in 2016/17 to $88.1 billion (Figure 16). However, as a percentage of the economy, gross debt decreased by 1.4% to 30.4% of GDP (31.8% of GDP a year earlier).

The increase in nominal gross debt was predominantly due to the increase in derivatives of $0.8 billion as well as a small increase from the issuance of Government bonds.

Figure 16 - Gross debt

Figure 16 - Gross debt

Source:  The Treasury

Total Crown borrowing

Overall total borrowing for the Government increased by $3.9 billion from $111.8 billion in 2016/17 year to $115.7 billion. For further information, please refer to page 18.

Crown's Borrowing Programme

The total level of borrowings outstanding at the year ended 30 June 2018 remains similar to the previous year. The proceeds from bond issuance were largely used to fund the December 2017 bond maturity and to begin repurchases of the March 2019 bond. Repurchasing the March 2019 bond prior to maturity assists in smoothing the Crown's cash profile, reduces refinancing risk, and minimises any residual market impacts associated with the maturity of this bond.

Table 9 - Cash proceeds from debt programme
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Issue of government bonds 7,716 8,058 8,079 7,847 7,043 6,874 7,034
Repayment of government bonds (2,196) (8,684) (1,779) (6,080) (6,828) (11,602) (7,263)
Net issue/(repayment) of short-term borrowing1 (935) 4,179 (3,513) 160 100 200 -
Total market debt cash flows 4,585 3,553 2,787 1,927 315 (4,528) (229)
Issue of government bonds - - - - - - -
Repayment of government bonds - (482) (139) (830) - - -
Net issue/(repayment) of short-term borrowing - (480) (100) - - - -
Total non-market debt cash flows - (962) (239) (830) - - -
Total debt programme cash flows 4,585 2,591 2,548 1,097 315 (4,528) (229)
  1. Short-term borrowings consists of Treasury Bills and may include Euro-Commercial Paper.

Government Financing

In accordance with the principles of responsible fiscal management set out in the Public Finace Act 1989, one of the Government's key fiscal objectives is to reduce net core Crown debt to 20% of GDP within five years of taking office.

Net core Crown debt represents the difference between gross debt which shows the amount of debt issued by the Crown to finance activities beyond cash generated funding and liquid financial assets (excluding the NZS Fund and advances) held by the core Crown. Net core Crown debt provides a useful insight into how past policy decisions (particularly around spending and tax) have impacted on the Government's financing requirements. Looking into the future net core Crown debt provides a means for assessing the Government's ability to sustain its current spending, tax and other policies.

There are a number of other debt indicators that are reported in these statements that provide different insights into the Government's borrowing. Total borriowing provides the most comprehensive picture of the Government's borrowing actitives. Total borrowings represents gross debt (mentioned above) and the borrowings undertaken by Crown Entities and SOEs. Total borrowings provides a whole-of-Government perspective of financing that has been required to fund all of the Government's activity.

The Government does have some discretion around how to finance its activity which will have different impacts on debt indicators. For example, if the Government chooses to allow a Crown Entity to borrow directly from the market this would increase total borrowing but would not impact on gross debt or net core Crown debt.

Table 10 - Debt Reconciliation 
$ million Actual
2018
Actual
2017
Net core Crown debt 57,495 59,480
Core Crown financial assets1 37,942 33,140
Gross sovereign-issued debt 95,437 92,620
Other adjustments2 (7,384) (5,479)
Gross debt 88,053 87,141
Crown entities, SOEs borrowings and eliminations 27,599 24,665
Total borrowings 115,652 111,806
  1. Core Crown financial assets excluding financial assets held by NZS Fund and advances.
  2. Adjustments relate to Reserve Bank and Debt Management Office settlement cash.

Source: The Treasury

Net Worth Attributable to the Crown

Table 11 - Net worth
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Net worth attributable to the Crown 75,486 86,454 89,366 110,532 129,644 105,566 117,649
Net worth attributable to minority interests 5,211 5,782 6,155 5,940 5,993 5,876 5,918
Total net worth 80,697 92,236 95,521 116,472 135,637 111,442 123,567
Net worth attributable to the Crown as a % of GDP 31.9% 35.2% 34.6% 40.3 % 44.8% 37.5% 40.4%

Net worth attributable to the Crown primarily consists of the accumulation of past operating surpluses and deficits (referred to as taxpayers' funds) and revaluation uplifts in the value of the Crown's physical assets (the property, plant and equipment revaluation reserve).

Along with the Crown's operating balance surplus, revaluation uplifts of the Crown's physical assets resulted in an increase in the Crown's net worth in the 2017/18 year (for more information, please refer to page 20).

Net worth attributable to the Crown was $129.6 billion at 30 June 2018, an increase of $19.1 billion from a year earlier. As a share of the economy, net worth attributable to the Crown grew 4.5% from 40.3% of GDP in 2016/17 to 44.8% of GDP in the current year.

Figure 17 - Net worth attributable to the Crown

Figure 17 - Net worth attributable to the Crown

Source:  The Treasury

Figure 18 shows that, while the nominal level of net worth attributable to the Crown has recovered from the decline which began in 2009, the composition of net worth has changed. The property, plant and equipment revaluation reserve has shown steady growth over the last few years, the main driver of this has been the increase in land and building prices. The increase in the current year was mainly due to the revaluation of the state highway network, we have discussed this on page 23. Although the property, plant and equipment revaluation reserve grew by 12.6%, as a percentage of net worth attributable to the Crown it has decreased from 76.1% in 2016/17 to 73.1%.

Figure 18 - Composition of net worth attributable to the Crown

Figure 18 - Composition of net worth attributable to the Crown

Source:  The Treasury

Taxpayers' funds, which is directly affected by the operating balance, increased from the prior year, growing by $8.4 billion. As a percentage of net worth attributable to the Crown, it has increased to 26.9% in the current year.

Net worth attributable to minority interests largely represents the share of net assets attributable to the investors in the mixed ownership companies (Air New Zealand, Genesis Energy, Mercury NZ and Meridian Energy). Net worth attributable to minority interests was in line with prior years at $6.0 billion in 2017/18 year.

Net worth attributable to the Crown

Why is net worth attributable to the Crown important?

Net worth is an important factor that shows the resilience of the Crown's finances. Net worth measures the difference between the Crown's total assets (what the Government owns) and its liabilities (what the Government owes). However, not all of this net worth is attributable to the Crown. Minority interest shareholdings in the Government entities (eg, Air New Zealand, Genesis Energy, Mercury NZ and Meridian Energy) are entitled to part of the net worth of the companies they have invested in. The Crown owns the rest. Net worth attributable to the Crown is a measure of the Crown's share of the statement of financial position.

Net worth attributable to the Crown (NWAC) has risen in each of the last six years. For the year ended 30 June 2018, NWAC is $129,644 million. Figure 19 shows that the nominal level of NWAC recovered from a decline, which began in 2008 due to the global financial crisis (GFC), and then the impact of the 2011 Canterbury earthquakes.

A positive level of net worth indicates that the Crown broadly has sufficient assets to meet its liabilities. Prudent net worth should provide a sufficient buffer, given the Crown's expected future fiscal outcomes and risks to those outcomes, to ensure the Crown is resilient to fiscal shocks (such as natural disasters or significant deterioration in the global economy). A positive level of NWAC requires the sum of retained operating surpluses/deficits and revaluation reserves attributable to the Crown to be positive.

Prior to the GFC, NWAC was approximately equally attributable to retained operating surpluses and the Property, Plant and Equipment revaluation reserve. Subsequent operating deficits to 2012 almost fully exhausted the retained operating surpluses to the extent that the property, plant and equipment revaluation reserve made up 94.4% of total NWAC in 2012.

Figure 19 - Composition of net worth attributable to the Crown

Figure 19 - Composition of net worth attributable to the Crown

Source:  The Treasury

Since then, retained operating surpluses have grown as revenues (including gains) have exceeded expenses (including losses). In addition, the property, plant and equipment revaluation reserve has grown, driven by price increases in land and buildings. While the property, plant and equipment revaluation reserve still makes up a large portion of NWAC, 73.1% for the year ended 30 June 2018, retained operating surpluses are forecast to continue to grow and are expected to make up 45.9% of NWAC in 2022.

Total Crown Balance Sheet

Total Crown assets were $339.9 billion at 30 June 2018, a $26.3 billion increase from last year. This growth was largely in social sector assets ($17.2 billion), while financial assets grew by $7.8 billion and commercial assets by $1.3 billion.

Total Crown liabilities were $204.3 billion, an increase of $7.2 billion from the previous year.

Table 12 - Composition of the statement of financial position
Year ended 30 June Forecast
30 June 2018
$ million Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Budget
2017
Budget
2018
Social assets 133,158 139,706 149,419 162,649 179,835 159,135 166,607
Financial assets 74,636 87,039 87,921 94,224 101,995 87,056 100,990
Commercial assets 49,030 52,469 55,339 56,736 58,102 56,585 57,295
Total assets 256,824 279,214 292,679 313,609 339,932 302,776 324,892
Social liabilities 17,015 17,625 19,223 20,089 22,993 19,761 20,890
Financial liabilities 129,589 137,218 144,354 143,186 146,835 136,217 145,583
Commercial liabilities 29,523 32,135 33,581 33,862 34,467 35,356 34,852
Total liabilities 176,127 186,978 197,158 197,137 204,295 191,334 201,325
Net worth 80,697 92,236 95,521 116,472 135,637 111,442 123,567
Minority interests (5,211) (5,782) (6,155) (5,940) (5,993) (5,876) (5,918)
Net worth attributable to the Crown 75,486 86,454 89,366 110,532 129,644 105,566 117,649

Social Assets and Liabilities

Social sector net worth at $156.8 billion was $14.3 billion higher than last year, driven largely by an increase in social assets.

The Crown's social assets were valued at $179.8 billion, a $17.2 billion increase since last year, and made up 52.9% of the Crown’s total assets. The largest uplifts related to the following:

  • The value of state highways (including land) increased by $9.3 billion, mainly reflecting valuation improvements, the development of new state highway assets and improvements to existing state highway network (detailed on page 23).
  • The housing portfolio increased by $1.7 billion of which $1.3 billion relates to an increase in housing stock and the revaluation of this stock. The revaluation increase included the effect of removing the encumbrances on the Christchurch and Invercargill housing stock.

Figure 20 - Total Crown balance sheet

Figure 20 - Total Crown balance sheet

Source:  The Treasury

Social liabilities were $23.0 billion, a $2.9 billion increase compared to 2016/17. This increase was largely due to increased borrowings across the social sector including $0.7 billion by Housing Corporation New Zealand (refer to page 18 for box on Government Financing).

Figure 21 - Social assets and liabilities

Figure 21 - Social assets and liabilities

Source:  The Treasury

Financial Assets and Liabilities

Financial sector net worth decreased by $4.1 billion, from negative $44.9 billion last year to negative $49.0 billion in the current year. The financial sector includes the Treasury's Debt Management Office which manages the Crown's bond programme and therefore holds the majority of the Crown's debt (while the assets funded by the debt are largely in the social sector).

Figure 22 - Financial assets and liabilities

Figure 22 - Financial assets and liabilities

Source:  The Treasury

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices. Note 2, on pages 53 to 58, sets out some of the sensitivities of the key assumptions regarding these assets and liabilities.

The Crown's financial sector assets were valued at $102.0 billion, a $7.8 billion increase compared to last year. The RBNZ recorded assets growing by $6.0 billion, which directly impacts the financial balance sheet.

Financial sector liabilities were $146.8 billion, $3.7 billion higher than the previous year, mainly due to increases in the value of RBNZ's and ACC's liabilities, offset by a decrease in the value of the Treasury's Debt Management Office liabilities.

Commercial Assets and Liabilities

Commercial sector net worth, at $23.6 billion, increased by $0.8 billion from last year.

The Crown's commercial assets were valued at $58.1 billion, a $1.3 billion increase over the year. This was spread over a number of entities. This increase mainly relates to net revaluation increases and purchases of property, plant and equipment.

Commercial liabilities, at $34.5 billion, increased by $0.6 billion from the prior year. This was largely related an increase in borrowings for the purchase of property, plant and equipment.

Figure 23 - Commercial assets and liabilities

Figure 23 - Commercial assets and liabilities

Source:  The Treasury

State Highway Valuation

The state highway network is a significant Crown asset and is valued annually based on the cost of replacing the network in its current condition1. The reported value of the network (excluding land) has increased by $7.9 billion this year from $23.8 billion to $31.7 billion.

Table 13 - State Highways valuation
$ million Actual
2018
Actual
2017
Opening Balance 2017 23,829 22,347
Additions 2,232 1,553
Disposals (11) (30)
Net revaluation 5,651 (41)
Other 1 -
Closing Balance 2018 31,702 23,829

Source: The Treasury

Additions of $2.2 billion reflect the construction of new roads, improvements to the existing network and capital work-in-progress on current projects during 2018. This differs from the cost of maintaining the network, which is recorded as an operating expense when it is incurred.

The net uplift in value of $5.6 billion reflects changes in estimates and assumptions underpinning the network valuation, resulting from an in-depth review of some of the valuation inputs.

The valuation approach

The state highway network consists of 11,556 kilometres of state highways and 2,693 bridges. These roads are managed by the New Zealand Transport Agency (NZTA), and exclude local roads, which are managed by local authorities. NZTA maintain a road assessment and maintenance management (RAMM) database and other databases, which have information that is used to help determine the valuation.

The network is categorised into components of formation, pavement structure, pavement surface, bridges, drainage, traffic facilities, culverts and subways and other structures. To determine the current replacement cost, and depreciation to reflect the age and current condition of these components, significant estimates and assumptions must be used. These include assuming quantities of components that would be required in replacing the network, their estimated unit cost, the expected life of the components, and the appropriate construction overhead factors to apply. These estimates and assumptions also reflect variations in construction costs and regional differences in prices. Construction costs can vary due to the type of terrain the road is constructed on (flat, rolling or steep) and whether it is being constructed in a rural or urban environment.

Improvements in the valuation process this year

This year NZTA implemented a number of improvements in the valuation (affecting both “additions” and “net revaluation” in Table 13 above). The three most significant areas of uplift are due to:

  • revising unit cost estimates (after engaging an independent company specialising in infrastructure development to review unit costs), resulting in a $2.4 billion uplift
  • updating the preliminary and general overhead factor assumption from 10% for roading assets and 15% for structures to an average of 34% across all project types, resulting in a $4 billion uplift2, and
  • ensuring that all capital work-in-progress for minor projects (less than $20 million in value) are included in the valuation, resulting in an uplift of $591 million.

In previous years, although estimates (indexed for price changes) and assumptions were applied consistently in the valuation process, it was noted there were some uncertainties due to limited information on quantities and useful lives within some databases and incomplete information relating to certain cost components.

While the work undertaken during the 2017/18 year has reduced the likelihood of understatement of the state highway valuation, further work is planned to improve the valuation. In 2018/19 the intention is to continue to refine the valuation process, with a focus on professional fees, formation costs and ongoing monitoring of brownfield costs3.

For further discussion on the valuation and changes in assumptions, refer to Note 16 of the Financial Statements of the Government.

The broader Crown balance sheet

Generally, current measures are more relevant for decision making and accountability purposes than historic numbers that may be decades out of date. Therefore, many of the Crown's assets and liabilities are measured using valuation methodologies requiring multiple inputs and assumptions. Some balance sheet items are valued using prices set by established active market, such as financial instruments, where other items use market-based evidence, typically involving discounted cash flow (DCF) valuations, drawing on market determined estimates for cash flows and discount rates (for example, in valuing electricity generation assets). For specialised assets that do not generate cash flows, but provide service potential, optimised depreciation replacement cost (ODRC) is typically used.

As a result, the value of many assets and liabilities cannot be measured with precision, and are inherently uncertain, but reflect the best estimate that can reasonably be determined at a point in time using a DCF or ODRC valuation method. This means a number of assets and liabilities are sensitive to changes in underlying assumptions. When new information about an assumption is applied, the value of an asset or liability can change periodically (up or down) depending on the valuation cycle for a particular asset.

Note 2 of the Financial Statements of the Government discusses the key assumptions, judgements and estimates underpinning the financial statements and provides some sensitivity analysis.

Notes
  1. The valuation methodology used is optimised depreciated replacement cost (ODRC) and represents the gross replacement cost of the asset, less allowances for physical deterioration (depreciation), and for obsolescence and relevant surplus capacity (optimised).
  2. An analysis of recent projects revealed that preliminary and general overhead costs are higher than previously estimated due to higher on-site construction overheads and general cost increases.
  3. Brownfield cost is a generic term for the additional costs of constructing in a particular location because of the increased intensity of surrounding land use (brown) compared to the cost of constructing in a vacant greenfield situation. For example, costs relating to one-off capital works relating to relocation and refurbishment of assets owned by other parties/compensation to landowners, increased traffic management and security, noise and dust limitations, and restricted hours of work.

Year End Results Compared to Budget 2018

The Budget Economic and Fiscal Update 2018 (Budget 2018) was published on 17 May 2018.

Table 14 - Comparison to Budget 2018
Year ended 30 June
$ million
Actual
2018
Budget
2018
Variance to
Budget 2018
$m
Variance to
Budget 2018

%
Core Crown tax revenue 80,224 79,537 687 0.9%
Core Crown expenses 80,576 81,720 1,144 1.4%
OBEGAL (excluding minority interests) 5,534 3,141 2,393 76.2%
Operating balance (excluding minority interests) 8,396 6,997 1,399 20.0%
Residual cash 1,346 (1,255) 2,601 207.3%
Gross debt 88,053 87,467 (586) (0.7%)
   as a percentage of GDP 30.4% 30.1%    
Net debt 57,495 60,409 2,914 4.8%
   as a percentage of GDP 19.9% 20.8%    
Total Borrowings 115,652 115,978 326 0.3%
Net worth attributable to the Crown 129,644 117,649 11,995 10.2%
   as a percentage of GDP 44.8% 40.4%    

Core Crown Tax Revenue

Core Crown tax revenue was $0.7 billion (0.9%) higher than expected in Budget 2018, with the largest differences being:

  • Source deduction revenue was $0.3 billion (1.1%) above forecast. Labour market data was in line with forecast, so this positive variance was the result of a higher-than-expected average effective tax rate.
  • Corporate tax revenue was $0.3 billion (2.4%) above forecast. PIE tax was higher than forecast owing to better-than-expected investment fund profits. Provisional tax revenue was also above forecast, indicating that 2017/18 profits were higher than was forecast in Budget 2018.
Table 15 - Core Crown tax revenue compared to Estimated Actuals
Year ended 30 June ($ billion)
Budget 2018 core Crown tax revenue 79.5
Source deductions 0.3
Corporate tax 0.3
Other movements 0.1
Actual 2018 core Crown tax revenue 80.2

Source:  The Treasury

The tax variance to forecast was below 1%. Overall, this is in line with prior variances as shown in Figure 24.

Figure 24 - Core Crown tax revenue variance to Estimated Actuals

Figure 24 - Core Crown tax revenue variance to Estimated Actuals

Source:  The Treasury

Core Crown Expenses

Core Crown expenses were $1.1 billion (1.4%) lower than expected.

The lower than forecast result was largely owing to changes in demand for services (eg, lower than forecast expenses across the education sector and lower than expected year-end family tax credit claims); one-off factors such as lower than forecast impairments; and timing delays with expenditure now expected to be spent in the 2018/19 fiscal year (eg, Provincial Growth Fund and social housing expenses).

Figure 25 - Core Crown expenses variance to Estimated Actuals

Figure 25 - Core Crown expenses variance to Estimated Actuals

Source:  The Treasury

OBEGAL

The OBEGAL surplus was $2.4 billion higher than Budget 2018 forecast. The majority of the variance against Budget 2018 relates to the favourable variances in core Crown revenue and core Crown expenses discussed earlier. In addition, KiwiRail had an improved OBEGAL result versus Budget 2018 of $0.3 billion, largely due to lower than forecast impairment expenses.

Operating Balance

The total Crown operating balance was $1.4 billion higher than forecast in Budget 2018, the primary reason for this is due to the favourable OBEGAL result, offset by increased actuarial losses from forecast.

Residual Cash

The residual cash surplus was $2.6 billion higher than Budget 2018 with cash flows from operations $1.8 billion higher than forecast and capital payments $0.8 billion lower than forecast.

Operating cash flows were favourable to forecast with operating payments making up $1.3 billion of this and tax receipts increasing by $0.6 billion. This is similar to the core Crown revenue and expenditure trends.

Capital payments were $0.8 billion lower than Budget 2018, driven by less than forecast purchase of physical assets and investments.

Net Debt

Net debt at $57.5 billion (19.9% of GDP) was $2.9 billion below forecast mainly driven by the residual cash surplus.

Gross Debt

Gross debt at $88.1 billion (30.4% of GDP) was broadly in line with forecast.

Total Borrowings

Borrowings at 30 June 2018 was $115.7 billion in line with the Budget 2018 forecast of $116.0 billion.

Net Worth Attributable to the Crown

The net worth attributable to the Crown was $12.0 billion stronger than Budget 2018 forecast mainly due to an upwards revaluation of physical assets of $10.7 billion and a favourable operating balance of $1.4 billion against Budget 2018.

Historical Financial Information

Historical Financial Information ($ million)
Year ended 30 June
$ million
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
Statement of financial performance
Core Crown tax revenue 54,681 50,744 51,557 55,081 58,651 61,563 66,636 70,445 75,644 80,224
Core Crown other revenue 4,510 5,013 5,642 5,347 5,154 5,530 5,577 5,676 6,138 6,554
Core Crown revenue 59,191 55,757 57,199 60,428 63,805 67,093 72,213 76,121 81,782 86,778
Crown entities, SOE revenue and eliminations 19,508 17,976 23,448 22,321 21,873 21,443 21,592 21,295 21,640 23,195
Total Crown revenue 78,699 73,733 80,647 82,749 85,678 88,536 93,805 97,416 103,422 109,973
Social security and welfare 19,189 20,814 21,724 21,956 22,459 23,026 23,523 24,081 25,294 25,999
Health 12,368 13,128 13,753 14,160 14,498 14,898 15,058 15,626 16,223 17,159
Education 11,455 11,724 11,650 11,654 12,504 12,300 12,879 13,158 13,281 13,629
Core government services 5,293 2,974 5,563 5,428 4,294 4,502 4,134 4,102 3,957 4,670
Law and order 2,992 3,103 3,312 3,338 3,394 3,463 3,515 3,648 3,882 4,184
Other core Crown expenses 12,415 11,811 14,097 12,403 12,813 12,985 13,254 13,314 13,702 14,935
Core Crown expenses 63,711 63,554 70,099 68,939 69,962 71,174 72,363 73,929 76,339 80,576
Crown entities, SOE expenses and eliminations 18,881 16,494 28,944 23,050 20,068 20,005 20,701 21,208 22,668 23,438
Total Crown expenses 82,592 80,048 99,043 91,989 90,030 91,179 93,064 95,137 99,007 104,014
OBEGAL (excluding minority interests) (3,893) (6,315) (18,396) (9,240) (4,414) (2,802) 414 1,831 4,069 5,534
Gains/(losses) (6,612) 1,806 5,036 (5,657) 11,339 5,741 5,357 (7,200) 8,248 2,862
Operating balance (excluding minority interests) (10,505) (4,509) (13,360) (14,897) 6,925 2,939 5,771 (5,369) 12,317 8,396
Statement of financial position
Property, plant and equipment 110,135 113,330 114,854 108,584 109,833 116,306 124,558 134,499 144,550 159,018
Financial assets 93,359 95,971 115,362 116,178 118,779 123,918 135,787 138,255 147,050 157,520
Other assets 13,657 14,054 14,999 15,556 15,804 16,600 18,869 19,925 22,009 23,394
Total assets 217,151 223,355 245,215 240,318 244,416 256,824 279,214 292,679 313,609 339,932
Borrowings 61,953 69,733 90,245 100,534 100,087 103,419 112,580 113,956 111,806 115,652
Other liabilities 55,683 58,634 74,083 80,004 74,318 72,708 74,398 83,202 85,331 88,643
Total liabilities 117,636 128,367 164,328 180,538 174,405 176,127 186,978 197,158 197,137 204,295
Minority interests 447 402 308 432 1,940 5,211 5,782 6,155 5,940 5,993
Net worth attributable to the Crown 99,068 94,586 80,579 59,348 68,071 75,486 86,454 89,366 110,532 129,644
Cash position                    
Core Crown residual cash (8,639) (9,000) (13,343) (10,644) (5,742) (4,109) (1,827) (1,322) 2,574 1,346
Debt Indicators                    
Net debt 17,119 26,738 40,128 50,671 55,835 59,931 60,631 61,880 59,480 57,495
Gross debt 43,356 53,591 72,420 79,635 77,984 81,956 86,125 86,928 87,141 88,053

Time series information has been restated to ensure comparability with current year's information.

Historical Financial Information (as % of GDP)
Year ended 30 June
as % of GDP
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
Nominal GDP (revised) 189,554 196,734 205,830 215,118 218,759 236,860 245,359 258,202 274,267 289,293
Statement of financial performance
Core Crown tax revenue 28.8% 25.8% 25.0% 25.6% 26.8% 26.0% 27.2% 27.3% 27.6% 27.7%
Core Crown other revenue 2.4% 2.5% 2.8% 2.5% 2.4% 2.3% 2.2% 2.2% 2.2% 2.3%
Core Crown revenue 31.2% 28.3% 27.8% 28.1% 29.2% 28.3% 29.4% 29.5% 29.8% 30.0%
Crown entities, SOE and elimination revenue 10.3% 9.2% 11.4% 10.4% 10.0% 9.1% 8.8% 8.2% 7.9% 8.0%
Total Crown revenue 41.5% 37.5% 39.2% 38.5% 39.2% 37.4% 38.2% 37.7% 37.7% 38.0%
Social security and welfare 10.1% 10.6% 10.6% 10.2% 10.3% 9.7% 9.6% 9.3% 9.2% 9.0%
Health 6.5% 6.7% 6.7% 6.6% 6.6% 6.3% 6.1% 6.1% 5.9% 5.9%
Education 6.0% 6.0% 5.7% 5.4% 5.7% 5.2% 5.2% 5.1% 4.8% 4.7%
Core government services 2.8% 1.5% 2.7% 2.5% 2.0% 1.9% 1.7% 1.6% 1.4% 1.6%
Law and order 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.4% 1.4% 1.4% 1.4%
Other core Crown expenses 6.6% 5.9% 6.8% 5.7% 5.8% 5.4% 5.5% 5.1% 5.1% 5.3%
Core Crown expenses 33.6% 32.3% 34.1% 32.0% 32.0% 30.0% 29.5% 28.6% 27.8% 27.9%
Crown entities, SOE and elimination expenses 10.0% 8.4% 14.0% 10.8% 9.2% 8.5% 8.4% 8.2% 8.3% 8.1%
Total Crown expenses 43.6% 40.7% 48.1% 42.8% 41.2% 38.5% 37.9% 36.8% 36.1% 36.0%
OBEGAL (excluding minority interests) -2.1% -3.2% -8.9% -4.3% -2.0% -1.2% 0.2% 0.7% 1.5% 1.9%
Gains/(losses) -3.4% 0.9% 2.4% -2.6% 5.2% 2.4% 2.2% -2.8% 3.0% 1.0%
Operating balance (excluding minority interests) -5.5% -2.3% -6.5% -6.9% 3.2% 1.2% 2.4% -2.1% 4.5% 2.9%
Statement of financial position
Property, plant and equipment 58.1% 57.6% 55.8% 50.5% 50.2% 49.1% 50.8% 52.1% 52.7% 55.0%
Financial assets and sovereign receivables 49.3% 48.8% 56.0% 54.0% 54.3% 52.3% 55.3% 53.5% 53.6% 54.4%
Other assets 7.2% 7.1% 7.3% 7.2% 7.2% 7.0% 7.7% 7.8% 8.0% 8.1%
Total assets 114.6% 113.5% 119.1% 111.7% 111.7% 108.4% 113.8% 113.4% 114.3% 117.5%
Borrowings 32.7% 35.4% 43.8% 46.7% 45.8% 43.7% 45.9% 44.1% 40.8% 40.0%
Other liabilities 29.4% 29.8% 36.0% 37.2% 33.9% 30.7% 30.3% 32.3% 31.1% 30.6%
Total liabilities 62.1% 65.2% 79.8% 83.9% 79.7% 74.4% 76.2% 76.4% 71.9% 70.6%
Minority interests 0.2% 0.2% 0.2% 0.2% 0.9% 2.1% 2.4% 2.4% 2.1% 2.1%
Net worth attributable to the Crown 52.3% 48.1% 39.1% 27.6% 31.1% 31.9% 35.2% 34.6% 40.3% 44.8%
Cash position                    
Core Crown residual cash -4.6% -4.6% -6.5% -4.9% -2.6% -1.7% -0.7% -0.5% 0.9% 0.5%
Debt Indicators                    
Net debt 9.0% 13.6% 19.5% 23.6% 25.5% 25.3% 24.7% 24.0% 21.7% 19.9%
Gross debt 22.9% 27.2% 35.2% 37.0% 35.6% 34.6% 35.1% 33.7% 31.8% 30.4%

Independent Audit Report of the Controller and Auditor-General

TO THE READERS OF THE FINANCIAL STATEMENTS OF THE GOVERNMENT OF NEW ZEALAND FOR THE YEAR ENDED 30 JUNE 2018

Opinion

I have audited the financial statements of the Government of New Zealand (the financial statements of the Government) for the year ended 30 June 2018 using my staff, resources, and appointed auditors and their staff. The financial statements of the Government on pages 38 to 141 comprise:

  • the annual financial statements that include the statement of financial position as at 30 June 2018, the statement of financial performance,analysis of expenses by functional classification,statement of comprehensive revenue and expense, statement of changes in net worth,and statement of cash flows for the year ended on that date, a statement of segments, and notes to the financial statements that include accounting policies, borrowings as at 30 June 2018, and other explanatory information;
  • a statement of unappropriated expenditure for the year ended 30 June 2018;
  • a statement of expenses or capital expenditure incurred in emergencies for the year ended 30 June 2018; and
  • a statement of trust money administered by departments for the year ended 30 June 2018.

In my opinion, the financial statements of the Government on pages 38 to 141:

  • present fairly, in all material respects the Government’s:
    • financial position as at 30 June 2018;
    • financial performance and cash flows for the year ended on that date;
    • borrowings as at 30 June 2018;
    • unappropriated expenditure for the year ended 30 June 2018;
    • expenses or capital expenditure incurred in emergencies for the year ended 30 June 2018; and
    • trust money administered by departments for the year ended 30 June 2018;
  • comply with generally accepted accounting practice in New Zealand, in accordance with Public Benefit Entity accounting standards.

My audit was completed on 1 October 2018. This is the date on which my opinion is expressed.

The basis for my opinion is explained below and I outline the key audit matters addressed in my audit. In addition, I outline the responsibilities of the Treasury and the Minister of Finance and my responsibilities relating to the financial statements of the Government. I also comment on other information and explain my independence.

Basis for opinion

I carried out my audit in accordance with The Auditor-General's Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. My responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements of the Government section of this report.

I have fulfilled my responsibilities in accordance with The Auditor-General's Auditing Standards.

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

Key audit matters

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the Government for the current year. In applying my professional judgement to determine key audit matters, I considered those matters that are complex, have a high degree of uncertainty, or are important to the public because of their size or nature. This year, I have included the entitlements under the Holidays Act 2003 as a key audit matter because of the significant uncertainties associated with the obligations to remediate issues under the Act and the public interest in this matter as it affects a significant number of current and former public servants.

The key audit matters addressed in my audit of the financial statements of the Government as a whole, and in forming my opinion thereon, are as follows.

Key audit matters
Recognising tax revenue How we addressed this matter

The largest source of revenue for the Government is income tax. This revenue source totals $51.8 billion for the year ended 30 June 2018.

As outlined in Note 2, income tax is subject to significant assumptions and judgements due to the timing differences between the reporting date and when taxpayers file tax returns.

In order to record tax revenue, judgement is applied to estimating:

  • the amount of tax revenue to be collected from provisional taxpayers who have not yet filed their final tax return;
  • the amount of tax revenue where payments have been received but no provisional or final tax return has been filed; and
  • the amount of tax revenue to be collected from, or refunded to, taxpayers who are not subject to provisional tax.

We obtained an understanding of the systems, processes, and controls in place over the receipt and review of provisional and final tax returns, tax assessments, and tax revenue receipts.

We assessed controls in place over significant reconciliation processes.

We tested the underlying data used in the various tax revenue estimation models to ensure that it was relevant and was used appropriately. This was performed by reviewing evidence to support key assumptions. The sensitivity of key assumptions was also tested.

We tested the reasonableness of the estimation models by checking actual revenue received related to previous financial years against estimates made in those years.

I am satisfied that the assumptions and judgements applied in estimating tax revenue are reasonable.

Valuing property, plant, and equipment How we addressed this matter

The Government owns significant physical assets totalling $159.0 billion.

The valuation of some of these assets requires significant judgement due to the uncertainties inherent in the valuation of these assets, the quality of data available, and the benefits these assets provide. I have identified some specific assets where such judgements are evident.

 
State highway network  

As outlined in Note 16, the state highway network has been valued at $31.7 billion at 30 June 2018 by an independent external valuer. Due to the unique nature of the state highway network, the value of the assets cannot be measured with precision. Significant estimates and assumptions have been applied to the valuation, which include assumptions on: quantities and rates used in the construction of state highway network components, the remaining life of the assets, and the unit costs to apply. Changes to the underlying estimates and assumptions can cause a material movement in the state highway valuation.

There are some uncertainties about the values assigned to different components (formation, bridges, etc.) of the state highway network due to limited information on quantities and useful lives within some databases and incomplete information relating to certain cost components.

Some of the costs associated with road construction (for example, traffic management) in urban areas are assessed as being a significant part of the network that may potentially be undervalued. An allowance to recognise these costs has been included since 2014 where a reliable estimate can be made.

We obtained an understanding of how the state highway network is valued, the significant estimates and assumptions used, and the reasonableness thereof. This involved confirming the competence, capabilities, and objectivity of the valuer, challenging the valuers’ key assumptions, and assessing the valuation procedures, including the information extracted from databases. We also considered whether there were any limitations placed on the valuer and the appropriateness of centrally calculated rates that were applied to the valuation.

We also carried out audit procedures to confirm that key controls were operating over the systems and processes used to record cost and other asset information related to the state highway network.

I am satisfied that the value of the state highway network at 30 June 2018 is reasonable and consistent with valuation practices, and that the disclosures outlining the inherent uncertainties in the valuation are appropriate.

Rail network  

As outlined in Note 16, the rail network has been valued at $1.2 billion at 30 June 2018. In arriving at this value, the freight and the metro transport parts of the network have been valued on different bases, reflecting the commercial nature of the freight part of the network and the public benefit nature of the metro transport part of the network.

The extent to which the freight part of the network is commercial is open to debate. The Government is currently conducting a review of rail, which is working towards defining the purpose of rail and determining the appropriate structure and capital requirements and funding mechanisms for KiwiRail in future years. This review is ongoing and might result in changes that could affect the valuation of the freight part of the network.

As outlined in Note 16, the valuation of the rail network could increase by up to $5.0 billion if the entire rail network was not considered commercial and it was valued on an optimised depreciated replacement cost basis.

We considered the evidence around the commercial nature versus the public benefit nature of the freight part of the rail network. The evidence included reviewing:

  • the State-owned Enterprises Act 1986;
  • strategy documents;
  • forecast results;
  • correspondence setting out the Ministers’ expectations; and
  • minutes from KiwiRail Board meetings.

As in past years, the evidence showed mixed results for the commercial nature versus the public benefit nature of the freight part of the rail network.

We also considered the updated terms of reference for the review of rail in New Zealand. The outcome of the current review will be key in deciding whether valuing the freight network on a commercial basis remains appropriate.

Due largely to the current review of rail, I am satisfied that the judgement to value the freight part of the network on a commercial basis for the current year, although marginal, remains reasonable, and that the disclosures appropriately outline the significant judgements.

Electricity generation assets  

As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $15.9 billion at 30 June 2018.The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create.

As a result, small changes to these assumptions, in particular, the forecast prices of electricity and the discount rates used to determine the present value of these prices - could significantly change the value of these assets.

We obtained an understanding of how electricity generation assets are valued. This involved confirming the competence, capabilities, and objectivity of the valuers, testing the valuers’ procedures for carrying out the valuations, including the information they used to carry them out, and challenging the valuers’ critical assumptions and judgements. We also used our own valuation specialists to assess the valuers’ procedures.

We tested the sensitivity of the key underlying assumptions used by the valuers to ensure that they were reasonable, and we compared the forecast prices of electricity to the expected longer-term wholesale prices and market data where it was available.

I am satisfied that the valuation of electricity generation assets at 30 June 2018 is reasonable, and that the disclosures appropriately outline the sensitivity and the complexity of the valuation of electricity generation assets.

Valuing insurance and superannuation liabilities How we addressed this matter
The Government has insurance liabilities of $45.3 billion and public servants' superannuation liabilities of $11.0 billion as at 30 June 2018. The valuation of these liabilities is complex and requires actuaries to estimate the value, based on assumptions about the future. I have identified some specific liabilities because of the significance of the value of those liabilities and the uncertainties inherent in the valuations.  
Accident Compensation Corporation's outstanding claims liability  

As outlined in note 11, the outstanding claims liability of the Accident Compensation Fund (ACC) has been valued at $40.6 billion at 30 June 2018 by an independent actuary.

Key assumptions used to value the outstanding claims liability include:

  • selecting an appropriate risk-free discount rate to present value future cash flows;
  • selecting an appropriate risk margin for the inherent uncertainty in the estimate of the present value of future cash flows;
  • estimating the impact of inflation and innovation on future medical costs; and
  • estimating the length of rehabilitation from injuries.

The sensitivity of each assumption is analysed in Note 11. This sensitivity analysis indicates that assumptions are closely linked, cannot be viewed in isolation, and changes in assumptions can have a large impact on the value of the liability as well as the actuarial gain or loss recognised.

We obtained an understanding of how ACC's outstanding claims liability is valued by assessing the reasonableness of the approach taken to value the liability. We also reviewed the key assumptions adopted by ACC for each significant claim type to ensure that these were appropriate.

We tested the systems and controls and carried out detailed testing of the process for recording claims.

We tested key assumptions by evaluating them against past claims experience. We assessed the reasonableness of forecasts that diverged from past experience by looking at the evidence supporting the forecasts.

We engaged our own actuaries to review the scope, approach, and reasonableness of the estimate of the liability.

We tested the reconciliations of the underlying claims data to ACC's systems, examined the sensitivity analysis for movements in key assumptions, and evaluated the related financial statement disclosures.

I am satisfied that the assumptions and judgements applied in estimating ACC's outstanding claims liability at 30 June 2018 are reasonable, and that the disclosures outline the sensitivity of the valuation to changes in assumptions.

Government Superannuation Fund's unfunded liability  

As outlined in Note 20, the Government's liability for public servants' superannuation entitlements for past and current members of the Government Superannuation Fund has been valued at $11.0 billion at 30 June 2018 by an independent actuary.

The present value of the unfunded liability is also sensitive to the estimated return on the Fund's assets, expected rates of salary increases for public servants who are members of the Fund, and estimated inflation and discount rates. The Fund'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 of critical assumptions and judgements is analysed in Note 20. This sensitivity analysis indicates that assumptions are closely linked, cannot be viewed in isolation, and changes in assumptions can have a large impact on the value of the liability.

We obtained an understanding of how the Government's liability for public servants' superannuation entitlements is valued. This involved confirming the competence, capabilities, and objectivity of the actuary, as well as testing the actuary’s valuation procedures. We engaged our own actuaries to review the assumptions, judgements, and procedures used to value the liability.

We tested key controls that ensure the completeness and accuracy of membership data that was used in the actuary's valuation.

We evaluated the appropriateness of key assumptions used in estimating the return on assets owned by the Fund and compared the expected rates of salary increases against external benchmarks.

I am satisfied that the Government's reported liability for public servants' superannuation entitlements at 30 June 2018 is reasonable, and that the disclosures outline the sensitivities of the valuation to changes in assumptions.

Valuing financial assets and liabilities How we addressed this matter

As outlined in Note 26, as at 30 June 2018, the Government has financial assets of $142.5 billion (of which $80.3 billion are valued at fair value and $62.2 billion are valued at amortised cost) and financial liabilities of $131.2 billion (of which $10.2 billion are valued at fair value and $121.0 billion are valued at amortised cost).

Financial assets and liabilities measured at fair value include derivatives (which have a principal value of $232.5 billion), marketable securities, and share investments.

Where quoted market prices are not available to determine the value of financial assets and liabilities, fair value must be estimated. This is done by applying a valuation approach that is most appropriate for the asset or liability, such as using valuation models. Inputs into the models will use market data when available; otherwise inputs are derived from non-market data, which requires judgement.

The fair value of financial assets and financial liabilities that are valued using non-observable inputs are valued at $4.3 billion and $0.06 billion respectively.

We obtained an understanding of the valuation techniques, controls, and inputs used to determine the fair value of financial assets and liabilities. 

We also carried out a range of audit procedures that reflected the nature of the financial assets and liabilities being valued, the valuation techniques adopted, and the uncertainties that existed in determining their fair values. These audit procedures included:

  • testing the internal controls in place over data relating to financial assets and liabilities that has been entered into financial and treasury systems;
  • obtaining an understanding of the controls and valuation approaches applied where a fund manager carries out the valuation;
  • comparing the fair value of financial assets and liabilities to independent information and investigating any significant variances; and
  • assessing the appropriateness of the inputs used for valuing financial assets and liabilities where the fair value was dependent on non-observable inputs.

I am satisfied that the fair values of financial assets and liabilities at 30 June 2018 are reasonable and that the disclosures outline the significant judgements.

Entitlements under the Holidays Act 2003 How we addressed this matter

As outlined in Note 25, a number of entities have commenced a review of payroll calculations in order to ensure compliance with the Holidays Act 2003 and other relevant legislation.

Where possible, provision has been made in the financial statements of the Government for obligations arising from those reviews or settlement has been made in the current or previous financial year.

To the extent that an obligation cannot reasonably be quantified at 30 June 2018, an unquantified contingent liability has been disclosed. Work continues to be undertaken by entities to calculate the potential liability required to remediate the issues associated with the calculation of these entitlements. In the case of certain sectors, complexities exist and the calculation of the liability is taking longer than expected to resolve. Entities within these sectors employ a significant number of public servants and the liabilities to settle these obligations remain uncertain.

For those entities most significantly affected, we obtained an understanding of the progress made in resolving the payroll calculation issues and we assessed the reasonableness of the approach to the financial reporting of these issues.

We carried out a range of procedures to audit the liabilities recognised, including:

  • reviewing processes followed for valuing the liabilities and testing a sample of transactions,
  • assessing the competence, capabilities, and objectivity of independent experts who were involved in the valuation,
  • challenging critical assumptions and judgements made in estimating the liabilities.

Where no liability could be reliably measured, we engaged with and challenged entities and their experts to understand the complexities associated with the calculation of a liability, what uncertainties existed, and the progress being made to resolve these uncertainties.

I am satisfied that the liabilities recognised for entitlements represent the best estimate using available information and that, in those cases where a liability cannot be reliably measured, the disclosures are appropriate.

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

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

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

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

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

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

In carrying out their respective responsibilities for the financial statements of the Government, the Treasury and the Minister of Finance are responsible for assessing the Government's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

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

My objectives are to obtain reasonable assurance about whether the financial statements of the Government as a whole are free from material misstatement, whether due to fraud or error, and to issue an audit report that includes my opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with The Auditor-General's Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts or disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions readers take on the basis of the financial statements of the Government.

For the budget information reported in the financial statements of the Government, my procedures were limited to checking that the amounts agree to the Government's relevant published budgets.

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

As part of an audit in accordance with The Auditor-General's Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. Also:

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

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

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

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

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

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

Other information

The Treasury is responsible for the other information. The other information comprises the information included on pages 1 to 152, but does not include the financial statements of the Government and my auditor's report thereon.

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

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

Independence

While carrying out this audit, my staff and appointed auditors and their staff complied with the Auditor-General's independence requirements, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code).

As an Officer of Parliament, I am constitutionally and operationally independent of the Government. Prior to commencing my role as Auditor-General on 2 July 2018, I was Deputy Director-General for the Ministry for Primary Industries. Thus, the Deputy Auditor-General deals with all matters relating to the Ministry for Primary Industries. Other than this matter, 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.

John Ryan
Controller and Auditor-General

Wellington, New Zealand

Audited Financial Statements of the Government of New Zealand

Statement of Financial Performance
for the year ended 30 June 2018

Statement of Financial Performance
2018 Forecast   Note Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Revenue      
76,872 78,825 Taxation revenue 3 79,596 74,973
5,057 5,240 Other sovereign revenue 3 5,223 5,081
81,929 84,065 Total sovereign revenue   84,819 80,054
16,994 18,477 Sales of goods and services 4 18,228 16,871
2,807 2,740 Interest revenue 5 2,798 2,727
3,835 3,954 Other revenue 6 4,128 3,770
23,636 25,171 Total revenue earned through operations   25,154 23,368
105,565 109,236 Total revenue (excluding gains)   109,973 103,422
    Expenses      
25,680 25,540 Transfer payments and subsidies 7 25,366 24,459
23,003 23,669 Personnel expenses 8 23,690 22,599
4,563 4,777 Depreciation   4,275 4,073
41,000 42,830 Other operating expenses 9 41,614 38,296
4,224 4,121 Interest expenses 5 4,151 4,162
4,546 4,840 Insurance expenses 11 4,918 5,418
293 186 Forecast new operating spending  
(1,000) (300) Top-down expense adjustment  
102,309 105,663 Total expenses (excluding losses)   104,014 99,007
398 432 Less minority interests share of operating balance before gains and losses   425 346
2,858 3,141 Operating balance before gains and losses (OBEGAL) (excluding minority interests)   5,534 4,069
2,538 5,251 Net gains/(losses) on financial instruments 5 5,331 6,330
(88) (1,579) Net gains/(losses) on non-financial instruments 10 (2,802) 1,321
2,450 3,672 Total gains/(losses)   2,529 7,651
26 17 Less minority interests share of total gains/(losses)   87 (27)
2,424 3,655 Gains/(losses) (excluding minority interests)   2,442 7,678
214 201 Net surplus from associates and joint ventures   420 570
5,496 6,997 Operating balance  (excluding minority interests)   8,396 12,317
    Operating balance consists of:      
5,496 6,997 Operating balance (excluding minority interests)   8,396 12,317
424 449 Minority interests share of operating balance 22 512 319
5,920 7,446 Operating balance (including minority interests)   8,908 12,636

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 2018

Analysis of Expenses by Functional Classification
2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Total Crown expenses    
30,795 30,738 Social security and welfare 30,195 29,794
16,389 16,786 Health 16,746 15,645
14,741 14,746 Education 14,607 14,112
4,572 4,935 Core government services 4,495 3,762
4,435 4,602 Law and order 4,494 4,161
7,949 8,831 Economic and industrial services 8,928 8,452
9,637 10,167 Transport and communications 9,940 9,360
2,286 2,255 Defence 2,239 2,145
1,012 1,286 Environmental protection 1,227 863
2,391 2,583 Heritage, culture and recreation 2,518 2,433
1,986 2,180 Primary services 2,134 1,886
1,954 2,044 Housing and community development 1,878 1,820
239 163 GSF pension expenses 163 231
406 340 Other 299 181
4,224 4,121 Finance costs 4,151 4,162
293 186 Forecast new operating spending
(1,000) (300) Top-down expense adjustment
102,309 105,663 Total Crown expenses (excluding losses) 104,014 99,007

Social security and welfare has been restated from $30,599 million in 2017 to $29,794 million. Budget comparatives have also been restated. Due to income related rents payments for social housing tenants previously presented on a gross basis, this year this revenue and expenditure has been eliminated between Government reporting entities, as this payment is more like a subsidy than rental payments on behalf of tenants.

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by Ministers, Departments, Offices of Parliament, the NZ Superannuation Fund and the Reserve Bank, but not Crown entities and State-owned Enterprises. Details of unappropriated expenditure can be found on page 131.

Analysis of Core Crown Expenses by Functional Classification
2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Core Crown expenses    
26,247 26,110 Social security and welfare 25,999 25,294
17,096 17,185 Health 17,159 16,223
13,985 13,937 Education 13,629 13,281
4,843 5,086 Core government services 4,670 3,957
4,119 4,276 Law and order 4,184 3,882
3,001 2,930 Economic and industrial services 2,732 2,544
2,329 2,452 Transport and communications 2,559 2,176
2,294 2,263 Defence 2,251 2,146
1,015 1,287 Environmental protection 1,238 871
885 881 Heritage, culture and recreation 850 850
730 851 Primary services 807 644
530 602 Housing and community development 552 539
220 150 GSF pension expenses 150 217
406 340 Other 299 181
3,493 3,484 Finance costs 3,497 3,534
293 186 Forecast new operating spending
(1,000) (300) Top-down expense adjustment
80,486 81,720 Total core Crown expenses (excluding losses) 80,576 76,339

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

Statement of Comprehensive Revenue and Expense
for the year ended 30 June 2018

Statement of Comprehensive Revenue and Expense
2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
5,920 7,446 Operating balance (including minority interests) 8,908 12,636
    Other comprehensive revenue and expense    
(22) Revaluation of physical assets 10,090 7,888
Share of associates revaluation of physical assets 578 1,035
28 273 Transfers to/(from) reserves 59 57
(1) 5 (Gains)/losses transferred to the statement of financial performance (25) 62
32 Foreign currency translation differences on foreign operations 122 (10)
4 (97) Other movements (34) 39
31 191 Total other comprehensive revenue and expense 10,790 9,071
5,951 7,637 Total comprehensive revenue and expense 19,698 21,707
    Attributable to:    
429 520  - minority interests 586 541
5,522 7,117  - the Crown 19,112 21,166
5,951 7,637 Total comprehensive revenue and expense 19,698 21,707

Statement of Changes in Net Worth
for the year ended 30 June 2018

Statement of Changes in Net Worth
2018 Forecast   Note Actual
Budget
2017
$m
Budget
2018
$m
Taxpayer
funds
$m
Reserves
$m
Minority
interests
$m
Total
net
worth
$m
95,521 95,521 Net worth at 30 June 2016   13,932 75,434 6,155 95,521
9,893 12,636 Operating balance   12,317 319 12,636
1,156 8,923 Net revaluations 16 8,745 178 8,923
139 47 Transfers to/(from) reserves   207 (199) 49 57
(11) 62 (Gains)/losses transferred to the statement of financial performance   62 62
(18) (10) Foreign currency translation differences on foreign operations   (10) (10)
(7) 49 Other movements   44 (5) 39
11,152 21,707 Total comprehensive revenue and expense   12,524 8,642 541 21,707
(750) (756) Transactions with minority interests 22 (756) (756)
105,923 116,472 Net worth at 30 June 2017   26,456 84,076 5,940 116,472
5,920 7,446 Operating balance   8,396 512 8,908
(22) Net revaluations 16 10,598 70 10,668
28 273 Transfers to/(from) reserves   12 49 (2) 59
(1) 5 (Gains)/losses transferred to the statement of financial performance   (25) (25)
32 Foreign currency translation differences on foreign operations   115 7 122
4 (97) Other movements   (23) (10) (1) (34)
5,951 7,637 Total comprehensive revenue and expense   8,385 10,727 586 19,698
(432) (542) Transactions with minority interests 22 (533) (533)
111,442 123,567 Net worth at 30 June 2018   34,841 94,803 5,993 135,637

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

Statement of Cash Flows
for the year ended 30 June 2018

Statement of Cash Flows
2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Cash Flows From Operations    
    Cash was provided from    
75,563 77,945 Taxation receipts 78,566 73,099
4,484 4,535 Other sovereign receipts 4,594 4,515
17,473 18,616 Sales of goods and services 18,387 16,948
2,395 2,373 Interest receipts 2,466 2,431
4,062 4,869 Other operating receipts 4,038 4,882
103,977 108,338 Total cash provided from operations 108,051 101,875
    Cash was disbursed to    
26,512 26,404 Transfer payments and subsidies 25,382 25,293
66,838 69,050 Personnel and operating payments 67,687 62,836
4,813 4,080 Interest payments 4,098 4,179
293 186 Forecast new operating spending
(1,000) (300) Top-down expense adjustment
97,456 99,420 Total cash disbursed to operations 97,167 92,308
6,521 8,918 Net cash flows from operations 10,884 9,567
    Cash Flows From Investing Activities    
    Cash was provided from    
632 290 Sale of physical assets 418 619
113,284 102,056 Sale of shares and other securities 102,569 91,597
Sale of intangible assets 32
1,882 2,613 Repayment of advances 1,898 2,088
71 90 Sale of investments in associates 127 216
115,869 105,049 Total cash provided from investing activities 105,012 94,552
    Cash was disbursed to    
9,061 9,508 Purchase and construction of physical assets 8,090 6,828
107,895 105,596 Purchase of shares and other securities 107,361 90,708
814 859 Purchase of intangible assets 817 780
3,078 2,827 Advances made 2,397 3,077
86 333 Acquisition of investments in associates 505 364
446 185 Forecast new capital spending
(840) (485) Top-down capital adjustment
120,540 118,823 Total cash disbursed to investing activities 119,170 101,757
(4,671) (13,774) Net cash flows from investing activities (14,158) (7,205)
1,850 (4,856) Net cash flows from operating and investing activities (3,274) 2,362
    Cash Flows From Financing Activities    
    Cash was provided from    
170 460 Issue of circulating currency 5,331 6,330
6,873 7,034 Issue of Government bonds (2,802) 1,321
6 171 Issue of foreign currency borrowings 87 (27)
8,765 17,925 Issue of other New Zealand dollar borrowings 2,442 7,678
15,814 25,590 Total cash provided from financing activities 24,746 25,904
    Cash was disbursed to    
11,602 7,263 Repayment of Government bonds 6,828 6,080
946 5,420 Repayment of foreign currency borrowings 1,028 486
6,138 8,676 Repayment of other New Zealand dollar borrowings 13,895 17,507
492 560 Dividends paid to minority interests 541 656
19,178 21,919 Total cash disbursed to financing activities 22,292 24,729
(3,364) 3,671 Net cash flows from financing activities 2,454 1,175
(1,514) (1,185) Net movement in cash (820) 3,537
17,495 18,732 Opening cash balance 18,732 15,617
3 521 Foreign-exchange gains/(losses) on opening cash  1,428 (422)
15,984 18,068 Closing cash balance 19,340 18,732
    Reconciliation Between the Net Cash Flows from Operations and the Operating Balance    
6,521 8,918 Net Cash Flows from Operations 10,884 9,567
    Gains/(losses)    
2,538 5,251 Net gains/(losses) on financial instruments 5,331 6,330
(88) (1,579) Net gains/(losses) on non-financial instruments (2,802) 1,321
26 17 Less minority interests share of net gains/(losses) 87 (27)
2,424 3,655 Total gains/(losses) 2,442 7,678
    Other Non-cash Items in Operating Balance    
(4,563) (4,777) Depreciation (4,275) (4,073)
(743) (720) Amortisation and impairment of non-financial assets (906) (1,102)
(801) (1,049) Cost of concessionary lending (704) (753)
(126) 99 Impairment of financial assets (excl receivables) 105 50
548 576 Change in accumulating pension expenses 568 472
145 (440) Change in accumulating insurance expenses (628) (1,047)
(184) 215 Other non-cash items 529 258
(5,724) (6,096) Total other non-cash items in operating balance (5,311) (6,195)
    Movements in Working Capital    
496 848 Increase/(decrease) in receivables 1,614 1,170
1,028 289 Increase/(decrease) in accrued interest 265 312
(11) (107) Increase/(decrease) in inventories 177 57
(7) (30) Increase/(decrease) in prepayments (8) 151
(20) (83) Decrease/(increase) in deferred revenue (200) (46)
789 (397) Decrease/(increase) in payables/provisions (1,467) (377)
2,275 520 Total movements in working capital 381 1,267
5,496 6,997 Operating balance (excluding minority interests) 8,396 12,317

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

Statement of Financial Position
as at 30 June 2018

Statement of Financial Position
2018 Forecast   Note Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Assets      
15,984 18,068 Cash and cash equivalents   19,340 18,732
17,452 19,317 Receivables 12 21,385 18,529
45,514 50,236 Marketable securities, deposits and derivatives in gain 13 51,117 50,506
30,140 36,440 Share investments 14 36,256 30,700
29,805 28,985 Advances 15 29,422 28,583
970 1,059 Inventory   1,344 1,167
2,352 2,648 Other assets   2,817 3,079
142,577 149,823 Property, plant & equipment 16 159,018 144,550
14,618 14,808 Equity accounted investments 17 15,416 14,210
3,713 3,808 Intangible assets and goodwill   3,817 3,553
616 185 Forecast new capital spending  
(965) (485) Top-down capital adjustment  
302,776 324,892 Total assets   339,932 313,609
    Liabilities      
5,932 6,440 Issued currency   6,375 5,980
12,479 13,007 Payables 18 14,422 14,794
2,086 2,307 Deferred revenue   2,424 2,224
111,500 115,978 Borrowings 19 115,652 111,806
41,219 44,109 Insurance liabilities 11 45,294 42,786
9,917 10,579 Retirement plan liabilities 20 10,991 11,006
8,201 8,905 Provisions 21 9,137 8,541
191,334 201,325 Total liabilities   204,295 197,137
111,442 123,567 Total assets less total liabilities   135,637 116,472
    Net Worth      
29,141 33,477 Taxpayer funds   34,841 26,456
76,526 84,097 Property, plant and equipment revaluation reserve 16 94,750 84,164
(101) 75 Other reserves   53 (88)
105,566 117,649 Total net worth attributable to the Crown   129,644 110,532
5,876 5,918 Net worth attributable to minority interests 22 5,993 5,940
111,442 123,567 Total net worth   135,637 116,472

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

Statement of Segments

Current Year Actual vs Estimated Actuals (Budget 2018)
  Core Crown Crown entities State-owned
enterprises
Inter-segment
eliminations
Total Crown
Actual
2018
$m
Forecast
Budget
2018
$m
Actual
2018
$m
Forecast
Budget
2018
$m
Actual
2018
$m
Forecast
Budget
2018
$m
Actual
2018
$m
Forecast
Budget
2018
$m
Actual
2018
$m
Forecast
Budget
2018
$m
Revenue                    
Taxation revenue 80,224 79,537 (628) (712) 79,596 78,825
Other sovereign revenue 1,638 1,586 4,966 5,074 (1,381) (1,420) 5,223 5,240
Revenue from core Crown funding 29,017 29,149 139 124 (29,156) (29,273)
Sales of goods and services 1,598 1,684 2,269 2,259 14,911 15,095 (550) (561) 18,228 18,477
Interest revenue 1,175 1,143 1,032 1,037 964 957 (373) (397) 2,798 2,740
Other revenue 2,143 2,009 3,176 2,708 858 939 (2,049) (1,702) 4,128 3,954
Total Revenue (excluding gains) 86,778 85,959 40,460 40,227 16,872 17,115 (34,137) (34,065) 109,973 109,236
Expenses                    
Transfer payments and subsidies 26,237 26,392 (871) (852) 25,366 25,540
Personnel expenses 7,249 7,241 13,546 13,538 2,935 2,925 (40) (35) 23,690 23,669
Other operating expenses 43,593 44,717 27,584 27,313 11,731 12,286 (32,101) (31,869) 50,807 52,447
Interest expenses 3,497 3,484 95 52 1,058 1,070 (499) (485) 4,151 4,121
Forecast new operating spending 186 186
Top-down expense adjustment (300) (300)
Total Expenses (excluding losses) 80,576 81,720 41,225 40,903 15,724 16,281 (33,511) (33,241) 104,014 105,663
Minority interest share of operating balance before gains/(losses) (2) (4) (448) (440) 25 12 (425) (432)
Operating Balance before gains and losses (excluding minority interests) 6,200 4,239 (765) (680) 700 394 (601) (812) 5,534 3,141
Gains/(losses) and other items 3,243 3,830 291 335 161 12 (833) (321) 2,862 3,856
Operating Balance (excluding minority interests) 9,443 8,069 (474) (345) 861 406 (1,434) (1,133) 8,396 6,997
Assets
Financial assets 104,255 99,447 51,302 50,169 25,287 25,209 (23,324) (21,779) 157,520 153,046
Property, plant and equipment 41,279 40,686 84,300 76,078 33,438 33,059 1 159,018 149,823
Investments in associates, CEs and SOEs 45,838 45,983 12,698 12,338 250 280 (43,370) (43,793) 15,416 14,808
Other assets 3,656 3,448 1,659 1,500 2,729 2,615 (66) (48) 7,978 7,515
Forecast adjustments (300) (300)
Total Assets 195,028 189,264 149,959 140,085 61,704 61,163 (66,759) (65,620) 339,932 324,892
Liabilities                    
Borrowings 97,749 97,249 5,517 5,240 30,628 30,796 (18,242) (17,307) 115,652 115,978
Other liabilities 34,758 32,168 53,974 52,943 8,517 8,265 (8,606) (8,029) 88,643 85,347
Total Liabilities 132,507 129,417 59,491 58,183 39,145 39,061 (26,848) (25,336) 204,295 201,325
Net Worth 62,521 59,847 90,468 81,902 22,559 22,102 (39,911) (40,284) 135,637 123,567
Cost of Acquisition of Physical Assets (Cash) 2,334 2,896 3,991 4,367 1,765 2,244 1 8,090 9,508

 

Current Year Actual vs Prior Year Actual
  Core Crown Crown entities State-owned
enterprises
Inter-segment
eliminations
Total Crown
Actual
2018
$m
Actual
2017
$m
Actual
2018
$m
Actual
2017
$m
Actual
2018
$m
Actual
2017
$m
Actual
2018
$m
Actual
2017
$m
Actual
2018
$m
Actual
2017
$m
Revenue                    
Taxation revenue 80,224 75,644 (628) (671) 79,596 74,973
Other sovereign revenue 1,638 1,458 4,966 4,919 (1,381) (1,296) 5,223 5,081
Revenue from core Crown funding 29,017 27,252 139 106 (29,156) (27,358)
Sales of goods and services 1,598 1,607 2,269 2,194 14,911 13,675 (550) (605) 18,228 16,871
Interest revenue 1,175 1,119 1,032 998 964 918 (373) (308) 2,798 2,727
Other revenue 2,143 1,954 3,176 2,980 858 772 (2,049) (1,936) 4,128 3,770
Total Revenue (excluding gains) 86,778 81,782 40,460 38,343 16,872 15,471 (34,137) (32,174) 109,973 103,422
Expenses                    
Transfer payments and subsidies 26,237 25,264 (871) (805) 25,366 24,459
Personnel expenses 7,249 6,890 13,546 12,878 2,935 2,869 (40) (38) 23,690 22,599
Other operating expenses 43,593 40,651 27,584 26,428 11,731 10,714 (32,101) (30,006) 50,807 47,787
Interest expenses 3,497 3,534 95 158 1,058 1,060 (499) (590) 4,151 4,162
Total Expenses (excluding losses) 80,576 76,339 41,225 39,464 15,724 14,643 (33,511) (31,439) 104,014 99,007
Minority interest share of operating balance before gains/(losses) (2) 10 (448) (347) 25 (9) (425) (346)
Operating Balance before gains and losses (excluding minority interests) 6,200 5,443 (765) (1,111) 700 481 (601) (744) 5,534 4,069
Gains/(losses) and other items 3,243 6,621 291 1,530 161 124 (833) (27) 2,862 8,248
Operating Balance (excluding minority interests) 9,443 12,064 (474) 419 861 605 (1,434) (771) 8,396 12,317
Assets                    
Financial assets 104,255 94,841 51,302 48,175 25,287 24,876 (23,324) (20,842) 157,520 147,050
Property, plant and equipment 41,279 39,221 84,300 72,599 33,438 32,730 1 159,018 144,550
Investments in associates, CEs and SOEs 45,838 43,001 12,698 12,143 250 219 (43,370) (41,153) 15,416 14,210
Other assets 3,656 3,313 1,659 1,870 2,729 2,730 (66) (114) 7,978 7,799
Total Assets 195,028 180,376 149,959 134,787 61,704 60,555 (66,759) (62,109) 339,932 313,609
Liabilities                    
Borrowings 97,749 93,730 5,517 4,082 30,628 30,222 (18,242) (16,228) 115,652 111,806
Other liabilities 34,758 34,898 53,974 50,804 8,517 8,326 (8,606) (8,697) 88,643 85,331
Total Liabilities 132,507 128,628 59,491 54,886 39,145 38,548 (26,848) (24,925) 204,295 197,137
Net Worth 62,521 51,748 90,468 79,901 22,559 22,007 (39,911) (37,184) 135,637 116,472
Cost of Acquisition of Physical Assets (Cash) 2,334 1,988 3,991 3,129 1,765 1,715 (4) 8,090 6,828

Notes to the Financial Statements

Note 1: Basis of Reporting

Statement of compliance

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

These financial statements have been prepared in accordance with Public Sector PBE Accounting Standards (PBE Standards) - Tier 1. These standards are based on International Public Sector Accounting Standards (IPSAS).

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

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

These financial statements were authorised for issue by the Minister of Finance on 1 October 2018.

Reporting period

The reporting period for these financial statements is for the year ended 30 June 2018.

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

Basis of preparation

These financial statements have been prepared on the basis of historic cost modified by the revaluation of certain assets and liabilities, and prepared on an accrual basis, unless otherwise specified (for example, in the Statement of Cash Flows).

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

The accounting policies included in these financial statements are the significant accounting policies for the Financial Statements of the Government and appear in grey shaded boxes. A full list of Crown accounting policies can be found at http://www.treasury.govt.nz/publications/guidance/reporting/accounting.

Comparatives

When presentation or classification of items in the financial statements are 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 2017 were 2018 forecasts published in the 2017 Budget Economic and Fiscal Update, while Budget 2018 were 2018 forecasts published in the 2018 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 forecast estimates.

Forecast new capital spending is an amount provided in the forecasts to represent the impact on the financial position and cash flowsof capital initiatives expected to be introduced over the forecast period. Forecast new operating spending is an amount included in the forecasts to provide for the operating balance impact of policy initiatives, changes to demographics, and other forecasting changes expected to occur over the forecast period. Top-down adjustment is an adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper spending limits) when preparing their forecasts. As appropriations apply to the core Crown only, no adjustment is required to State-owned Enterprises or Crown entity forecasts.

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. Investments in Crown entities and SOEs are reported at historic cost in this segment with no impairment. This ensures losses in those entities are reflected in the appropriate segment.
  • 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 Limited, Mercury NZ Limited, Meridian Energy Limited and Genesis Energy Limited. 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) and published by the United Nations Statistical Division.

Accounting Standards issued and not yet effective and not early adopted

Standards and amendments to standards, issued but not yet effective that have not been early adopted, and that are relevant to these Financial Statements are:

Financial Instruments

PBE IFRS 9: Financial Instruments was issued in January 2017 replacing the existing standard PBE IPSAS29 andNZ IAS 39, Financial instruments: Recognition and Measurement. The standard is effective for periods beginning on or after 1 January 2021. The Crown has resolved to early adopt this standard for non-hedge financial instruments from 1 July 2018 and has exercised the option under PBE IFRS 9 to continue to apply the hedge accounting requirements of PBE IPSAS 29.

The main changes under the standard for non-hedge financial instruments are:

  • New financial asset classification requirements for determining whether an asset is measured at fair value or amortised cost.
  • A new impairment model for financial assets based on expected losses, which may result in the earlier recognition of impairment losses.

While the impact of the adoption continues to be assessed the following are expected to be the key areas of impact:

  • The measurement classification rules mean that student loans are now valued at fair value, rather than the previous basis of amortised cost. This will result in a one-off increase of $628 million to the value of the student loan asset based on the valuation at 30 June 2018. This uplift reflects the different points in time that the student loan asset is measured under the two different methods (refer to Note 15).
  • The impact on impairment allowances in relation to Kiwibank loans and advances have been reviewed as part of the bank's NZ IFRS 9 conversion project. As at 30 June 2018 Kiwibank's best estimate on the impact of the transition, due to the application of the expected credit loss model, is a +/- $2 million movement in equity as at 1 July 2018.
  • Enhanced and updated disclosures especially around credit risk management and exposure.
Consolidated Financial Statements

PBE IPSAS 35 Consolidated Financial Statements issued in December 2016 (replacing IPSAS 6 Consolidated and Separate Financial Statements) is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted, but the Crown does not intend to adopt it before the 2019/20 Financial Statements of the Government.

The assessment to date of PBE IPSAS 35 against the entities in which the Government has an interest, suggests any significant impact on the entities consolidated in the financial statements is unlikely.

Employee Benefits

PBE IPSAS 39 Employee Benefits issued in January 2017 (updating the existing standard PBE IPSAS 25 Employee Benefits) is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted, but the Crown does not intend to adopt it before the 2019/20 Financial Statements of the Government.

The new standard will have an impact on the way the Government Superannuation Fund defined benefit pension scheme is presented in the financial statements with actuarial gains/losses being presented in the Statement of Other Comprehensive Revenue and Expenses rather than as a gain or loss in the Statement of Financial Performance (refer to Note 10 for values).

Government Reporting Entity as at 30 June 2018
Reporting entity

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

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

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

Basis of combination

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

Core Crown entities
  • Ministers of the Crown
  • Government departments
  • Offices of Parliament
  • the Reserve Bank of New Zealand
  • New Zealand Superannuation Fund
Other entities
  • State-owned Enterprises
  • Crown entities (excluding tertiary education institutions)
  • Air New Zealand Limited
  • Regenerate Christchurch
  • Education Council of Aotearoa New Zealand
  • Organisations listed in Schedule 4 and 4A (Non-listed companies in which the Crown is majority or sole shareholder) of the Public Finance Act 1989
  • Organisations listed in Schedule 5 (Mixed ownership model companies) of the Public Finance Act 1989
  • Legal entities listed in Schedule 6 (Legal entities created by Treaty of Waitangi Settlement Acts) of the Public Finance Act 1989

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

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

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

Core Crown Segment

Departments

  1. Crown Law Office
  2. Department of Conservation
  3. Department of Corrections
  4. Department of Internal Affairs
  5. Department of the Prime Minister and Cabinet
  6. Education Review Office
  7. Government Communications Security Bureau
  8. Inland Revenue Department
  9. Land Information New Zealand
  10. Ministry for Culture and Heritage
  11. Ministry for Pacific Peoples
  12. Ministry for Primary Industries
  13. Ministry for the Environment
  14. Ministry for Women
  15. Ministry of Business, Innovation, and Employment
  16. Ministry of Defence
  17. Ministry of Education
  18. Ministry of Foreign Affairs and Trade
  19. Ministry of Health
  20. Ministry of Justice
  21. Ministry of Māori Development
  22. Ministry of Social Development
  23. Ministry of Transport
  24. New Zealand Customs Service
  25. New Zealand Defence Force
  26. New Zealand Police
  27. New Zealand Security Intelligence Service
  28. Office of the Clerk of the House of Representatives
  29. Oranga Tamariki, Ministry for Children
  30. Parliamentary Counsel Office
  31. Parliamentary Service
  32. Serious Fraud Office
  33. State Services Commission (Includes Social Investment Agency as a departmental agency)
  34. Statistics New Zealand
  35. Te KāhuiWhakamana Rua Tekau mā Iwa—Pike River Recovery Agency
  36. The Treasury

Offices of Parliament

  1. Controller and Auditor-General
  2. Office of the Ombudsman
  3. Parliamentary Commissioner for the Environment

Others

  1. New Zealand Superannuation Fund
  2. Reserve Bank of New Zealand
State-owned Enterprises Segment

State-owned Enterprises

  1. Airways Corporation of New Zealand Limited
  2. Animal Control Products Limited
  3. AsureQuality Limited
  4. Electricity Corporation of New Zealand Limited
  5. KiwiRail Holdings Limited
  6. Kordia Group Limited
  7. Landcorp Farming Limited
  8. Meteorological Service of New Zealand Limited
  9. New Zealand Post Limited
  10. New Zealand Railways Corporation
  11. Quotable Value Limited
  12. Solid Energy New Zealand Limited
  13. Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act Schedule 5)

  1. Genesis Energy Limited
  2. Mercury NZ Limited
  3. Meridian Energy Limited

Other

  1. Air New Zealand Limited
  2. Kiwi Group Holdings Limited (including Kiwibank)
Crown entities Segment

Crown entities

  1. Accident Compensation Corporation
  2. Accreditation Council
  3. Arts Council of New Zealand Toi Aotearoa
  4. Broadcasting Commission
  5. Broadcasting Standards Authority
  6. Callaghan Innovation
  7. Children's Commissioner
  8. Civil Aviation Authority of New Zealand
  9. Commerce Commission
  10. Crown Irrigation Investments Limited
  11. Crown Research Institutes (7)
  12. District Health Boards (20)
  13. Drug Free Sport New Zealand
  14. Earthquake Commission
  15. Education New Zealand
  16. Electoral Commission
  17. Electricity Authority
  18. Energy Efficiency and Conservation Authority
  19. Environmental Protection Authority
  20. External Reporting Board
  21. Families Commission
  22. Financial Markets Authority
  23. Fire and Emergency New Zealand
  24. Government Superannuation Fund Authority
  25. Guardians of New Zealand Superannuation
  26. Health and Disability Commissioner
  27. Health Promotion Agency
  28. Health Quality and Safety Commission
  29. Health Research Council of New Zealand
  30. Heritage New Zealand Pouhere Taonga
  31. Housing New Zealand Corporation
  32. Human Rights Commission
  33. Independent Police Conduct Authority
  34. Law Commission
  35. Maritime New Zealand
  36. Museum of New Zealand Te Papa Tongarewa Board
  37. New Zealand Antarctic Institute
  38. New Zealand Artificial Limb Service
  39. New Zealand Blood Service
  40. New Zealand Film Commission
  41. New Zealand Lotteries Commission
  42. New Zealand Productivity Commission
  43. New Zealand Qualifications Authority
  44. New Zealand Symphony Orchestra
  45. New Zealand Tourism Board
  46. New Zealand Trade and Enterprise
  47. New Zealand Transport Agency
  48. New Zealand Venture Investment Fund Limited
  49. New Zealand Walking Access Commission
  50. Office of Film and Literature Classification
  51. Pharmaceutical Management Agency
  52. Privacy Commissioner
  53. Public Trust
  54. Radio New Zealand Limited
  55. Real Estate Agents Authority
  56. Retirement Commissioner
  57. School Boards of Trustees (2,406)
  58. Social Workers Registration Board
  59. Sport and Recreation New Zealand
  60. Takeovers Panel
  61. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
  62. Te Taura Whiri i te Reo Māori (Māori Language Commission)
  63. Television New Zealand Limited
  64. Tertiary Education Commission
  65. Transport Accident Investigation Commission
  66. WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

  1. Agricultural and Marketing Research and Development Trust
  2. Asia New Zealand Foundation
  3. Fish and Game Councils (12)
  4. Game Animal Council
  5. Leadership Development Centre Trust
  6. Māori Trustee
  7. National Pacific Radio Trust
  8. New Zealand Fish and Game Council
  9. New Zealand Game Bird Habitat Trust Board
  10. New Zealand Government Property Corporation
  11. New Zealand Lottery Grants Board
  12. Ngāi Tahu Ancillary Claims Trust
  13. Pacific Co-operation Foundation
  14. Pacific Island Business Development Trust
  15. Reserves Boards (21)
  16. Te Ariki Trust

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

  1. Crown Asset Management Limited
  2. Crown Infrastructure Partners Limited (previously Crown Fibre Holdings Limited)
  3. Education Payroll Limited
  4. Ōtākaro Limited
  5. Predator Free 2050 Limited
  6. Research and Education Advanced Network New Zealand Limited
  7. Southern Response Earthquake Services Limited
  8. Tāmaki Redevelopment Company Limited
  9. The Network for Learning Limited

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

  1. Te Urewera

Others

  1. Education Council of Aotearoa New Zealand
  2. Regenerate Christchurch
  3. Christ Church Reinstatement Trust
Other entities not fully consolidated into the financial statements of the Government with only the Crown's interest in them being included

Crown entities

  1. Tertiary Education Institutions (27)

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

  1. City Rail Link Limited

Tertiary education institutions are equity-accounted for the reasons explained in note 17 and City Rail Link Limited is reported as a joint operation as a consequence of the agreements with Auckland Council in these financial statements for the period ended 30 June 2018. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

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

Note 2: Key Assumptions and Judgements

These financial statements reflect the Government's financial position (service potential and financial capacity) as at 30 June 2018, and the financial results of operations and cash flows for the year ended on that date. Underpinning these financial statements are a number of judgements, estimations and assumptions. These include assumptions and judgements about the future, in particular, the service benefits and future cash flows in relation to existing assets and liabilities.

Key assumptions

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

  Assumption
Foreign exchange rates That foreign currency denominated financial assets and liabilities will be able to be translated to New Zealand dollars at the exchange rate prevailing at balance date. 
Share prices That listed share investments, which consist of approximately 95% of the Government's total share investments, can be realised at quoted market prices at balance date.
Interest rates That current market yield curves provide an appropriate basis for determining the value of the majority of marketable securities and borrowings.
Carbon price That the carbon price, determined by the Ministry for the Environment based on the quoted NZU spot price at the end of the reporting date as published by OM Financial Limited on their CommTrade Carbon website, reflects the value of units that will be surrendered to the Crown.
Property prices That current property prices, determined using market evidence, provide the most relevant basis on which to value land and buildings owned by the Crown.
Depreciation rates That the economic useful life of assets (used to determine depreciation rates) will equate to the estimates determined using a combination of engineering and historical evidence.
Student loans That the effective interest rate, consumer price index adjustment, future salary inflation rate and interest rate for overseas borrowers are appropriate for the valuation of student loans.
Asset Purpose That assets will continue to be held for their intended purpose.  Assets that are held for commercial purposes are subject to a commercially recoverable amount test (the higher of the income that can be generated from the asset, or the proceeds from its sale).  Assets that are held for public benefit purposes are generally valued at optimised depreciated replacement cost.  Optimisation means that surplus assets are identified.  If not surplus, it can be assumed the asset will be replaced, and therefore the asset value is not reduced below its optimised depreciated replacement cost.  If surplus, the asset will be valued at its net selling price.

With respect to the asset purpose assumption, the valuation of the Rail Freight Network is particularly uncertain at present. Treated as a for-profit asset since 2012, this asset has a carrying value of $186 million (2017: $96 million). The Crown is currently conducting a review to consider KiwiRail's structure, capital requirements and funding mechanisms within the context of rail's purpose within a multi modal transport system. This review may change the assumptions underlying the future valuations of KiwiRail's Rail Freight Network.

Decisions from this review, expected in early 2019, may affect the mix of assets and operations, the extent of the rail network, and which of the entities within the Crown might own those assets and/or perform those operations. That in turn could result in some or all of the freight assets being revalued using the optimised depreciated replacement cost methodology that was used prior to 2012. The potential impact of this revaluation could increase the asset value up to $5.1 billion and result in the reversal of some or all of the $1.4 billion impairment expense previously recognised. For further information, see note 16.

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

Economic variable Assumptions and Methodology
Inflation rates Inflation rate assumptions are used to help estimate future cash flows, as prices are expected to increase through time.  The consumer price index (CPI) is most commonly used to indicate the inflation rate.  However, some costs (referred to as superimposed inflation) are assumed to increase faster than the rate of inflation due to factors such as innovation in medical treatment. 
Discount rates (time value of money) Discount rates are used to determine the value of future cash flows in today's dollar values.  The Treasury sets a risk free discount rate for accounting valuation purposes.  In the near term discount rates are based on market data and then smoothed to a single long-term risk-free interest rate of 4.75%.  A full description of the evidence and methodology used to determine this rate can be found at: http://www.treasury.govt.nz/publications/guidance/reporting/accounting/discountrates
Amount and duration of future cash flows Judgements around the duration of future cash flows are critical for valuations.  Some examples of this are:
  • the length of rehabilitation from injuries for the ACC obligation
  • mortality rates for the GSF obligation
  • repayment rates of student loans.

These assumptions are largely based on extrapolating historical experience.  As time goes on, better information becomes available and estimates are updated to reflect more current information.

Sensitivity of key assumptions

The tables below outline the sensitivity of the key assumptions discussed above on the significant valuations included in the statement of financial position. They do not include second or third-order effects on forecast revenues and expenses. A negative impact on the Operating Balance is designated by the use of brackets.

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices and account for a significant portion of the financial position. At 30 June 2018 financial assets totalled $142.5 billion (2017: $133.3 billion) while financial liabilities totalled $131.4 billion (2017: $128.4 billion).

  Impact on operating balance
2018
$m
2017
$m
NZ dollar exchange rate strengthens by 10% (846) (793)
NZ dollar exchange rate weakens by 10% 983 922
Share prices strengthen by 10% 3,580 3,044
Share prices weaken by 10% (3,580) (3,044)
Increase in NZ interest rates 1% (100 basis points) (1,550) (946)
Decrease in NZ interest rate 1% (100 basis points) 1,697 1,122
NZD carbon price increases by $1 (120) (118)
NZD carbon price decreases by $1 120 118

In relation to assumptions concerning property prices, land and buildings account for 57% (2017: 58%) of total property, plant and equipment and 67% (2017: 68%) of the asset revaluation reserve. A significant decline in property prices would not impact the operating balance but would reduce net worth.

Long term liabilities such as the ACC claims liability $43.3 billion (2017: $40.3 billion) and the GSF retirement plan $11.0 billion (2017: $11.0 billion) are particularly sensitive to the assumptions associated with estimating discounted cash flows. The table below outlines the sensitivity of those liabilities to key assumptions:

  Change Impact on operating balance
2018
$m
2017
$m
Sensitivity of assumptions      
Risk-free discount rate +1% 7,392 6,675
  -1% (9,559) (8,712)
Inflation rates (including superimposed inflation) +1% (9,566) (8,769)
  -1% 7,375 6,818
Social rehabilitation benefits - superimposed inflation after four years for serious injury claims (ACC only) +1% (3,272) (3,233)
  -1% 2,555 2,384
Average weighted term to settlement from reporting date (ACC only) +1 year 470 1,139
    -1 year (479) (1,175)
Areas of significant estimation

These financial statements include estimated amounts that have a number of uncertainties (discussed below).

Key estimation Basis of estimation
Recognition of tax revenue and associated receivables

The New Zealand tax system is predicated on self-assessment where taxpayers are expected to understand the tax laws and comply with them.  This has an impact on the completeness of tax revenues when taxpayers fail to comply with tax laws, for example, if they do not report all of their income. 

Income tax

Income tax revenue is recognised on an accruals basis in the period the taxable event occurs.  It is deemed to accrue evenly over the period to which it relates. 

Where income tax returns have not been filed for the relevant period, accrued income tax revenue receivable or payable has been estimated based on current provisional assessments or prior year terminal assessments.  The outcome of income tax revenue and refunds is not known with certainty until income tax returns for the period have been filed.  This usually occurs sometime after the publication of these financial statements. 

The measurement of the tax revenue accruals requires significant estimates where terminal tax assessments are not yet available for the period.  Key features of the estimation used are as follows:

  • Where taxpayers subject to the provisional tax regime have not yet filed a terminal tax assessment for the period, revenue is recognised based on provisional tax at balance date plus estimated provisional tax due after the balance date that relates to the current period.  The estimation of provisional tax due after balance date uses forecast cash flows from Treasury which are based on assumptions in the Treasury's most recent Budget Economic and Fiscal Update.  A key assumption in this estimation is the split of cash receipts between terminal and provisional tax.  This split is calculated based on historical information.  A change in the assumption may change the amount of revenue recognised. 
  • Where taxpayers have made payments to Inland Revenue but have not submitted a provisional tax assessment for the period, their credit balance is accrued as revenue.  Payments into the tax pool are not captured by this approach as payments into the tax pool are not limited to provisional tax and information as to their nature is not available.  At year-end this is not considered to be material as provisional assessments should have been filed for the year-end. 
Recognition of tax revenue
  • For individual taxpayers not subject to provisional tax, an estimate is made of the tax revenues receivable and refundable based on prior year returns adjusted for current year experience.
  • For company taxpayers not subject to provisional tax for the current year, revenue is recognised when terminal tax is assessed, ie, no estimate of tax revenue is accrued in the period of the taxable event. This is because a reliable estimate cannot be made in the period of the taxable event.

Business Transformation

The Inland Revenue (IR) is currently undertaking a major businesstransformation process which involves implementing a new core IT platform, START (Simplified Tax And Revenue Technology).  As with any major transformation, the IR may identify things that they can or should be doing differently.  As maintaining the integrity of the tax system is critical, any systematic or procedural issues that are identified are, and will be, resolved in a timely and accurate way.

Rail network

These financial statements report the value of the rail network at $1.1 billion (2017: $0.9 billion).  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. 

The valuation of the freight services on a commercial basis reflects the objectives of the Government to achieve a commercial return on those assets.  Any change from a commercial valuation to public benefit valuation at optimised depreciated replacement cost would result in a significant increase in the reported value of rail assets as disclosed in note 16.

Electricity generation assets These financial statements report the value of electricity generation assets at $15.9 billion (2017: $15.9 billion).  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. 
State Highway network (excluding land)

These financial statements report the value of the state highway network at $31.7 billion (2017: $23.8 billion).  There are necessarily significant assumptions and judgements required in determining the replacement values assigned to different components (pavement, formation, bridges, etc,) of the state highway network, the appropriate overhead cost factors to apply and the life of component assets for depreciation.  These assumptions are set out in Note 16.

The valuation inputs and/or assumptions subject to the most estimation uncertainty are:

  • Preliminary and general costs (P&G costs).
    P&G costs are the construction overheads on projects. An analysis of recent projects revealed that P&G costs are higher than previously estimated due to higher on-site construction overheads and general costs increases. This has resulted in an increase in P&G costs from 10% for roading assets and 15% for structures to an average of 34% across all project types.
  • Professional fees.
    Professional fees are the costs of professional services of external consultants and internal costs for investigations, design, project management and quality assurance. Professional fees of 15% are derived based on project averages.
  • Formation
    Formation is the constructed land form profile and platform on which the pavement structure is built. The unit cost used on the valuation are based on those established by the valuer over several years valuing the state highway and local roading networks and indexed to 2018 dollars.
  • Bridges
    Bridge construction dates, lengths, widths and associated characteristics are extracted from the NZ Transport Agency's database. The replacement cost of bridges is based on bridge span (single or multi-span) or if it is a motorway ramp. There is also a provision for bridges that have been deemed to be exceptional in nature/service level in which case a specific unit cost has been applied.
  • Brownfield costs
    Brownfield cost is a generic term for the additional costs of constructing in a particular location because of the increased intensity of surrounding land use compared to the cost of constructing in a vacant greenfield situation.  They include one-off capital works relating to relocation and refurbishment of assets owned by other parties, and compensation to landowners.  Other components of the brownfield cost result from the increased constraints or requirements imposed when constructing in an already developed location, such as increased traffic management and security, noise and dust limitations and restricted hours of work.

The valuation does not include a specific allowance for “historic brownfield” costs for assets prior to 2014.  However, it is estimated that a significant portion of existing brownfields costs has been captured as a result of the 2017/18 review of the P&G costs.

Work undertaken in 2017/18 has reduced the likelihood of understatement of the state highway valuation; however, further work is planned to improve the valuation. The intention is to continue to refine the valuation process in 2018/19, with a focus on professional fees, formation costs and ongoing monitoring of brownfield costs.

Other uncertainties

In addition to those items in the statement of financial position there are a number of liabilities or assets that may arise in the future but are not currently recognised. This is because they are dependent on uncertain future events occurring or the liability/asset cannot be measured reliably. If these contingencies crystallise, there will be an associated impact on the operating balance and net worth of the Crown. These contingencies are reported in note 25 of these financial statements.

Risk management

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

The Crown's current risk management framework generally involves holding individual government reporting entities responsible for managing the risks that they individually face, subject to legislation and central guidance such as the Public Finance Act 1989 and Treasury Instructions. Government-wide financial resilience is supported through relatively low debt levels, a strong financial position and effective budgeting.

With respect to its financial portfolios, the Government's financial instrument holdings expose it primarily to the financial risks of changes in interest rates, foreign exchange rates, risk of default and liquidity risk. 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 entities who manage 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 the Treasury and the 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 from the previous year to the manner in which the Government reporting entities that manage the Government's portfolios, manage and measure risks.

Derivative financial instruments are often used across the portfolios to manage exposure to interest rate, and foreign currency risk. Refer to pages 123 and 124 for further derivative information.

Note 3: Sovereign Revenue

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Direct Income Tax Revenue    
    Individuals    
29,498 30,380 Source deductions 30,721 28,641
6,497 6,661 Other persons 6,819 6,382
(1,686) (1,777) Refunds (2,102) (1,638)
554 555 Fringe benefit tax 559 525
34,863 35,819 Total individuals 35,997 33,910
    Corporate Tax    
12,110 12,622 Gross companies tax 13,022 12,228
(206) (187) Refunds (157) (188)
589 638 Non-resident withholding tax 627 599
3 Foreign-source dividend withholding payments 3 (10)
12,493 13,076 Total corporate tax 13,495 12,629
    Other Direct Income Tax    
1,519 1,545 Resident withholding tax on interest revenue 1,531 1,472
685 762 Resident withholding tax on dividend revenue 753 743
2,204 2,307 Total other direct income tax 2,284 2,215
49,560 51,202 Total direct income tax 51,776 48,754
    Indirect Income Tax Revenue    
    Goods and Services Tax    
32,354 33,448 Gross goods and services tax 33,899 31,259
(11,774) (12,757) Refunds (13,086) (11,751)
20,580 20,691 Total goods and services tax 20,813 19,508
    Other Indirect Taxation    
1,900 1,911 Petroleum fuels excise and duty1 1,898 1,908
1,715 1,753 Tobacco excise and duty1 1,807 1,677
1,437 1,505 Road user charges 1,551 1,469
1,003 1,028 Alcohol excise and duty1 1,017 985
148 172 Other customs duty 172 152
529 563 Miscellaneous indirect taxation 562 520
6,732 6,932 Total other indirect taxation 7,007 6,711
27,312 27,623 Total indirect taxation 27,820 26,219
76,872 78,825 Total taxation revenue 79,596 74,973
    Other Sovereign Revenue    
2,689 2,721 ACC levies 2,643 2,882
518 562 Fire service levies 568 392
329 309 EQC levies 309 283
261 229 Child support and working for families penalties 231 262
96 96 Court fines 118 105
1,164 1,323 Other miscellaneous items 1,354 1,157
5,057 5,240 Total other sovereign revenue 5,223 5,081
81,929 84,065 Total sovereign revenue 84,819 80,054

1 Includes customs excise-equivalent duty.

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

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 tax recognition point has occurred and the tax revenue can be reliably measured as described in the table below.

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
Income tax The earning of assessable income during the taxation period by the taxpayer
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
Other indirect taxes When the debt to the Crown arises
ACC levies The levy revenue is earned evenly over the levy period
Other levies When the obligation to pay the levy is incurred

Note 4:  Sales of Goods and Services

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
8,102 9,344 Sales of goods 9,155 8,259
8,892 9,133 Rendering of services 9,073 8,612
16,994 18,477 Total sales of goods and services 18,228 16,871

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.

Note 5:  Investment Income/(Expense)

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Interest Revenue    
601 590 Student loans (interest unwind) 604 602
1,274 1,204 Other financial assets classified as amortised cost or available for sale 1,223 1,190
3 3 Financial assets classified as held for trading 4 4
929 943 Financial assets classified as fair value through the operating balance 967 931
2,807 2,740 Total interest revenue 2,798 2,727
    Interest Expense    
4,207 4,180 Financial liabilities classified as amortised cost 3,803 3,834
(22) (90) Financial liabilities classified as fair value through the operating balance 309 296
39 31 Interest unwind on provisions 39 32
4,224 4,121 Total interest expenses 4,151 4,162
(1,417) (1,381) Net interest income/(expense) (1,353) (1,435)
    Gains and Losses on Financial Instruments    
12 123 Foreign exchange gains on financial assets and financial liabilities measured at amortised cost 1,486 7
(8) 352 Foreign exchange losses on financial assets and financial liabilities measured at amortised cost (183) (448)
Change in fair value of financial assets and financial liabilities classified as held for trading 4 3
(101) (6) Gains/(losses) on disposal of financial assets and financial liabilities measured at amortised cost (107) (214)
1,619 5,085 Change in fair value of financial assets and financial liabilities classified as fair value through the operating balance 7,491 2,071
1,522 5,554 Net gains/(losses) on financial assets and financial liabilities 8,691 1,419
1,016 (303) Net gain/(loss) on derivatives (3,360) 4,911
2,538 5,251 Net gains/(losses) on financial instruments 5,331 6,330
    Other investment income/(expense)    
917 833 Dividend income 877 871
917 833 Total other investment income/(expense) 877 871
2,038 4,703 Total investment income/(expenditure) 4,855 5,766

Student loans are advanced on an interest-free basis, therefore they are discounted to reflect their fair value. The interest unwind reflects the increase in value as the period to repayment reduces (refer note 15).

Interest revenue and expense is accrued using the effective interest method.  The effective interest rate exactly discounts estimated future cash receipts / payments through the expected life of the financial instrument's net carrying amount.  The method applies this rate to the principal outstanding to determine interest revenue or expense each period.

Gains and losses may be reported in the Statement of Financial Performance when assets and liabilities are revalued in certain circumstances as described in the accounting policies for those assets and liabilities.  For the purposes of reporting the operating balance before gains and losses (OBEGAL) these gains and losses are excluded from total revenue and total expenses; and presented elsewhere in the Statement of Financial Performance.

Note 6:  Other Revenue

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
621 587 Rental revenue 581 575
917 833 Dividends 877 871
208 213 Sale of royalties 270 222
1 31 EQC insurance claim on reinsurers 83 (216)
2,088 2,290 Other revenue 2,317 2,318
3,835 3,954 Total other revenue 4,128 3,770

Income related rents for social housing tenants were presented gross in previous financial years. This year this revenue and expenditure has been eliminated between Government reporting entities, as this payment is more like a subsidy than rental payments on behalf of tenants. Rental revenue in 2017 has been restated from $1,380 million to $575 million. Budget comparatives have also been restated.

Rental revenue 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 revenue.

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

Note 7:  Transfer Payments and Subsidies

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
13,671 13,703 New Zealand superannuation 13,699 13,043
1,663 1,693 Jobseeker support and emergency benefit 1,697 1,697
1,823 1,696 Family tax credit 1,639 1,723
1,531 1,540 Supported living payment 1,541 1,533
1,218 1,208 Accommodation assistance 1,204 1,127
1,117 1,109 Sole parent support 1,117 1,159
810 920 KiwiSaver subsidies 897 743
644 647 Official development assistance 643 520
603 575 Other working for families tax credits 556 596
505 509 Student allowances 511 465
118 37 Income related rent subsidy 19 10
379 379 Disability allowances 379 377
1,598 1,524 Other social assistance benefits 1,464 1,466
25,680 25,540 Total transfer payments and subsidies 25,366 24,459

Income related rent payments for social housing tenants were presented gross in previous financial years. This year this revenue and expenditure has been eliminated between Government reporting entities, as this payment is more like a subsidy than rental payments on behalf of tenants. Due to a change in accounting policy in the current year, income related rent subsidy has been restated from $815 million in 2017 to $10 million. Budget comparatives have also been restated.

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

Note 8:  Personnel Expenses

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
21,656 22,107 Salaries and wages 21,812 20,966
457 552 Costs incurred on defined contribution plans (eg, KiwiSaver) 628 591
262 182 Costs incurred on GSF and other defined benefit plans 174 245
628 828 Other personnel expenses 1,076 797
23,003 23,669 Total personnel expenses 23,690 22,599

Employee entitlements to salaries and wages, annual leave, long service leave, retiring leave and other similar benefits are recognised as an expense 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.

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

Termination expenses 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 as the expense arises as a result of an offer to encourage voluntary redundancy.  Termination expenses 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.

Key management personnel compensation was $11 million (2017: $10 million). This reflects salaries, benefits and allowances. Key management personnel are the 28 Ministers of the Crown who are members of the Executive Council (including the Prime Minister).

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

Note 9:  Other Operating Expenses

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
5,611 5,574 Grants and subsidies 5,436 4,906
1,721 1,939 Repairs and maintenance 2,209 1,986
1,272 1,371 Rental and leasing costs 1,363 1,289
1,175 1,229 Clinical supplies 1,290 1,218
743 720 Amortisation and impairment of non-financial assets 906 1,102
1,047 646 Impairment of financial assets 590 607
801 1,049 Cost of concessionary lending 704 753
541 699 Lottery prize payments 686 652
371 358 Inventory expenses 278 278
3 3 Fees paid to audit firms other than the Auditor-General (refer below) 4 5
27,715 29,242 Other operating expenses 28,148 25,500
41,000 42,830 Total other operating expenses 41,614 38,296

Where grants and subsidies are at the government's discretion until payment, the expense is recognised when the payment is made.  Otherwise, the expense is recognised when the specified criteria for the grant or subsidy have been fulfilled and notice has been given to the government.

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

Audit fees paid to the Controller and Auditor-General

Fees paid to the Controller and Auditor-General (including independent auditors providing services on behalf of the Controller and Auditor-General) for the audit of the financial statements of the Government and its reporting entities were $42.0 million (2017: $41.8 million). These fees include $0.2 million (2017: $0.2 million) for the audit of these financial statements. Audit fees for assurance and related services paid to the Controller and Auditor-General were $1.5 million (2017: $0.8 million). As the Controller and Auditor-General is part of the Government reporting entity, these fees are eliminated on consolidation.

Note 10:  Net Gains and Losses on Non-Financial Instruments

2018 Forecast   Note Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
(883) Actuarial gains/(losses) on ACC outstanding claims 11 (1,881) 387
(149) Actuarial gains/(losses) on GSF liability 20 (553) 964
(448) Gains/(losses) on the Emissions Trading Scheme 21 (462) 73
(88) (93) Gains/(losses) on disposal or revaluation of property, plant and equipment   71 (193)
(6) Other gains/(losses) on non-financial instruments   23 90
(88) (1,579) Net gains/(losses) on non-financial instruments   (2,802) 1,321

The ACC and GSF liabilities are valued by an independent actuary (refer notes 11 and 20).  Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when previously calculating the liability and the effect of changes in actuarial assumptions (experience adjustments).

Note 11: Insurance

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Insurance expense by entity    
4,613 4,758 Accident Compensation Corporation (ACC) 4,363 4,587
(28) 76 Earthquake Commission (EQC) 514 332
(49) (54) Southern Response (28) 325
10 60 Other 69 174
4,546 4,840 Total insurance expenses 4,918 5,418

At 30 June 2018 the total amount paid or payable for damage in relation to the 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 for Southern Response.

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Insurance liability by entity    
40,707 42,725 ACC liability 43,314 40,288
295 925 EQC property damage liability 1,453 1,853
166 358 Southern Response liability 401 668
51 101 Other insurance liabilities 126 57
Inter-segment eliminations (80)
41,219 44,109 Total insurance liabilities 45,294 42,786
    By component    
    Outstanding claims liability 42,351 39,998
    Unearned premium liability 2,134 2,019
    Unearned premium liability deficiency 809 769
    Total insurance liabilities 45,294 42,786
    By maturity    
    Expected to be settled within one year 6,920 7,256
    Expected to be outstanding for more than one year 38,374 35,530
    Total insurance liabilities 45,294 42,786
    Assets arising from insurance obligations are:    
    Receivables for premiums 2,381 2,280
    Reinsurance claim recoveries 236 222

The future cost of outstanding insurance claims liabilities are valued based on the latest actuarial information.  The liability 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 the operating balance.

Further information on these liabilities may also be found in the annual reports of each of these entities and on their respective websites. 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 (eg, marketing costs) in respect of insurance obligations at the reporting date. In addition each of these entities is backed by a guarantee from the Crown.

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 2018. 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).

The remainder of this note provides detailed analysis of the ACC insurance expense and 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.

  Actual
30 June
2018
$m
30 June
2017
$m
Analysis of ACC Insurance Expense    
By type    
Claims expense 6,578 4,524
Movement in unearned premium deficiency liability 92 109
Other underwriting expenses 191 160
Total ACC claims and other expenses 6,861 4,793
Less expenses reported elsewhere in the statement of financial performance    
Actuarial gain/(loss) - (refer note 10) (1,881) 387
Operating costs relating to claims (617) (593)
Total ACC insurance expenses (excluding gains/(losses) and operations) 4,363 4,587

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

  Actual
30 June
2018
$m
30 June
2017
$m
ACC Claims Incurred    
Current year net ACC claims incurred    
Gross claims incurred and related expenses - undiscounted 8,435 8,117
Discount and discount movement (3,820) (3,902)
Total current year net claims incurred 4,615 4,215
Previous years' net ACC claims incurred    
Reassessment of gross claims and expenses - undiscounted 696 7,113
Discount and discount movement 1,267 (6,804)
Total previous years' net claims incurred 1,963 309
ACC claims expense 6,578 4,524

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

  Actual
30 June
2018
$m
30 June
2017
$m
Net ACC Underwriting Result    
Premium revenue (refer to note 3) 2,643 2,882
ACC underwriting revenue 2,643 2,882
Less claims and other expenses (6,861) (4,793)
Net ACC underwriting surplus/(deficit) (4,218) (1,911)
ACC operating cash flows associated with the underwriting result are:    
Cash receipts 2,844 2,820
Cash payments (3,904) (3,590)
Net ACC operating cash flows (1,060) (770)
Analysis of ACC insurance liability

An independent actuarial estimate by Taylor Fry, consulting actuaries, has been made of the future expenditure relating to accidents that occurred prior to balance date, whether or not the claims have been reported to or accepted by ACC. The Taylor Fry actuarial report is signed by Mr Alan Greenfield, Fellow of the Institute of Actuaries of Australia and Mr Ross Simmonds, Fellow of the New Zealand Society of Actuaries. Mr Ross Simmonds is also a Fellow of the Institute and Faculty of Actuaries (UK).

  Actual
30 June
2018
$m
30 June
2017
$m
The ACC liability comprises:    
ACC outstanding claims liability 40,605 37,739
ACC unearned premium liability 1,937 1,870
ACC unearned premium liability deficiency 772 679
Total ACC liability 43,314 40,288
Analysis of Outstanding ACC Claims Liability    
Undiscounted outstanding claims liability 83,021 78,259
Discount adjustment (47,069) (44,854)
Risk margin 4,653 4,334
Total outstanding ACC claims liability 40,605 37,739
Discounted central estimate of future payments for outstanding claims 33,856 31,466
Claims handling expenses 2,096 1,939
Outstanding claims liability before risk margin 35,952 33,405
Risk margin 4,653 4,334
Total outstanding ACC claims liability 40,605 37,739
Movement in Outstanding ACC Claims Liability    
Opening balance 37,739 36,663
Claims incurred for the year 4,688 4,849
Claims paid out in the year (4,436) (4,138)
Discount rate unwind 733 752
Experience adjustments (actuarial gains and losses):    
- actual and assumed claim experience (735) 1,849
- change in discount rate 2,724 (3,452)
- change in inflation rate (108) 1,216
Closing outstanding ACC claims liability 40,605 37,739
  Actual
30 June
2018
$m
30 June
2017
$m
Movement in ACC Unearned Premium Liability    
Opening balance 1,870 1,873
Earning of premiums previously deferred (1,870) (1,873)
Deferral of premiums on current year contracts 1,937 1,870
Closing ACC unearned premium liability 1,937 1,870
Analysis of ACC unearned premium liability deficiency    
Unearned premium liability 1,937 1,870
Adjusted for unearned premium relating to claims arising from medical misadventure premium liabilities without deficiency (112) (107)
Adjusted ACC unearned premium liability 1,825 1,763
Discounted central estimate of payments for insured future claims 2,333 2,194
Risk margin 264 248
Present value of expected cash flows for future accident claims 2,597 2,442
Total ACC unearned premium liability deficiency 772 679
Claims development historical analysis

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

  2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
30 June
2018
$m
Estimate of ultimate claims costs:                
At the end of the                
  accident year 6,877 6,794 7,264 7,192 6,884 7,914 8,038  
One year later 6,118 6,608 6,547 6,682 7,272 7,160    
Two years later 5,546 5,762 5,823 7,062 7,230      
Three years later 4,979 5,007 6,252 7,382        
Four years later 4,458 5,180 6,316          
Five years later 4,780 5,633            
Six years later 5,068              
Current estimate of cumulative claim costs 5,068 5,633 6,316 7,382 7,230 7,160 8,038 46,827
Cumulative payments (1,597) (1,688) (1,833) (1,940) (1,907) (1,772) (1,119) (11,856)
Outstanding claims undiscounted 3,471 3,945 4,483 5,442 5,323 5,388 6,919 34,971
Discount               (20,978)
Claims handling costs               2,363
2011 and prior claims (net present value)               24,227
Short tail outstanding claims               22
Total outstanding ACC claims liability               40,605
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 3.51% (2017: 3.8%) and a long term discount rate of 4.75% beyond 39 years (2017: 4.75% beyond 39 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
2018
Next Year
30 June
2018
Beyond
Next Year
30 June
2017
Next Year
30 June
2017
Beyond
Next Year
Summary of assumptions        
Average weighted term to settlement from reporting date 16 years   16 years  
  8 months   1 month  
Weighted average risk margin 13.0%   13.0%  
Probability of adequacy of liability 75.0%   75.0%  
Weighted average risk margin for liability adequacy test 13.0%   13.0%  
Probability of adequacy of liability to cover unearned premiums 75.0%   75.0%  
Risk-free discount rate 1.8% 1.9% to 4.8% 2.0% 2.4% to 4.8%
Inflation rates (excluding superimposed inflation):        
    Weekly compensation 1.9% 1.9% to 2.2% 2.7% 2.7% to 3.0%
    Impairment benefits 1.7% 1.7% to 2.0% 2.2% 1.7% to 2.0%
    Social rehabilitation benefits (serious and non serious injury) 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
    Hospital rehabilitation benefits 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
    Medical costs 1.9% 1.9% to 2.2% 1.9% 1.9% to 2.2%
Superimposed inflation:        
    Social rehabilitation benefits (serious injury) 0.2% 0.0% to 3.2% 19.0% 1.2% to 7.5%
    Social rehabilitation benefits (non-serious injury) 0.7% 0.8% to 3.2% 5.1% 1.0%
    Hospital rehabilitation benefits 3.0% 3.0% 4.0% 4.0%
    Medical costs (GPs) 3.0% 3.0% 3.0% 3.0%
    Medical costs (Radiology) 2.0% 2.0% 2.0% 2.0%
    Medical costs (Physiotherapists) 2.0% 2.0% 2.0% 2.0%
    Medical costs others (specialists) 2.5% 2.5% 2.5% 2.5%
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
2018
$m
30 June
2017
$m
Sensitivity of assumptions      
Average weighted term to settlement from reporting date +1 year (470) (1,139)
  -1 year 479 1,175
Risk-free discount rate +1% (5,791) (5,114)
  -1% 7,624 6,826
Inflation rates (including superimposed inflation) +1% 7,781 7,031
  -1% (5,859) (5,342)
Social rehabilitation benefits - superimposed inflation for non-serious injury claims +1% 1,494 790
  -1% (1,206) (594)
Social rehabilitation benefits - superimposed inflation after two years for serious injury claims +1% 3,272 3,233
  -1% (2,555) (2,384)
Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $35,952 million (2017: $33,405 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 2018. These estimated cash flows include the effects of assumed future inflation.

  Actual
30 June
2018
$m
30 June
2017
$m
No later than 1 year 2,712 2,559
Later than 1 year and no later than 2 years 1,927 1,885
Later than 2 years and no later than 5 years 4,948 4,782
Later than 5 years and no later than 10 years 7,523 7,260
Later than 10 years and no later than 15 years 7,016 6,837
Later than 15 years and no later than 20 years 6,666 6,607
Later than 20 years and no later than 25 years 6,423 6,459
Later than 25 years and no later than 30 years 6,190 6,290
Later than 30 years and no later than 35 years 5,927 6,074
Later than 35 years and no later than 40 years 5,633 5,737
Later than 40 years and no later than 45 years 5,285 5,276
Later than 45 years and no later than 50 years 4,860 4,684
Later than 50 years 17,911 13,809
Undiscounted outstanding claims liability 83,021 78,259

Note 12: Receivables

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
10,098 10,507 Tax receivables 11,559 10,313
2,517 2,830 ACC levy receivables 2,308 2,225
760 779 Social benefit receivables 808 736
280 366 Other levies, fines and penalty receivables 325 350
13,655 14,482 Sovereign receivables 15,000 13,624
15 135 Reinsurance receivables 236 222
3,782 4,700 Trade and other receivables 6,149 4,683
17,452 19,317 Total receivables 21,385 18,529
    By maturity    
16,209 17,716 Expected to be realised within one year 19,711 16,898
1,243 1,601 Expected to be outstanding for more than one year 1,674 1,631
17,452 19,317 Total receivables 21,385 18,529

Receivables arising from sovereign revenue will be initially recognised at fair value.  These receivables are subsequently adjusted for penalties and interest as they are charged, and as they are tested for impairment.  Interest and penalties charged on tax receivables are presented as tax revenue in the statement of financial performance.

Reinsurance and other recoveries receivable on paid claims and outstanding claims, are recognised as revenue 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.

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.

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

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

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

Other levies, fines and penalty receivables comprise debtor portfolios administered by Ministry of Justice (ie, court fines) and Inland Revenue (ie, child support). These receivables are recorded at fair value, which on initial recognition represent the face value of the amount owed to the Crown, adjusted to reflect the amount expected to be recoverable. For the current year the initial adjustment from face value to fair value of these receivables was $201 million (2017: $201 million), with $137 million (2017: $129 million) of the adjustment relating to child support debt administered by Inland Revenue.

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

Trade and other receivables are relatively short term, with $5,668 million (2017: $4,567 million) expected to be settled in the next year. Their carrying amount provides a reasonable approximation of their fair value.

30 June 2018 Gross
receivable
$m
Impairment
$m
Net
receivable
$m
Tax receivables 13,594 (2,035) 11,559
ACC levy receivables 2,418 (110) 2,308
Social benefit receivables 1,617 (809) 808
Other levies, fines and penalty receivables 2,855 (2,530) 325
Reinsurance receivables 236 236
Trade and other receivables 6,256 (107) 6,149
Total receivables 26,976 (5,591) 21,385
30 June 2017 Gross
receivable
$m
Impairment
$m
Net
receivable
$m
Tax receivables 12,348 (2,035) 10,313
ACC levy receivables 2,341 (116) 2,225
Social benefit receivables 1,506 (770) 736
Other levies, fines and penalty receivables 2,891 (2,541) 350
Reinsurance receivables 222 222
Trade and other receivables 4,782 (99) 4,683
Total receivables 24,090 (5,561) 18,529

The Inland Revenue Department (IRD) administers the majority of the tax receivable portfolio. The recoverable amount of the portfolio is calculated by forecasting the expected repayments based on analysis of historical debt data, deducting an estimate of service costs and then discounting at the current market rate of 5.0% (2017: 5.0%).

If the recoverable amount of the portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount. Alternatively, if the recoverable amount is more, the carrying amount is increased.

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

 

 

Actual
30 June
2018
$m
30 June
2017
$m
Gross Tax Receivable    
Current 10,491 9,357
Past due 3,103 2,991
Total gross tax receivable 13,594 12,348
% past due 22.8% 24.2%
Impairment of Tax Receivables    
Opening balance 2,035 3,766
Impairment losses recognised during the year 619 498
Amounts written off as uncollectible (619) (2,229)
Closing balance 2,035 2,035
Tax Receivable Net of Impairment    
Current 11,246 9,302
Past due 313 1,011
Total tax receivable net of impairment 11,559 10,313
% past due 2.7% 9.8%
Ageing of Tax Receivables Past Due (Gross)    
Less than six months 813 707
Between six months and one year 331 447
Between one year and two years 710 561
Greater than two years 1,249 1,276
Total tax receivables past due (Gross) 3,103 2,991

Note 13: Marketable Securities, Deposits and Derivatives in Gain

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    By type    
36,138 40,619 Marketable securities 40,532 39,558
3,257 4,197 Long term deposits 5,379 4,730
4,313 3,529 Derivatives in gain 3,153 4,381
1,806 1,891 IMF financial assets 2,053 1,837
45,514 50,236 Total marketable securities, deposits and derivatives in gain 51,117 50,506
    Expected Realisation    
27,442 29,317 Expected to be realised within one year 32,195 29,080
18,072 20,919 Expected to be held for more than one year 18,922 21,426
45,514 50,236 Total marketable securities, deposits and derivatives in gain 51,117 50,506

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. Long-term deposits are instruments with maturities greater than three months that are not traded in an active market.

Marketable securities and derivatives in gain are reported at their fair value.  Fair value is either based on quoted market price or the use of 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 measured at amortised cost.  Their carrying amount provides a reasonable approximation of their fair value.

Further information is provided on these financial assets in note 26.

Note 14: Share Investments

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Expected Realisation    
18,092 24,007 Expected to be realised within one year 24,109 19,555
12,048 12,433 Expected to be held for more than one year 12,147 11,145
30,140 36,440 Total share investments 36,256 30,700

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 is provided on these financial assets in note 26.

Note 15: Advances

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    By type    
18,902 18,402 Kiwibank loans and advances 18,281 17,795
9,210 9,317 Student loans 9,301 9,197
1,693 1,266 Other advances 1,840 1,591
29,805 28,985 Total advances 29,422 28,583

Further information on the management of risks associated with these financial assets is provided in note 26.

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Kiwibank Loans and Advances    
    By maturity    
1,323 1,288 Expected to be repaid within one year 1,268 1,319
17,579 17,114 Expected to be outstanding for more than one year 17,013 16,476
18,902 18,402 Total Kiwibank loans and advances 18,281 17,795
    Impairment of Kiwibank Loans and Advances    
    Opening balance 40 53
    Impairment losses recognised 8 10
    Amounts written off as uncollectible (5) (7)
    Impairment losses reversed (7) (16)
    Closing balance 36 40
    Collective impairment allowance 31 34
    Individual impairment allowance 5 6
    Total impairment of Kiwibank loans and advances 36 40
    Ageing of Kiwibank Loans and Advances Past Due But Not Impaired    
    Less than six months 126 101
    Between six months and one year 12 7
    Total Kiwibank loans and advances past due but not impaired 138 108

Kiwibank loans and advances are measured at amortised cost. The fair value of Kiwibank loans and advances is $18,350 million (2017: $17,824 million). This fair value is based on a discounted cash flow model with reference to market interest rates, prepayment rates and estimated credit losses.

The maximum loss due to default on Kiwibank loans and advances 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 loans and advances are primarily in the form of properties. The fair value of the collateral provided is sufficient to ensure that the entire amount owing over the life of the mortgage will be recovered and there is reasonable assurance that collection efforts will result in payment of the amounts owed in a timely manner.

2018 Forecast   Note Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Student Loans      
15,963 15,774 Nominal value   15,869 15,735
(6,753) (6,457) Write-down on initial recognition and impairment   (6,568) (6,538)
9,210 9,317 Total student loans   9,301 9,197
    Gross carrying value   10,989 10,991
    Impairment of student loans   (1,688) (1,794)
    Total student loans   9,301 9,197
    By maturity      
    Expected to be repaid within one year   1,333 1,273
    Expected to be outstanding for more than one year   7,968 7,924
    Total student loans   9,301 9,197
    Movement During the Year      
    Opening balance   9,197 8,982
    Net new lending (excluding fees)   1,300 1,475
    New lending - establishment fee   36 10
    Initial write-down to fair value   (594) (662)
    Repayments made during the year   (1,348) (1,272)
    Interest unwind 5 604 602
    Movement in impairment during the year   106 62
    Closing balance student loans   9,301 9,197
    Impairment of Student Loans      
    Opening balance   1,794 1,856
    Impairment losses recognised during the year   (56) (30)
    Amounts written off as uncollectible   (50) (32)
    Closing balance   1,688 1,794

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

Fair value on initial recognition of student loans is determined by projecting forward estimated repayments from borrowers under the scheme and discounting them back at an appropriate discount rate.

The student loan scheme is intended to provide a cost effective means of enabling a wide range of people to access tertiary education, gaining knowledge and skills that enhance the economic and social wellbeing of New Zealand. No interest on loans to New Zealand residents is charged and there are no repayments required from those with very low incomes. Loans of those who die or become bankrupt are written off.

The Student loan valuation model reflects current student loan policy and macroeconomic assumptions. As such, the carrying value is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate on new borrowers.

  Actual
30 June
2018
30 June
2017
Significant assumptions behind the carrying value are:    
Effective interest rate - weighted average 6.8% 6.8%
Interest rate applied to loans for overseas borrowers 3.7%-5.5% 3.9%-5.5%
Consumer Price Index 1.0%-2.0% 0.2%-2.0%
Future salary inflation 2.9%-3.3% 1.5%-3.0%

In contrast to 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 as at 30 June 2018. It is determined by discounting the cash flows at an appropriate rate.

  Actual
30 June
2018
$m
30 June
2017
$m
Fair value of the student loan portfolio 9,929 9,812
Impact on fair value of a 1% increase in discount rate (520) (535)
Impact on fair value of a 1% decrease in discount rate 579 601

The fair value differs from the carrying value by $628 million 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. In contrast, the fair value is calculated on a discount rates that are current at 30 June 2018. At that date the fair value was calculated on a discount rate (including expenses) of 5.6% (2017: 5.7%) whereas a weighted average effective interest rate of 6.8% (2017: 6.8%) was used for the carrying value.

The Crown has resolved to early adopt PBE IFRS-9: Financial Instruments from 1 July 2018. This new accounting standard will have a material impact on the value of the Student Loan book due to a change in its measurement basis. Refer to Note 1 for further discussion of the expected impact of the move to this standard.

Through 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 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. This can be found at: http://www.educationcounts.govt.nz/publications/series/student_loan_scheme_annual_reports

Note 16: Property, Plant and Equipment

For the year ended
30 June 2018
Total
$m
Land
$m
Buildings $m State highways
$m
Electricity generation assets
$m
Electricity distribution network
$m
Aircraft (excluding military)
$m
Specialist military equipment
$m
Specified cultural and heritage assets
$m
Rail network
$m
Other plant and equipment
$m
Gross carrying amount                      
Opening balance 1 July 2017 160,631 49,640 36,491 23,829 15,875 5,666 4,112 4,042 3,677 2,021 15,278
Additions 8,912 708 2,832 2,232 315 216 669 344 38 398 1,160
Additions thru business combinations   54 -   58
Disposals (1,864) (167) (229) (11) (1) (31) (26) (13) (3) (1,383)
Revaluations 7,972 2,491 (47) 5,651 (81) (98) 24 32
Transfers from/(to) other asset classes 93 134 72 (28) (85)
Other (92) (113) (10) 1 16 (1) 57 (24) 23 (1) (40)
Total gross carrying amount 175,652 52,693 39,109 31,702 16,124 5,850 4,686 4,373 3,767 2,418 14,930
Accumulated Depreciation and Impairment                      
Opening balance 1 July 2017 16,081 1,836 9 1,586 923 580 1,082 10,065
Eliminated on disposal (1,490) (113) (28) (2) (33) (3) (1,311)
Eliminated on transfer to other asset classes (71) (25) (28) (18)
Eliminated on revaluation (2,255) (1,347) (383) (267) (286) 24 4
Impairment losses charged to operating balance 103 112 (9)
Depreciation expense 4,275 1,587 383 505 195 316 304 26 35 924
Other (9) (8) (1) (5) 2 1 2
Total accumulated depreciation and impairment 16,634 1,930 246 1,753 1,189 629 1,230 9,657
Carrying value as at 30 June 2018 159,018 52,693 37,179 31,702 15,878 4,097 4,686 3,184 3,138 1,188 5,273
By holding                      
Leasehold 3,318 229 2 3,060 27
Public Private Partnerships 2,152 224 1,073 855
Freehold (excluding PPP) 153,548 52,469 35,877 30,847 15,876 4,097 1,626 3,184 3,138 1,188 5,246
Carrying value as at 30 June 2018 159,018 52,693 37,179 31,702 15,878 4,097 4,686 3,184 3,138 1,188 5,273

The total amount of property, plant and equipment under construction is $2,960 million (2017: $2,247 million).

For the year ended
30 June 2017
Total
$m
Land
$m
Buildings
$m
State highways
$m
Electricity generation assets
$m
Electricity distribution network
$m
Aircraft (excluding military)
$m
Specialist military equipment
$m
Specified cultural and heritage assets
$m
Rail network
$m
Other plant and equipment
$m
Gross carrying amount                      
Opening balance 1 July 2016 149,806 44,959 33,423 22,347 15,799 5,488 3,860 3,740 3,570 1,735 14,885
Additions 7,781 953 2,203 1,553 132 215 757 326 24 295 1,323
Disposals (1,533) (250) (231) (30) (1) (31) (40) (24) (3) (923)
Net revaluations 5,260 4,462 1,109 (41) 51 (407) 86 (7) 7
Transfers from/(to) other asset classes (676) (441) (201) (39) 5
Other (7) (43) 188 (106) (6) (19) (2) (19)
Total gross carrying amount 160,631 49,640 36,491 23,829 15,875 5,666 4,112 4,042 3,677 2,021 15,278
Accumulated Depreciation and Impairment                      
Opening balance 1 July 2016 15,307 1,933 80 1,415 670 535 776 9,898
Eliminated on disposal (859) (73) (14) (9) (9) (3) (751)
Eliminated on transfer to other asset classes (90) (96) (30) 36
Eliminated on revaluation (2,504) (1,374) (366) (502) (270) 22 (14)
Impairment losses charged to operating balance 325 12 287 26
Depreciation expense 4,073 1,472 366 494 185 310 293 26 32 895
Other (171) (26) (75) (1) (31) (13) (25)
Total accumulated depreciation and impairment 16,081 1,836 9 1,586 923 580 1,082 10,065
Carrying value as at 30 June 2017 144,550 49,640 34,655 23,829 15,866 4,080 4,112 3,119 3,097 939 5,213
By holding                      
Leasehold 3,078 18 264 2 2,761 33
Public Private Partnerships 1,636 253 874 509
Freehold (excluding PPP) 139,836 49,369 33,517 23,320 15,864 4,080 1,351 3,119 3,097 939 5,180
Carrying value as at 30 June 2017 144,550 49,640 34,655 23,829 15,866 4,080 4,112 3,119 3,097 939 5,213

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 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. Property, plant and equipment owned by State-owned Enterprises and mixed ownership companies has been pledged to secure borrowings and finance lease obligations of $3,761 million (2017: $3,348 million).

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.

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 is effectively realised, and is transferred to taxpayer funds.

Property, plant and equipment revaluation reserve Actual
30 June
2018
$m
30 June
2017
$m
Opening revaluation reserve 84,164 75,626
Net revaluations 10,668 8,923
Minority interest share of revaluation reserve (70) (178)
Transfers from/(to) taxpayer funds (12) (207)
Closing revaluation reserve 94,750 84,164
Class of Asset    
Land 39,366 36,860
Buildings 23,824 22,051
State highways 18,469 12,436
Electricity generation assets 10,774 10,651
Specified cultural and heritage assets 1,520 1,507
Specialist military equipment 448 335
Rail network 11 13
Other plant and equipment 338 311
Closing revaluation reserve 94,750 84,164

Net revaluations in the note above exclude movements attributable to minority interests and includes the shares of associates revaluation of physical assets. It will therefore differ from the movements on pages 78 and 79.

The remainder of this note provides detailed analysis and information about Property, Plant and Equipment.

Land and Buildings - Page 81

State Highways - Page 83

Electricity Generation Assets - Page 85

Specified Cultural and Heritage Assets - Page 87

Rail Network - Page 88

Public Private Partnerships - Page 90

Accounting Policies - Page 91

Land and Buildings
Breakdown of land and buildings
(total valuation over $500m)
30 June 2018
Actual
Land
$m
Buildings
$m
Total
$m
Housing stock 18,301 10,196 28,497
School property 5,709 13,083 18,792
State highway corridor land 12,351 7 12,358
Conservation estate 6,063 63 6,126
Hospitals 1,202 5,493 6,695
Rail network corridor land 3,522 3,522
Prisons and Department of Corrections 178 2,288 2,466
Defence Force land and buildings 982 1,735 2,717
Landcorp farmland and buildings 1,117 152 1,269
Ministry of Justice land and buildings 239 897 1,136
Police stations 241 351 592
Fire Stations 296 362 658
Other 2,492 2,552 5,044
Total land and buildings 52,693 37,179 89,872
30 June 2017 Actual
Land
$m
Buildings
$m
Total
$m
Housing stock 17,845 8,910 26,755
School property 5,683 12,413 18,096
State highway corridor land 10,892 9 10,901
Conservation estate 5,718 64 5,782
Hospitals 1,091 4,716 5,807
Rail network corridor land 3,520    -  3,520
Prisons and Department of Corrections 166 1,960 2,126
Defence Force land and buildings 983 1,728 2,711
Landcorp farmland and buildings 1,091 148 1,239
Ministry of Justice land and buildings 204 782 986
Police stations 151 475 626
Fire Stations 220 319 539
Other 2,076 3,131 5,207
Total land and buildings 49,640 34,655 84,295
Valuation Information
Description Valuer/Reviewer Approach Timing
Housing stock Quotable Value NZ Limited Valuations based on market evidence using sales comparison data. Annual valuation with the latest completed in the 30 June 2018 financial year.
School property Quotable Value NZ Limited or experienced staff (reviewed by Quotable Value Limited) Valuations based on market evidence where possible, or optimised depreciated replacement cost (ODRC). Annual valuation with the latest completed as at 30 June 2018.
State highway corridor land and held properties Darroch Ltd, a registered property valuation company, peer reviewed by WSP Opus with NZTA.

Valued using opportunity cost based on adjacent use as an approximation to fair value.

The valuation for held properties was determined by reference to quoted prices in an active or liquid market unless it is a specialised asset, where the optimised depreciated replacement cost was used.

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 2018.
Conservation estate (national parks, forest parks, conservation areas, reserves) CoreLogic rateable valuations reviewed by Logan Stone Limited Valued based on current year rateable valuations from CoreLogic. Land not matched to a rateable valuation was assessed using a calculated average per hectare rate. Land that is not subject to a full valuation in the current year is subject to a valuation update through the use of price indices from CoreLogic.  Annual valuation with the latest completed as at 30 June 2018.
Crown historic buildings Inspected and valued by Logan Stone Limited Valued based on the building replacement cost. Annual valuation with the latest completed as at 30 June 2018.
Hospitals Each District Health Board uses an independent valuer Land values were based on market evidence while buildings were valued at ODRC. Each DHB revalues land and buildings on a three to five year cycle with varying valuation dates.
New Zealand Railways Corporation rail corridor land Jones Lang LaSalle Limited (JLL) 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 2017.
NZ Defence Force Land and Buildings WSP Opus Valued using market based approaches for buildings outside defence areas and land.  An index/ODRC method has been used for buildings inside defence areas. Valuations completed at least once every five years with the latest full independent land and buildings valuation completed as at 30 June 2017.
Carrying value of other asset classes subject to revaluation
State Highways (excluding land)
  Actual
30 June
2018
$m
30 June
2017
$m
State highways 31,702 23,829
Valuation information
Description Valuer/Reviewer Approach Timing
Roads, bridges, culverts, tunnels, underpasses including the formation works, road structure, drainage works and traffic facilities.  WSP Opus State Highways are valued using the ODRC of the existing asset database.  A full valuation is completed annually where the majority of assets are indexed. The latest valuation was completed as at 30 June 2018.

State highways are recorded on an optimised depreciated replacement cost (ODRC) basis representing the cost of replacing the network asset in its current condition. The valuation reflects the estimated present cost of constructing the existing asset by the most appropriate method of construction, reduced by allowances for the age and condition of the asset (depreciation). The estimated current cost is expected to change over time.

WSP Opus, an independent valuer, determined the valuation of the state highway as at 30 June 2018 by assigning replacement costs to the components of the state highway reported in the Road Assessment and Maintenance Management (RAMM) database and other databases as at 30 June 2017. The net capital expenditure for the year to 30 June 2018 was added to this data. The costs assigned are adjusted depending on the region and the type of terrain. The replacement cost is also adjusted for depreciation to reflect the current age and condition of the physical components. The major components of the state highway network and the optimised depreciated replacement cost of those components are shown in the table below:

State Highway Component 2018
$m
2017
$m
Formation    11,497 9,104
Pavement (structure)      6,099 4,236
Pavement (surface)         878 742
Bridges      7,431 5,405
Drainage      1,564 903
Traffic Facilities      1,383 1,330
Culverts and subways         762 491
Other structures      2,088 1,618
Total 31,702 23,829

Due to the unique nature of the state highway network, the value of the assets cannot be measured with precision. Significant estimates and assumptions have been applied to the valuation, which include assumptions on: quantities used in the construction of state highway components, the unit cost to apply and the life of the assets. Changes to these underlying estimates and assumptions can cause a material movement in the valuation and are reviewed on a periodic basis. The main assumptions affecting the state highway valuation are:

  2018 2017
Asset Lives    
Formation Permanent Permanent
Pavement structure - subbase Permanent Permanent
Pavement structure - base course 50 years 50 years
Pavement surface 9 years 9 years
Bridges 90-100 years 90-100 years
Overhead Factors    
Professional Fees 15% 15%
Preliminary & general costs 34% 10-15%
Formation    
$ per square metre cost in flat terrain $24-$43 $24-$42
$ per square metre cost in rolling terrain $40-$60 $39-$58
$ per square metre cost in mountainous terrain $65-$92 $64-$89
Pavement    
Asphalt (average $/m2) $34.70 $42.00
Chipseal (average $/m2) $7.50 $6.80
Bridges    
Routine (single span) ($/m2) $3,961 $2,897
Routine (multi span) ($/m2) $3,237 $2,367
Motorway ramps ($/m2) $4,686 $3,426

The range of costs in the above table reflect regional variation and the differing costs of construction depending on terrain.

In addition, assumptions are made about the completeness of the RAMM database. These assumptions are used in determining additional items to be added so the complete network is valued. RAMM also contains assumptions to ensure appropriate allocation of all assets by region and terrain type, and on matters such as base course depth, subbase depth, shoulder formation, base course and retaining walls.

The following sensitivity analysis represents possible impacts on the state highway network valuation based on changes to estimates. There is a risk the valuation is understated for overhead factors, particularly for external professional fees (which is a focus for the 2018/19 improvement plan) and therefore, the sensitivity table reflects this:

  Change in valuation
($m)
Increase in external professional fees by 10%    2,688
Increase in preliminary & general costs from an average of 34% to 38%      788
Increase or decrease in formation unit costs by 10%      1,064/(1,064)
Increase or decrease in unit costs of bridges, culverts, surface, pavements, railings and barriers by 10% 1,522/(1,522) 

WSP Opus has performed simulation analysis on the valuation to quantify the range of valuation outcomes that could occur as a result of changes in the different valuation inputs.

WSP Opus has concluded that the overall valuation is between -7.5% to +10% of the current value (-$2.3 billion to +$3.1 billion) excluding the impact of brownfield costs. (Refer to Note 2 for additional discussion on brownfield costs).

Electricity generation assets
  Actual
30 June
2018
$m
30 June
2017
$m
Meridian Energy 7,845 7,849
Mercury NZ 5,216 5,241
Genesis Energy 2,980 2,938
Inter segment eliminations (163) (162)
Total electricity generation assets 15,878 15,866
Valuation and sensitivity information
Description Valuer/Reviewer Approach Timing
Meridian Energy: Hydro stations and wind farms PwC, Independent valuer Based on an income valuation approach based primarily on the capitalisation of earnings with additional consideration of the discounted cash flows to establish a valuation range on which the Board's ultimate valuation decision is based. Revaluations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair values as at 30 June 2018.
Mercury NZ Limited: Hydro and Geothermal stations PwC, Independent valuer 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 2018.
Genesis Energy: Thermal and Hydro stations and Wind farms Internal valuation 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 2018.

There are a number of key assumptions used to value electricity generation assets. These assumptions relate to future maintainable earnings derived from 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 Mercury NZ 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
Key input Sensitivity range Valuation Impact on fair value of generation assets
NZ Generation volumes 13,490 GWh p.a to 15,430 GWh p.a +/- 250 GWh $135 million / ($135) million
Operating expenditure $285 million p.a. (in real terms) +/- $10 million p.a. ($138) million / $138 million
EBITDAF earnings multiple 12.6 x EBITDAF +/- 0.5x $359 million / ($359) million
Genesis Energy
Key input Sensitivity range Valuation Impact on fair value of generation assets
Wholesale electricity price path $75/MWh to $103/MWh by 2027 (in nominal terms) +/- 10% $537 million / ($497) million
Generation volume 6,363 GWh to 7,035 GWh +/- 10% $376 million / ($376) million
Discount rate Pre-tax equivalent discount rate of 10.4% +/- 1%. $541 million / ($400) million
Mercury NZ
Key input Sensitivity range Valuation Impact on fair value of generation assets
Future wholesale electricity price path $63/MWh to $105/MWh (in real terms) +/- 10% $783 million / ($790) million
Discount rate Post-tax discount rate between 7.5% to 7.9% +/- 0.5% $(496) million / $592 million
Operational expenditure $160 million p.a. +/- 10% ($231) million / $230 million
Specified cultural and heritage assets
  Actual
30 June
2018
$m
30 June
2017
$m
National Library 1,056 1,053
Te Papa 947 948
National Archives 625 614
Conservation 449 446
Other 61 36
Total specified cultural and heritage assets 3,138 3,097
Specified cultural and heritage assets
Description Valuer/Reviewer Approach Timing
National Library collections Ashley and Associates 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. Valuations completed cyclically with all collections valued at least once every three years with the latest full valuation completed as at 30 June 2017.
Te Papa collections

Art, Library, History, Mataraunga Māori, Pacific and International and Photography Collections: Art & Object and Dunbar Sloane

Philatelic: Mowbray Collectables

Natural History Collection: Dunbar Sloane & internal experts

Art, Library, History, Mataraunga Māori, Philatelic, Pacific and International and Photography Collections are valued based on market value by independent valuers.

 

 

 

 

The Natural History Collection is valued at replacement cost value and based on market value by independent valuers where available.

Valuations completed cyclically with all collections valued at least once every three years with the latest valuations completed as at 30 June 2018.
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. Valuations completed cyclically with all collections valued at least once every three years with the latest full valuation completed as at 30 June 2017.
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.  Visitor buildings and track assets were valued at fair value effective as at 30 June 2018.
Rail network
Recoverable
amount
$m
ODRC
 
$m
30 June
2017
Carrying
value
$m
  Recoverable
amount
$m
ODRC
$m
30 June
2018
Carrying
value
$m
96 4,486 96 Network required for freight 186 5,331 186
9 724 724 Network not required for freight (including metro) 20 871 871
105 5,210 820 Total rail infrastructure 206 6,202 1,057
    50 Buildings     41
    69 Capital work in progress     90
    939 Rail network     1,188

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.

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.

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 $292 million (2017: $210 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 $161 million (2017: $258 million) on the rail network during the year.

Since the restructuring of KiwiRail as a profit-oriented entity, there have been challenges in making investment decisions, marrying the duality of commercial “for profit” activities that align with an SOE's commercial mandate with other “public benefit” activities that deliver social benefits rather than commercial returns, and integrating relatively short-term funding commitments with prudent investment decisions for long-life assets such as rail infrastructure. The Government has therefore initiated a review which includes determining the appropriate structure, capital requirements and funding mechanisms of the KiwiRail Group in relation to the purpose of rail in a multi-modal transport system, including the outcomes and objectives for rail that the government seeks. Decisions from this review, expected in early 2019, are likely to affect the mix of assets and operations, the extent of the rail network, and which of the entities within the Crown might own those assets and/or perform those operations. These decisions could affect how much of the rail network is valued at ODRC (if fully valued at ODRC the rail infrastructure would be valued at $6,202 million (2017: $5,210 million) and how much is valued at recoverable amount if fully valued at recoverable amount the rail infrastructure would be valued at $206 million (2017: $105 million)).

Rail network
Description Valuer/Reviewer Approach Timing
Buildings, bridges, tunnels, tracks, level crossings signals and electrification.  All these assets are held on freehold basis.

Buildings - Jones Lang LaSalle Limited

Other Rail Network Assets - Ernst & Young

Non-specialised building assets not on the rail corridor were valued based on market evidence using comparable sales.  Specialised building assets and buildings on rail corridor land were valued using ODRC.

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

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

Valuation completed with sufficient regularity to ensure that the carrying amount does not differ materially from fair value with the latest full valuation completed as at 30 June 2017 for buildings and 30 June 2018 for other rail network assets.
Other valuation information
Specialist military equipment
Description Valuer/Reviewer Approach Timing
Specialist military equipment Valuations are obtained through specialist assessment by New Zealand Defence Force advisers, and the basis for the valuation is confirmed as appropriate by the Australian Defence Force. Valued using an ODRC method. Valuation completed at least once every five years with the latest valuation being as at 30 June 2018.
Aircraft
Description Valuer/Reviewer Approach Timing
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 2018.
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 Crown's obligation to pay for these assets is included in other borrowings.

  Actual
30 June
2018
$m
30 June
2017
$m
Transmission Gully 603 448
Education Assets 503 384
Auckland South Corrections Facility 310 325
Auckland Prison 359 295
Puhoi to Warkworth State Highway 377 184
Total public private partnerships 2,152 1,636
Carrying value of assets by source    
Provided by private sector partner 1,895 1,350
Existing government assets 257 286
Total public private partnerships 2,152 1,636

Movements in carrying value for Public Private Partnerships

  Actual
30 June
2018
$m
30 June
2017
$m
Gross carrying amount    
Opening balance 1 July 1,643 977
Assets provided by private sector partner(s) 545 505
Existing Government assets 15 124
Net revaluations (30) 35
Other 1 2
Total Gross Carrying Amount 2,174 1,643
Accumulated Depreciation and Impairment    
Opening balance 1 July 7 14
Eliminated on revaluation (9) (22)
Depreciation expense 24 15
Total accumulated depreciation 22 7
Carrying value as at 30 June 2,152 1,636

The assets in a public private partnership (PPP) 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.

Details on individual PPP's can be found in the annual reports of individual agencies (Ministry of Education, New Zealand Transport Agency and the Department of Corrections).

Subsequent to initial recognition, classes of Property, Plant and Equipment (PPE) are accounted for as set out 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.

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

Generally, Government borrowings are not directly attributable to individual assets.  Therefore, borrowing costs incurred during the period, including any that could be allocated as a cost of completing and preparing assets for their intended use are expensed rather than capitalised.

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. 

When an item of PPE is revalued, any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.

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 added to an asset revaluation reserve for that class of asset.  To the extent that there is a balance in the asset revaluation reserve for the asset class, any loss is deducted from that reserve.  Otherwise, losses are reported in the statement of financial performance.

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.

Class of PPE Accounting policy
Land and buildings

Land and buildings are recorded at fair value 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 an optimised depreciated replacement cost basis less depreciation 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 an optimised depreciated replacement cost basis representing the cost of replacing the network asset in its current condition.
 

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 accumulated since the assets were last revalued.  Rail infrastructure not required for freight operations and used for metro services is recorded on an optimised depreciated replacement cost basis less depreciation accumulated since the assets were last revalued.
Aircraft Aircraft (excluding specialised military equipment) are recorded at fair value less depreciation 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 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.  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.

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

Class of PPE Estimated useful lives
Buildings 25 to 150 years
Specialist military equipment (SME) 5 to 55 years
Rail Network:  
   Track and ballast 40 to 50 years
   Tunnels and bridges 75 to 200 years 
   Overhead traction and signalling 15 to 80 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

Note 17: Equity Accounted Investments

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
12,171 12,128 Tertiary Education Institutions 12,505 11,972
1,423 1,599 Kaingaroa Timberlands Partnership 1,885 1,593
301 326 City Rail Link Limited 307
723 755 Other 719 645
14,618 14,808 Total equity accounted investments 15,416 14,210

NZ GAAP 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. 

The Treasury's view is that because the Government cannot determine the operating and financing policies of tertiary education institutions, but does have a number of powers in relation to these entities, it is appropriate to treat them as associates. City Rail Link and Kaingaroa Timberlands Partnerships are joint operations or ventures that the Government jointly controls with its joint venture partners.

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.

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

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Operating Results    
2,378 2,583 Revenue from Crown 2,461 2,349
2,886 2,654 Other revenue 2,714 2,844
(5,155) (5,146) Expenses (5,226) (4,955)
109 91 Net surplus (51) 238
    Assets    
1,759 1,625 Financial assets 2,039 1,833
11,894 11,522 Property, plant and equipment 11,675 11,044
1,137 1,313 Other assets 1,436 1,324
14,790 14,460 Total assets 15,150 14,201
    Liabilities    
709 572 Borrowings 399 449
1,910 1,760 Other liabilities 2,246 1,780
2,619 2,332 Total liabilities 2,645 2,229
12,171 12,128 Net worth 12,505 11,972
Kaingaroa Timberlands Partnership

The New Zealand Superannuation Funds has a 42% ownership interest (2017: 42%) in Kaingaroa Timberlands Partnership (KTP). For the year ended 30 June 2018, KTP recognised revenue of $555 million (2017: $457 million), profit of $1,033 million (2017: $688 million), assets of $4,701 million (2017: $4,055 million), liabilities of $33 million (2017: $30 million) and equity of $4,668 million (2017: $4,026 million).

City Rail Link Limited

City Rail Link Limited (CRLL) is a jointly controlled Crown entity, co-funded by the Crown and Auckland Council, for the purpose of designing and constructing of the Auckland City Rail Link (an underground rail line between the city centre and the existing western line). The expected costs of the project are $3.4 billion, which will be confirmed once all the contracts are finalised. The maximum funding limits for the project agreed by the Sponsors totals $3.6 billion. Therefore, the Government's maximum share of costs is $1.8 billion.

For the year ended 30 June 2018, CRLL recognised revenue of $3 million (2017: $Nil) and a deficit of $8 million (2017: $Nil), assets of $625 million (2017: $Nil) liabilities of $11 million (2017: $Nil) and equity of $614 million (2017: $Nil).

New Zealand Local Government Funding Agency (NZLGFA) (included in other)

The Government holds $5 million of the $25 million paid-up capital of NZLGFA.

For the year ended 30 June 2018, NZLGFA recognised revenue of $343 million (2017: $321 million) and a surplus of $12 million (2017: $11 million). NZLGFA's assets and liabilities were $8,835 million (2017: $8,478 million) and $8,771 million (2017: $8,424 million) respectively. The Crown's share of the net assets is $13 million (2017: $11 million). The Crown is not a guarantor of the NZLGFA and has no share of any contingent liabilities of the NZLGFA.

Note 18: Payables

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    By type    
7,905 8,679 Accounts payable 9,221 10,517
4,574 4,328 Taxes repayable 5,201 4,277
12,479 13,007 Total payables 14,422 14,794
    By maturity    
11,932 12,454 Expected to be settled within one year 13,721 14,065
547 553 Expected to be outstanding for more than one year 701 729
12,479 13,007 Total payables 14,422 14,794

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 19: Borrowings

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    By type    
59,591 63,187 Government bonds 62,393 64,349
15,357 17,262 Kiwibank customer deposits 16,160 15,960
7,183 7,063 Settlement deposits with Reserve Bank 7,603 6,471
2,800 3,206 Derivatives in loss 5,067 3,113
4,096 3,997 Treasury bills 4,114 4,071
2,559 2,524 Finance lease liabilities 1,318 1,412
205 183 Government retail stock 182 190
19,709 18,556 Other borrowings 18,815 16,240
111,500 115,978 Total borrowings 115,652 111,806
    By maturity    
36,445 36,547 Expected to be settled within one year 47,472 37,370
75,055 79,431 Expected to be outstanding for more than one year 68,180 74,436
111,500 115,978 Total borrowings 115,652 111,806
    By guarantee    
78,805 83,425 Sovereign-guaranteed debt 83,230 81,395
32,695 32,553 Non-sovereign debt 32,422 30,411
111,500 115,978 Total borrowings 115,652 111,806

Finance leases transfer, to the Crown as lessee, substantially all the risks and rewards incident to 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.

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.

Government Bonds

Government bonds are measured at amortised costs, 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 $67,289 million (2017: $68,611 million). This valuation is based on observable market prices. The valuation of Government bonds reported at fair value is also based on observable market prices.

New Zealand Government bonds are rated Aaa by Moody's and AA+ by S&P and Fitch. The rating outlook is stable with Moody's, S&P and Fitch.

Kiwibank customer deposits

Kiwibank customer deposits are measured at amortised cost using the effective interest rate method.  Amortisation and foreign exchange gains and losses are recognised in the Statement of Financial Performance as is any gain or loss when the liability is derecognised.

The fair value of Kiwibank customer deposits measured at amortised cost is $16,172 million (2017: $15,970 million). For fixed term deposits by customers, fair values have been estimated using a discounted cash flow model with reference to market interest rates. For other deposits by customers, the carrying amount is a reasonable estimate of fair value.

Kiwibank customer deposits exclude deposits held by other government reporting entities and will therefore differ from the total customer deposits reported by Kiwibank.

Settlement deposits with Reserve Bank

Settlement deposits with the Reserve Bank represent the amount 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). 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.

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.

Other borrowings
  Actual
30 June
2018
$m
30 June
2017
$m
Other borrowings measured at amortised cost 13,655 11,777
Other borrowings measured at fair value 5,160 4,463
Total other borrowings 18,815 16,240
  Actual
30 June
2018
$m
30 June
2017
$m
Other borrowings measured at fair value    
Carrying value 5,160 4,463
Amount payable on maturity 5,016 4,350
Fair value impact from changes in credit risk for the year (19) (73)
Cumulative fair value impact from changes in credit risk 95 115

Other borrowings are measured at fair value. The movements in fair value are reported in the statement of financial performance.  When they are held for trading or they are managed, their performance is evaluated on a fair value basis.  All other borrowings are reported at amortised cost.

Other borrowings includes $3,090 million (2017: $2,636 million) of sovereign-guaranteed debt administered by the Reserve Bank and the Treasury.

The fair value of other borrowings measured at amortised cost is $12,924 million (2017: $11,556 million). The fair value of financial liabilities with standard terms and conditions traded on active liquid markets was 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 the 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 table above identifies the difference between the carrying value and amount payable at maturity as well as the extent that fair value movements have resulted from changes in credit risk of the issuing entity. The carrying value can differ from the amount actually payable on maturity where the effect of discounting cash flows is material.

Note 20: Retirement Plan Liabilities

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
9,916 10,577 Government Superannuation Fund (GSF) 10,988 11,004
1 2 Other funds 3 2
9,917 10,579 Total retirement plan liabilities 10,991 11,006

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 2018. 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
2018
$m
30 June
2017
$m
Net GSF Obligation    
Present value of defined benefit obligation 15,558 15,272
Fair value of plan assets (4,570) (4,268)
Present value of unfunded defined benefit obligation 10,988 11,004
Present value of defined benefit obligation    
Opening defined benefit obligation 15,272 16,406
Expected current service cost 65 75
Expected unwind of discount rate 293 340
Actuarial losses/(gains) 810 (675)
Benefits paid (882) (874)
Closing defined benefit obligation 15,558 15,272
Fair value of plan assets    
Opening fair value of plan assets 4,268 3,965
Expected return on plan assets 209 194
Actuarial gains/(losses) 257 289
Funding of benefits paid by Government 719 690
Contributions from other entities 17 18
Contributions from members 26 27
Benefits paid (882) (874)
Other (44) (41)
Closing fair value of plan assets 4,570 4,268

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

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Personnel Expenses    
    Expected current service cost 65 75
    Expected unwind of discount rate on GSF obligation 293 340
    Expected return on plan assets (209) (194)
    Contributions from members and funding employers (43) (45)
    Other expenses 44 41
    Past service cost
220 150 Total included in personnel expenses 150 217
    Net (Gains)/Losses on Non-Financial Instruments    
149 Actuarial (gain)/loss recognised in the year 553 (964)
220 299 Total GSF expense 703 (747)

The Government expects to make a contribution of $727 million (2017: $741 million in the year ending 30 June 2018) to GSF in the year ending 30 June 2019. 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
2018
%
30 June
2017
%
Summary of assumptions    
For following year    
Discount rate 1.8% 2.0%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation 1.7% 1.7%
Beyond next year    
Discount rates between 2 and 21 years 1.9% to 4.0% 2.4% to 4.6%
Discount rates between 22 and 29 years 4.0% to 4.4% 4.6% to 4.7%
Discount rates between 30 and 36 years 4.4% to 4.7% 4.7% to 4.8%
Discount rate from 37 years onwards 4.8% 4.8%
Expected return on plan assets 5.0% 5.0%
Expected rate of salary increases 2.5% 2.5%
Expected rate of inflation from years 2 to 19 1.7% 1.7%

Assumed inflation increases of 1.7% each year to year 19, then gradually increases, reaching 2.0% in year 37.

The defined benefit obligation increased in the year to 30 June 2018 by $286 million, mainly due to a decrease in the short and medium term discount rates over the last year.

The discount rate used to present value the pension cash flows associated with this obligation has a risk-free rate based on the market yield curve of New Zealand Government Bonds. Given the short-term nature of market data on Government Bonds in New Zealand, we also assume a single long-term equilibrium risk-free interest rate of 4.75% based on macroeconomic extrapolation. Discount rates are then smoothed over a minimum of 10 years from the end of the market yield curve to that long-term rate.

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

  Actual
30 June
2018
$m
30 June
2017
$m
Equity instruments 3,023 2,638
Other debt instruments 599 517
Cash and short term investments 313 220
Property 3 6
Other 632 887
Fair value of plan assets 4,570 4,268

The expected rate of return on the plan assets of 5.0% (2017: 5.0%) has been calculated by taking the expected long-term returns from each asset class, reduced by tax (using the current rates of tax).

The actual return on plan assets for the year ended 30 June 2018 was 11.1%, or $466 million (2017: 12.7% or $490 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
2018
$m
30 June
2017
$m
Sensitivity of assumptions      
Discount rate (present value of the obligation) + 1% (1,601) (1,561)
  - 1% 1,935 1,886
Share price (fair value of equity instruments) + 10% (302) (264)
  - 10% 302 264
Expected rate of inflation + 1% 1,785 1,738
  - 1% (1,516) (1,476)
Historical Analysis

Actuarial 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
2018
$m
30 June
2017
$m
30 June
2016
$m
30 June
2015
$m
30 June
2014
$m
Present value of defined benefit obligation 15,558 15,272 16,406 14,932 14,560
Fair value of plan assets (4,570) (4,268) (3,965) (4,087) (3,674)
Present value of unfunded defined benefit obligation 10,988 11,004 12,441 10,845 10,886
Experience adjustment - increase/(decrease) in plan assets 257 289 (182) 325 212
Less experience adjustment - increase/(decrease) in plan liabilities (16) (90) 184 157 68
Total experience adjustments - (losses)/gains 273 379 (366) 168 144
Changes in actuarial assumptions (826) 585 (1,662) (490) 433
Actuarial (losses)/gains recognised in the year (553) 964 (2,028) (322) 577
Undiscounted defined benefit obligation

The reported GSF defined benefit obligation of $15,558 million (2017: $15,272 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 2018. These estimated cash flows include the effects of assumed future inflation.

  30 June
2018
$m
30 June
2017
$m
No later than 1 year 923 918
Later than 1 year and no later than 2 years 918 911
Later than 2 years and no later than 5 years 2,759 2,753
Later than 5 years and no later than 10 years 4,496 4,525
Later than 10 years and no later than 15 years 4,145 4,218
Later than 15 years and no later than 20 years 3,554 3,671
Later than 20 years and no later than 25 years 2,804 2,942
Later than 25 years and no later than 30 years 2,039 2,181
Later than 30 years and no later than 35 years 1,351 1,481
Later than 35 years and no later than 40 years 803 903
Later than 40 years and no later than 45 years 419 485
Later than 45 years and no later than 50 years 184 221
Later than 50 years 80 104
Undiscounted defined benefit obligation 24,475 25,313

Note 21: Provisions

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    By type    
3,551 3,508 Provision for employee entitlements 3,677 3,582
2,023 2,620 Provision for Emission Trading Scheme credits 2,541 2,028
816 806 Provision for National Provident Fund guarantee 835 856
Aircraft Lease Return Costs 265 266
1,811 1,971 Other provisions 1,819 1,809
8,201 8,905 Total provisions 9,137 8,541
    By longevity    
3,844 3,939 Expected to be settled within one year 3,994 3,932
4,357 4,966 Expected to be outstanding for more than one year 5,143 4,609
8,201 8,905 Total provisions 9,137 8,541
For the year ended 30 June 2018 Employee
entitlements
$m
ETS
$m
NPF
guarantee
$m
Aircraft
lease
return costs
$m
Opening Provision 3,582 2,028 856 266
Additional Provision 1,927 720 86
Provision Utilised (1,533) (669) (69) (86)
Reversal of previous provision (150) (57) (11)
(Gains) / Losses on NZ Units 462
Other Movements (149) 105 10
Closing Provision 3,677 2,541 835 265
For the year ended 30 June 2017 Employee
entitlements
$m
ETS
$m
NPF
guarantee
$m
Aircraft
lease
return costs
$m
Opening Provision 3,604 2,250 918 295
Additional Provision 1,835 295 -   89
Provision Utilised (1,706)  (444)  (61)  (96)
Reversal of previous provision (176) (111) (17)
(Gains) / Losses on NZ Units (73)
Other Movements 25 -   110  (5)
Closing Provision 3,582 2,028 856 266

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.

Employee entitlements  

The provision for employee entitlements represents annual leave, accrued long service leave, 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 1.78% (2017: 1.97%) next year to 4.75% (2017: 4.75%) in later years.

Emissions Trading Scheme

The Emissions Trading Scheme (ETS) was established to encourage a reduction in New Zealand's greenhouse gas emissions. The carbon price used to calculate the ETS provision at 30 June 2018 is $NZ21.10 (2017: $NZ17.20). The ETS provision represents the tradeable NZ units outstanding, that will be accepted by the government as emitters honour the emissions obligations under the ETS. The carbon price used by the Ministry for the Environment is determined by the quoted NZU spot price at the end of the reporting date as published by OM Financial Limited on their website: https://commtrade.co.nz

National Provident Fund guarantee

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 $835 million (2017: $856 million), represented by a gross estimated pension obligation of $871 million (2017: $892 million) with net investment assets valued at $36 million (2017: $36 million).

Aircraft lease return costs

Where a commitment exists to maintain aircraft held under operating lease arrangements, a provision is made during the lease term for the lease return obligations specified within those lease arrangements. The provision is based upon historical experience, manufacturers' advice and, where appropriate, contractual obligations.

Other provisions

Other provisions are recognised where there is a present obligation as a result of a past event, where it is probable that this obligation will be settled and the liability can be reliably estimated. Other provisions include rehabilitation and restoration provisions.

Note 22: Minority Interests

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Net Worth Attributable to Minority Interests    
5,879 5,940 Opening minority interest 5,940 6,155
450 466 Operating balance attributable to minority interests 512 319
(432) (542) Transactions with minority interests (533) (756)
Movement in reserves attributable to minority interests 74 227
(21) 54 Other movements (5)
5,876 5,918 Closing minority interest 5,993 5,940
    Consisting of interests in:    
    Meridian Energy 2,213 2,326
    Mercury NZ 1,461 1,503
    Air New Zealand 1,294 1,128
    Genesis Energy 912 920
    Other 113 63
    Minority share of Operating Balance    
    Air New Zealand 286 116
    Mercury NZ 104 83
    Meridian Energy 92 90
    Genesis Energy 27 40
    Other 3 (10)
    Operating balance attributable to minority interests 512 319

Transactions with minority interests include dividend payments and dividend reinvestments. Other minority interests consists of minority interests in New Zealand Superannuation Fund investments and the KiwiBank Group capital notes issued. Crown Infrastructure Partners minority interest in 2017 no longer exists for 30 June 2018.

Note 23: 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 the predictability and stability of tax rates
  • when formulating fiscal strategy, having regard to 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.

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 is expressed through its long term objectives and short term intentions for fiscal policy.

Long Term Fiscal Objectives - Fiscal Strategy Report 2018
Debt

Maintain total debt at prudent levels. The Government will reduce the level of net core Crown debt to 20% of GDP within five years of taking office, and maintain it at prudent levels thereafter.

Operating balance

The Government will deliver a sustainable operating surplus across an economic cycle.

Operating expenses

The Government will maintain its expenditure to within the recent historical range of spending as a ratio of GDP. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits, in particular prioritising investments to address the long-term financial and sustainability challenges facing New Zealand.

Operating revenues

The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

Net worth

The Government will strengthen net worth consistent with the debt and operating balance objectives.

Short Term Fiscal Intentions
Fiscal Strategy Report 2017 Fiscal Strategy Report 2018 Fiscal Position 2018[2]

Debt

The Government's Intention is to reduce net debt to around 20% of GDP in 2020 and to between 10% and 15% of GDP by 2025.  Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 26.3% of GDP in 2020/21. 

Net core Crown debt (excluding the New Zealand Superannuation Fund (NZSF) and advances) is forecast to be 20.6% of GDP in 2019/20 and 19.3% in 2020/21.  It is projected to be 13.3% in 2024/25 and 11.8% in 2025/26. 

Debt

The Government's Intention is to reduce the level of net core Crown debt to 20% of GDP within five years of taking office (subject to any significant shocks to the economy).  Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 27.3% of GDP in 2021/22. 

Net core Crown debt (excluding NZS Fund and advances) is forecast to be 20.6% of GDP in 2019/20, 20.2 % of GDP in 2020/21 and 19.1% in 2021/22.

This assumes new capital allowances of $3.8 billion in Budget 2018, $3.7 billion in Budget 2019, $3.4 billion in Budget 2020, and $3.0 billion in Budget 2021.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2018 was 33.0% of GDP (2017: 33.8%).

Net core Crown debt (excluding NZS Fund and advances) at 30 June 2018 was 19.9% of GDP (2017: 21.7%).

Operating balance

The Government's intention is to maintain rising operating surpluses (before gains and losses) so that net core Crown debt begins to reduce in dollar terms (subject to any significant shocks to the economy).

The operating balance (before gains and losses) is forecast to be 0.6% of GDP in 2016/17, rising to 1.0% of GDP in 2017/18 and 2.2% of GDP in 2020/21.  This is consistent with the long-term objective for the operating balance.

The operating balance is forecast to be 3.3% of GDP in 2020/21. 

Operating balance

The Government's intention is to deliver operating surpluses (before gains and losses) to ensure net debt falls to 20% of GDP within five years of taking office.

The operating balance (before gains and losses) is forecast to be 1.1% of GDP in 2017/18, rising to 1.7% of GDP in 2019/20 and 2.1% of GDP in 2021/22.  This is consistent with the long-term objective for the operating balance.

The operating balance is forecast to be 3.3% of GDP in 2021/22. 

Operating balance

The operating balance (before gains and losses) for the year ended 30 June 2018 was a surplus of 1.9% of GDP (2017: 1.5%).

The operating surplus for the year ended 30 June 2018 was 2.9% of GDP (2017: 4.5%).

Expenses

The Government's intention is to support fiscal surpluses by restraining the growth in core Crown expenses and reducing these to below 30% of GDP.

Core Crown expenses are forecast to fall from 28.8% of GDP in 2016/17 to 27.5% of GDP in 2020/21.

Total Crown expenses are forecast to be 35.2% of GDP in 2020/21.

This assumes new operating allowances of $1.7 billion per year in Budget 2018, growing at 2% per Budget until Budget 2020. 

Expenses

The Government's intention is to ensure expenses are consistent with the operating balance objective.

Core Crown expenses are forecast to be 28.1% of GDP in 2017/18 to 28.0% of GDP in 2021/22.

Total Crown expenses are forecast to be 36.2% of GDP in 2021/22.

This assumes new operating allowances of $2.8 billion per year in Budget 2018, and $2.4 billion per year in Budget 2019, 2020 and 2021. 

Expenses

Core Crown expenses for the year ended 30 June 2018 were 27.9% GDP (2017: 27.8%).

Total Crown expenses for the year ended 30 June 2018 were 36.0% of GDP (2017: 36.1%).

Revenues

The Government's intention is to support fiscal surpluses by growing revenue in dollar terms, although maintaining it at broadly the same proportion of GDP.

Total Crown revenues are forecast to be 37.6% of GDP in 2020/21.

Core Crown revenues are forecast to be 29.8% of GDP in 2020/21.

Core Crown tax revenues are forecast to be 27.7% of GDP in 2020/21. 

Revenues

The Government's intention is to ensure sufficient revenue to meet the operating balance objective.

Total Crown revenues are forecast to be 38.4% of GDP in 2021/22.

Core Crown revenues are forecast to be 30.4% of GDP in 2021/22.

Core Crown tax revenues are forecast to be 28.3% of GDP in 2021/22. 

Revenues

Total Crown revenues for the year ended 30 June 2018 were 38.0% of GDP (2017: 37.7%). 

Core Crown revenues for the year ended 30 June 2018 were 30.0% of GDP (2017: 29.8%). 

Core Crown tax revenues for the year ended 30 June 2018 were 27.7% of GDP (2017: 27.6%). 

Net worth

The Government's intention is to strengthen the Crown’s balance sheet as a buffer against future adverse shocks.

Total net worth attributable to the Crown is forecast to be 40.9% of GDP in 2020/21.

Total Crown net worth is forecast to be 42.7% of GDP in 2020/21.

Net worth

The Government's intention is to increase net worth consistent with the operating balance objective.

Total net worth attributable to the Crown is forecast to be 44.2% of GDP in 2021/22.

Total Crown net worth is forecast to be 45.8% of GDP in 2021/22.

Net worth

Total net worth attributable to the Crown as at 30 June 2018 was 44.8% of GDP (2017: 40.3%).

Total Crown net worth as at 30 June 2018 was 46.9% of GDP (2017: 42.5%).

Note 24: Commitments

  Actual
30 June
2018
$m
30 June
2017
$m
Capital Commitments    
State highways1 4,410 5,122
Aircraft (excluding military) 1,526 1,637
Specialist military equipment 377 366
Land and buildings 3,016 2,735
Other property, plant and equipment 502 471
Other capital commitments 398 227
Tertiary Education Institutions 752 673
Total capital commitments 10,981 11,231
Operating Lease Commitments    
Non-cancellable accommodation leases 3,708 3,398
Other non-cancellable leases 2,879 2,468
Tertiary Education Institutions 649 499
Total operating lease commitments 7,236 6,365
Total commitments 18,217 17,596
By source    
Core Crown 6,481 5,945
Crown entities 7,980 8,024
State-owned Enterprises 4,526 4,492
Inter-segment eliminations (770) (865)
Total commitments  18,217 17,596
By Term    
Capital Commitments    
One year or less 5,041 4,886
From one year to two years 2,083 2,231
From two to five years 1,337 1,685
Over five years 2,520 2,429
Total capital commitments  10,981 11,231
Operating Lease Commitments    
One year or less 1,217 1,053
From one year to two years 1,003 942
From two to five years 1,915 1,749
Over five years 3,101 2,621
Total operating lease commitments  7,236 6,365
Total commitments 18,217 17,596
  1. The 2017 comparative for state highways has been restated from $6.1 billion to $5.1 billion due to non-contractual future outflows being included in 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 separately reported as commitments.

Note 25:  Contingent Liabilities and Contingent Assets

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 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 2018 where they are expected to be material but not remote. Where there is an obligation under New Zealand GAAP, amounts have been recognised in the financial statements.

Contingent Liabilities
  Note Actual
30 June
2018
$m
30 June
2017
$m
Quantifiable Contingent Liabilities      
Uncalled capital a 8,330 7,638
Guarantees and indemnities b 224 690
Legal proceedings and disputes c 332 333
Other quantifiable contingent liabilities d 514 327
Total quantifiable contingent liabilities   9,400 8,988
By source      
Core Crown   9,297 8,769
Crown entities   17 16
State-owned Enterprises   86 203
Total quantifiable contingent liabilities   9,400 8,988

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 more than remote.  Contingent assets are disclosed if it is probable that the benefits will be realised.

a) 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 the organisations listed below, 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”.

  Note Actual
30 June
2018
$m
30 June
2017
$m
Asian Development Bank i 3,231 2,941
International Monetary Fund - promissory notes ii 2,255 2,123
International Bank for Reconstruction and Development iii 1,643 1,512
International Monetary Fund - arrangements to borrow iv 634 540
Asian Infrastructure Investment Bank v 548 504
Other uncalled capital   19 18
Total uncalled capital   8,330 7,638
i) Asian Development Bank (ADB)

New Zealand was a founding-regional member of the ADB, whose 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) 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. Accordingly, as New Zealand is a member, we contribute to the IBRD only as required by the IBRD.

iv) 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.

v) Asian Infrastructure Investment Bank (AIIB)

New Zealand was a founding-regional member of the AIIB. AIIB is a Chinese-initiated multilateral investment bank aimed at addressing the significant gap in infrastructure investment across Asia. The Crown has agreed to make funds available to the AIIB, the occurrence and amounts of which will depend upon uncertain trigger events and AIIB calling the funds.

Southern Response Earthquake Services Ltd

The Crown has agreed to provide an uncalled capital facility of $230 million to Southern Response Earthquake Service Limited (SRES) to support the Christchurch earthquake recovery process. Of this amount $113 million has been called, leaving $117 million as a contingent liability. This capital support will increase core Crown net debt when called.

b)  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.

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.

  Note Actual
30 June
2018
$m
30 June
2017
$m
New Zealand Export Credit Office guarantees i 137 136
Air New Zealand letters of credit and performance bonds ii 32 32
The Body Laid Bare Exhibition indemnity iii 459
Other guarantees and indemnities   55 63
Total guarantees and indemnities   224 690
i)  New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office 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)    The Body Laid Bare Exhibition indemnity

From March to July 2017, the Auckland Art Gallery Toi o Tāmaki hosted the exhibition The Body Laid Bare: Masterpieces from the Tate Gallery. The exhibition was indemnified under the Government Indemnity of Touring Exhibition Scheme from 7 February 2017 to 28 July 2017 to cover the period of transit and display of these valuable works of art. This indemnity no longer exists at 30 June 2018.

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 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.

  Note Actual
30 June
2018
$m
30 June
2017
$m
Legal tax proceedings i 146 145
Kiwifruit vine disease Psa-V ii 94 93
Customs legal dispute iii 37 78
Ministry of Education - Contractual disputes iv 24
Other legal proceedings and disputes   31 17
Total legal proceedings and disputes   332 333
i)  Legal tax proceedings 

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 maximum liability Inland Revenue has in respect of these cases.

ii)  Kiwifruit vine disease Psa-V

A post-harvest operator has filed a claim against the Ministry for Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease, Psa-V. This plaintiff filed a notice of particulars of loss in September 2016, which quantifies its loss as $93 million. The Ministry defended the claim. On 27 June 2018 the High Court found that the Ministry did not owe a duty of care to Seeka. Strathboss and Seeka filed a cross-appeal on 7 August 2018.

iii)  Customs legal dispute

Customs assesses duty payable by taxpayers. Taxpayers may apply for refunds, drawbacks or remission of duty or may challenge the amount of duty assessed. Parties may challenge assessments or refusal of refund applications in the Customs Appeal Authority. The liability is shown as the maximum liability the Crown faces.

iv)  Ministry of Education - Contractual disputes

Legal proceedings and disputes represent the amounts claimed by plaintiffs in relation to the performance of the Ministry of Education's statutory role.

d) Other quantifiable contingent liabilities
  Note Actual
30 June
2018
$m
30 June
2017
$m
Unclaimed monies i 161 147
Air New Zealand partnership ii 158 121
Ministry for Primary Industries - Bonamia ostreae iii 86
Land Information New Zealand - Quake outcasts iv 35
Other contingent liabilities   74 59
Total other contingent liabilities   514 327
i) 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.

ii) Air New Zealand partnership

The Air New Zealand Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engine 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.

iii) Ministry for Primary Industries - Bonamia ostreae

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for Bonamia Ostreae. These claims can be quantified but do not meet the tests for recognising a provision.

iv) Land Information New Zealand - Quake outcasts

On 21 August 2018 the Minister for Greater Christchurch Regeneration announced that the Crown would pay former residential red zone owners 100% of the 2007/08 rateable value for uninsured homes. This payment is for those property owners who have not already received a payment for their uninsured improvements. The total cost of these ex gratia payments is estimated at $12 million. In addition, the Crown will purchase privately-owned red zone properties if owners are interested in selling their property. The Crown offer would be on the basis of 100% of the 2007/08 rateable value for land and improvements, regardless of insurance status.

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: indemnities, legal disputes and other contingent liabilities.

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 Limited 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 Energy'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 Deed between Genesis 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 the beds of lakes and rivers subject to operating easements. 
 

Justices of the Peace, Community Magistrates and Disputes Tribunal Referee

Section 50 of the District Courts Act 2016 and 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 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 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 39 of the Civil Defence Emergency Management Act 2002 National 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.
New Zealand Railways Corporation Section 10 of the Finance Act 1990 Guarantees all loan and swap obligations of the New Zealand Railways Corporation.
 

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

The Crown Transactional Banking Services Agreement with Westpac New Zealand Limited dated 24 September 2015. The Crown has indemnified Westpac New Zealand Limited:

  • for all amounts paid by Westpac New Zealand under letters of credit issued on behalf of the Crown, and
  • against certain cost, damages and losses to third parties resulting from:
    • unauthorised, forged or fraudulent payment instructions
    • unauthorised or incorrect direct debit instructions, or
    • cheques mistakenly drawn in favour of a third party rather than drawn in favour of the Crown.
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 

Litigation involving ACC arises almost exclusively from challenges to operational decisions made by ACC through the statutory review and appeal process. No accrual has been made for contingent liabilities which could arise, as these disputes are issue based and ACC's active management of litigation means that it will be either settling or defending, depending on the merits of the issue in dispute. ACC's Board believes the resolution of outstanding appeals will not have any material effect on the financial statements of ACC and therefore are not material for the Crown.

ii) Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for incursions including Mycoplasma bovis, fruit fly, pea weevil, bonamia ostreae and myrtle rust. Due to the complexity and uncertainty of the amount of these claims the amounts are unquantified. To the extent that an obligation can be quantified, provision has been made in these accounts.

iii) 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 that has been transferred by the Crown to a State-owned enterprise (SOE) or tertiary institutions, 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.

iv) Kiwifruit vine disease Psa-V

Approximately 210 growers have filed a claim against the Ministry for Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease, Psa-V. The plaintiffs have not quantified their losses, but have publicly claimed it is in the vicinity of $380 million, citing total industry losses of $885 million. The Ministry defended the claim. On 27 June 2018 the High Court found that the Ministry owed a duty of care to Strathboss and claimants; that it breached its duty of care at the import permit stage; and that the breach caused the Psa-V incursion. An appeal was filed by the Crown on 24 July 2018.

v) Canterbury insurance disputes

Southern Response Earthquake Services Limited (SRESL) from time to time receives notification of legal claims and disputes in relation to claim settlements as a commercial outcome of conducting its business.

A representative action proceeding was filed against SRESL on 29 May 2018. The financial statements make no allowance for the outcome of these proceedings, as the range of possible outcomes cannot be reliably quantified at this time. These claims are being defended.

Other unquantified 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 a 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 PBE IPSAS 19: 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. Where costs cannot be reliably measured, they are disclosed as an unquantified contingent liability.

iii) Remediation of Per- and Poly- Fluoroalkyl Substances Contamination

Local and central government entities are investigating per- and poly-fluoroalkyl substances (PFAS) contamination from the historic use of specialised firefighting foam at sites on, and in the vicinity of, airports, New Zealand Defence Force bases, fuel storage facilities and other sites. Various government agencies have been undertaking a programme to review, investigate and develop a comprehensive approach to manage the impact of PFAS at sites around New Zealand. Once a response is agreed, it is possible the Crown may incur costs for the response to PFAS contamination, however these costs cannot be estimated without the agreed response being finalised, so an unquantified contingent liability has been disclosed.

iv) Treaty of Waitangi claims - settlement relativity payments

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1.0 billion in 1994 present-value terms, the mechanism provides that the Crown is liable to make payments to maintain the real value of Ngāi Tahu's and Waikato-Tainui's settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

v) Holidays Act and other relevant legislation

A number of entities have commenced a review of payroll calculations over the past six years in order to ensure compliance with the Holidays Act 2003 and other relevant legislation. Where possible, a provision has been made in these financial statements for obligations arising from those reviews. Further work continues to be undertaken by a number of entities including the Ministry of Education, District Health Boards, the Department of Corrections and KiwiRail Holdings Limited. These entities have complexities that are taking longer to resolve. To the extent that an obligation cannot reasonably be quantified at 30 June 2018, there is an unquantified contingency.

Contingent Assets
  Note Actual
30 June
2018
$m
30 June
2017
$m
Contingent assets      
Tax disputes i 49 48
Transpower New Zealand Limited ii 40
New Zealand Defence Force Insurance Recoveries iii 46
Other contingent assets   38 14
Total contingent assets   133 102
By source      
Core Crown   133 58
Crown entities   4
State-owned Enterprises   40
Total quantifiable contingent assets   133 102
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) Transpower New Zealand Limited

Transpower operates its revenue setting methodology within an economic value (EV) framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. Under Commerce Commission regulations, Transpower is required to pass onto or claim from customers over time the economic value of the gains or losses. Transpower's contingent asset included the provisional balance from the EV accounts at 30 June 2017.

iii) New Zealand Defence Force Earthquake Insurance Recoveries

There are quantifiable contingent assets in relation to claims with NZDF insurers for material damage, business interruption and rental savings of $46 million as at 30 June 2018.

As at 30 June 2018, there are unquantifiable contingent assets in relation to claims with NZDF insurers for business interruption and loss of the fixtures and fittings in Defence House following the 2016 Kaikōura/Hurunui Earthquakes. A further contingent asset relates to a claim with the Defence House landlord for historical contributions to the landlord for build costs.

Unquantifiable Contingent Assets
Social Housing - Crown Residual Interest (CRI)

The Crown has the contractual right to receive the return of the Crown Residual Interest (CRI) in relation to social housing properties released from capacity contracts with registered Community Housing Providers via a cash payment. The CRI is an asset created to provide protection to the Crown in the event that a property is no longer needed for social housing.

Note 26:  Financial Instruments

The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as the Treasury, Reserve Bank, New Zealand Superannuation Fund, Inland Revenue, Kiwi Group Holdings Limited 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:

  • Funding purposes. Primarily financial assets and liabilities are held to finance the Government's borrowing requirements and provide funds to Government entities. Examples include Government bonds and Treasury bills. Financing activity exposes the Government to financial risks from interest rates and global demand for New Zealand Government bonds.
  • Social policy purposes. Primarily held to achieve social policy objectives. A large portion of the financial instruments for social policy purposes relates to student loans to support tertiary education policy. The associated risk for the Student Loan portfolio is that borrowers will default on their obligation.
  • Investment purposes. Primarily held for the purpose of generating returns to assist in funding long-term obligations. The main investment portfolios are managed by ACC and the NZ Superannuation Fund. Associated risks include performance of the New Zealand and global markets.
  • Central bank purposes. Primarily held for the Reserve Bank's foreign reserve management and market operations. The main financial risks to which the Reserve Bank is exposed includes foreign exchange risks, liquidity risks and financial stability risks.
  • Commercial purposes. Primarily held by entities that operate on a commercial basis, who will hold financial instruments arising from their normal business activity. The main examples are State-owned Enterprises (including the mixed ownership model companies). Associated risks include interest rates risks, foreign exchange risks and price risks.

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. Detailed risk management policy disclosure of Government reporting entities can be found in an individual entity's Annual Report.

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, the forecasts reported in the Half Year and Budget Economic and Fiscal Updates, and a more in-depth analysis of the Crown's assets in regular Investment Statements.

This note provides the following details of the Crown's financial instruments:

  • Non-derivative financial instrument policies (pages 118 to 119)
  • Classification of financial assets and financial liabilities (pages 120 to 121)
  • Fair value measurement (page 122)
  • Derivative disclosures (pages 123 to 124)
  • Risk management (pages 124 to 128), and
  • Sensitivity analysis (pages 128 to 129).
Non-derivative 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 the operating balance.  This designation is made by reference to the purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation. 

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

Major financial asset type Designation
Trade and other receivables All designated as loans and receivables at amortised cost
Student loans All designated as loans and receivables at amortised cost
Kiwibank loans and advances 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 the operating balance
Marketable securities Generally designated as fair value through the operating balance
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 revenue policy). Loans and receivables issued with durations of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Interest, impairment losses and foreign exchange gains and losses are recognised in the statement of financial performance.

Financial assets held-for-trading and financial assets designated at fair value through the operating balance 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 the operating balance 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 revenue and expense, 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 revenue and expense include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised in the statement of comprehensive revenue and expense, 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.

Non-derivative 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 the operating balance.  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.

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

Financial liabilities held-for-trading and financial liabilities designated at fair value through the operating balance 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 the operating balance 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. 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.

Classification of financial assets and financial liabilities

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 the operating balance. Changes in the value of an instrument may be reported in the statement of financial performance or directly in other comprehensive revenue and expense depending on its designation.

Financial assets
  Note Actual
30 June
2018
$m
30 June
2017
$m
By class      
Cash and cash equivalents   19,340 18,732
Reinsurance, trade and other receivables 12 6,385 4,905
Long-term deposits 13 5,379 4,730
Derivatives in gain 13 3,153 4,381
Marketable securities 13 40,532 39,558
IMF financial assets 13 2,053 1,837
Share investments 14 36,256 30,700
Kiwibank loans and advances 15 18,281 17,795
Student loans 15 9,301 9,197
Other advances 15 1,840 1,591
Total financial assets   142,520 133,426
By valuation methodology      
Loans and receivables at amortised cost   62,232 58,135
Fair value      
     Available for sale   1,240 1,223
     Held for trading   3,194 4,446
     Fair value through the operating balance   75,854 69,622
Total financial assets at fair value   80,288 75,291
Total financial assets   142,520 133,426

As at 30 June 2018, the carrying value of financial assets that had been pledged as collateral was $2,418 million (2017: $888 million). These transactions are conducted under terms that are usual and normal to standard securities borrowing. The amount will fluctuate depending on the market values of derivatives held that are in a loss position at 30 June 2018 and that require collateral to be posted as per the terms. The increase in collateral pledged is largely as a result of securities pledged as collateral by the Reserve Bank and the New Zealand Superannuation Fund. For more information, refer to the individual entity's annual report.

Financial liabilities
  Note Actual
30 June
2018
$m
30 June
2017
$m
By class      
Issued currency   6,375 5,980
Accounts payable 18 9,221 10,517
Borrowings: 19    
     Government bonds   62,393 64,349
     Kiwibank customer deposits   16,160 15,960
     Settlement deposits with Reserve Bank   7,603 6,471
     Derivatives in loss   5,067 3,113
     Treasury bills   4,114 4,071
     Finance lease liabilities   1,318 1,412
     Government retail stock   182 190
     Other borrowings   18,815 16,240
Total borrowings   115,652 111,806
Total financial liabilities   131,248 128,303
By valuation methodology      
Amortised cost (loans and receivables)   121,021 120,727
Fair value      
     Held for trading   5,067 3,113
     Fair value through the operating balance   5,160 4,463
Total financial liabilities at fair value   10,227 7,576
Total financial liabilities   131,248 128,303
Fair Value Measurement

The following hierarchy details the basis for the valuation of financial assets and financial liabilities measured at fair value. This includes financial assets and financial liabilities that are available for sale, held for trading, or fair value through the operating balance. 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. Fair values are determined according to the following hierarchy:

  • Quoted Market Price - Financial instruments with quoted prices for identical instruments in active markets (level 1).
  • Valuation Technique Using Observable Inputs - Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets, and financial instruments valued using models where all significant inputs are observable (level 2).
  • Valuation Technique with Significant Non-observable Inputs - Financial instruments valued using models where one or more significant inputs are not observable (level 3).
Fair Value Financial Instruments by Measurement Hierarchy
  Actual
30 June
2018
$m
30 June
2017
$m
Financial assets    
Quoted market price 45,782 43,039
Observable market inputs 30,202 28,948
Significant non-observable inputs 4,304 3,304
Total financial assets at fair value 80,288 75,291
Financial liabilities    
Quoted market price 986 881
Observable market inputs 9,178 6,629
Significant non-observable inputs 63 66
Total financial liabilities at fair value 10,227 7,576
Net financial instruments at fair value 70,061 67,715
Significant non-observable inputs

The following table details movements in the fair value of financial instruments measured using significant non-observable inputs.

  Actual
30 June
2018
$m
30 June
2017
$m
Financial assets 4,304 3,304
Financial liabilities 63 66
Net financial instruments 4,241 3,238
Opening balance 3,238 3,315
Total gains/(losses) recognised in the statement of financial performance 138 197
Total gains/(losses) recognised in the statement of comprehensive revenue and expense 47 28
Purchases 1,120 433
Sales (165) (104)
Issues 1 1
Settlements (249) (671)
Transfers into and out of non-observable inputs 111 39
Closing balance 4,241 3,238
Derivatives

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, currencies or electricity price and volume. The notional value is therefore a reference to the calculation base, not a reflection of the counterparty exposure.

  Carrying Value
As at 30 June 2018
Carrying Value
As at 30 June 2017
Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Net carrying value
$m
Foreign exchange contracts 496 2,004 (1,508) 1,677 475 1,202
Cross currency swaps 560 862 (302) 864 441 423
Interest rate swaps 1,238 1,464 (226) 1,175 1,710 (535)
Futures 26 1 25 9 4 5
Other derivatives 833 736 97 656 483 173
Total derivatives 3,153 5,067 (1,914) 4,381 3,113 1,268
  Notional Value
As at 30 June 2018
Notional Value
As at 30 June 2017
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$m
Derivatives in gain
$m
Derivatives in loss
$m
Total Notional value
$m
Foreign exchange contracts 22,783 67,175 89,958 64,964 14,803 79,767
Cross currency swaps 7,682 11,014 18,696 11,122 5,469 16,591
Interest rate swaps 43,147 43,256 86,403 42,183 55,027 97,210
Futures 3,258 4,985 8,243 2,037 3,371 5,408
Other derivatives 17,806 11,434 29,240 20,400 13,077 33,477
Total derivatives 94,676 137,864 232,540 140,706 91,747 232,453
Derivatives liquidity analysis

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.

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

i) whether an economic hedge exists and the effectiveness of that hedge

ii) whether the hedge accounting qualifications could be met, and

iii) the extent to which it would improve the relevance of reported results.

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 revenue and expense 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 revenue and expense is included in the initial cost of the asset or liability.  Otherwise, gains or losses recognised in the statement of comprehensive revenue and expense 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 revenue and expense is transferred to the statement of financial performance. 

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.

As at 30 June 2018 Total
cash flows
$m
<1 year
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Derivatives            
  settled gross            
 - inflow 106,584 94,224 1,885 4,530 5,307 638
 - outflow (108,364) (95,844) (1,899) (4,515) (5,362) (744)
Total settled gross (1,780) (1,620) (14) 15 (55) (106)
Derivatives in loss settled net 2,982 965 514 970 454 79
As at 30 June 2017 Total
cash flows
$m
<1 year
$m
1-2 years
$m
2-5 years
$m
5-10 years
$m
> 10 years
$m
Derivatives            
  settled gross            
 - inflow 97,085 83,274 3,364 4,495 5,037 915
 - outflow (95,054) (81,944) (3,305) (4,081) (4,764) (960)
Total settled gross 2,031 1,330 59 414 273 (45)
Derivatives in loss settled net 2,200 892 437 600 235 36
Interest rate risk

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. This 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.

Foreign currency risk

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 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:

  30 June
2018
$m
30 June
2017
$m
Financial Assets (excluding derivatives)    
New Zealand Dollar 54,571 56,159
United States Dollar 40,960 33,907
Yen 9,863 8,157
Euro 9,103 10,168
Other 24,870 20,654
Total financial assets (excluding derivatives) 139,367 129,045
Financial Liabilities (excluding derivatives)    
New Zealand Dollar 115,386 112,773
United States Dollar 6,407 8,057
Yen 978 817
Euro 819 980
Other 2,591 2,563
Total financial liabilities (excluding derivatives) 126,181 125,190
Derivatives in gain/(loss)    
New Zealand Dollar 57,299 48,553
United States Dollar (30,166) (21,136)
Yen (9,332) (7,652)
Euro (9,590) (10,649)
Other (10,125) (7,848)
Total derivatives (1,914) 1,268
Net Financial Assets/(Liabilities)    
New Zealand Dollar (3,516) (8,061)
United States Dollar 4,387 4,714
Yen (447) (312)
Euro (1,306) (1,461)
Other 12,154 10,243
Net Financial Assets/(Liabilities) 11,272 5,123

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 revenue and expense when hedge accounting is applied.

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 revenue and expense.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Government. The carrying value of financial assets equates to the maximum exposure to credit risk as at balance date. Credit risk is managed at the entity level in accordance with their capital objectives and risk management policies. These objectives and policies include limits to individual and industry counterparty exposure, collateral requirements, and counterparty credit ratings.

Of the financial assets held by the Government at 30 June 2018, the fair value of collateral held that could be sold or repurchased was $20,415 million (2017: $17,194 million). The majority of this relates to Kiwibank Limited, who can enforce their collateral in satisfying the debt in the event of the borrower failing to meet their contractual obligations.

Concentrations of credit exposure classified by credit rating, geography and industry of the counterparty are provided in the following tables.

Kiwibank loans and advances consist mainly of residential lending. Therefore, these financial assets have been classified as non-rated and individuals for the purposes of credit risk.

Concentration of credit exposure by credit rating (using Standard & Poor's ratings)
As at 30 June 2018 Total
$m
AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Cash and cash equivalents 19,340 4,936 6,312 7,966 79 47
Trade and other receivables 6,385 55 186 6,144
Long-term deposits 5,379 4,490 963 167 (241)
Derivatives in gain 3,153 1,242 1,758 48 105
Marketable securities 40,532 13,861 15,091 3,522 2,591 5,467
IMF financial assets 2,053 2,053
Share investments 36,256 716 3,689 8,580 8,123 15,148
Kiwibank loans and advances 18,281 18,281
Student loans 9,301 9,301
Other advances 1,840 129 93 321 1,297
Total credit exposure by credit rating 142,520 19,513 31,008 23,068 13,382 55,549
As at 30 June 2017 Total
$m
AAA
$m
AA
$m
A
$m
Other
$m
Non-rated
$m
Cash and cash equivalents 18,732 3,975 7,315 7,244 57 141
Trade and other receivables 4,905 70 152 4,683
Long-term deposits 4,730 3,733 847 124 26
Derivatives in gain 4,381 1,884 2,351 75 71
Marketable securities 39,558 13,261 13,341 4,593 3,137 5,226
IMF financial assets 1,837 1,837
Share investments 30,700 556 2,896 7,263 7,035 12,950
Kiwibank loans and advances 17,795 17,795
Student loans 9,197 9,197
Other advances 1,591 198 122 235 1,036
Total credit exposure by credit rating 133,426 17,792 29,437 22,572 12,500 51,125
  30 June
2018
$m
30 June
2017
$m
Financial Assets    
Concentration of credit exposure by geographical area    
New Zealand 55,397 53,352
USA 26,759 25,581
Europe 21,511 20,486
Japan 9,818 8,128
Australia 12,616 10,505
Other 16,419 15,374
Total financial assets 142,520 133,426
Concentration of credit exposure by industry    
Individuals 27,727 27,181
Sovereign issuers 26,996 25,758
New Zealand banking 11,100 12,643
Foreign banking 14,847 13,280
Supranational 7,507 8,070
Other 54,343 46,494
Total financial assets 142,520 133,426

At 30 June 2018, 15.1% (2017: 15.1%) of student loan borrowers were overseas. As the total advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk.

Liquidity risk

Liquidity risk refers to the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is managed on an individual entity basis generally by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows.

The following table details the Government's remaining contractual maturity for its financial liabilities. The table was compiled based on:

  • the undiscounted cash flows of financial liabilities based on the earliest date on which the Government can be required to pay, and
  • both interest and principal cash flows.
Financial Liabilities (excluding derivatives) 30 June
2018
$m
30 June
2017
$m
Less than 1 year 61,828 55,942
1-2 years 13,093 17,488
2-5 years 30,727 29,914
5-10 years 22,048 28,059
More than 10 years 19,428 14,868
Total contractual cash flows 147,124 146,271
Total carrying value 126,181 125,190

The Government holds loan commitments of $3,158 million (2017: $3,378 million) which primarily all have contractual cash flows of less than two years.

In addition to the above financial liabilities, the Crown has entered into various financial guarantees and indemnities totalling $224 million (2017: $702 million) which expose the Crown to liquidity risk. These guarantees are classified as contingent liabilities and are set out in note 25. For all these guarantees, the earliest period which the Crown would be required to pay if the guarantees are called upon is less than one year.

The Government has access to financing facilities, of which the total unused amount at 30 June 2018 was $885 million (2017: $959 million). The Government expects to meet its obligations from operating cash flows, from the results of bond tenders, and proceeds of maturing financial assets.

Sensitivity analysis

The sensitivity of the fair value of the Government's financial assets and liabilities to changes in interest rates, New Zealand exchange rate and share prices are shown below. Any change would impact the operating balance and net worth of the Government.

  Impact on operating balance Impact on net worth
2018
$m
2017
$m
2018
$m
2017
$m
Increase in NZ interest rates 1% (100 basis points) (1,550) (946) (1,561) (927)
Decrease in NZ interest rate 1% (100 basis points) 1,697 1,122 1,703 1,107
NZ dollar exchange rate strengthens by 10% (846) (793) (873) (828)
NZ dollar exchange rate weakens by 10% 983 922 1,014 962
Share prices strengthen by 10% 3,580 3,044 3,580 3,044
Share prices weaken by 10% (3,580) (3,044) (3,580) (3,044)
Interest rate sensitivity

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 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 the operating balance 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 table above. The impact is net of any hedging by way of interest rate derivatives.

The Government's sensitivity to interest rates has increased 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 11 and note 20 for sensitivity information for these long-term liabilities).

Foreign currency sensitivity

The sensitivity analysis is net of hedging via foreign exchange derivatives, but does not include the impact on prices of goods and services purchased or sold in foreign currencies.

The Government's sensitivity to foreign currency has increased during the current period. This change is largely in relation to financial instrument portfolios held by NZS Fund and ACC offset by changes in relation to the financial instrument portfolio managed by the Treasury.

Equity market sensitivity

Share investments 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 above has been determined based on the exposure of the NZS Fund and ACC to share price risks at the reporting date. These portfolios combined make up 99% of the Government's total share investments (2017: 99%).

The Government's sensitivity to share prices has increased from the prior year in line with an increase in the level of share investments held.

Note 27: 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 Financial Statements of the Government.

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.

Related party relationships are a normal feature of commerce. Therefore, the Government will transact with related parties as a matter of course.

Given the breadth of Government activities these related parties transact with the government sector in the same capacity as ordinary citizens. Such transactions include the payment of taxes and user charges (such as purchase of electricity), and the receipt of entitlements and services (such as access to education). These transactions have not been separately disclosed in this note.

Other transactions with these related parties can include the employment of Ministers' spouses, children and dependants by a Government entity, including ministerial offices, departments, Crown entities and State-owned Enterprises, receipt of grants from, or the purchase or sale of goods and services to, a Government entity by Ministers, their spouses, children and dependants, or private-sector entities they own or jointly control. Such related party transactions will be disclosed if they have taken place within the Minister's portfolio or if they involve lending or guaranteeing Ministers.

Taking the above paragraphs into account, there are no related party transactions to be separately disclosed.

Note 28: Events Subsequent to Balance Date

Boeing P-8A Poseidon Aircraft

After balance date, Cabinet approved the purchase of four Boeing P-8A Poseidon maritime patrol aircraft from the United States Government. The new P-8As, training systems, infrastructure and introduction into service costs will total $2.346 billion. The purchase is not included in the Statement of Commitments because the approval was given after balance date.

Nurses Pay Offer

On 7 August 2018, nurses accepted a pay offer from the Government (excluding pay equity) of $0.5 billion between 4 June 2018 and 31 July 2020, with an ongoing cost of $0.2 billion per year thereafter.

Waikeria Prison

On 17 September 2018, a Public Private Partnership contract was signed with Cornerstone Infrastructure Partners LP to develop a facility at Waikeria Prison. The facility can accommodate 500 prisoners with the capability to provide mental health treatment for a further 100 offenders. The agreement is not included in the Statement of Commitments as it was entered into after balance date.

Other than those noted above, there have been no material events subsequent to balance date.

Notes

  1. [2] GDP for the year ended 30 June 2018 was $289,293 million (2017: $274,267 million revised).

Supplementary Statements

Statement of Unappropriated Expenditure
for the year ended 30 June 2018

Parliament's approval for the incurring of expenses or capital expenditure is generally given either by means of an Appropriation Act or an Imprest Supply Act followed by an Appropriation Act.

Imprest Supply Acts authorise the Government to incur expenses and capital expenditure, in advance of the passing of an Appropriation Act, up to a specified amount. Cabinet rules require any use of imprest supply to be authorised by a specific Cabinet decision or in some instances by delegated authority to joint ministers. All expenses and capital expenditure incurred under an Imprest Supply Act must be subsequently approved by Parliament prior to the end of the financial year. If not approved by Parliament prior to the end of the financial year, then the expenditure must be validated in an Appropriation (Confirmation and Validation) Act.

Expenses or capital expenditure that is incurred without an appropriation or other authority (such as an Imprest Supply Act) or that is incurred under imprest supply but not included in an Appropriation (Supplementary Estimates) Act by the end of the financial year, is classed as “unappropriated expenditure” and remains so until it is subsequently validated by Parliament.

Unappropriated expenditure is subject to specific requirements in the Public Finance Act 1989:

  • it must be disclosed in the annual financial statements of the Government, and of the relevant administering department, and
  • it must be retrospectively validated by Parliament through the passing of an Appropriation (Confirmation and Validation) Act.

The following table describes the various types of unappropriated expenditure that can typically occur during the year. Categories (A) to (C) represent unappropriated expenses with authority, whilst categories (D) to (F) represent unappropriated expenditure without authority. All unappropriated expenditure is confirmed or validated through an Appropriation Act in the following year.

Category of unappropriated expenditure Reporting requirements to Parliament under the Act
(A) Approved by the Minister of Finance under Section 26B of the Public Finance Act 1989 Where the amount in excess (but within the scope) of an existing appropriation was within $10,000 or 2% of the appropriation, Section 26B of the Act authorises the Minister of Finance to approve these items.  Such items must also be confirmed by Parliament in the Appropriation Act for the year.
(B) With Cabinet authority to use imprest supply but in excess of appropriation prior to the end of the financial year

Where the unappropriated items exceed the limits available for approval under Section 26B, they fall into one of five categories of unappropriated expenditure. 

All such instances are unlawful unless validated by Parliament through an Appropriation Act (Section 26C of the Act). 

The validating legislation will be accompanied by a report to the House of Representatives that sets out each unappropriated item together with an explanation made by the Minister responsible for the appropriation. 

(C) With Cabinet authority to use imprest supply but without appropriation prior to the end of the financial year
(D) In excess of appropriation and without prior Cabinet authority to use imprest supply
(E) Outside scope of an appropriation and without prior Cabinet authority to use imprest supply
(F) Without appropriation and without prior Cabinet authority to use imprest supply

The following graphs show the number of unappropriated items by category of unappropriated expenditure over the last five years as well as the amount of unappropriated expenditure.

Statement of Unappropriated Expenditure

In 2018, there were a total of 825 appropriations (2017: 806). In the 2018 financial year there were 18 instances of expenditure (2017:15) that either exceeded the amount appropriated or did not have an appropriation.

30 June
2018
Number
30 June
2017
Number
Unappropriated Expenditure by Category   30 June
2018
$m
30 June
2017
$m
    By category      
3 6 Approved by the Minister of Finance A 16 4
4 Cabinet authority to use imprest supply but in excess of appropriation B 11
1 1 Cabinet authority to use imprest supply but without appropriation C 23 30
5 4 Without Cabinet authority and in excess of appropriation D 6 12
2 2 Without Cabinet authority and outside scope E 46 5
3 2 Without Cabinet authority and without appropriation F 17 73
18 15 Total unappropriated expenditure   119 124
Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(A) Expenses and capital expenditure incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989
Ministry of Health      
Vote Health Non-Departmental Output Expense    
  National Disability Support Services 1,242,680 12,850

The Ministry of Health has incurred costs that were higher than forecast mainly due to additional equipment claims, additional residential care services costs and growing demand for individualised funding services.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(A) Expenses and capital expenditure incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989 (continued)
Ministry of Justice      
Vote Justice Non-Departmental Output Expenses    
  Electoral Services 57,749 898

The Northcote by-election was announced subsequent to the Budget and Supplementary Estimates process. As a result, the by-election additional funding was required for the Electoral Services appropriation.

 
Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(A) Expenses and capital expenditure incurred in excess of existing appropriation and approved by the Minister of Finance under Section 26B of the Public Finance Act 1989 (continued)
Ministry of Social Development      
Vote Social Development Non-Departmental Capital Expenditure    
  Recoverable Assistance 204,931 2,326

The Ministry of Social Development incurs demand driven costs within the Recoverable Assistance appropriation. Although the forecast at Budget 2018 was for an increase in the number of recoverable assistance payments, the amounts granted in April and May 2018 were higher than expected and larger in than the same period in 2017. Total expenditure at 30 June 2018 exceeded the appropriation by $2.326 million.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(B) Expenses and capital expenditure incurred with Cabinet authority to use Imprest Supply but in excess of appropriation prior to the end of the financial year
Ministry of Business, Innovation and Employment      
Vote Business Science and Innovation Non-Departmental Output Expenses    
  Communications: Emergency Telecommunications Services 3,108 1,200

Subsequent to the Budget and Supplementary Estimates process, the Ministry of Business, Innovation and Employment received Cabinet approval of $1.200 million for the Communications: Emergency Telecommunications Services appropriation under Imprest Supply. This increased the total amount for this appropriation to $4.308 million. Any expenditure above the Supplementary Estimates authority of $3.108 million is unappropriated and will need to be confirmed in the Appropriation (2017/18 Confirmation and Validation) Act. The total amount spent against this appropriation at 30 June 2018 was $4.374 million, resulting in two types of unappropriated expenditure: $1.200 million with Cabinet authority to use Imprest Supply and a further $0.066 million without Cabinet authority (see section D of this statement).

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(B) Expenses and capital expenditure incurred with Cabinet authority to use Imprest Supply but in excess of appropriation prior to the end of the financial year (continued)
Ministry for Primary Industries      
Vote Primary Industries and Food Safety Multi-Category Appropriation    
  Biosecurity: Border and Domestic Risk Management 275,294 2,637
  Non-Departmental Other Expenses    
  Compensation and Ex-Gratia Payments following a Biosecurity Event 75,000 6,109

In response to the outbreak of Mycoplasma Bovis, Cabinet agreed to fund from Imprest Supply two appropriations within Vote Primary Industries and Food Safety, to enable the depopulation of infected properties. This occurred after the Budget and Supplementary Estimates process and did not receive Parliament's authorisation before the financial year end.

For the Biosecurity: Border and Domestic Risk Management multi-category appropriation an additional $8.000 million was approved by Cabinet of which $2.637 million was incurred.

For the Compensation and Ex-Gratia Payments following a Biosecurity Event appropriation an additional $100.000 million was approved by Cabinet of which $6.109 million was incurred to enable the depopulation of further infected properties.

Department
Vote
Expense type
Appropriation name
Authority at time of breach  
$000
Amount without or exceeding appropriation
$000
(B) Expenses and capital expenditure incurred with Cabinet authority to use Imprest Supply but in excess of appropriation prior to the end of the financial year (continued)
Ministry of Transport      
Vote Transport Non-Departmental Capital Expenditure    
  Joint Venture Airports 500 597

The Ministry of Transport administers the appropriation Joint Venture Airports and is responsible for the Crown's share of costs incurred by joint venture airports. A number of claims for costs dating back over a number of years were made to the Ministry of Transport in the 2017/18 year. Cabinet has given approval for costs of up to $0.700 million to be met from Imprest Supply. The amount of these claims has resulted in the appropriation exceeding the authority published in the Supplementary Estimates by $0.597 million.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(C) Expenses and capital expenditure incurred with Cabinet authority to use imprest supply but without appropriation prior to the end of the financial year
Ministry of Health      
Vote Health Mental Health and Addictions Support Workers Pay Equity Claim   23,449

The settlement of the Mental Health and Addictions Support Workers Pay Equity Claim was agreed after finalisation of the 2017/18 Supplementary Estimates. The 2017/18 expenditure of $23.449 million could not be met from any existing 2017/18 appropriation and was therefore incurred without appropriation. This expenditure was identified as a possibility at Budget 2018 and Cabinet agreed that any expenditure associated with the settlement in 2017/18 would be met from Imprest Supply.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply
Department of the Prime Minister and Cabinet      
Vote Prime Minister and Cabinet Non-Departmental Other Expenses    
  Rehabilitation of Kaikōura Harbour 720 1,145

In-principle approval was given to transfer the 2016/17 underspend in the Rehabilitation of Kaikōura Harbour appropriation to 2017/18 to manage uncertainties around the timing of expenditure for the rehabilitation of the Kaikōura Harbour. Joint Ministers approval for this transfer was given in November 2017, which was after expenditure had been incurred.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Business, Innovation and Employment      
Vote Business Science and Innovation Non-Departmental Other Expenses    
  Communications: Telecommunications Development Levy Funded Procurement - Non-Urban Infrastructure 312 16

A contract between the Ministry of Business, Innovation and Employment and TeamTalk Limited has been in place for the delivery of broadband services to the Chatham Islands under the RBI 1 programme since 2014, and was due to expire on 31 July 2018. An agreement was made to extend the contract to ensure continuity of broadband services. A variation agreement was entered into in May 2018 whereby an increase of funding of $8,200 per month would be made to coincide with TeamTalk’s obligation to ensure that the link would meet the higher target capacity effective from May 2018. When agreeing to this variation it was thought that this could be allocated to the Telecommunications Development Levy Funded Procurement ­ Infrastructure Investment multi-year appropriation. It was later confirmed that the expenditure should be allocated to the Telecommunications Development Levy Funded Procurement - Non-Urban Infrastructure appropriation. Two payments were made against this appropriation in 2017/18, which together exceeded the spending limit of the appropriation.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Business, Innovation and Employment      
Vote Business Science and Innovation Non-Departmental Output Expenses    
  Communications: Emergency Telecommunications Services 3,108 66

Subsequent to the Budget and Supplementary Estimates process, the Ministry of Business, Innovation and Employment received Cabinet approval of $1.200 million for the Communications: Emergency Telecommunications Services appropriation under Imprest Supply. This increased the total amount for this appropriation to $4.308 million. Any expenditure above the Supplementary Estimates authority of $3.108 million is unappropriated and will need to be confirmed in the Appropriation (2017/18 Confirmation and Validation) Act. The total amount spent against this appropriation at 30 June 2018 was $4.374 million, resulting in two types of unappropriated expenditure: $1.200 million with Cabinet authority to use Imprest Supply (see section B of this statement) and a further $0.066 million without Cabinet authority.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Business, Innovation and Employment      
Vote Building and Housing Multi-Category Appropriation    
  Temporary Accommodation Services 1,249 3,340

The Ministry of Business, Innovation and Employment received confirmation for three in-principle expense transfers from 2016/17 to 2017/18, totalling $1.249 million, all of which were subsequently transferred to the Temporary Accommodation Services multi-category appropriation on 28 August 2017. A fourth expense transfer was overlooked and as a result spending against the current year's appropriation exceeded the total authorised amount available. The appropriation was given additional authority on 27 March 2018. The total amount spent in the appropriation until 27 March 2018 was $4.589 million.

Department
Vote
Expense type
Appropriation name
Authority at time of breach
$000
Amount without or exceeding appropriation
$000
(D) Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Health      
Vote Health Departmental Output Expenses    
  Managing the Purchase of Services 41,973 1,395

The settlement of the Mental Health and Addictions Support Workers Pay Equity Claim and associated costs were agreed after finalisation of the 2017/18 Supplementary Estimates. The implementation costs associated with this that were incurred in the 2017/18 financial year have resulted in the total spend against the Managing the Purchase of Services appropriation to exceed the total authority. The total spend against this appropriation was $43.368 million.

Department
Vote
Expense type
Appropriation name
Amount without appropriation
$000
(E) Expenses and capital expenditure incurred outside of scope of an appropriation and without prior Cabinet authority to use imprest supply
Department of Internal Affairs    
Vote Internal Affairs Non-Departmental Output Expenses  
  Members of the Executive Travel 571

The scope statement of the appropriation Members of the Executive - Travel was amended in 2015 to reflect changes in the legislation governing Ministers' entitlements. This amendment had the unintended consequence of excluding the cost of staff travelling with the Ministers, impacting the 2015/16, 2016/17 and 2017/18 years. The expenditure for 2015/16 and 2016/17 was reported as unappropriated expenditure in the 2016/17 Statement of Unappropriated Expenditure. To avoid ongoing unappropriated expenditure, a new appropriation Services Supporting the Executive - Travel was established in November 2017. Until the new appropriation was in place, unappropriated expenditure continued to be incurred in 2017/18 year.

Department
Vote
Expense type
Appropriation name
Amount without appropriation
$000
(E) Expenses and capital expenditure incurred outside of scope of an appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Business, Innovation and Employment    
Vote Business Science and Innovation Non Departmental Capital Expenditure  
  Communications: Broadband Investment (Crown Fibre Holdings Capital Costs) 2016-2021 45,000

Crown Fibre Holdings Limited changed its name in September 2017 to Crown Infrastructure Partners Limited. The Ministry of Business, Innovation and Employment made a payment to Crown Infrastructure Partners Limited in December 2017. However, the scope statement for the appropriation referred to Crown Fibre Holdings Limited. Therefore, this payment has been deemed outside of the scope of the appropriation.

Department
Vote
Expense type
Appropriation name
Amount without appropriation
$000
(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply
Ministry of Business, Innovation and Employment    
Vote Building and Housing Multi-Category Appropriation  
  Temporary Accommodation Services 880

MBIE incurred costs against the Temporary Accommodation Services multi-category appropriation prior to approval being given for its creation on 28 August 2017.

Department
Vote
Expense type
Appropriation name
Amount without appropriation
$000
(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply (continued)
Department of Internal Affairs    
Vote Internal Affairs Non-Departmental Capital Expenditure  
  Capital Investments - Lake Taupō 1,879

Unappropriated spending against the Capital Investments - Lake Taupō appropriation was incurred by the Department of Internal Affairs in the months from July to November 2017 due to the continuing nature of the construction contracts for the redevelopment of Motuoapa Marina, Lake Taupō. The Minister of Finance agreed to an in-principle capital transfer from 2016/17 to 2017/18 up to a maximum of $2.500 million but the final agreed amount of $1.996 million to be transferred was not approved by Joint Ministers until November 2017.

Department
Vote
Expense type
Appropriation name
Amount without appropriation
$000
(F) Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply (continued)
Ministry of Transport    
Vote Transport Auckland City Rail Link finance costs 14,453

The Ministry of Transport paid a finance charge of $14.453 million to Auckland Council in December 2017 for costs relating to stage 1 enabling works and interim funding for the Auckland City Rail Link, to which the Crown and Auckland Council are joint sponsors. This expenditure is within the funding limits approved by Cabinet for the Crown's share of the Auckland City Rail Link. However, as finance costs are operating in nature and there is no operating appropriation for Auckland City Rail Link, this expenditure was unappropriated.

Statement of Expenses or Capital Expenditure Incurred in Emergencies
for the year ended 30 June 2018

Under section 25 of the Public Finance Act 1989, if a state of national emergency is declared under the Civil Defence Act 1983, Civil Defence Emergency Management Act 2002, or if the Government declares an emergency because of any situation that affects the public health or safety of New Zealand, the Minister of Finance may approve expenses or capital expenditure to meet such emergency or disaster whether or not an appropriation by Parliament is available for the purpose. Once expenses or capital expenditure have been incurred, the amounts that have not been appropriated must be disclosed in the annual financial statements of the Government for the financial year and sanctioned by Parliament in an Appropriation Act.

During the year there were no such emergency expenses or capital expenditure incurred.

Statement of Trust Money
for the year ended 30 June 2018

Trust money is defined by section 66 of the Public Finance Act 1989 as:

  • Money that is deposited with the Crown pending the completion of a transaction or dispute and which may become repayable to the depositor or payable to the Crown or any other person.
  • All money that is paid into Court for possible repayment to the payee or a third party, by virtue of any Act, rule or authority whatsoever.
  • All money that is paid to the Crown in trust for any purpose.
  • Money that belongs to or is due to any person and is collected by the Crown pursuant to any agreement between the Crown and that person.
  • Unclaimed money that is due to or belongs to any person and is deposited with the Crown.

Trust money exists only where there is a trustee/beneficiary relationship. Money set aside by the Crown or department for a particular purpose will normally not be trust money as there is no directly identifiable beneficiary who has deposited the money with the Crown.

Trust money held by the Crown is managed separately from public money.

Under the Act, the Treasury has the responsibility to manage and invest trust money. The Treasury may appoint agents (including departments) to act on its behalf. Written Notices of Appointment to Manage and Invest Trust Money are issued in these cases. Section 68 of the Act establishes the constraints on the investment of trust money.

Statement of Trust Money
for the year ended 30 June 2018
Department
   Trust Account
As at
30 June
2017
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2018
$000
Department of Conservation            
Bonds/Deposits Trust 6,738 213 (112)  186  -  7,025
Conservation Project Trust  1,327  1,695 (600) 23  -  2,445
National Parks Trust  176  43  (40)  3  -  182
Walkways Trust 11 -  -  1  - 12
Wildlife and Reserves Trusts1  - -  - -  -  -
Department of Corrections            
Prisons Trust  1,716  19,461  (19,183) -  -  1,994
Crown Law Office            
Legal Claims Trust 54 189 (175)  1 (7) 62
Ministry of Business, Innovation and Employment            
Coal and Minerals Deposits Trust  291 -  - -  -  291
Criminal Assets Management and Enforcement Regulators Association Trust 16  3  - -  - 19
Employment Relations Service Trust  456  1,073 (748)  9 (114)        676
Employment Relations Act Security of Costs Trust  4 -  (4) -  -          -  
New Zealand Immigration Service Trust  1,089 143 (314) 14 (236)        696
Official Assignee's Office Trust 24,683  28,742  (15,781)  724  (13,649)     24,719
Patent Co-operation Treaty Fees Trust  107 811 (650)  1  (21)        248
Petroleum Deposits Trust 96  13  (29) -  -         80
Proceeds of Crime Trust  135,303  37,617  (32,411)  2,333 (6,580)    136,262
Residential Tenancies Bond Trust  509,097 245,211 (208,358) 20,197  (20,197)    545,950
Weathertight Services Financial Assistance Trust  -  7,514  (7,514) -  -          -  
Ministry for Culture and Heritage            
Dictionary of New Zealand Biography Trust 16 -  -  1 (7)         10
New Zealand Historical Atlas Trust  160 -  -  2  -        162
New Zealand History Research Trust  1,412 - (101) 48  -      1,359
New Zealand Oral History Awards Trust  784 - (100) 23  -        707
War History Trust  102 -  -  2  (56)         48
National War Memorial Trust  8 -  - -  -          8
New Zealand Customs Services            
Customs Regional Deposit/Bonds Trust No.1, No.2 & No.3 89,051  41,086  (77,952) -  -     52,185
Health Promotion Agency Trust  988  13,457  (13,436) -  -      1,009
Heavy Engineering Research Association Trust  187  1,777  (1,777) -  -        187
New Zealand Customs Service IBM MSA Trust1  - -  - -  -          -  
New Zealand Customs Service Multiple Deposit Scheme Release Trust  482  78,501  (78,870) -  -        113
New Zealand Customs Service Multiple Deposit Scheme Suspense Trust  2  43,245  (43,241) -  -          6
Statement of Trust Money (continued)
for the year ended 30 June 2018
Department
   Trust Account
As at
30 June
2017
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2018
$000
Ministry of Education            
Code of Practice for Providers who Enrol International Students Trust 6,130  6,280  (9,775)  110 (97) 2,648
Conferences Trust  - -  - -  -  -
Ngārimu VC and 28th (Māori) Battalion Memorial Scholarship Fund Board Trust 1,270 217 (217)  24 (83) 1,211
Capital Works Construction Funds Trust1  - -  - -  -  -
Ministry of Foreign Affairs and Trade            
Afghanistan New Zealand Aid ProgrammeTrust 4 -  - - (1) 3
Cook Island Trust 1  1,795  (1,796)  1  - 1
Government Administration Building,Niue Trust 52 - (19)  1  - 34
New Zealand/France Friendship Trust 45 100 (100)  8  - 53
Niue Primary School Infrastructure Projects Trust1  332 - (334)  2  -  -
Kiribati Green Climate Fund Readiness Support Programme Trust 1  - -  - -  -  -
Niue Development Assistance Trust 4,378  1,852 (150)  93  - 6,173
Ministry of Health            
Medicines Review Objectors Deposit Trust 1  - -  - -  -  -
Inland Revenue Department            
Child Support Agency Trust 32,439 285,507 (279,824) -  - 38,122
KiwiSaver Returned Transactions Trust 2,992 -  (2,849) -  -  143
KiwiSaver Employer Trust1  - -  - -  -  -
Reciprocal Child Support Agreement Trust  499 17,435 (17,398) -  -  536
Department of Internal Affairs            
Christchurch Earthquake Appeal Trust 1,784 43  -  1,056  (500) 2,383
Interloan Billing System Trust 42 -  -  558  (558) 42
Macklin Bequest Fund Trust  290 -  -  9  -  299
Retention Trust Account2  - -  -  340  -  340
New Zealand 1990 Scholarship Trust1  - -  - -  -  -
Ministry of Justice            
Courts Law Trust 11,213 12,978 (14,198) -  - 9,993
Election Candidates Deposit Trust1  - -  - -  -  -
Employment Court Trust  120 176 (122) -  -  174
Fines Trust 45,473 171,367 (170,691) -  - 46,149
Foreign Currency Euro Fund Trust  - -  - -  -  -
Foreign Currency United States Dollar Trust  - -  - -  -  -
Legal Complaints Review Officer Trust1  - 53 (53) -  -  -
Maori Land Court Trust 48  5 (11) -  - 42
Supreme Court Trust  187 100 (201) -  - 86
Victims' Claims Trust 16 187 (56) -  -  147
Statement of Trust Money (continued)
for the year ended 30 June 2018
Department
   Trust Account
As at
30 June
2017
$000
 Contributions
$000
 Distributions
$000
 Revenue
$000
Expenses
$000
As at
30 June
2018
$000
Land Information New Zealand            
Crown Forestry Licences Trust 98  6,272  (5,858) -  - 512
Deposits Trust1  - -  - -  - -  
Endowment Rentals Trust  5  5,953 (261) -  - 5,697
Hunter Gift for the Settlement of Discharged Soldiers Trust 57 -  - -  - 57
New Zealand Police            
Bequests, Donations and Appeals Trust  5  8  - -  - 13
Found Money Trust  176 327 (309) -  - 194
Money in Custody Trust 11,333  15,591  (8,205) -  - 18,719
Reparation Trust  -  5  (4) -  - 1
Money forfeited to Crown  553  6,675  (7,138) -  - 90
Ministry for Primary Industries            
MAF Overfishing Account Trust  6,644  5,176  (8,419)  175  - 3,576
MAF Fish Forfeit Property Trust  1,331 110  (43) 24  - 1,422
Meat Board Levies Trust  8  60,670  (60,497)  5  (12) 174
National Animal Identification Tracing Trust  7  2,402  (2,154) -  - 255
Seized Timber Trust1  - -  - -  - -  
Department of the Prime Minister and Cabinet            
Christchurch Cathedral Restoration Trust2  - -  -  1  -   1
Ministry of Social Development            
Australian Dollar Embargoed Arrears Trust  536  5,206  (5,230)  7  - 519
Australian Recovery Debt Trust  -  8  (7) -  - 1
Maintenance Trust 22 538 (534)  5  - 31
Netherlands Recovery Debt Trust 11 100 (111) -  - -  
Overseas Debt Recovery Trust1  - -  - -  - -  
CYF Custody Trust Account  6 -  (6) -  - -  
WR Wallace Trust  475 - (513) 38  - -  
Oranga Tamariki, Ministry for Children            
CYF Custody Trust Account  -  6  - -  - 6
WR Wallace Trust  - 488  (1)  6  - 493
The Treasury            
Genesis Share Offer Trust  1 -  - -  - 1
Meridian Share Offer Trust  1 -  - - (1) -   
Mighty River Share Offer Trust  1 -  - -  - 1
Trustee Act 1956 Trust  8,479  4,840 (550) 10  - 12,779
Total  911,420  1,133,264  (1,099,030) 26,041  (42,119)  929,576
  1. Inoperative trust account
  2. New trust account

The opening balance does not agree to prior year accounts as the District Health Boards Deposit Trust which was reported in 2017, is between Government Reporting Entities and therefore is no longer reported. The closing balance was $1.394 million.

Additional Financial Information

Fiscal Indicator Analysis
for the year ended 30 June 2018

The purpose of the following fiscal indicator analysis is to provide a link between the financial statements (published on pages 37 to 130) and the fiscal indicators used to measure the Government's performance against the fiscal objectives set out in the Fiscal Strategy Report.

The fiscal analysis comprises two statements: core Crown residual cash and debt.

Core Crown Residual Cash

The core Crown residual cash statement measures the core Crown cash surplus (or deficit), after operating and investing cash requirements are met, that is available for the Government to invest, repay, or, in the case of a deficit, fund in any given year.

Debt

The debt statement presents the calculation of both gross debt and core Crown net debt.

Gross debt is defined as gross-sovereign issued debt and represents debt issued by the sovereign (core Crown) and includes Government stock held by the NZS Fund, Accident Compensation Corporation, and the Earthquake Commission. Gross debt excludes Reserve Bank settlement cash and Reserve Bank bills as these are issued for liquidity management purposes.

Core Crown net debt represents gross debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing.

Fiscal Indicator Analysis - Core Crown Residual Cash
for the year ended 30 June 2018

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Core Crown Cash Flows from Operations    
77,133 79,445 Tax receipts 80,079 74,729
892 944 Other sovereign receipts 900 955
630 670 Interest receipts 650 688
3,307 3,194 Sale of goods & services and other receipts 3,127 3,340
(26,512) (26,404) Transfer payments and subsidies (26,253) (25,293)
(48,424) (48,985) Personnel and operating costs (47,740) (44,581)
(3,507) (3,488) Finance costs (3,483) (3,530)
(293) (186) Forecast for future new operating spending
1,000 300 Top-down expense adjustment
4,226 5,490 Net core Crown operating cash flows 7,280 6,308
(3,196) (3,217) Net purchase of physical assets (2,515) (2,153)
(325) (127) Net repayment / (issue) of advances (92) 111
(2,888) (3,201) Net purchase of investments (2,827) (1,692)
(500) Contribution to NZS Fund (500)
(446) (185) Forecast for future new capital spending
840 485 Top-down capital adjustment
(6,015) (6,745) Net Core Crown capital cash flows (5,934) (3,734)
(1,789) (1,255) Residual cash surplus / (deficit) 1,346 2,574
    Residual cash is (invested) / funded as follows:    
    Debt programme cash flows    
    Market:    
6,874 7,034      Issue of government bonds 7,043 7,847
(11,602) (7,263)      Repayment of government bonds (6,828) (6,080)
200      Net issue/(repayment) of short-term borrowing1 100 160
(4,528) (229) Total market debt cash flows 315 1,927
    Non market:    
     Repayment of government bonds (830)
     Net issue/(repayment) of short-term borrowing
Total non-market debt cash flows (830)
(4,528) (229) Total debt programme cash flows 315 1,097
    Other borrowing cash flows    
1,034 7,874 Net (repayment)/issue of other New Zealand dollar borrowing 2,190 (2,352)
(971) (5,333) Net (repayment)/issue of foreign currency borrowing (865) 2,425
63 2,541 Total other borrowing cash flows 1,325 73
    Investing cash flows    
6,087 (1,370) Other net sale/(purchase) of marketable securities and deposits (3,041) (194)
170 460 Issues of circulating currency 396 265
(3) (147) Decrease/(increase) in cash (341) (3,815)
6,254 (1,057) Total investing cash flows (2,986) (3,744)
1,789 1,255 Residual cash (invested) / funded (1,346) (2,574)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper

Fiscal Indicator Analysis - Debt
as at 30 June 2018

2018 Forecast   Actual
Budget
2017
$m
Budget
2018
$m
30 June
2018
$m
30 June
2017
$m
    Gross and net core Crown debt analysis:    
111,500 115,978 Total borrowings 115,652 111,806
39.6% 39.9% As a percentage of GDP 40.0% 40.8%
    Net core Crown debt:    
92,565 97,248 Core Crown borrowings1 98,295 94,107
(1,908) (2,263) Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (2,858) (1,487)
90,657 94,985 Gross sovereign-issued debt2 95,437 92,620
74,344 85,569 Less core Crown financial assets3 88,226 81,015
16,313 9,416 Net core Crown debt (including NZS Fund)4 7,211 11,605
35,486 39,050 Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 38,035 35,861
51,799 48,466 Net core Crown debt (excluding NZS Fund)4 45,246 47,466
12,312 11,943 Advances 12,249 12,014
64,111 60,409 Net core Crown debt (excluding NZS Fund and advances)6 57,495 59,480
22.8% 20.8% As a percentage of GDP 19.9% 21.7%
    Gross debt:    
90,657 94,985 Gross sovereign-issued debt2 95,437 92,620
(8,179) (9,118) Less Reserve Bank settlement cash and bank bills (8,984) (7,079)
1,600 1,600 Add back changes to DMO borrowing due to settlement cash7 1,600 1,600
84,078 87,467 Gross sovereign-issued debt excluding settlement cash and bank bills 88,053 87,141
29.8% 30.1% As a percentage of GDP 30.4% 31.8%
  1. Core Crown borrowings in this instance includes unsettled purchases of securities (classified as accounts payable in the statement of financial position).
  2. Gross Sovereign-Issued Debt (GSID) represents debt issued by the sovereign (the core Crown) and includes Government stock held by the New Zealand Superannuation Fund (NZS Fund), ACC and EQC.
  3. Core Crown financial assets exclude receivables.
  4. Net core Crown debt represents GSID less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the creditworthiness of a country.
  5. Adding back the NZS Fund assets provides the financial liabilities less financial assets of the core Crown, excluding those assets set aside to meet part of the future cost of New Zealand superannuation.
  6. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
  7. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by Government borrowing. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

Information on State-owned Enterprises and Crown Entities

Accounting Policies

The Crown's financial interest in State-owned Enterprises (SOEs) and Crown entities (CEs) is reported in accordance with the Crown's accounting policies. Adjustments have been made to restate the financial position and financial performance of certain entities, as reported in their own financial statements, to a basis consistent with the Crown's accounting policies.

With the exception of Tertiary Education Institutions (TEIs) the Crown has line-by-line combined all SOEs and CEs.

The Crown has equity accounted 100% of the net assets of TEIs on the basis that, in the event of disestablishment of a TEI (which is subject to a resolution of the House of Parliament), 100% of the net assets revert to the Crown in the absence of a decision to transfer the assets to a new or existing institution and, in the meantime, the Crown enjoys the benefits of the provision of a higher education to the public of New Zealand (refer note 17).

Mixed Ownership Companies

In addition to the core Crown's direct investment in the mixed ownership companies (Air New Zealand, Genesis Energy, Meridian Energy and Mercury NZ) a number of Crown Financial Institutions (CFIs) have invested in the companies as part of their normal investment activities. These investments have the effect of reducing the overall minority interest.

Company % minority interest
before CFI investment  
% minority interest
after CFI investment  
Air New Zealand 48.09% 45.58%
Genesis Energy 48.71% 46.98%
Meridian Energy 48.98% 46.01%
Mercury NZ 47.45% 44.48%

Balance Dates

Except for those entities listed below, all SOEs and significant CE's have a balance date of 30 June, and the information reported in these financial statements is for the period ended 30 June 2018:

Crown entities Balance date Information reported to
New Zealand Symphony Orchestra 31 December 30 June 2018
School boards of trustees 31 December 31 December 2017
TEIs 31 December 30 June 2018

The results presented in the following tables use Crown accounting policies and classifications. As a consequence the results may differ from those published in individual annual reports and profit announcements.

  30 June 2018 30 June 2017
Revenue
(excl
gains)
$m
Expenses
(excl
losses)
$m
Operating
balance
$m
Distributions
$m
Revenue
(excl
gains)
$m
Expenses
(excl
losses)
$m
Operating
balance
$m
Distributions
$m
State-owned Enterprises                
Airways Corporation of New Zealand Limited 214 192 27 11 205 182 24 9
AsureQuality Limited 212 201 8 4 180 172 5 5
Landcorp Farming Limited 248 236 38 233 227 51
New Zealand Post Limited1 889 933 13 5 923 910 70 105
KiwiRail Holdings Limited 667 802 (119) 725 973 (243)
Transpower New Zealand Limited 1,089 842 245 165 1,067 859 272 164
Kordia Group Limited 218 211 6 1 202 202 (1) 8
Kiwi Group Holdings Limited1 1,206 1,091 121 11 1,014 1,011 8 1
New Zealand Railways Corporation 1 2
Other State-owned enterprises 174 157 5 4 429 339 6 4
Total State-owned Enterprises 4,917 4,665 345 201 4,978 4,875 194 296
Air New Zealand Limited 5,526 5,086 628 247 5,153 4,804 251 505
Genesis Energy Limited 2,323 2,237 59 167 1,942 1,884 85 164
Meridian Energy Limited 2,764 2,543 201 486 2,321 2,101 197 477
Mercury NZ Limited 1,780 1,598 233 273 1,555 1,405 183 252
Less minority interests (448) (541) (347) (509)
Total mixed ownership companies 12,393 11,464 673 632 10,971 10,194 369 889
Intra-segmental eliminations (438) (405) (157) (478) (426) 42
Total SOE segment 16,872 15,724 861 833 15,471 14,643 605 1,185
Crown Entities                
Accident Compensation Corporation 5,371 5,778 29 5,384 5,978 597
Crown Infrastructure Partners 33 107 (69) 26 95 (68) 2
Crown Research Institutes 755 730 20 717 688 28
Callaghan Innovation 306 307 266 267
District Health Boards 14,745 14,995 (265) 13,942 14,055 (114)
Earthquake Commission 403 587 (179) 83 398 (314)
Fire and Emergency New Zealand 593 490 119 411 420 (2)
Housing New Zealand Corporation 1,353 1,253 80 1,327 1,240 110
Museum of New Zealand Te Papa 62 70 (9) 58 63 (6)
New Zealand Lotteries Commission 1,185 901 283 1,145 870 275
New Zealand Transport Agency 2,650 2,620 (68) 2,353 2,348 81
Ōtākaro Limited 142 168 (32) 121 145 (31)
Public Trust 65 64 2 62 145 4
Schools 7,953 7,871 77 7,558 7,428 126
Southern Response Earthquake Services 1 (8) 1 45 347 (302)
Tamaki Regeneration Limited 75 154 (79) 76 153 19
Tertiary Education Commission 3,094 3,065 28 21 2,950 2,892 56 2
TEIs (51) 238
Television New Zealand 320 315 6 9 318 317 1 13
Other Crown entities 2,385 2,368 53 2,228 2,074 107 3
Total Crown entities 41,491 41,835 (54) 30 39,070 39,923 805 20
Intra-segmental eliminations (1,031) (610) (420) (727) (459) (386)
Total Crown entities segment 40,460 41,225 (474) 30 38,343 39,464 419 20

Information on State-owned Enterprises and Crown Entities (continued)

  30 June 2018 30 June
2017
Equity
$m
Purchase
of PPE
$m
Total
PPE
$m
Total
assets
$m
Borrowings
$m
Total
liabilities
$m
Equity
$m
State-owned Enterprises              
Airways Corporation of New Zealand Limited 40 177 231 42 98 133 116
AsureQuality Limited 5 33 123 32 65 58 51
Landcorp Farming Limited 38 1,317 1,861 319 360 1,501 1,465
New Zealand Post Limited1 24 148 1,778 304 489 1,289 1,282
KiwiRail Holdings Limited 500 1,736 2,089 270 491 1,598 1,314
Transpower New Zealand Limited 270 4,419 5,464 3,496 4,192 1,272 1,191
Kordia Group Limited 12 63 153 19 61 92 88
Kiwi Group Holdings Limited1 27 47 20,816 19,213 19,258 1,558 1,406
New Zealand Railways Corporation 2 3,522 3,522 3,522 3,523
Other State-owned enterprises 2 18 71 18 35 36 37
Total State-owned Enterprises 920 11,480 36,108 23,713 25,049 11,059 10,473
Air New Zealand Limited 669 5,423 8,503 2,734 5,665 2,838 2,449
Genesis Energy Limited 50 3,408 4,208 1,329 2,269 1,939 1,956
Meridian Energy Limited 33 7,941 8,567 1,701 3,758 4,809 5,082
Mercury NZ Limited 94 5,358 6,093 1,404 2,807 3,286 3,307
Total mixed ownership companies 846 22,130 27,371 7,168 14,499 12,872 12,794
Intra-segmental eliminations (1) (172) (1,775) (253) (403) (1,372) (1,260)
Total SOE segment 1,765 33,438 61,704 30,628 39,145 22,559 22,007
Crown entities              
Accident Compensation Corporation 7 24 43,229 268 44,584 (1,355) (1,268)
Crown Infrastructure Partners 534 43 491 437
Crown Research Institutes 88 542 889 17 239 650 614
Callaghan Innovation 11 44 199 125 74 60
District Health Boards 343 6,750 8,297 84 2,554 5,727 5,504
Earthquake Commission 2 13 542 1,491 (949) (770)
Fire and Emergency New Zealand 105 925 1,174 62 186 988 795
Housing New Zealand Corporation 958 26,644 27,482 2,762 5,168 22,314 21,595
Museum of New Zealand Te Papa 20 1,386 1,412 11 1,401 1,404
New Zealand Lotteries Commission 5 17 138 1 104 34 25
New Zealand Transport Agency 2,090 44,082 44,859 1,531 2,123 42,736 33,948
Ōtākaro Limited 65 243 403 142 251 152 122
Public Trust 1 4 423 362 362 61 51
Schools 244 1,570 3,382 191 960 2,422 2,399
Southern Response Earthquake Services 346 407 (61) (175)
Tamaki Regeneration Limited 30 1,876 1,952 13 18 1,934 1,959
Tertiary Education Commission 2 6 639 27 502 137 126
TEIs 12,505 12,505 11,972
Television New Zealand 4 153 313 69 244 226
Other 33 321 1,610 72 488 1,138 993
Total Crown entities 4,008 84,600 150,328 5,532 59,685 90,643 80,017
Intra-segmental eliminations (17) (300) (369) (15) (194) (175) (116)
Total Crown entities segment 3,991 84,300 149,959 5,517 59,491 90,468 79,901

Glossary of Terms

Commercial sector

Consists of the assets and liabilities held by companies with commercial objectives, predominantly State-owned Enterprises.

Comparatives (Budget 2017 and Budget 2018)

Comparatives referred to as Budget 2017 were forecasts published in the 2017 Budget Economic and Fiscal Update while comparatives referred to as Budget 2018 were forecasts published in the 2018 Budget Economic and Fiscal Update.

Contingent assets

Revenue that the Crown will realise if a particular uncertain event occurs, or a present asset is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent assets). Contingent assets typically comprise loans with specific events that trigger repayment and Inland Revenue pending assessments (where there is a proposed adjustment to a tax assessment).

Contingent liabilities

Costs that the Crown will have to face if a particular uncertain event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent liabilities). Contingent liabilities typically comprise guarantees and indemnities, legal disputes and claims, and uncalled capital.

Core Crown

A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 49 to 52).

Core Crown expenses

The day-to-day expenditure (eg, public servants' salaries, welfare benefit payments, finance costs and maintaining national defence etc) that does not build physical assets for the core Crown. This is an accrual measure of expenses and includes items such as depreciation on physical assets.

Core Crown revenue

Consists primarily of tax revenue collected by the Government but also includes investment revenue, sales of goods and services and other revenue of the core Crown.

Core Crown net debt

Core Crown net debt represents gross debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing.

Corporate tax

The sum of net company tax, non-resident withholding tax (NRWT) and foreign-source dividend withholding payments (FDWP).

Domestic bond programme

The amount and timing of government bonds expected to be issued or redeemed.

Excise duties

A tax levied on the domestic production of alcohol, tobacco and light petroleum products (CNG, LPG and petrol).

Financial assets

Any asset that is cash, an equity instrument of another entity (shares), a contractual right to receive cash or shares (taxes receivable and ACC levies), or a right to exchange a financial asset or liability on favourable terms (derivatives in gain).

Financial liabilities

Any liability that is a contractual obligation to pay cash (government stock, accounts payable), or a right to exchange a financial asset or liability on unfavourable terms (derivatives in loss).

Financial sector

Consists of the assets and liabilities held by the Crown to finance or pre-fund government expenditure.

Forecast new capital spending

An amount provided in the forecasts to represent the impact on the financial position and cash flowsof capital initiatives expected to be introduced over the forecast period.

Forecast new operating spending

An amount included in the forecasts to provide for the operating balance impact of policy initiatives, changes to demographics, and other forecasting changes expected to occur over the forecast period.

Gains and losses

Gains and losses typically arise from the revaluation of assets and liabilities, such as investments in financial assets and long-term liabilities for ACC and the Government Superannuation Fund. These valuation changes are reported directly as a movement in net worth (eg, asset revaluation reserves) or indirectly through the statement of financial performance.

Gross domestic product (GDP)

A measure of the value of all goods and services produced in New Zealand. Changes in GDP measure growth or contraction in economic activity or output. GDP can be measured as the actual dollar value of goods and services at today's prices (nominal GDP), or excluding the effects of price changes over time (real GDP).

Gross debt (or Gross sovereign-issued debt)

Represents debt issued by the sovereign (core Crown) and includes Government stock held by the NZS Fund, Accident Compensation Corporation, and the Earthquake Commission.

Insurance liabilities

The gross obligation for the future cost of claims incurred prior to balance date represented in today's dollars (present value). The net liability is the gross liability less the asset reserves held to meet those claims.

Inter-segment eliminations

The amounts of transactions between different segments (core Crown, Crown entities and State-owned Enterprises) that are eliminated to determine total Crown results.

Marketable securities

Assets held with financial institutions. These assets are held for both cash flow and investment purposes. Examples are bonds, commercial papers and debentures.

Net core Crown cash flow from operations

The cash impact of operating results. It is represented by the operating balance (before gains and losses) less retained items (eg, net surplus of State-owned Enterprises, Crown entities and NZS Fund net revenue) less non-cash items (eg, depreciation).

Net worth

Total assets less total liabilities. The change in net worth in any given forecast year is largely driven by the operating balance and property, plant and equipment revaluations.

Net worth attributable to the Crown

Represents the Crown's share of total assets and liabilities and excludes minority interest's share of those assets and liabilities.

Operating balance

Represents OBEGAL plus gains and losses. The operating balance includes gains and losses not reported directly as a movement against net worth. The impact of gains and losses on the operating balance can be subject to short-term market volatility and revaluations of long term liabilities.

Operating balance before gains and losses (OBEGAL)

Represents core Crown revenue less core Crown expenses plus surpluses from State-owned Enterprises and Crown entities. OBEGAL can provide a more useful measure of underlying stewardship than the operating balance as short term market fluctuations are not included in the calculation.

Optimised Depreciated Replacement Cost

Valuation method which represents the gross replacement cost of the asset, less allowances for physical deterioration (depreciated) and for obsolescence and relevant surplus capacity (optimised).

Public Sector PBE Accounting Standards (PBE standards)

The reporting and measurement framework under which these financial statements are prepared. These standards are approved by the External Reporting Board in New Zealand, based on requirements of the international public sector accounting standards issued by the International Public Sector Accounting Standards Board, adjusted where appropriate for the New Zealand context.

Residual cash

The level of money the Government has available to repay debt or, alternatively, needs to borrow in any given year. Residual cash is alternatively termed “Cash available/ (shortfall to be funded)”.

Residual cash is equal to net core Crown cash flow from operations excluding NZS Fund activity less core Crown capital payments (eg, purchase of assets, loans to others).

Settlement cash

This is the amount of money deposited with the Reserve Bank by registered banks. It is a liquidity mechanism used to settle wholesale obligations between registered banks and provides the basis for settling most of the retail banking transactions that occur every working day between businesses and individuals.

Social sector

Consists of the assets and liabilities held primarily to provide public services or to protect assets for future generations.

Tax revenue

The accrual, rather than the cash (“tax receipts”) measure of taxation. It is a measure of tax due at a given point in time, regardless of whether or not it has actually been paid.

Top-down adjustment

An adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper spending limits) when preparing their forecasts. As appropriations apply to the core Crown only, no adjustment is required to State-owned Enterprises or Crown entity forecasts.

Total borrowings

Represents the Government's total debt obligations to external parties and can be split into sovereign-guaranteed debt and non-sovereign-guaranteed debt. Non-sovereign-guaranteed debt represents the debt obligations of State-owned Enterprises and Crown entities that are not explicitly guaranteed by the Crown.

Total Crown

Includes the core Crown (defined above) plus Crown entities and State-owned Enterprises. Also known as the Government Reporting Entities (which are listed on pages 49 to 52).

Last updated: 
Monday, 8 October 2018